Efforts to counteract “excessive exuberance” in global finance may have led to regulation that constrains investment, Luisa Porritt learns
Pension fund money and infrastructure assets seem an ideal match. Pension funds hold plenty of capital and invest over a long period, while infrastructure requires substantial long-term capital. But only 1% of global institutional capital meets that need.
This inconsistency was highlighted last week at a joint symposium in Paris hosted by French insurer AXA and the United Nations Environment Programme (UNEP). Institutional investors, pension funds and insurers held $93 trillion of AUM at end 2013, and that amount may have since grown to more than $100 trillion, said Rintaro Tamaki, Deputy Secretary General at the OECD. But only 1% of it is allocated to infrastructure and green investments.
Regulatory tightening following the 2008-9 financial crisis may be a reason. “There has been an increase in complexity, but it is not always obvious this encourages systemic efficiency and flexibility,” said John Lipsky, former first deputy managing director at the IMF who is now Senior Fellow at the School of International Studies at John Hopkins University.
Tamaki emphasised the need to strike a balance between better regulation and recovering trade and investment. In 2008 liquidity was a key issue, but the high premium today’s regulatory system puts on liquidity makes it expensive to provide long-term financing, admitted Levin Holle, director-general for Financial Policy at the German Ministry of Finance. The result has seen much investment into ‘safe’ public bonds and little in equities or real economy assets, he said.
“Banks are not very good vehicles for financing long-term assets; they take short-term deposits of money and turn those into loans,” said Lipsky, adding that focus should shift to getting prices right and regulations out the way of developments needed to promote sustainability. “There is incredible liquidity, but extremely weak investment,” he said.
Fear of ‘excessive exuberance’ has permeated new legislation and the regulatory framework, said Luiz Awazu Pereira da Silva, deputy governor in charge of Financial Regulation at the Central Bank of Brazil. Lipsky and Tamaki agreed the system should be simplified, but Holle warned the political elite is reluctant until they become satisfied the system is robust enough.
Designing instruments for long-term investment and improving communication to investors about how certain products behave, for example that some products only deliver if held over a long period, might help to draw infrastructure financing, added Holle.
Lipsky argued the public sector may need to play a catalytic role, for instance by providing clarity on carbon pricing. Upon opening the conference, Henri de Castries, AXA’s Chairman and CEO, had said he is repeatedly asked by governments to be more open to infrastructure investment, but that regulatory changes make it difficult to increase what his firm is already doing.