St Paul's Institute

Working Towards Sustainable Capitalism

by William Andrews Tipper

Posted: 06 Nov 2012

This piece is a response to the event on Sustainable Capitalism held recently with Al Gore.  A summary report of this event can be downloaded here.

In recent years capitalism has fallen into disrepute. The excesses that were carried out in its name have led to questions as to whether this is a project with a future. This is too strong: surgery is undoubtedly needed, but the patient will survive. The task we are faced with is to ensure these interventions accelerate the development of the sustainable capitalism model developed by Al Gore and his colleagues at Generation. 

During his speech Mr. Gore set out a compelling vision of capitalism's future, built on a coruscating critique of its recent past. Less positively, he also outlined how few people currently see that it would be in their interests to make this vision happen, and how little time we have to change their minds.

What has got us to this point of crisis, and what can we do about it? The answer to both questions is "follow the money". The owner and allocators of capital have traditionally provided investment to underpin growth of companies in the real economy. But in recent years this sector embraced a different model based on the speculative trading of poorly-understood and ultimately toxic financial products. And now, scarred by the fall-out from the ensuing financial crisis, financiers are rushing to "safe havens" such as gold or fossil fuel extraction while monies for investing in our infrastructure and SMEs dry up. In the short-term, this will do nothing to get flat-lining economies back on their feet. In the long-term, the results of this rapidly-inflating carbon bubble will be little short of disastrous.

This philosophy has not delivered for investors, andthe consequences for the real economy have been dire. Mr. Gore highlighted two in particular: price volatility and supply instability for a whole range of commodities, driven by massive speculative trade in financial derivatives, as well as hyper-inequality within societies, with the gap between rich and poor getting ever-wider. As a recent UNCTAD report demonstrates, income equality not only brings social benefits but helps drive higher long-term economic performance. Thus a narrow focus on growth, based on the highly-limited measure of GDP, is as bad for economies as it is for people.

So what is driving this behaviour? Ultimately, investors make these decisions because the system we have set-up encourages them to. Mr. Gore set-out a number of inter-related factors, some of which bear repeating here. The growth of short-termism, with decisions driven by quarterly reporting and executive incentives designed accordingly. This approach privileges cost-cutting "efficiency gains" and profit maximisation over investment that creates value over the long-term. The prevailing narrow perception of "value" is also problematic, with everything that lies outside that view - such as unsustainable resource depletion or unethical labour practices - being discounted or excluded entirely. This is coupled with a correspondingly narrow view of "values", with short-term financial returns taking precedent over any other consideration.

Carrots and sticks will be needed to break these destructive patterns of investing. Focusing on carrots, designing incentives to which individual asset managers will respond is a necessary first step. In this respect aligning personal bonus payments with long-term investment performance, as Generation IM has done, is an idea whose merits are blindingly obvious.

However in many instances investment institutions are not investing their own money. What carrots can we offer to the ultimate owners of that capital to make them activists in the transition to sustainable capitalism?

Here is one idea. With the introduction of auto-enrolment on 1st October 2012, increasing numbers of UK workers will be investing in financial products to generate their retirement income. This money will be invested on their behalf by financial institutions, who thereby generate profits for themselves as well as a return for savers. Currently tax relief is granted to all pension contributions, which already serves to effectively subsidise - to the tune of billions of pounds - the returns made by investment institutions.

This subsidy should be put to work for the cause of sustainable capitalism. Requiring investments from savings to meet certain sustainability criteria to qualify for tax relief would at a stroke change the terms of the game.This would create strong drivers for development of a new range of products that price-in everything that is currently priced-out, and take a long-term approach to returns on investment. Savers would clamour for their money to be invested sustainably in order to be eligible for tax relief, while investors would be motivated to meet this demand. 

Defining what constitutes a "sustainable" investment would, of course, not be straightforward. However there is a compelling financial, as well as moral, case for doing so. Generation IM and others are already demonstrating that investing on the basis of a company's fundamental value - rather than betting on short-term changes in the market - delivers good returns. As the long-term impacts of the carbon bubble become apparent, the value of these investments can only increase, delivering bigger pension pots for savers.

This would also help meet a profound need in the real economy. The UK faces a massive investment shortfall in the infrastructure that will underpin long-term economic growth. Pension funds, with their long-term investment horizons, are perfectly-placed to be partners in this process. The Treasury is targeting £2bn from UK pension funds for this very purpose through the Pension Infrastructure Platform. Ensuring that pension investments into green infrastructure benefit from tax relief would turbo-charge flows of money into the UK's long-term low-carbon economic potential.

Making UK savings the engine for UK prosperity is not a new idea but one that seems to have fallen into neglect. Capitalism has been bloodied by the events of the past 5 years, but by incentivising more sustainable patterns of investing we can look forward with optimism to the future.

About this author

Head of Sustainable Business, Green Alliance.

Comment on this dialogue


The opinions expressed in this article are those of the author, and do not necessarily represent the views of St Paul's Institute or St Paul's Cathedral.