The investment system must be transformed to become a vehicle for inclusive growth

This month, we mark the 10th anniversary of the 2008 financial crash with distressing levels of poverty prevalent in the UK.  According to the Joseph Rowntree Foundation, one in eight UK workers (3.7 million) was living in poverty in 2017.

We will find it hard to tackle this as long as our economy remains oriented towards short-term thinking. To create secure, well-paid jobs, we must rethink the behaviours and incentives in the system.

Take private pensions, a hugely important industry that ShareAction has long campaigned to make more sustainable and accountable to savers. These schemes are investing £3 trillion of our money. Many of them are investing over long periods of time and, for this reason, have huge potential to be vehicles for inclusive growth. In practice, however, market expectations mean their investments are usually too focused on the short-term.

Pressure from investors often results in short-term thinking on executive boards: for example, in a reluctance to invest in workers’ wages. The upshot, however, is that everybody loses out over the longer term: the worker suffers the deprivations of a low income; and the employer sees lower productivity, higher staff turnover, and more spent on training and recruitment costs.

Ironically, many workers mired in in-work poverty have been automatically enrolled into saving with a pension fund which invests in companies that pay poverty wages. How, then, can we use our pensions to create better jobs?

The Living Wage Foundation works with employers to put in place an hourly rate of pay calculated to cover the real cost of living. ShareAction has joined forces with the Foundation on this, supporting investors like pension schemes to engage with the companies they invest in and encourage them to pay the Living Wage. This has seen some big successes and 36 FTSE 100 companies are now Living Wage Employers.

Some say that pension trustees shouldn’t be thinking about social concerns – that they are bound by their fiduciary duty simply to maximise returns for the scheme’s members. But these objections result from widespread misconceptions about this area. Historically, many trustees and advisors have felt they have to ignore environmental, social and governance (ESG) issues, such as poverty pay, when they invest on behalf of savers. Yet these factors often pose significant financial risks and opportunities for pension schemes over the longer term and, as such, should be taken into account.

Fortunately, the ground is shifting. This month, after a consultation process that ShareAction followed closely, the Department for Work and Pensions (DWP) unveiled important new regulations confirming the relevance of ESG for pensions investment. We hope these regulations will bring clarity to the confusion.

These regulations will also increase transparency for savers, by requiring many pension schemes to report on what they’re doing to take account of ESG factors. Surveys indicate that pension savers care about how their money is invested, and there is real appetite for action on the Living Wage. DWP’s regulations are an important step in the right direction but they are only a first step. Giving savers a stronger voice, through better rights to dialogue and representation in pensions, would do even more to drive out bad practice in both the investment and corporate sectors.

All parts of the investment system – pension schemes, asset management firms, investment consultants, company boards – need scrutiny and reform. Collectively, these actors can transform the UK’s investment system into a force for good. The challenge falls to policymakers to bring this about: an ambitious but achievable task. The systems change required for inclusive growth is a prudent investment – if we pursue policies that recognise this, our economy will be stronger for it.