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IPE special report May 2018

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Carlos Joly: I support the Tobin Tax and UNPRI members should do the same

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  • Carlos Joly: I support the Tobin Tax and UNPRI members should do the same

While many in the industry have strongly opposed a transaction tax, Carlos Joly argues that the European Union's (EU) recent proposals not only show backbone on part of the 27 countries, but also that responsible investors should be in favour of the measures.

Finally, it seems like EU politicians may be getting some spine. The proposed tax on financial transactions hopefully signals a line is being drawn on the capitulation of economic policy to bond market blackmail. Institutional investors worried about financial markets disfunctionality and the stock market implosion should support this proposed tax heartily. Here's why.

Firstly, from a fiduciary point of view, it's the responsible thing to do.

Large institutional investors have an inextricable interest in governments managing receipts and borrowings against expenditures in a reasonable way. Institutional investors have a stake in the stock market as a whole. Whether a pension fund considers itself a "universal owner" or whether an institutional investor follows a predominantly passive index-linked investment strategy, the impact of the current crisis is the same: asset destruction. A falling tide grounds all boats. The wrong macro-economic policies - fiscal austerity, socially regressive taxation, and failure to renew basic infrastructure - are causing economic recession, job depression, and asset deflation in developed economies.

The US political system is unable to act reasonably. It has sadly degenerated into a reality show. Congress, holding the trump card, is bent on low taxes on the rich and on aborting any government stimulus in the absurd belief this will magically prompt business to hire people and invest. But nobody in their right mind invests in falling demand. Magic is no basis for fiduciary duty. With this new tax, the EU is sending a signal it may be leaving magic aside.

Pension fund fiduciary duty in the current context must mean supporting policies that create real economic growth and employment. Firing and cost cutting by businesses has pretty much run its course, there is little fat left to cut. Margin growth is played out. Demand creation is the only option left, and that requires expansive investment policies by governments. Inasmuch as this tax will support that, investors need be for it.

Secondly, from a political point of view, it's tactically a smart move.

A week ago I gave a talk in northern France to some 400 owners of small and medium-sized businesses. In the Q&A I indicated why I was for the separation of banks into transaction, savings and lending institutions on the one hand and at-risk investment banks on the other, with government protections for the former and none for the later; and why I believed any further bank bailouts should be subject to conditionality that funds be used for lending to business. I did not expect the standing applause. The pent up anger against banks, brokers and traders runs strong and deep. Banks beware - bullying has its limits. If bank lobbyists derail this tax, I have no doubt pressure will build up for more drastic action.

Thirdly, from a social point of view, it's the right thing to do.

The past decades have seen an enormous transfer of income and wealth in developed markets from lower and middle deciles to the upper deciles. Much of this comes from tax breaks for large corporates and the wealthy, as well as royal compensation to senior execs, bankers and traders at the expense of compensation to middle and lower income employees. Think of the proposed tax on financial transactions as a sales tax or VAT. As such, at 0.1% on stock and bond trades and 0.01% on derivatives, it is nothing compared to the usual 25% VAT in Europe, which is a regressive tax penalizing people with lower incomes. The financial transactions tax has the unusual virtue of being a progressive VAT that taxes only those who have the money to buy stocks and bonds and deal in derivatives.

Finally, from an ethical point of view, it's a no brainer.

The public having spent hundreds of billions of dollars and euros bailing out banks and insurers, with arguably scant benefit to those contributing, a requirement to pay back a fraction in the form of this tax seems like a step in the right direction towards retributive justice.

What might go wrong with the tax? As the FT's Lex column pointed out at the end of last month: "The key issue is avoidance. Unless all jurisdictions set a unified tax, Tobin taxes [like this proposal] become an invitation for financial engineering, and a marketing tool for offshore centers."

I believe sufficiently strong punitive measures can be built into the law to discourage off shoring. Which bank CEO and board would risk suspension - even if temporary - of its licence to operate if caught cheating? Lack of universality is too often used as an excuse for self-interested protectionism. It has not stopped the UK government from doing the right thing by enacting strong carbon emissions control legislation, nor should it stop it from voting for the transactions tax.

How, then, should institutional investors and investment professionals support this tax? By lobbying for it and by pressuring banks in their portfolios not to lobby against it. Most large institutional investors engage with companies on environmental, social and governance matters, or say that they do so.

Take the Principles of Responsible Investment (PRI), for instance. This initiative boasts 240 pension funds, 525 investment managers, and 151 professional service partners representing many trillions of dollars in assets. In my view, no signatory to the PRI should lobby against the tax and those that do or support industry associations that do have no place in the PRI and should be asked to leave.

The PRI should lobby in favour of the tax, concentrating its efforts on any EU members that might oppose it. In short, it's a matter of fiduciary responsibility, social fairness, and political smarts.

Carlos Joly is visiting professor of finance and climate at Ecole Superieure de Commerce, Toulouse, France, and formerly in senior management of a leading Scandinavian asset management company. He was also co-chair of the of the expert group that drafted the PRI.

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