15 Sep 2013
G20 leaders have publicly lent their support to an initiative designed to redirect the flow of institutional investment towards longer-term assets. The plan, released by the OECD, includes measures to improve both the breadth of investors providing long term finance and incentives for allocations in more sustainable projects, including clean energy and infrastructure.
The proposals are broadly similar to the Green Paper consultation released by the EU earlier this year – perhaps unsurprising given the regularity of global coordination efforts following the financial crisis.
Collectively, insurers, mutual, pension and sovereign wealth funds hold more than USD 80 trillion in assets, but in 2012, despite the long-term nature of their liabilities only 1% of those assets were invested in infrastructure, with even less spent on clean energy projects.
In their paper, the OECD contends that encouragement of investment in longer-term, more sustainable assets, so long as they offer a reasonable risk-adjusted return, will have benefits for overall economic growth and offer savings to investors, by reducing turnover within portfolios. Notably, the OECD believes that a shift towards enduring investments may also help to counter the cyclical investment cycle, and therefore absorb shock in times of financial distress.
The framework does concede that assessing risk over a longer horizon is more difficult and that the governance requirements of such investments may be more complex. It recommends eight principles to improve the governance of institutional investors and incentivise longer-term allocations, including: an emphasis on the governing board ensuring prudence, a regular review of strategy and risk, close oversight of the performance of fund managers over an appropriate horizon and the calculation of remuneration on long-term, risk-return criteria.
Kevin Desmond, a director in Capital Markets at PwC, nodded to the need for investors to have as much financial stability in the markets as possible but said that “appropriate regulation and legislation can only contribute to their confidence in taking a long term view – they’ll only do so if they think it’s in their best interests”. He added that, as with the EU’s Green Paper consultation, “the current need is for legislation that helps rebuild trust between business and investors, but doesn’t discourage or prevent appropriate risk-taking”.