The Post-2015 Financial Fitness Test: is the Financing for Development Zero Draft Fit for Purpose?

·  I thought I would share with my readers some excellent analysis of the Financing for Development text by AVIVA for those who do not know AVIVA is provides 29 million customers with insurance, savings and investment products. It is one of the UK’s leading insurers and one of Europe’s leading providers of life and general insurance. It has operations in 16 countries and provide life, general and health insurance and asset management and Aviva Investors has over £250 billion in assets under management. They looked at the zero draft and came up with 6 tests for the financial sector 

This is taken from their submission:

If the Sustainable Development Goals (SDGs) are to succeed, they must promote inclusive capitalism.

In other words, capital markets that address Environmental, Social and Corporate Governance (ESG) issues at every stage of intermediation. This involves ensuring that capital markets are comprised of intermediaries that embed long term sustainability thinking throughout their operations and within their culture. For policy makers to achieve this requires a holistic, long term and systemic view of the markets as well as a clear view on the promotion of good standards, transparency, and appropriate incentive structures within these financial intermediaries. It also requires the correction of market failures that allow unsustainable companies to externalize costs onto society, weakening the long term potential of the global economy.

Policy makers need to promote good investment standards, and ensure that there is a chain of transparency and accountability connecting all the various stages of financial intermediaries with the individuals that invest at one end of the supply chain with the companies that they ultimately capitalize at the other.

At the moment, the supply chain of capital has significant number stages of different intermediaries; the operations of most of them are poorly understood due to a lack of transparency and poor financial literacy among the end investors. Consequently, there is a lack of accountability.

The current Zero Draft does not meet our six tests set out below. However, it does contain some very important concepts and a number of positive commitments. While it includes elements of some of the tests, none are met in full on some are overlooked entirely. 

Test 1. Getting Prices Right: Does the debate recognize the central importance of ensuring that the price mechanism promotes sustainable development in order to ensure that unsustainable business finds it hard to attract capital? 

Conclusion: fail. While the document does include useful suggestions on fiscal measures, particularly regarding the elimination of harmful subsidies for fossil fuels, it is not sufficiently central to the focus of the document. 

Test 2. Getting Incentives Right: are there measures that will change the business models and personal incentives of the institutional participants in the capital supply chain in particular, sell-side brokers, stock exchanges, fund managers, investment consultants and asset owners?

Conclusion: partial success. However, there needs to be far greater clarity regarding which incentives, which intermediaries and how this will be approached at the national level and internationally coordinated.   

Test 3. Securing Capital: are there investment instruments that will be sufficiently attractive to markets and/or does it look likely to generate a plausible capital raising plan? 

Conclusion: fail. There is no evidence that a capital raising plan will be generated, nor sufficient investable instruments created to finance the SDGs. This is a major problem with the current draft. 

Test 4. Systemic Transparency: does the means of implementation include measures that will promote the transparency of companies on their sustainability performance as well as all the transparency of all the investment intermediaries that connect the end investor to the companies that they own?

Conclusion: partial success. Excellent to see the proposal regarding Integrated  Reporting becoming mandatory over the duration. However, more need to be done to ensure systemic transparency, ie transparency by all the investment intermediaries including brokers, asset managers and asset owners etc. This latter element is entirely missing. 

Test 5. Sustainable Finance Standards: will the means of implementation create the right kind of hard and soft standards that facilitate sustainable capital markets? For example, will they ensure Foreign Direct Investment by multinational compiles with generally accepted standards and norms such as the Global Compact, the ILO tripartite labour declaration, the Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises?  Will they confer onto the owners of these businesses - investors - a responsibility for ensuring that they behave as responsible long term owners and promote such standards within the companies that they invest? Will they develop a responsible investment International Standard (ISO) in order to ensure that their clients can see quickly and easily whether their investment firms are good long term owners.

Conclusion: partial success. However, very little of substance exists on the promotion of responsible investment standards - and a key paragraph within the Synthesis Report is missing. 

Test 6. Sustainable Demand for Sustainable Finance: does the debate ensure that there is sufficient demand for sustainable finance and sufficient accountability of financial intermediaries by promoting financial literacy measures among the investing public?

Conclusion: fail. There is nothing in the document that would lead to increased demand for sustainable and responsible investment by the end investor. This is a major missed opportunity. 

Overall, the debate only partially recognizes the central importance of ensuring that the price mechanism promotes sustainable development. We see the primary failure of the capital markets in relation to sustainable development as one of misallocation of capital. This, in turn, is a result of national governments’ failure to act properly to ensure that environmental and social costs are reflected in companies’ profit and loss statements through the prices that they pay and receive for goods and services. As a consequence, the capital markets do not incorporate companies’ full social and environmental costs.