Want to know how to fix investment for the next generation? Try asking them what they want.

When today’s children get around to studying the great financial crisis of 2007-9 they will be shocked. They will be shocked by the extent of the crisis and by the far-reaching consequences of the policy solutions put in place to deal with it, of course. But most of all, I suspect they will be shocked by the pre-crisis lack of engagement of the investment industry. Why did shareholders let big bank management get so out of control? Why did no one vote against the pay packages that incentivised so much of the bad behaviour? Why was the focus of the fund management firms seemingly always on making short-term returns from investments rather than, as it surely should have been, on long-term stewardship of the companies they were invested in? Why was so little thought given to the social context in which the banks operated? The older generation of investors would say that larger social ramifications of corporate behaviour just weren’t thought to be the responsibility of shareholders. As long as everyone worked tirelessly to raise short-term profits and hence share prices and dividends, the rest, it was assumed at the time, would follow - invisible hand style.

Time for conscious capitalism

This (quite rightly) is not how the young think today. They’ve seen what can go wrong, they know that they are to be long term shareholders but also long term stakeholders in the global economy and that the social impact of the activities of their investments therefore matter. Research¹ regularly shows that millennials are far more likely to make ethical investments than their parents; that they would take their money out of a company if it faced allegations of misconduct; that they expect the interests of employees and suppliers to be considered alongside those of shareholders; and that they expect high standards of environmental behaviour from the corporate sector. The fact that these are the attitudes today’s children will inherit is very good news. Given the financial disasters of the last decade and the manner in which the investment industry has failed to properly steward the global corporate sector so far, a good dose of what is now called “conscious capitalism” is clearly sorely needed  (assuming we all agree that we want capitalism - the greatest poverty destroying system ever - to survive).

This is something that the fund management firms are clearly beginning to grasp. Modern asset managers know that their future clients will not just ask them to look to make the best returns but also to keep an eye on the social impact of making those returns. Investing has to change, for the simple reason that the priorities of generations of end investors are changing. Note that, according to CFA research², 73% of investment leaders expect ESG³ factors to become “more influential” from now on. But here’s the vital question: in our new “woke” era how are asset managers to know what the new generation of stakeholder/shareholder actually wants from them on the sustainable investing front? So far, this question hasn’t really been asked properly.

Instead, based on an endless supply of vague surveys showing that investors are one way or another worried about ethics, green stuff and niceness, managers are making assumptions about what they might want. They talk vaguely about having more respect for wider stakeholders; instilling cultures of ethical decision-making; integrating moral purpose into business; and the like. But while this kind of waffle fills up an awful lot of report pages and conference programmes, what it doesn’t do is answer the actual question - what does sustainability mean to different investors?

How to return ownership rights to rightful owners

There is however an easy way to for the financial industry to find out what their future clients - the end owners of the world’s assets - might want, and to act on it with a view to being better rather than just talking about being better. They could ask them properly.

The rise of the platforms and of fund investing has left the end owners with no real way to have input into how managers invest and how those managers then ask companies to behave. The retail investor has effectively lost his ownership and stewardship rights. For a new generation as interested in social returns as much as financial returns, that matters. Right now almost everyone in work in the UK, for example, is an equity owner (whether they know or not) thanks to our brilliant auto enrollment pension schemes. The same is increasingly true across the rest of Europe, where the defined contribution pension is on the rise. Unlike the defined benefit pension savers of the last generation who had no obvious need to engage with their investments over the long term, this gives the young an imperative to be financially engaged (a couple of percentage points here or there every year over 40 years could be transformative to their retirement). But given their strong interest in sustainability – in environmental matters and, crucially, in the transformation of modern day crony capitalism into something a little better - they have an imperative to be socially engaged with their asset managers too.

Today’s technology makes this easy by the way - not being able to contact clients is no excuse at all for not asking every one of them how they want their votes to be used at every annual general meeting. They will then provide full transparency over how they attempt to deliver the answers and over time will, I hope, be able to provide personalised portfolios to fit every client preference on sustainability out there. If the new world of investing is to be sustainable it must also be collaborative – focused more on what clients want than what the professionals think they should want.

The long term survivors in the investment industry will, I think, be the ones who understand that as a new generation enters the market, they will no longer be the ones who set the rules.

The next generation of investors - one that understands that all shareholders are also stakeholders - will be.

Merryn Somerset Webb is the Editor in chief of Moneyweek, the UK’s bestselling financial magazine;  a columnist for the Financial Times; and a regular TV and radio commentator on financial matters. She is also a non-executive director of two UK listed investment trusts.

Please note that Merryn Somerset Webb’s views and opinions are her own and not necessarily a reflection of those of the Lombard Odier Group.
¹ Rathbone Greenbank Investment
² Future of Finance project
³ Environmental, social and governance