NSFM opinion: Game-changing innovation

Penny Shepherd writes: Following the financial crisis, investment practices will not remain static. There are strong underlying pressures for change, even if restrained so far by barriers to entry and customer apathy.

Sustainable investment champions need to consider how the industry may alter over time if they are to influence effectively. This includes reflecting on the potential for disruptive innovation and indeed when and how to encourage it. It would be a historical error to assume the practices of tomorrow will be much like those of today, give or take some sustainability reforms.

So what will challenge today’s dominant practices over the next 5-10 years? How about these:

  1. Rising dissatisfaction with the ability of today’s investment management solutions to meet client needs. Issues include high costs for the value delivered, and volatility when clients value stability and show loss aversion.
  2. Structural changes in asset ownership, e.g. the long term shift from defined benefit occupational pension provision, the potential for insurance companies to take over historical pension commitments, the shift to personal rather than collective retirement provision, and the rise of sovereign wealth funds and emerging market asset owners.
  3. Nascent investment management approaches that are not fit for mainstream investment use today but, because they meet the demands of other users, may develop over time into mature solutions that displace today’s investment management incumbents. These may harness technological developments like the internet or respond to socioeconomic changes.

These forces may encourage investment management solutions that bypass the current investment chain. Here are just a few of the ways this could happen:

  1. The return of the conglomerate. Insurance companies, sovereign wealth funds and major companies shifting to direct long-term ownership and management of wealth-generating assets with less regard for external managers, liquidity or exit strategies.
  2. Crowdsourcing, perhaps through trade mutuals. As well as pooling long-term savings, consumers such as built environment professionals could pool their expertise to use the “wisdom of crowds” to supplant paid professional investment managers.
  3. Super-Kiva. Online consumer exchanges that build on today’s internet based microfinance markets to access a range of local investments from around the world; Ebay is already in this market and it is not difficult to imagine say Google, Amazon or Apple becoming key players.

Radical Victorians sought to improve the welfare of working animals while the development of the internal combustion engine rapidly marginalised their efforts. Sustainable investment champions today must influence which game-changing solutions emerge and succeed.

Penny Shepherd is Chief Executive of the UK Sustainable Investment and Finance association (UKSIF).

This article is part of our NSFM opinion series, in which participants propose specific steps towards real and sustainable market reform. They do so in a personal capacity. NSFM participants are invited to contribute to the series. Please contact Ebba Schmidt or Frank Jan de Graaf for further information.