The financial sector has expanded massively over the last 30 years. International barriers to the flow of capital have been removed, investors have been granted greater power within companies and securitization means almost any asset can be transformed into a financial product.
For Professor Afshin Mehrpouya, this has had a significant impact on the life of company executives. Investors now feature far more frequently in managerial decisions and initiatives have to pass the test of the annual general meeting.
“The critics say this leads to increased volatility because of the mobile and short-term nature of the dominant forms of international finance,” he adds. However, investor power and market stability are not necessarily opposed. About 70% of wealth in the global financial markets is controlled by pension funds, insurers and sovereign wealth funds, and all of these “asset owners” have an inherent long-term focus.
The pressures of the stock market, quarterly reporting, bonuses based on short-term returns, and weak supervision of how large portions of their assets are managed by asset management firms, however, poses a serious challenge for these investors to maintain their long-term mandate. As a result, the voice and aspirations of the citizen, who is the beneficiary of these investments can be hard to hear over these pressing financial concerns.
Despite these challenges, the recent trend is for an increasing number of asset owners to allocate more money to environmental and social causes. Major asset owners such as CalPERS (US), ABP Netherlands), USS (UK), FRR (France) and especially the Government Pension Fund Global (Norway) are striking examples of this type of investment strategy.
More investors are exercising their shareholder rights to push for long-termism and environmental and social sustainability in their portfolios. The recent divestment of major investors such as Axa Asset Management and Allianz, from coal assets underlines this growing trend.
In reality, the dominant and loudest voices in the AGMs of major companies are still those of investors with a narrow financial focus pushing for short-term results. The fundamental challenge is to ensure that the will of beneficiaries and the long-term mandate of asset owners is better reflected in the investment management practices of asset managers.
“Even though you say you’re in this business for the long-term, when you report on the short-term you expose yourself to short-term pressures.” Professor Afshin Mehrpouya
FINANCE WITH A POSITIVE SOCIAL IMPACT
Impact investment is a growing trend that aims to increase financial flows into social and environmental initiatives across the world. Impact investors look for projects that offer both financial returns and positive social outcomes, in areas such as education and healthcare.
“These investments can have greater social impact than mainstream financial attempts at integrating environmental and social concerns into portfolio management because this type of investment strategy focuses directly on areas of real social need,” states Professor Mehrpouya.
However, the fundamental challenge is the difficulty in measuring the positive and constructive social impact of these investments on the communities receiving the capital. Considerable care also has to be taken to ensure that imposing financial obligations on organizations, which provide public goods, does not compromise their core values and focus.
Another very promising development is the rise of decentralized financial services – such as crowdfunding platforms and peer-to-peer mobile banking in remote and poor communities. B-Kash in Bangladesh is just one inspiring example. When the company was founded in 2010, 90% of Bangladeshis had never used a bank. By capitalizing on rapidly expanding mobile phone use among the poorest pockets of the population, BKash quickly expanded its peer-to-peer financial services. It now has over 24 million users – about one in three adults old enough to have an account. This type of financial service enables poor, rural communities to access markets, trade their products without have to use middlemen, and keep more of the returns.
Kiva is another example of a highly successful decentralized finance initiative. This peer-to-peer lending platform has now facilitated loans to over 2.5 million borrowers, who would not normally be able to borrow from traditional banks. In Kenya, M-Pesa uses microfinancing to bring the tradition of financially supporting the extended family into the 21st century, by increasing its reach and facilitating financial aid from family and friends overseas.
By integrating financial services into communities and their social relationships, these peer-to-peer services are more likely to support the long-term needs of local communities than distant investors, and help finance to become a driver of social good.
“Companies end up paying for environmental and social damage. They lose their license to operate. Long-term investors either divest or put pressure on them to change their behavior.” Professor Afshin Mehrpouya