In his recent bestseller, Dutch journalist Rutger Bregman presents a reading of human history centered on kindness. It is the altruism of millions of people, rather than their self-interest, that has allowed humanity to survive crises and paved the way to its long-term success.
The same philosophy now applies to the financial sector. When asked, individuals consistently express the will to have their investments make a positive impact on the world. Individual investors are increasingly searching for ways to overcome climate change and the pandemic, notwithstanding a loss of trust in the institutions that govern our world. The ‘moral bankruptcy’ of our financial system thus does not reflect the values of the people whose money is invested. Rather, it is the result of financial intermediaries insufficiently reflecting the will of people.
We must therefore adopt a people-centered approach to sustainable finance that is grounded in the protection of three rights: the right of people to know how their money is spent (“right to know”), to be asked about their sustainability preferences (“right to guide”), and to not be misled by investment products and services with overstated sustainability credentials (“right to be protected”).
A people-centered approach to sustainable finance is likely to lead to a win-win scenario where the achievement of people’s rights and sustainability goals goes in hand in hand. This approach will empower people to manage their money in accordance with their values, while they seek to benefit from the value generated through sustainability-aligned investing.
Different regulatory approaches to protecting these rights have been proposed in the 2022 Financing for Sustainable Development Report, an annual report by United Nations departments and agencies on the state of sustainable finance.
Firstly, regulation can mandate increased transparency. Institutions managing funds on behalf of others currently disclose information on how their funds have been invested, yet the way they disclose sustainability-related information is largely left up to the discretion of the fund managers and is difficult to interpret for anyone.
Regulators could require fund managers to consistently disclose the environmental and social footprint of their clients’ portfolios in a meaningful format. Doing so would expose people to the relative (un)sustainability of their investments, empowering them to demand better of their managers.
Secondly, regulation can require pension funds and financial advisors to ask their beneficiaries and clients about their sustainability preferences. These preferences should subsequently be incorporated in the financial products and investment plans offered to them.
Today this happens too little, and, when it happens, the responses are not always reflected in the investment decisions by those managing their money.
Only 59 per cent of individual investors across 24 countries said their financial advisors discussed Environmental Social and Governance (ESG) investments with them. Meanwhile, 80 per cent of pension fund members in the United Kingdom wish for their pension to do some good. If more people were able to properly guide how their money is managed, trillions more would be directed towards sustainable investing.
Thirdly, investors are too often misled by or lured into sustainable investment products that are sustainable in name only. Regulation should protect people against deceptive practices. They can strengthen market integrity by establishing common norms and criteria for investment products to be labelled as sustainable. Regulators should also embrace ambitious sustainability frameworks, for instance using the Sustainable Development Goals (SDGs) as references for market norms.
However, norms can only be established if adequate information is available about investable assets. Companies should therefore disclose adequate information on their environmental and social impact to make this possible. Again, regulation is needed as it would be naïve to only rely on voluntary disclosure by corporates.
In short, by creating, or reinforcing, these three ‘rights’, policymakers have the opportunity to put people back at the center of investment decisions and in doing so increase the likelihood of achieving their sustainability goals.
Some jurisdictions are ahead. In the European Union, regulations have been updated to ensure that wealth and portfolio managers incorporate clients’ sustainability preferences in their recommendations, and thresholds have been set for the marketing of financial products as sustainable.
If a people-centered approach is pursued in more jurisdictions, humanity’s innate sense of kindness and cooperation will prevail and sustainable finance can deliver on its true potential for sustainable development.
Mathieu Verougstraete and Sander Glas work at the United Nations Department of Economic and Social Affairs.