The returns rationale for long-term investing and sustainable institutional investment
by Hugh Wheelan | June 5th, 2018
I suggested in yesterday’s editorial that what’s missing from responsible investment is a clear rationale for long-termism as an economic and investment thesis.
One contact wrote to me, asking: “Isn’t the end of civilisation sufficient?” Tragically it isn’t, or we would have already found a social/political solution to the potentially disastrous problem of climate change and pressing issues like pollution, inequality or tax avoidance. What we need is society/governments working with finance for solutions.
Enter Professor Mariana Mazzucato, Director of the Institute for Innovation & Public Purpose and Chair in the Economics of Innovation and Public Value at University College London, in a brilliant new book titled:The value of everything: making and taking in the Global Economy.
Mazzucato resuscitates the serious political economy debate about how ‘value’ is considered economically. What is productive or unproductive? What constitutes rent-seeking or valuable input for growth? She puts this in the equally important context of what the economy is for, and perhaps more importantly, what sort of economy do we want? This is a debate that has been hugely abstracted and obstructed today.
Importantly, Mazzucato argues that purpose, fulfilment, happiness, the debate on equality and inequality, and the fight against our seriously deepening environmental crises need to be systemically re-evaluated in the calculation of value; notably GDP and the assessment of the ‘production bound’, which drives political/economic thinking. Market price should not dominate economic and social ‘value’. The potential symbiosis between government and finance for productive investment needs a massive overhaul, she says; the poverty and paucity of the debate on large-scale green infrastructure is one glaring example. These big picture economic debates can often seem tangential to financial markets. They are not, of course. Financial markets receive huge implicit economic subsidies based on their perceived value to society; whether it is in the form of tax breaks to pension funds and retail savers, the advantageous fiscal treatment of debt and capital gains, and a prominent place at the political table.
More broadly, pension funds represent an implicit notion of inter-generational equity. They have a ‘fiduciary’ duty to promote the economic growth of savings over the long-term. That’s before we even start thinking about the desperate social need in most counties to revitalise pension saving before we end up with generations of people unable to retire. Mazzucato demonstrates that the utility of finance as an economic growth generator itself is hugely questionable, despite its supposed ‘productivity’ being included in GDP numbers in many countries. At RI we have always argued that long-term, sustainable finance thinking underpins the real, potential value-add of the finance sector: investment in companies over time to engender real economic growth. Rent-seeking speculation is not the same, and empirical evidence shows it is rarely productive for investors. The former needs support, the latter doesn’t. This is not anti-finance; it’s pro growth and pro real investment returns. Finance needs to demonstrate utility clearly if it should retain its advantaged economic status.
The report of asset management by the UK’s Financial Conduct Authority (FCA) last year was damning about the value of investment performance once fees and market movement have been removed. And the findings by Thomas Philippon, the French economist and professor of finance at the Leonard N. Stern School of Business, New York University, that the cost of intermediation by the finance industry is 2%, and has not improved in 130 years, are patently un-capitalistic and ripe for disruption. They are perhaps testament to the inability of finance markets as they are to be a force of economic progress That must evolve.
This calls for a serious re-evaluation of where ‘value’ is created in investment. It’s a debate we are in the middle of now, including variations of debates on principal-agent theory, the need for liquidity, etc. At RI, we have never shied away from pushing these macro-economic subjects into the sustainability window of institutional investors.
They are issues that we believe have to become more material to long-term institutional investors; and many are, although in the case of climate change, nowhere near rapidly enough.
The RI Europe conference is our attempt to distil this thinking into an event that leads from the front on big issues like climate/inequality/gender/populism/tax in a socio-economic context, but gets down to the nitty-gritty of how responsible investors are and should be thinking about them in their day-to-day work. The clear rationale for long-term investing as an economic and investment thesis is that empirical evidence shows it to be the most fruitful generator of economic growth. This, in turn, merits/needs clear support from governments, and will generate the best and most sustainable returns for institutional investors.