Public policy plays a critical role in regulating and framing the relationship between companies and their investors and, in turn, the relationship between companies, investors and wider society.
Policy sets the rules of the game; it defines roles, responsibilities and accountabilities, it creates risks and opportunities, and it mediates between competing interests.
A well-designed and implemented policy framework promotes economic development, fosters social inclusion and protects the environment. For long-term investors, effective policies are needed to ensure market integrity, resolve market failures and reform damaging government actions.
Historically, however, investors have taken a narrow approach to public policy. Investors have become engaged on an issue-by-issue basis. Too often, the focus has been on the symptoms of a particular problem, rather than on the underlying causes.
“Public policy engagement is a clear priority for us. It is an area where we can deliver the greatest gains in terms of our long-term investment objectives, and we can deliver these gains at a modest cost.”
Philippe Desfossés, CEO, ERAFP
Three main factors have driven public policy up the investor agenda.
In the wake of the global financial crisis, governments are proposing and implementing an extensive series of regulations to reform the financial sector.
These include new requirements for risk management, for capital reserves and transparency. They also grant significant new inspection and enforcement powers to regulatory bodies.
This has potentially profound and often unintended implications for investors and capital markets:
- requiring investors to introduce new risk management processes and to strengthen existing processes;
- strengthening the role and responsibility of investors in the governance of corporations;
- imposing new requirements concerning investors f management of cash flows and capital reserves.
While these regulations aim to restore stability and integrity to the capital markets, they also affect operational costs, balance sheet strength and asset allocation decisions.
Governments would like to stimulate economic recovery by mobilising investment in the real economy. With public spending constrained, and many banks still in the process of rebuilding their balance sheets, governments are looking to investors as a potential source of longterm finance, for example with regard to infrastructure and low carbon innovation.
Environmental, social and governance factors – climate change, energy security, human rights, income inequality, international development and water stress – are having an increasing impact on the ability of investors to deliver long-term returns. The solutions to these rely on resolving both the market and the policy failures at the heart of these problems.
“Collaborating on policy to promote a stable and effective financial system in support of sustainable development is one of the key ways in which the finance sector can be a force for good.”
Katherine Garrett-Cox, Chief Executive, Alliance Trust PLC
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The case for investor engagement in public policy