Rethinking the investment system – the launch of New Capital Consensus

Over the past few years, a growing coalition of Finstic, University of Leeds, Radix and Chatham House have been working together to better understand the fundamental flows of the UK investment system. Our collective mission has been to identify pathways that can better connect capital to social goals, giving savers enhanced individual and collective outcomes over the long-term.

Whilst some of the Accelerator’s work focuses on specific pathways for the transition (including recent enquiries int the Bioeconomy and Regenerative Design), this strand of enquiry takes a more systemic and “pathway neutral” perspective. Given the major disruptions and transformations we will encounter in the coming decades, the work seeks to understand where the current investment system is not fit for purpose to meet these challenges– and how it can be changed for the better.

Across multiple conversations and geographies, we can see momentum building for a more a radical re-evaluation of the investment system’s role in shaping a fairer, more sustainable future. In this context, New Capital Consensus’ report plays a key role in understanding both the underlying systemic issues and how these interact with a broad range of industry perspectives and priorities.

The full report is a rich and detailed piece of analysis with lots to say. From the perspective of the Accelerator, we’re particularly interested in how investment reform can help address bottlenecks and reduced capital flows for the transition that arise from systemic short-termism, unequal distribution and non-productive investment. Lets take each one of these in a bit more detail.

A system-wide focus on short-term volatility, combined with regulatory safetyism, has contributed to a market that prioritizes risk minimization over finding the appropriate trade-off between risk and return.

For the transition, finding a different balance between risk and return within the investment system is a crucial step to channel capital into longer-term investments, likely to benefit a range of low-carbon and nature-positive transition pathways.

Currently, the dominance of global approaches to asset allocation have created capital deserts and lakes that restrict support for many emerging ideas and smaller-scale innovations, as well as inhibiting the flow of investment to many parts of both the economy and country. In particular, an over-focus on cost in Defined Contribution (DC), retail, and private investment has encouraged a passive investment mindset and helped to limit diversity in investment strategies.

For the transition, finding ways to expand the universe of investible activities will allow more capital to be allocated to early-stage innovative approaches and business models that deliver sustainable goals, as well as enabling more place-based investment in adaptation and resilience.

Currently, the dominance of low-cost, passive, and secondary investment approaches in the UK has limited the ability of capital to actively support innovation and long-term value creation. For example, if an investor buys more BT shares on the stock market, the money goes to the previous owner of the shares, not to providing BT with additional capital to invest in infrastructure.

For the transition, finding ways to reduce investment emphasis on rentier capital and an accompanying increase in productive investment are key priorities to empower savers to direct their money to benefits they seek to support, and to enable flows to better address real needs and drive tangible sustainable outcomes.

The full report provides more detailed analyses of these concepts and more, alongside concrete policy measures to actively disrupt ingrained industry practices and break reinforcing feedback loops that entrench current maladaptive behaviours.

For a UK investment context, the report underlines the need to focus on the specific incentives, dynamics and practices that drive the system. And whilst no single policy action will be sufficient in isolation, the report highlights a portfolio of relevant changes, including: facilitating the consolidation of private DB pension schemes; revisiting regulatory and industry risk measures to free up investment strategies and support institutional risk-sharing with clients; and reforms to a highly fragmented regulatory architecture.

Whilst the initial report focuses on the UK, it emerges from a broader discussion of investment systems globally, and a growing understanding of how different national and regional investment contexts and archetypes serve to support or inhibit productive investment in the transition. You can expect to hear more from New Capital Consensus in the coming months and years, as the team delves deeper into foundational analysis, country comparisons and practical implications for the transition.