Citizen Smith: Ex-CFA boss urges regulators to drive ESG

Reflecting on how best to use his experience, former hedge fund industry guru Paul Smith wants to help investors improve how they deploy money, and talks "purposeful capitalism".
Citizen Smith: Ex-CFA boss urges regulators to drive ESG

Having stepped down from his role as global chief executive of the CFA Institute in September, Hong Kong-based fund industry veteran Paul Smith thinks his next challenge may well lie in the developing world.

And he is of the belief that the governments and regulators should be driving the financial industry towards a more responsible form of capitalism. 

Smith, who turned 60 last year, said it was unlikely he will be involved in another big corporate role. “I don’t think people should expect me to be re-emerging in that sense,” he told AsianInvestor.

Instead, he hopes to devote his attention to continuing some of the work he was involved in at the CFA Institute supporting financial services professionals in Asia, Africa, Eastern Europe and Latin America. 

“There’s lots to do, particularly around the area of sustainable, purposeful capitalism. Figuring out how to create a finance industry that is focused on delivering a more obvious good for society than [it is] today.”

Paul Smith

The momentum that has built around environmental, social and governance (ESG) issues in recent years is feeding into the idea of a greater purpose for capitalism, said Smith.

“Those debates are raging now within the investment industry and with regulators. They are resonating with the public too. Clearly climate change is an enormous catalyst for that.”

But structural issues persist at a corporate level and among global regulators, he lamented. “We live in a connected world, but it’s becoming obvious to everyone that we don’t have connected supranational bodies that enable us to resolve these problems."

“The major trading blocs are pulling apart from each other in terms of global governance," Smith added. "So we’ve got this war at the moment between politics and the underlying issues. That’s the concern; that the politics are working against what we all need at the moment.”

His comments recall the oft-quoted line of Jean-Claude Juncker – at the time prime minister of Luxembourg and he later served as president of the European Commission – on the challenge facing governments seeking reform: "We all know what to do, but we don’t know how to get re-elected once we have done it." 


Based on Smith's experience of extending the CFA’s charter into China, India and other emerging markets during his near-five-year tenure as CEO, he believes it’s easier to talk about purposeful capitalism in developing countries than developed ones.

“People [in emerging markets] get it intuitively; they recognise that things don’t work so well in their own countries, because their financial services industry is poorly developed.”

On a similar note, Smith thinks he will most likely end up working in the non-profit sector. “It’s an awful thing to have to say, but it’s true nonetheless: the for-profit world ignores the developing world.

“[Emerging market companies'] investment returns are 10 or 15 years away, perhaps, because they’ve got to build a business. Most public companies in the financial services world can’t afford to have that quarter-over-quarter profit drag. So the people doing interesting things in the developing world are NGOs [non-governmental organisations] primarily.”

While much of the private capital going into developing countries is down to family office philanthropy and impact investing into housing, education and healthcare, Smith said, there are still some interesting government initiatives in developing countries.

“Look at India, for instance, and the scheme they put in place three years ago to give everyone a smart ID card that was attached to a bank account and an insurance policy. That sort of thing is a combination of financial technology, financial services and government regulation. I like that, where you’re getting the industry, the client and the regulator all on the same side of the fence.”

Smith is also encouraged by the fact that the smart money in ESG is finding ways to mobilise funds into industries to resolve some of the problems around climate and sustainability.

He acknowledges that the financial industry still has a long way to go. “Most of us are intermediaries, and we have clients that we need to appease, so ultimately we are driven by investment return. So to an extent, the finance industry is an easy whipping boy.”


But changes to the system are really in the hands of the government and regulators, he argued. “What is going to make industry change is if the regulator alters the rules of the game. That’s what needs to happen, whether through a carbon tax or other mechanisms. Investment dollars need to be purposely directed towards companies and opportunities that will maximise the value in more than just dollars and cents.”

The societal impact of companies and their communities has yet to be properly addressed, said 'Citizen' Smith.

“We don’t account for all the things that a company does to the community. In that context – it’s not a perfect analogy – but in rustbelt America, when a car company closes down a parts manufacturer in some town in Ohio, the whole town goes bankrupt. Schools have to close, people’s properties are devalued.

"Those societal costs are not charged to the company," he pointed out. "The company is able to make an economic decision that is divorced from its impact on the community that hosts it.”

Smith thinks countries should, through regulation, connect corporate action to the downstream consequences and force companies to account for them. The upshot woud be that "ultimately, companies make different decisions, based on a broad set of principles rather than [just] dollars and cents. 

"The finance industry can participate in that conversation," he said, "but it’s also got to take place at a much higher level.”

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