Asset managers say capital markets must be ‘servants of society’

Capital markets must be reformed to better serve society, examining risks other than traditional financial metrics, according to a UK think tank.

The report by Tomorrow’s Company argues that threats to quality of life, climate change and future nutrition need to be better addressed by capital market participants, as the market has a “vital” part to play in meeting such human needs.

Mark Goyder, chief executive at Tomorrow’s Company, said it was important for markets to be “servants of society and not behave like the masters of the universe”.

“We need to design the rules of markets and shape our habits as market participants so we see life this way,” he said.

The report, titled ‘Tomorrow’s Capital Markets’, argues that there is a need to understand that an asset’s value is “multi-dimensional rather than simply financial” and suggests a greater focus on environmental, social and governance matters.

“It is about building risk resilience now and for the future,” the report says.

“It is about identifying the opportunities that come from dealing with challenges we need to urgently address.

“And it is about recognising that addressing these challenges and achieving acceptable, if not superior, risk-adjusted returns are not incompatible aims.”

The report adds that it is about ensuring money is not being invested “only to end up in a miserable world”.

The report follows on from a number of similarly themed reports by the think tank, which argue that short-term investment is “yesterday’s game”, as well as a list of recommendations by asset owners on how to improve stewardship.

The new report, supported by consultancy Towers Watson and asset managers including Aviva Investors and Hermes Investment Management, also stresses the importance of aligning incentives with the interest of investors.

Damien Carnell, director at Towers Watson and a member of the report’s steering group, emphasised the need to understand how incentives could lead to “unwanted consequences”.

“In future,” he said, “there needs to be a much greater awareness of the design process, the importance of governance in design and operation, and the role of good corporate culture for incentives to be improved.”