The Future of Capital Markets

Introduction

Well-functioning capital markets are critical to economic development and social progress. In the 21st century, capital markets and the financial sector have played a leading role in the creation of a global economy that has promoted economic growth and lifted millions out of poverty in developing countries.

At the same time, the increasing influence and power of the financial sector throughout the world has created new challenges for both capital markets and the societies they serve. The sheer size of large global financial institutions has overwhelmed the ability of governments alone to create a regulatory framework that can ensure that capital markets operate efficiently and in the long-­term interests of investors and society. The recent Great Recession and the subsequent regulatory response provided a clear demonstration of the damage that can occur both economically and socially in the absence of such a framework.

The High Meadows Institute’s Interest and Approach

While recognizing the critical role of governments, our interest is in the role business leadership should now play in contributing to a framework for a sustainable capital market system equal to the challenges of a global economy. Our goal is to identify where the best opportunities for this leadership lie and mobilize financial sector leaders around them. Within this context, we have identified two key categories of challenges.

Governance and Leadership
How can asset owners, asset managers and intermediaries in the financial system take greater individual and collaborative leadership for ensuring that the industry operates sustainably and in the long-term interests of both investors and society? What values, culture and incentive system reforms are needed?

Valuation
How can sustainability factors be integrated into mainstream financial valuation and asset allocation models that drive financial decision-making? What are the metrics and standards needed for this and how can the industry take leadership in the development of them?

The first phase of our project, working with guidance from our advisory board, will include conducting research on these two categories of challenges. Reports on our findings are published as developed and posted in our resource center here.

How Integrated is ESG in Capital Markets?

The Institute has published Charting the Future for Capital Markets: A Survey of Current Progress and Practices which looks specifically at how financial institutions define “sustainability” and are working to incorporate non-financial data on environmental, social, and governance (ESG) factors into their valuation models and investment strategies. The report starts by examining the leading methodologies measuring the impact of “intangibles” and ESG factors on financial performance. It then looks at the current strategies and practices of top asset owners, asset managers, credit rating agencies, investment consulting firms and stock exchanges based on publicly available data. A summary of the findings is below.