Purposeful finance and the pandemic - RSA

Purposeful finance and the pandemic

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  • Picture of David Pitt-Watson
    founder, RSA Tomorrow’s Investor programme and chair, CDC Pensions Forum
  • Picture of Hari Mann
    Hari Mann
  • Economics and Finance

Finance is as important to our economy as the NHS is to our health. David Pitt-Watson FRSA and Hari Mann FRSA set out why the finance industry needs to act urgently to support companies and individuals during the pandemic – and how it should build a better economy once it is over.

The NHS ensures the health of the nation. The financial system ensures the health of the economy.

In the face of this pandemic, few doubt that the NHS carries out that role with skill and dedication. The financial system needs to show that it too has the skill and dedication to fulfil its purpose.

Finance needs to get on the front foot. Not for PR reasons, but because finance – banks in particular – are urgently needed. The life of thousands of businesses, and the jobs of hundreds of thousands of people, will depend on whether the finance industry is prepared for the challenges ahead.

We don’t know exactly what will happen. But the scale of the problem looks enormous. According to the Inland Revenue, 800,000 businesses have placed 6.3 million workers on furlough. Over a million people have claimed Universal Credit.

So what does the finance industry need to do?

In response to Covid-19, the health system has gone into overdrive: opening hospitals, recruiting staff, buying equipment.  The finance industry needs a similar response. Banks should be in overdrive helping companies prepare financially. They need to help companies and individuals find the support they will need – either directly, or with government help.

The finance industry needs to report back to the government what is happening, so that policy makers can make better decisions. We all know that, sadly, some companies will not survive. But if they are to fail, the finance industry must show, like the medics in our ICU wards, that they have strained every sinew to help companies stay in business. Small businesses need to hear from their bank about what to do and what help is available.

Any response will need financial resources. Banks need to hold on to all the capital they can find, not quibble over the payment of dividends. However uncomfortable it may seem, they surely can’t pay bonuses if the profits on which they have been calculated have evaporated and the money is needed to fulfil the very purpose of the bank.

Universal banks that have investment banking operations could redeploy their capital away from the investment bank, to support the real economy. Indeed, banks should consider whether they should take advantage of the relaxed rules for raising more capital.

Our finance industry also needs to think longer term

We need a new finance industry that recognises its purpose in using people’s savings to support a prosperous economy. One central benefit which savers should receive from an effective system is financial security; whether that be to ensure we have an income in retirement, or that we have adequate funds when we are out of work, or that our dependents are protected should we die. 

That goal will only be secured if our savings are put to work, building a new, and better, economy when the pandemic is over. Deploying the people’s capital to build sustainable prosperity. We need pension funds that can invest long term in the infrastructure we will so desperately need.

We need to find ways to stop our savings being spent on a costly ‘arms race’ where fund managers are no longer concerned about who owns the money they invest, and instead spend billions in trying to ‘outperform’ one another. We need leadership to stop those expensive activities that are ‘not socially useful’. We should no longer be quibbling about whether those who invest money should tell customers how much it has cost to manage their savings – of course they should.

This pandemic should be a wake up call on the need to tackle the climate emergency

Global warming is an existential threat. The disruption we face today as a result of Covid-19 is minimal in comparison to the disruption faced by the threat of climate change and its effect on our world. If there are lessons from Covid-19, they are to be sure we work together and don’t leave things too late.

Some simple changes could make all the difference. The investment institutions use our savings to invest in company shares. In turn, those shares are used to vote for the boards that manage our major companies. From now on those votes should only be used to appoint people who will run their company in a way that is compatible with a sustainable world.

Covid has also taught us the value of innovation. The finance industry needs to ensure we are armed with new and faster ways to innovate, leading the way for more effective technological solutions on the road to lower emissions.

This tragic pandemic is the opportunity to show how vital finance is. The financial system needs a unified voice, and a will to show the same skill and dedication in its care of customers as the NHS has shown to its patients. Finance is as important to our economy as the NHS is to our health. This is its opportunity to be fulfilling that purpose, now and in the future.

David Pitt-Watson is a fellow at Cambridge University, Judge Business School. He leads the RSA’s Tomorrow’s Investor project. He was formerly a director of Hermes Fund Managers and founder of their responsible investment activities.

Hari Mann is a Professor of Strategy and Innovation and has worked with the RSA Tomorrow's Investor project for over ten years. Previously, he was an investment banker in the City.

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  • Finance is an enabler.  The challenge is much wider.  We have to ensure that all forms of enterprise have a clear purpose, a reason to exist and that it should be focused on enhancing the well being of all stakeholders in the enterprise.  Too often criticism is only levied at those businesses that are publicly listed on a recognised stock exchange.  These days there are more businesses held privately and by Private Equity than there are listed business.  These too should have a purpose.  Private Equity has to be cognisant of the need to advance the interests of society at large through the investments it makes and not only to advance the financial well being of the very limited number of people able to invest in the Private Equity Funds.  This is not a cry to move away from the concept of shareholder value per se.  It is a call to ensure that whilst acknowledging that the investors who make available the capital for enterprise to utilise must receive a fair return they also have a very real social responsibility.  This has been made abundantly clear by the recent events. 

  • This commentary by David Pitt-Watson, Cambridge, and Professor Hari Mann was stimulating and informative. I particularly liked the ideas on dividends, bonuses, redeploying capital into the real economy, raising more capital. and banks being especially proactive at this time.The authors quite rightly say the economic situation runs in parallel with that of the pandemic. The Chancellor is probably in the process of making far reaching decisions, for example on furloughing funding, whether to give it another month or taper it in July. He has already said it won't be a cliff edge. Tapering bothers me for those whose pay is not being made up. If it is cut to 60%, that will be a 40% cut overall and realistically that could mean cutting back on essentials, or running up significant debt when jobs may not automatically return in every case. Big decisions. The BOE said today they are committed to the welfare of the people of this country which was very reassuring. Thank you for this essay.


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