What do they do with your money?

logoDid you notice it was Good Money Week last week? The annual campaign to raise awareness of responsible finance so people can make informed choices about their money’s impact could do with a little more oomph.

Surprisingly few of us realise how great an impact our money can have.  The pounds in your pension could have a much greater clout than Fair-trade coffee.  As John David, Head of Rathbone Greenbank Investments, quoted in a related Good with Money article, explains “Avoiding companies that contradict personal values and actively making ethical choices as a consumer is a great first step, but the possibilities for any long-term, tangible impacts often stretch beyond simply boycotting a particular brand or product.”  Shareholders can play a powerful role in shaping behaviours companies, and the financial system.

This short (ish at 3:30 minutes) video from Aviva illustrates how our savings are linked, via the investment system, to companies. As the video shows, as the ultimate owner of the money, pension savers can influence, where and how money or funds are invested. The intermediaries, pension providers, and investment fund managers, should be communicating with savers about how they engage with companies’ on the issues that savers care about from climate change to executive pay.

Nearly all (97%) of the CEOs in the latest UN-Global Compact-Accenture CEO survey believe sustainability is important to the future of their business. 59% of CEOs say that they are able to accurately quantify the business impact of sustainability initiatives. Yet, only 10% report that investor pressure is one of the top three factors motivating them to take action. Why are investor voices not louder?

At Good Money Talks, Simon Howard, CEO of UK Sustainable Investment Forum, shared UKSIF’s research shedding light on savers’ disengagement. Essentially, 60% of 25 to 34 years olds do not know that there are sustainable financial products available, but 55% of them would like to choose fossil-free financial products.  Earlier that day, Andrew Bailey and officials at the FCA voiced concern that saving rates are low, particularly among younger cohorts. The UKSIF research offers one insight into why: the products on offer do not appeal. Greater transparency and product choice are why I choose to save in an ISA or invest directly through crowd-funding platforms rather than top up an old employer pension.   The onus is on the industry to do more to tell their customers about all the available choices.  It might just motivate people to save, if they felt empowered and enthused by the ability to fund the future they want to live in.

The conflation of ethical, responsible, sustainable labels is also confusing and polarising. Bruce Davies, co-founder and Managing Director of Abundance Investment  remarked we need to move away from divisive to inclusive language, “I don’t think there’s a difference in ethics. People young and old worry about the future”.  Some still think there is a binary choice between strong environmental, social and governance performance or financial performance. Thankfully research abounds that debunks this view (see right).  Incscreen-shot-2016-11-09-at-13-40-39reasingly sustainability management is taken as an indicator of a company’s sound management, innovation and the potential for long-term value.

Environmental, social and governance factors are all business risks that manifest over longer time horizons, the horizons that many of us have as savers. Climate change and the risk of stranded assets are now widely accepted, though not necessarily yet widely reflected in the options available to savers. The Financial Stability Board’s Task Force on Climate-related Financial Disclosures is working towards a single framework on climate risk exposure, which will drive transparency of companies, and funds’ exposure to climate risk. Michael Bloomberg, Chair of FSB notes, “Increasing transparency makes markets more efficient, and economies more stable and resilient.” Disclosure is important, but does not necessarily drive action, unless the risks are communicated through the investment supply chain to the ultimate asset owners, the savers.  The industry needs to explain how greater stewardship with and on behalf of savers to mitigate these risks is in all our interests.

cwbif4iwiaegmyjIt is incredible that pension funds investing the savings of millions of people resist engaging with them. Pension providers are editing savers’ choice, with out asking about their preferences for the allocation of their capital. Recently, I co-chaired ShareAction’s Pension Power Parliament at the House of Commons where members of a range of pension schemes shared stories of perseverance and occasional success, such as Royal London’s appointment of a customer representative to its independent governance committee (IGC).  We have a long way to go before savers can compare providers, and the underlying funds.  Pension providers could make more use of  digital platforms to deliver engaging and useful toolkits to ensure savers are putting aside enough for the future, and for savers to collectively to feedback their preferences.

Those within the financial industry need to do more to engage, educate, and enable their customers to make prudent, informed choices about their future.  If you want to know what they do with your money, ask your provider.  You could also join a ShareAction Pension Power team for a louder voice.

Related links:

http://good-with-money.com/2016/10/30/invest-to-make-big-business-behave-better/

https://carefullycurated.co.uk/2014/09/08/closing-the-loop-and-investing-for-the-future/

https://www.cbd.int/financial/mainstream/ifc-businesscase.pdf

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