Investments 

When they speak out, investors can change the world

This article is part of
Spring Investment Monitor - March 2015

The importance of public policy for long-term investors has grown in recent years.

This is due to a number of factors, including legislative reform of the financial sector in the wake of the global financial crisis; governmental need for investors as a source of long-term finance; and the increasing impact of environmental, social and governance (ESG) factors on the ability of investors to deliver long-term returns.

Investors are waking up to the fact that they can wield their considerable financial muscle to engage with policymakers on a range of ESG issues that strengthen ESG integration, increase the stability and integrity of the financial services sector and deliver economic benefits.

The climate change debate, which has brought together some of the world’s largest pension fund and investment managers, is a good example of how investors can capture the attention of policymakers and help drive policy initiatives.

In spite of the enormous potential that the dialogue between these two parties can generate, investor engagement with policymakers is lagging.

A recent report by Principles for Responsible Investment (PRI) – ‘The Case for Investor Engagement in Public Policy’, which included interviews with an international group of investors and policymakers – found that several barriers are preventing more widespread engagement. These include scepticism about whether public policy engagement will make a difference, as well as a lack of understanding regarding how to influence policy processes and concern about the costs and timeframes involved in public policy.

PRI’s report identified six steps aimed at helping investors engage more effectively with policymakers. By strengthening long-term investor involvement in the ‘rules of the game’ that govern the financial system, it is hoped that they will become more proactive about engaging policymakers in future.

The process of public policy has a number of stages that interact in a dynamic fashion: identification, information-gathering, decision-making, implementation, evaluation, termination and renewal. Investors need to understand their role for each. Before engaging policymakers, decisions need to be made on what, whether and how to proceed. This first stage involves discussions about the issue, the information needed, the key actors to be consulted and the policy options that may be available. Policy processes may be initiated by investors concerned about gaps in regulatory frameworks.

Information gathering involves reviews of the available evidence and discussions with key stakeholders and opinion formers. It will also include some initial analysis of the issue in question, of the options for action, and of the merits of alternative courses of action. Investors can contribute by providing information on current practice and by providing practical support to policymakers.

When making a decision on the measures to be adopted, policymakers will assess the likely effectiveness of the options available (including the ‘do nothing’ option), the financial costs and benefits of taking action and the political implications. Investors may contribute to formal consultation processes. They may also publicly set out their views and lend explicit support to their preferred policy options.