Should your savings finance a sustainable future or a burned-out economy?

Date published: 8 February 2018
Author: Pablo Grandjean

The existing definition of investors’ “best interest” is about maximising financial returns while adjusting risk to the profile of the client. It says nothing about the impact the investments have on the future of the investor or his/her children.

When a professional of finance advises an investor, he is legally bound to stick to his client’s “best interests”. This definition doesn’t include Environmental, Social and Governance Criteria (ESGs) yet. It only means “balancing financial risk and profit maximisation” according to the investor's objectives.

But as evidence piles up, non-financial considerations such as climate risk (see for example the disinvestment movement), poor governance practices (see for example the case of Crédit Suisse in Mozambique) or bad buzz related to human rights can significantly impact financial return. In other words, even from an investor’s traditional “best interest” definition perspective, a consistent approach of profit maximisation should include sustainability reporting on ESG criteria: the two notions aren’t conflicting but working together.

To put it visually, our cartoon below addresses this definition problem: What is investor's "best interest"?

legal-duties-sustainable-finance-extrait

Moreover, the consideration of sustainability factors can bring non-financial benefits which are not reflected in the standard models: an investor should also be able to assess non-financial impacts of his/her investment decisions and should be given the possibility to distribute personal investment objectives between non-financial and financial benefits. It is the least one can expect from a financial advisor in the context of rising environmental and social crisis, when the world leaders have finally come to an agreement on defining the Sustainable Development Goals and a climate roadmap with the Paris Agreement.

The European Commission organised a consultation on whether or not to include the sustainability criteria in the definition of the legal duty of institutional investors and asset managers. Finance Watch and its members have answered the consultation along with a few rare NGOs, while the banking industry with at least 1700 permanent staff in Brussels have probably massively contributed their very own views on this idea. It is indeed a technicality, but influencing the European definition of an asset manager's legal duty could trickle down into redirecting billion euros[1] towards some most needed investments in the energy transition or in public housing for example. It is a textbook case of why citizens and the civil society should turn towards these technical matters of financial regulation and work on the links between finance and society; why we need to join forces to obtain a real transition towards a sustainable and safe financial system. At Finance Watch, we think that it is time to build a collective movement to #ChangeFinance.

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[1] The total size of GLOBAL assets under management was some 85 trillion dollars (yes, trillion) at the end of 2016. For Europe, we speak of about 23 trillions euros

 

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