Panama Papers: from point scoring to progress?

I am delighted to see at least some of the ethical aspects of investment hitting the headlines – but have a strong feeling that constructive debate would be more useful than political mudslinging…

Tempting as it is, I intend to stay well away from specific cases and take a brief look at three areas that I feel would be beneficial for the financial community to consider.

1. Investment and investors 

Going back to basics – having investments does not make anyone a criminal, super rich or even morally dubious!  Pensions, ISAs (which often invest via OEICs), endowments – these ‘products’ are widely used to pay off mortgages, save for old age etc and so tends to be rather useful.

The Panama Papers highlight the ‘offshore’ investment world, much of which is no doubt well managed and perfectly legal.  Some however clearly is not.  And it’s a big world out there.  Attention needs to focus on finding and addressing criminal activity and if necessary, reviewing any legislation or procedures that may have become outdated.

The key challenges for the UK financial services industry however is that people don’t generally understand it and so tar us all with the same brush.

Even well informed commentators struggle with product structures, tax treatment and related rules.  Passing no judgement on the reasons for this – today’s situation looks as though it could increasingly become a problem.  The (international) financial services industry, regulators, legislators and others should see the Panama Papers as a wakeup call.

2. Tax and investment –  sparring partners

All too often the ‘financial world’ appears to operate on the premise that ‘tax is bad’.  This is as short sighted as saying ‘wealth is bad’ – in my view.

Post financial crisis, Starbucks etc opinions have shifted and things are starting to change.  One of the problems appears to be that the benefits of taxation is rarely discussed in a balanced fashion.  Advisers are of course required to act in the best interest of their clients.  However it is also worth remembering that countries that do not collect enough tax (or other revenues) cannot function properly – think West Africa and Ebola.  Likewise – as many in financial community will say – countries that ‘over tax’ are unattractive to investors (ie employers), lose talent and incentivise tax avoidance – as illustrated by the Panama Papers.

In both cases extreme positions are ultimately damaging to business and society.  Neither is sustainable – or desirable.

Finding a sensible balance means encouraging investment (both corporate and individual) whilst ensuring everyone pays their way.  Of course this is not easy in a ‘globalised’ economy, particularly when money is tight – but I am not sure there is a workable alternative.

To rebuild trust and avoid potentially unwelcome consequences we need to encourage greater openness and collaboration – building on the premise that tax and investment are partners not opponents.  Publishing the odd tax return for the public to ogle at will not solve this.

3.  The elephant in the room – ‘where we invest’ matters

The elephant in the room is that it also matters where people invest – not just how they invest.

This matters for a number of reasons.  Investors power business. Individual investors are part of this.  Ignoring the relevance of investment selection drives a misalignment between the world we are building (through share ownership and other financial instruments) and the world we want to live in.

Reducing investment decisions to  a collection of statistics contributes to the general detachment people feel from their investments and can only fuel mistrust.  Reconnecting investors with their money can do nothing but good.

Sustainable, responsible and ethical investments offer a solution for this yet they remain at only 1.2% of retail fund assets according to the Investment Association – who label such options as ‘Ethical’ funds.

Part of the problem may be the name ‘ethical’.  This area is emphatically not a single strategy and not only about ‘ethics’.  In reality it is a mixture of different, very diverse  styles that reflect different opinions and exploit different opportunities.  Collectively they consider areas such as sustainability and environmental, social and governance (ESG) issues – as well as ethical issues like armaments, tobacco etc – building them into otherwise rather normal investment strategies and product structures.

Many of these investments actively look for ways to build the kind of future people generally say they are hoping for.

2015 saw the highest ever net inflows into retail ethical funds and this area is growing well.  Its potential to address some of the challenges of the financial services  sector remain largely unexplored however.  Now might be a good time to change that.

Where next?

My view is that it does no one any favours for people to invest in ways they are not comfortable with.

People with views on ethical, social or environmental and other issues should discuss these areas with their adviser, ask questions and take action.

Our new, free to use database tool and hub www.FundEcoMarket.co.uk is a starting point for those interested in this area.    It is designed for investment professionals – but open for all to use.

The purpose of Fund EcoMarket is to get this message out as loudly and as clearly as possible so that people can invest in line with their lifestyles choices, personal opinions and values.

(We do not offer advice or sell products.    The Fund EcoMarket  is paid for by our fund manager sponsors.

Our website offers further opinions on this topic in our ’30 people, 30 years’30 words’ Adviser guide to why ethical investment matters.’ See right hand column of www.FundEcoMarket.co.uk)

Or download guide directly from www.panaceaadviser.com/ethicalguide 

Julia Dreblow

11 April 2016