While financial analysis was telling one story, a wider look at the bank’s practices, competitive environment and the strains on its customers pointed to danger ahead. As such, Abil’s collapse is a ringing endorsement for incorporating a wider range of investment analysis tools - such as environmental, social and governance screens - into the investment process.
Investment is about managing risk and advocating responsible investment policies will not eliminate the risk, but may uncover additional sources. Arguably there was not enough scepticism around Abil as the financial services industry was the catalyst that delivered the global financial crisis and the great recession we have been living with for over six years.
Certainly, there was mismanagement and, arguably, questions of integrity around microlender practices as regards customers – but that’s not (yet) something you’re going to be thrown in jail for. Indeed, globally there has been precious little personal retribution against those who exploited the financial system causing such great economic destruction.
Thirty years ago as my generation graduated from university, we knew there was exploitation in the world but we believed we could do better than our parents’ generation. In the ensuing period we have seen some startling trends. For example, 40% of the world's wealth is in the hands of 1% of the population. According to the Forbes top ten list in 1986, the highest-paid CEOs earned in aggregate $57.88m.
Twenty-six years later, the ten highest-paid CEOs earned more than $616.40m in total - a 965% increase compared to a 103% rise in the consumer price index over the same period. The growth of workers’ income has stagnated, while corporate profits have accelerated sharply. This seems unfair and unjust.
A self-indulgent frenzy
However well intentioned, it seems clear that my generation became co-opted into the system and has spent the last 30 years in a sort of self-indulgent frenzy.
As an advocate for responsible investing and a fiduciary mindset, there is perhaps no more damning indictment than a recent CFA Institute study which indicated only 52% of investors said they trust their asset manager to “do what is right”. That’s staggering: your asset manager is the person you are supposed to trust to look after your savings.
Combine unfairness, injustice and mistrust and we can understand why there may be a backlash in the form of higher taxes and more regulation. But rules can only go so far, and the critical buttresses are an ethical framework and fiduciary culture.
I believe that there is no obstacle to making investments both profitably and responsibly. In other words, you can align investments with society’s development.
Since the late 1990s there has been a growing group of investors who wanted to "do well and do good" with their pension investments. These investors understand that responsibility and profitability are two sides of the same coin and they want their investments to have a positive developmental impact.
For nearly 20 years, in the wake of South Africa’s transition to democracy, we’ve had the honour of mobilising people’s pension fund savings for various forms of infrastructure and social development investment - such as low-income housing, hospitals, roads, rail, power, telecommunications, rural development, urban redevelopment and much more.
But we must never lose sight of the fact that we must protect and grow those savings. We have no right to offer “free” money to any project or business, no matter how socially beneficial. Our primary fiduciary duty is to look after other people’s savings - and that, in itself, is a worthy mission.
It is certainly possible for investors who are doing “good” to also do “well”.
It is axiomatic that in making investments with positive impact (eg hospitals, education) that you must first avoid investments with negative impact (eg gambling, armaments, pornography). Between the two poles of “clearly right” and “clearly wrong” lies a grey area where companies might improve their practice. And it is in this area that we try to engage with the world as it is, toward the goal of the world as it should be.
There are finance professionals of integrity, but many of my generation of finance professionals have committed sins in their singular pursuit of self-interest. The fact is that the sins could not have been committed if the owners of the money had not abdicated the power and responsibility that comes with it.
*Andrew Canter is the chief investment officer for Futuregrowth Asset Management.