Sun, Apr 29, 2018 - Page 7 News List

Time for a global financial makeover

By Liu Zhenmin

UN member states in 2015 came together and committed to achieving a comprehensive and universal set of 17 Sustainable Development Goals (SDGs) spanning all dimensions of economic and social development.

Investment will be indispensable to achieving the SDGs, which aim to eliminate poverty, end hunger, combat climate change, build resilient infrastructure, and promote inclusive and sustainable economic growth.

Yet, three years on, we still have not done nearly enough to leverage our financial systems in pursuit of the SDGs.

The UN, in coordination with almost 60 agencies and international institutions, recently published an assessment of the world’s progress toward changing financing, policies and regulations to achieve the SDGs.

It finds that, despite positive momentum on sustainable investment, the goals will not be met unless we shift the entire financial system toward long-term investment horizons, and make sustainability a central concern. Without a long-term perspective, certain risks, especially those associated with climate change, will not be priced into private investment decisions.

Global financial flows are vast, yet the quality of investment matters. Short-term investment patterns are driving capital-market and exchange-rate volatility, and significantly raising the costs and risks of sustainable investment, particularly for developing countries.

If we create incentives to steer the flow of financing toward long-term infrastructure projects such as bridges, roads, and water and sewage systems, we would be making a major contribution to both development and stability.

Those investment projects must also be more environmentally and socially sustainable. Because today’s investments, particularly in energy systems, will lock in development paths for decades to come, more must be done to ensure that investments now, and in the future, do not undermine our efforts to address climate change. Moreover, as with all economic policies, gender equality needs to become a central consideration.

Transforming finance will not be easy. Today’s capital markets are highly oriented toward short-termism, as evidenced by capital-flow volatility and the short holding period of stocks in some developed markets, which has fallen from an average of eight years in the 1960s to eight months today. While long-term institutional investors hold about US$80 trillion in assets, with about half of these representing long-term liabilities, nearly 75 percent are held in liquid instruments, whereas just 3 percent are in infrastructure.

The same tendency is prevalent in the real economy. In 2016, S&P 500 companies spent more than 100 percent of their earnings on dividends and share buybacks, which boost stock prices in the short run, rather than raising long-term value through investment.

A McKinsey Global Institute survey in February last year found that 87 percent of corporate executives and directors feel “pressured to demonstrate strong financial performance within two years or less,” while 65 percent say that “short-term pressure has increased over the past five years.” Moreover, 55 percent said they would delay investments in projects with positive returns to hit quarterly balance-sheet targets.

Shifting investors from short-termism toward long-term thinking is a prerequisite for achieving all of our economic, social and environmental goals, but the private sector will not make this transition by itself. Policymakers must step in and provide leadership.

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