Guest blog: Orphaned Mandates for the Addis Ababa Action Agenda

By Steve Waygood  AVIVA Chief Investment Officer leads their Global Investment Team 

and 

Pauliina Murphy AVIVA Head of International Government Engagement | Group Legal & Co Sec 

The AAAA was endorsed by all the member states in 2015 the following areas appear to us to be orphaned mandates. Our comments and suggested next steps are made in italics.

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Para 38. … “We will endeavour to design policies, including capital market regulations where appropriate, that promote incentives along the investment chain that are aligned with long-term performance and sustainability indicators, and that reduce excess volatility.”

This is a major commitment with potentially significant and positive ramifications for the sustainability of global markets. UNCTAD could conduct an analysis of the pay structure and business models within all the investment intermediaries in the investment chain including, inter alia, investment banks, credit rating agencies, stock exchanges, fund managers, investment consultants, and pension schemes. This could be published in the forthcoming World Investment Report, and reviewed at a summit of global finance leaders.

Para 47.... “We note with concern the decline in infrastructure lending from commercial banks. We call on standard-setting bodies to identify adjustments that could encourage long-term investments within a framework of prudent risk-taking and robust risk control. We encourage long-term institutional investors, such as pension funds and sovereign wealth funds, which manage large pools of capital, to allocate a greater percentage to infrastructure, particularly in developing countries. In this regard, we encourage investors to take measures to incentivise greater long-term investment such as reviews of compensation structures and performance criteria.”

The IFC performance standards underpin the Equator Principles that apply to project finance. However, they do not extend to infrastructure as an asset class. The UN could invite ISO and the World Bank to collaborate on the production of a standard that covers infrastructure.

Para 110… “We resolve to reduce mechanistic reliance on credit-rating agency assessments, including in regulations. To improve the quality of ratings, we will promote increased competition as well as measures to avoid conflicts of interest in the provision of credit ratings. We acknowledge the reports of the Financial Stability Board and others in this area. We support building greater transparency requirements for evaluation standards of credit-rating agencies. We will continue ongoing work on these issues, including in the United Nations.”

CRAs are a major part of the finance system, with the market dominated by a few key players. S&P and Moody’s have developed Environmental, Social and Corporate Governance ratings, but these ratings are separate to their main credit rating. CRAs should be encouraged to state in their public methodology how they consider sustainability risks. UN Environment is doing interesting work in this broad area with its Inquiry into Design of a Sustainable Financial System. Their work is good, but it needs a permanent and well funded home.