Incentivize sustainable investing

Short-term betting

Problem statement:

The EU urgently needs infrastructure and project-investment to support sustainable, inclusive growth. But investors are increasingly short-term in their outlook, encouraged by finance professionals who benefit from high turnover in the market. The ‘cult of liquidity’ in capital markets makes this worse, focussing attention on how easy it is to buy and sell securities rather than on an investment’s long-term financial performance.

Banks are and will remain the main providers of these investments/credits in the near future – even if they choose to improve their capital ratios by reducing lending rather than by raising equity. One incentive amongst others would be to include in the ‘citizen dashboard’ the share of credit they allocate on a long-term basis to productive use (see ‘citizen dashboard’ above).

Listed markets play an important role as well. While they proved more reliable than OTC markets during the crisis (which is reason why there is a push for more trading to take place on ‘regulated infrastructure’), it is a fact that they have also largely contributed to the development of betting (short-term speculation) as opposed to (long-term) investment, mainly to the profit of market infrastructures and intermediaries.

In Finance Watch’s view, capital markets should create a partnership between those with surplus capital and those in need of it (start-ups, small companies, large corporations, public entities…). The partnership should be long-term with both parties sharing the upside and the downside. The role of intermediaries should be to facilitate the partnership at the lowest cost possible. But as the UK’s Kay Review has shown, the chain of intermediaries has grown far beyond what is needed and the purpose of market activities has been diverted to maximise revenues along that chain.

While this delivers growth to the financial sector, it comes at a cost to other sectors and to retail and institutional investors, who must bear the costs of more and more financial intermediation.

Retail investors face an additional danger: being miss-sold unsuitable investment products. The pressure on sales staff to meet targets can make it very hard for them to put their customers’ needs first, as we believe they should.

What else needs to be solved?