How can finance become a more professional and beneficial industry?
The “Future State of the Investment Profession” study explores ‘Four States for the Relationship between Investment Management and Society’. These four states, which are described on page nine of the executive summary, consider the possible evolution of the investment management sector depending on whether the benefits generated accrue to the industry or to society as a whole.
To better understand these potential future states, we interviewed Richard Brandweiner, CFA, focusing our discussion on the factors required for finance to move toward a more professional industry as well as other ways it could serve the greater good.
Brandweiner is a partner at Leapfrog Investments and served as CIO of First State Super, one of Australia’s largest superannuation funds. He has a singular view about where finance is heading and often speaks on the potential growth and performance of the fledgling impact investing industry and how the investment management sector can contribute to society.
In 2015, Brandweiner was included in the Power 100 of Top CIOs in the World and was named Australian CIO of the Year in 2016 by Investment Magazine. He is a past president of CFA Society Sydney.
CFA Institute: What needs to happen in the next five to 10 years for investment management to become a ‘Professional Industry’ – one that is ethical, sustainable, trusted, and value-focused?
Richard Brandweiner, CFA: The past 30 years have seen extraordinary growth in the financialisation of the world. [Gerald A.] Epstein (2005) defines it as “the increasing role of financial motives, financial markets, financial actors, and financial institutions in the operation of the domestic and international economies.”
Quite simply, the role and responsibility of the financial services industry are more significant than perhaps at any time in history.
Yet, the industry is immature. It is not yet properly aware of its importance in the broader ecosystem and it certainly has not positioned itself to be worthy of the responsibility that flows from this. For good reason, the ‘real world’ has come to see financial agents as untrustworthy and self-serving.
Perhaps this is a function of the extraordinary rate of growth which, with the benefit of hindsight, has probably caught us off guard. The legal and medical professions have evolved over a much longer time, and they grew to assume a sense of responsibility which contributed toward the development of their ethical framework. Just 30 years ago, would anyone have even thought that a handful of young math graduates playing with credit derivatives could have had the economic influence that they ended up having? What sort of ethical considerations would have even been imagined?
Now the power and influence of the financial system are very real and have profound environmental, economic, and social consequences for our society.
To win its proper place in our society, one that is respected, sustainable, and trusted, the investment management industry needs to acknowledge its broader influence and accept its broader responsibility. Much of this will involve a better understanding of externalities and a broader conception of its legal duties.
Does society provide the investment management industry with a clean license to operate? If not, what benefits must society receive in the future that it is not today?
The world needs the financial system to operate effectively and, so, I do believe that the license to operate currently exists. While the broader community cannot afford for Wall Street to fail, there is an increasing sense of disconnect between the financial system and society, and the feeling of being held ransom is not a positive basis for an ongoing social license.
Society needs to see the financial system serving the community more broadly and, in one sense, acting more fairly. For this to happen, I believe that society must see improving levels of income equality and positive environmental and social change being driven by the flow of capital.
How can the industry become ‘unnecessary’ by being disintermediated by outside organisations that are trusted and/or can provide greater societal benefits?
The industry is immense and highly profitable but delivers questionable levels of value. It lacks the trust of the broader community and is seen as self-serving and deliberately obstructionist. I think it is highly likely that the incumbent industry will be disrupted by those with a greater focus on the consumer and a greater sense of the corporate responsibility to serve multiple stakeholders. However, incumbency is powerful. A positive outcome would see the industry increasingly adopting these ideas itself.
Does the growth in impact investing and the ability to generate social and environmental impact alongside a financial return reveal where the industry is heading?
All investing generates externalities — the second and third order consequences of an allocation of capital, and so all investing has impact. The first stage was to recognise that these externalities exist. The second, but much harder, stage is to be able to measure them. The growth of impact investing has involved more effort and focus on the targeting and measurement of these externalities. This is unequivocally positive as it better reflects the complex adaptive system of our world and should lead to (a) a broader sense of stewardship and responsibility and (b) decision making that is more optimal for society.
Will impact investing ever be able to deploy capital at a scale substantial enough that investment management can help improve the world?
The current impact investing industry, in its very early stage, still has some challenges that have limited the ability of large institutional investors to take part in a very meaningful way. The challenges are three:
- Lack of scale
- Lack of liquidity
- Lack of suitable intermediaries
I believe all are solvable. Over time, as the science of the measurement of externalities improves, an increasingly broad spectrum of investments will be considered ‘impactful’. For the moment, however, there are three areas which represent the most logical opportunities to provide scale. They are:
- Social infrastructure (especially housing)
- Renewable energy
- The developing world
All three represent both profound social or environmental challenges that are immense in scope and have return streams that can be identified.
For impact investing to deploy capital at a scale substantial enough to help improve the world over time, the industry could start by working together to identify practical investment solutions in these areas. An important first step in changing the ways the stewards of global capital see their responsibilities is to demonstrate to large asset owners, for example, that strategies exist which can deliver strong financial returns and measurable social or environmental impacts in ways which meet their governance model and fiduciary responsibilities.
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