Stewardship key to achieving sustainable wealth, says investor initiative.
The 300 Club, a group of global investors, has called on the industry to reform its business model to focus on long-term sustainability despite existing systemic failures hindering change.
The group, founded in 2011, sees an urgent need to reassess the foundations of the investment industry, arguing that current ﬁnancial and investment market theory is likely to fail investors.
In a new paper, the group asserts that the path to sustainable wealth creation lies in “the careful stewardship of investors’ capital in the way it is allocated and active stewardship of those investments once they are made”.
Among its members are Federated Hermes, CalSTRS, PGGM, Amundi Asset Management, Royal London Asset Management and the Impact Investing Institute.
The current system is deeply dysfunctional as it prizes relative returns against index benchmarks and control of relative short-term volatility, the club wrote. It says the purpose of the industry is to be dedicated to investors’ needs and achieve the goal of sustainable wealth creation through stewardship.
“Our core investment beliefs are that investment is long-term by nature and that successful investment benefits both investors and society.
“Real success comes from underlying, sustainable wealth creation and is measured by absolute returns that are long-term, cumulative, and sustainable,” it writes.
Reform is possible but difficult because each link in the investment chain is accountable to another link that is de-incentivising change.
The scale of the investment needed means that passive funds will have a major role to play to meet investor demand and appropriate benchmarks will need to be created, the paper notes.
Among the necessary reforms it says are to redefine portfolio objectives, so that they focus on long-term absolute returns (generally seven years or more) with levels of absolute risk to capital.
The group also recommends reforms to align the duration of contracts for active investment managers to longer-term objectives of mandates; to cover smaller numbers of securities, so that active managers can exercise good stewardship over capital allocation; and to align fees and manager incentives to promote the objectives of sustainable wealth creation.
Stefan Dunatov, Chairman of The 300 Club and Executive Vice President, Investment Strategy and Risk at British Columbia Investment Management Corporation (BCI), said: “Our ambition is to facilitate a co-ordinated process that allows every link in the investment chain to implement the necessary reforms to mandates and incentives to align themselves with sustainable wealth creation, all the way from the providers of capital through asset owners and managers to companies themselves.
“The 300 Club calls on all links in the investment chain to work together and give permission to those they influence or pay for services to deliver these changes with profoundly positive consequences for long-term investor returns and for society as a whole.”