Preventable Surprises is pleased to publish a new discussion note on the financial services sector as part of the Corporate Lobbying Alignment Project (CLAP). The discussion note considers opportunities for engaged asset owners and other investors to address lobbying and policy influence by the largest players in the financial services sector. Financial services sector firms dominate all aspects of the global economy which makes the sector an important engagement target for ESG investors and others concerned with systemic risks including climate change, biodiversity loss, and income inequality as well as long-term financial stability.
It is difficult to develop and deploy stewardship strategies in the sector, since it involves the lobbying practices of asset managers themselves, or concerns the banking and financial services conglomerates they form a part of. One the one hand, this is a conflict of interest and calls for external intervention, including from asset owners who are the focus audience for the recommendations below. On the other hand, investors who increasingly understand the global political and economic dysfunction stemming from corporate capture would do well to begin addressing this in their own organisations. Beyond this, regulation looms.
As a result of the global expansion of the financial sector over the past decades, financial services firms are deeply involved in regulatory processes across all areas of public policy. This creates new risks for investors in the sector, particularly pension funds and other long-term fiduciaries. Increasing concentration in the banking and credit ratings industries, for example, create risks of policy capture and enable risk taking that can lead to systemic failures in the form of banking crises.
The note considers corporate influence across key market segments and identifies several areas for productive investor engagement. Long-term asset owners can engage with the financial services sector to better understand and then address reputational, legal, and market risks created by lobbying and influence by companies and their trade associations. Asset owners committed to engaging with the risks linked to policy capture and negative lobbying in the financial services sector can:
In designing a collaborative engagement programme to address lobbying by the asset management industry and other business segments in the financial services sector, asset owners can take inspiration from existing shared statements on the need for lobbying disclosure, including the European investor expectation document on corporate lobbying on climate change .
Engaging with financial industry trade associations
Alongside targeted company engagements, the discussion note flags the opportunity for investors to engage with the policy influence programmes managed by large industry associations. Regulatory comment letters from trade associations like the Institute of International Finance (IIF) help companies shape governance frameworks in key markets, and this influence may create market risks for long term investors. Model laws on tax structures and all major areas of financial regulation published by the American Legislative Exchange Council (ALEC) are another powerful tool for shaping the regulatory environment that may create reputational risks for investors . By systematically engaging with the largest companies and trade associations in the financial services sector, investors can better understand the global risk profile and communicate clear and consistent expectations on the need for transparency and disclosure at the sector level.
Scaling up stewardship to address systemic risks in the 2020s
While these are not new areas for investor action, persistence and a scaling up of engagement to cover the largest firms in a coordinated, systematic way presents an important new opportunity for the 2020s. This coordination work could happen through existing investor networks coordinated by the UN-PRI, Ceres, the International Corporate Governance Network, and others.
Significantly, the largest investment managers are not yet providing this disclosure in a systematic manner, indicating opportunities to scale up engagement in 2021. BlackRock, for example, has had its own shareholder resolution from investors requesting more detailed disclosure of political spending. The resolution called for an annual report disclosing the company’s trade association and lobbying expenditures, and BlackRock’s procedures and guidelines for determining lobbying communications and payments.  Although BlackRock rejected this resolution, this work could serve as a model for disclosure across the sector.
The discussion note flags case studies across the financial services sector, including at HSBC. HSBC’s regular struggle with controversy shows that lobbying and influence cannot prevent the crystallisation of reputational risks, even at the world’s largest banks. Investors can be proactive and ask for full disclosure on lobbying and influence spending and make clear that smokescreens, astroturf, and the use of other influence tactics are not a replacement for robust corporate governance, adherence with regulations, and integrity in business operations.
Beyond banking, financial sector influence includes successful opposition to a financial transaction tax following the Global Financial Crisis , a well established revolving door between regulators and regulated companies , the use of smokescreens to divert public attention away from the core issues of how the global financial system is regulated and influence via trade associations and astroturf organisations like the Main Street Investors Coalition. These persistent issues all represent opportunities for enhanced stewardship and engagement by investors this year.
Join us to discuss and debate these opportunities in our financial services sector online roundtable this Thursday, 21 January at 10 am ET. Register here.
 ICGN Press Statement (07.01.2021) ‘ICGN Calls for Calm in the USA:’ https://www.icgn.org/sites/default/files/07_Jan_US_PressStatement.pdf
 ‘Shareholder Proposal – Production of an Annual Report on Certain Trade Association and Lobbying Expenditures:’ https://www.sec.gov/Archives/edgar/data/1364742/000119312519104809/d632173ddef14a.htm#toc632173_33
 ‘Lobbying to kill off Robin Hood’ (2012): https://corporateeurope.org/sites/default/files/publications/killing_robin_hood.pdf; ‘The future of capital taxation’ (13.12.2018): https://responsibletax.kpmg.com/page/the-future-of-capital-taxation
 ‘Osborne criticised over Treasury job for former bank lobbyist’ (09.12.2015): https://www.theguardian.com/politics/2015/dec/09/former-bank-lobbyist-to-head-treasury-office-tax-simplification