Here is a roadmap to do it
The Biden administration is wasting no time putting together its economic team. Careful observers of his movements should be encouraged by a choice: Heather Boushey as a member of her Council of Economic Advisers.
Boushey is co-founder of the Washington Center for Equitable Growth which focuses on how we can create an economy with stable and sustainable growth. After the news broke, Boushey tweeted: “We have an opportunity to rethink the way we invest in people, and we must seize it as we rebuild our economy. “
Boushey is the kind of person we want to advise our new president as we recover from this global pandemic. She and other members of Biden’s team understand that we cannot go back to where we were before COVID-19. Instead, we need to create an economy and a society that better mitigates systemic risks such as income inequality and climate change.
After nine months of a global pandemic, it is increasingly clear that we must build a new financial and social “normal”. Instability and turmoil in all aspects of our lives, from financial markets and public health to racial considerations and the environment, have forced investors to realize that global systems are inextricably interconnected. Many have been and are responding to this idea by taking environmental, social and governance (ESG) issues into account in their investment analysis. However, the worsening of the 2020 crises shows that ESG considerations are no longer enough. Rather, investors need to think bigger, consider the relationship between their investments and the larger systems within which they operate, and align their investment practices with the realities of the 21st century.st Century.
Investors are beginning to understand the need to be good stewards of the systems in which they work and from which they benefit. Unfortunately, the Covid-19 pandemic is not an isolated incident; social (and environmental) disruption will continue to occur, more often, simultaneously and with greater severity over time. The need for a systems-driven approach to investing will only grow in the years to come, as additional interconnected complexities create new disasters.
Yet the scale of the problem is preventing many investors from taking action. Where do investors start? The investment integration project (TIIP), in partnership with the Move the market (MtM) – a collaboration between Humanity United, UBS Optimus Foundation and The Freedom Fund – analyzed lessons learned so far from the COVID-19 pandemic to develop a roadmap in their report, “Addressing Systemic Social Risk: A Roadmap for Financial System Action. ”
This is a highly regarded report and one that investors should pay attention to. Previously I wrote on the Social purpose test (TCP). Part of it involved a global survey through GlobeScan of 561 people from business, the investment community, government, academia and civil society. The survey asked for an opinion on how these different groups have responded to COVID-19 and inequality. Institutional investors came in last by far. On COVID-19, only 10 percent of those surveyed rate their performance as good and 45 percent rate it weekly. The second lowest group were governments at 27 percent and 35 percent, respectively. (The companies were 25 percent and 28 percent).
The inequality performance was even worse for these last three groups. Only five percent rated institutional investors as performing well (governments were at seven percent and corporations 11 percent) and 66 percent as poor performing (governments were at 65 percent and corporations were at 64 percent).
The roadmap report argues that the financial system remains committed to a flawed and outdated neoliberal economic theory in which unfettered markets can achieve the best economic and societal outcomes. This belief has led us to a current paradigm that favors short-term shareholder gains over long-term value. This, in turn, has eroded labor standards and workers’ health, exacerbating inequalities and increasing the vulnerability of our systems (Figure 1).
Figure 1. Pre-existing systemic vulnerabilities: flawed theory, value extraction behaviors and sub-optimal outcomes
“The Covid-19 economic crisis has further highlighted that social considerations are not fully taken into account in capital markets,” said Kilian Moote, director of Humanity United. “It is imperative to re-examine the structure of our financial system to better understand which practices contribute to social harm. It’s time for big ideas and major structural changes focused on building and maintaining the long-term health of our systems. This includes confronting long-standing systemic weaknesses and rethinking pervasive short-term value extraction behaviors that ignore the full range of impacts.
Such a shift must begin with policymakers and industry regulators proactively shaping a financial system that generates better outcomes for all stakeholders, including ‘ensuring[ing] that companies give equal priority to all stakeholders. According to the report, this means:
● Limit or otherwise regulate the excessive use of profits to enrich managers and shareholders to the detriment of workers, customers and innovation;
● Protect workers and give them the means to organize, defend themselves and actively participate in company decision-making; and
● Require standardized and decision-useful disclosures on corporate social risks throughout supply chains.
Concretely, this means adopting investment practices that balance short-term profits with long-term value creation. It is to adopt “system level investment”To address big systemic issues alongside their ongoing management of portfolio risk and rewards – something I’ve written about here, here, and here before. Such an approach can help them leverage collective action and public policy advocacy to hold businesses, policymakers and regulators accountable for their actions and push them to act.
However, the pressure and encouragement will not be enough. meaningful reform will require laws and regulations. In 2019, for example, 181 CEOs signed a corporate roundtable statement that included a commitment to reject the focus on shareholders and put all stakeholders first. On the occasion of this anniversary, I even wrote an open letter to these CEOs suggesting that each of their companies ask the board of directors to issue a “statement of intent” for their particular company. I received no response and to my knowledge none of them did.
During the first months of the Covid-19 pandemic, these same companies returned 20 percent more of their profits to shareholders than their peers who did not sign the pledge. This decision to focus on the short term rather than the long term had consequences: These companies were more likely to announce layoffs related to Covid-19, and less likely to donate to Covid-relief efforts. 19, offer discounts to customers or pivot to a pandemic-friendly business model.
To support this change within companies, the report recommends that policymakers and regulators should also “allow investors to embrace the long term and integrate social risk considerations”, including:
● Require investors to manage social risks; and
● Clarify that the management of social risks does not conflict with the fiduciary duty.
For example, the UN-backed Principles for Responsible Investment help more than 3,000 signatories integrate social risk considerations into their investment decision-making and report on their progress over time.
The recommendations to investors focus on the balance of “short and long term considerations, immediate returns and value”, which fall into three categories (Table 1).
The roadmap highlights the work of investors such as Living wage platform, a collaboration between 15 financial institutions with more than $ 3 trillion in assets, which encourages companies to pay a living wage; and the Cleanup Responsibility Framework, an Australian coalition of investors, unions, property developers and others that promotes the rights of works who commit to providing cleaning services.
“The global financial system is at a critical inflection point,” said William Burckart, president of TIIP and co-author of the forthcoming book. 21st Century Investing: Reorienting Financial Strategies to Drive Systems Change (Berrett-Koehler, 2021). “Policymakers and investors may stick their heads in the sand and ignore how persistent and pervasive systemic social challenges make the financial system weak and vulnerable to social challenges, or they may reject the status quo and face these challenges of proactively before tragedy strikes again. This new roadmap shows them how.
You can also learn more about the roadmap by joining a upcoming webinar on January 12, 2021 about their findings and what’s next. If more and more investors pay attention to these recommendations, we will be better equipped to handle the next global disaster that lies before us. Equally important, it will enable them to better tackle system-level social problems such as income inequality. It will be impossible to put in place an effective response to climate change without addressing these social issues. It’s hard to worry about climate change when you are hungry, have no home to live in, and only see the bleakest prospects for you and your children.