Hack:
Accelerate the Shift to Long Horizon Responsible Investing – Exploring the Organizational Change Agenda for Pension Funds
This is not a sharp, easy and clear cut solution, but a long term approach for long term change that leads to long term, patient capitalism.
The last decade has seen an explosion of thought-leadership work on long-horizon responsible investing (LHRI)[i] and related operational activity. But in the last 1-2 years, leading insiders have acknowledged, in public, the challenges they face and the reality that progress is slow. And when speaking privately, even those who are “best in class”, often question if they are really succeeding with regards to pace, depth and durability of change. Still, institutional investors are trapped in neo-classical economic models, not giving the opportunity for patient capitalism.
This 22 month project of the Network for Sustainable FInancial Markets - an international, non-partisan network of finance sector professionals, academics and others who have an active interest in long-term - uses well-established organizational development frameworks to identify obstacles to change and build leadership capabilities for more systemic interventions with deeper, faster progress.
Currently, institutional investors are trapped in neo-classical economic models, not giving the opportunity for patient capitalism. The last thirty years have been dominated, in theory and practice, by a complex of beliefs about the operation of the capital markets and global financial integration that Nobel laureate and former International Monetary Fund (‘IMF’) Chief Economist Joseph Stiglitz has called ‘market fundamentalism’.[1] The macroeconomic version of the theory is that global ‘capital-market liberalization should be good for economic growth and [reducing] the volatility of consumption’ of developing economies.[2] In contrast to the theoretical predictions, by 2003 even the IMF Board recognised that ‘it becomes difficult to make a convincing connection between financial integration and economic growth once other factors, such as trade flows and political stability are taken into account’.[3] Actual capital market liberalisation and global integration have thus been associated with greater financial instability, more frequent currency crises, real economic dislocation and pro-cyclical flows of ‘hot money’ that do not necessarily lead to long-term growth.[4] In part this disconnect between neoclassical economic theory and real world results is because the underlying assumptions of the neoclassical model, assuming ‘perfect information, perfect capital markets, and perfect competition’ are ‘a poor description of developed economies, and an even poorer description of developing countries and international capital markets’.
The last decade has seen an explosion of thought-leadership work on long-horizon responsible investing (LHRI)[i] and related operational activity. But in the last 1-2 years, leading insiders have acknowledged, in public, the challenges they face and the reality that progress is slow. And when speaking privately, even those who are “best in class”, often question if they are really succeeding with regards to pace, depth and durability of change.
[1] Joseph Stiglitz, ‘Capital-Market Liberalization, Globalization, and the IMF’ (2004) 20 Oxford Review of Economic Policy 57, 57.
[2] Ibid 59.
[3] Eswar Prasad, Kenneth Rogoff, Shang-Jin Wei and M Ayhan Kose, Effects of Financial Globalization on Developing Countries: Some Empirical Evidence (2003) International Monetary Fund <http://www.imf.org/external/np/res/docs/2003/031703.pdf> at 12 September 2009.
[4] See Dani Rodrik, Has Globalization Gone Too Far (1997); Francisco Rodríguez and Dani Rodrik, ‘Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross-National Evidence’ (2000) 15 NBER Macroeconomics Annual 261.
[i] This is an interim portmanteau phrase to cover the overlap between long-horizon, sustainable and responsible investing.
A deep understanding is needed in organisational change processes within leading investors, not only by academics but especially by current investment professionals. The participants show important awareness of the need for change, but all struggle with organizational barriers. Together with them a project team will let them experience opportunities for change and thereby change the investors.
This leads to the following objectives:
- To understand the dynamics of organizational change related to LHRI by working with leading investment professionals. Discover with them opportunities for change.
- To develop a capacity building programme for influential individuals to enable them to implement, within their organizations, practices relating to new thinking on LHRI (starting with the nexus of fiduciary duty, climate change and hidden risks but then going wider).
- To encourage and support a wider community of investment professionals (in particular those associated with NSFM) and through them, the organizations they influence.
Changing finance by developing insights in how individuals can tackle organizational barriers
Stage 1: Synthesis and Survey Design (3 months)
An interdisciplinary panel, including subject and organizational development specialists, will synthesise learning from thought-leaders about what needs to change and how (including obstacles). To give some focus, we will concentrate on the nexus between fiduciary duty, climate change and hidden risks. From this synthesis we will create a survey to explore obstacles and find ways forward.
Stage 2: Survey Implementation (3 months)
Pension fund decision-makers (in particular, institutions that are linked with the UN Principles for Responsible Investment) plus other important stakeholders will be surveyed. This will include some face-to-face interviewing as well as over the internet. Standards relating to independence will be rigorous. NSFM participants will be invited to help access decision-makers they know personally, so improving the response rate.
Stage 3: Analysis and Report with Recommendations (3 months)
The results will be analysed qualitatively and quantitatively, as appropriate, and according to best practice academic guidelines, to highlight key areas of resistance to change and likely ways forward.
Stage 4: Capacity Building Programme to Support Implementation of Change (12 months)
We will develop a pilot project to support fifteen individuals in three organizations who have been identified at the survey results stage as particularly willing and able to benefit from such support. If successful the model could be scaled up and more organizations brought on board.
Stage 5: Evaluation and Report (1 month)
Capturing and disseminating the learning will be essential in supporting wider outreach and change.
The participants of the Network for Sustainable Financial Markets, see: http://www.sustainablefinancialmarkets.net/participants/
Within the development of this approach, NSFM cooperated with 'The Guild', a project of The Grubb Institute which has considerable – and complementary – expertise in organizational change.
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