Remarks by Angel Gurría,
Paris, 20 November 2015
(As prepared for delivery)
Ladies and gentlemen,
It is my great pleasure to be at today’s event, a key part of the Institutional Investors and Long-term Investment project. Before presenting the OECD’s latest work in this area, and our high-level contributions to the G20, let me take a moment to explain why long-term investment is so fundamental to the pursuit of stronger, greener and fairer growth.
In our Economic Outlook we expect the global economy to grow by less than 3% in 2015. This is the weakest growth since 2009 and well below the long-run average. This largely reflects further weakness in EMEs, with recessions in Brazil and Russia and the slowdown in China hitting activity in its key trading partners. Credit remains subpar in many advanced countries, particularly in the euro area and particularly for SMEs.
Stronger investment is crucial to strengthen economic growth. It will foster demand today, while at the same time laying the foundations for higher potential growth in the future. Some positive trends with respect to investment have been identified in the G20/OECD report on G20 investment strategies agreed by the Leaders this Monday. Based on G20 Members’ projections, average investment growth in the G20 should be higher than average GDP growth over the next few years. So there seems to be some light in the tunnel, at least in the emerging world. In OECD countries, by contrast, total investment is expected to remain subdued. In our Economic Outlook we project it to rise by a mere 3.2% per annum over 2015-16.
Having adopted fiscal stimuli during the crisis, many advanced countries have limited room for manoeuvre in terms of public investment. And as we have subjected banks to stricter regulations and scrutiny, they are less willing – or less able – to lend. Institutional investors have to fill the gaps, and indeed, they are becoming increasingly important in providing financing for productive investment. The assets of institutional investors have reached new levels, having increased substantially since the financial crisis: together, pensions, insurance and mutual funds managed around USD 90 trillion in assets by the end of 2014. And, as QE has soaked up large parts from the bond market, institutional investors are actively seeking attractive assets to invest their money. In fact, some preliminary estimates put the excess demand by institutional investors that QE has created at almost USD 5 trillion – a large gap that creates an important opportunity for investment in ‘real assets’.
Long-term investment will also be crucial for the successful transition to a low-carbon economy. The start of COP 21 here in Paris is less than two weeks away, adding to the importance of events such as this. New investment in renewable energy increased by 17% in 2014, to USD 270 billion, recovering from a decrease of 10% in 2013. While this is promising, much more is needed. And as Mark Carney has pointed out in the speech he gave at Lloyds in September, it is in fact in the interest of institutional investors to finance the de-carbonisation of our economy. Not only does this present an important business opportunity, it would also reduce their exposure to assets that might become stranded as regulation to fight climate changes makes the use of fossil fuels too expensive.
Investment is also a top priority for the G20. It is one of the Turkish Presidency’s three I’s: inclusiveness, implementation, and investment.
Investment, combined with increased trade and competition and supportive macroeconomic policies, are central to the G20’s goal of lifting the regions’ GDP by at least a cumulative additional two per cent over the next five years. Ambitious country-specific investment strategies, a core part of the plan, were endorsed by G20 leaders in Antalya earlier this week. If fully implemented, these strategies will contribute to lifting the aggregate G20 investment to GDP ratio by an estimated 1 percentage point by 2018. While more is surely needed, this would already be a good start.
Improving the investment ecosystem, supporting the financing of SMEs, fostering institutional investors’ involvement, and supporting the development of alternative capital market instruments and asset-based financing models are key to implementing this plan. This sounds like a ‘no brainer’, but there are numerous obstacles that need to be overcome.
The OECD has been supporting countries in their endeavour to lift investment on several different fronts. The OECD has supported the implementation of the G20/OECD High-Level Principles of Long-Term Investment Financing by Institutional Investors, which were endorsed by G20 Leaders in 2013. These principles set out solution-oriented policy recommendations aiming to mobilise productive investment by institutional investors. This year, the OECD delivered effective approaches for the implementation of these Principles and conducted a survey of how countries meet them based on an agreed checklist for country strategies.
The OECD has also developed Principles of Corporate Governance, which were endorsed by the G20 in Antalya last weekend to become the G20/OECD Principles of Corporate Governance. These principles aim at ensuring a strong corporate governance framework which incentivises companies to undertake more productive investment.
Regarding infrastructure investment, regulatory uncertainty is the number one issue. But investors also have to negotiate in an often harsh business climate, and there is a lack of profitable and “bankable” projects or appropriate financial vehicles. All of this is compounded by severe information gaps between interested parties. In all these areas, policymakers can play a constructive role. The OECD has sought to advance work on market-based financing for infrastructure, for instance laying out a comprehensive Taxonomy of Financial Instruments and Risk Mitigation Techniques used in the financing of infrastructure.
Long-term investment is a key contributor to growth, job creation and stability. And it can help finance the low carbon transition as will be discussed at the upcoming COP21. Given the constraints on government budgets and the considerable need for long-term investment now and in the future, particularly for infrastructure, it is essential that countries improve the efficiency of the use of resources and partner with the private sector to meet some of these investment needs.
Besides working on enhancing the macroeconomic and legal environments, many G20 governments currently have a key role in fostering long term investment not only by the direct use of funds, but also by playing an important catalytic role with respect to the mobilization of private financing.
Next year, the OECD will work with the Chinese G20 Presidency both to deepen and broaden the analysis on LTI financing. A program of work is emerging, including promoting diversified and innovative financing, addressing data gaps on infrastructure investment, and assessing the scope for infrastructure investment to become an asset class from the institutional investor perspective.
The OECD Long-term Investment project and this network of long-term investors will play an important role to advance the work and ensure effective policy responses.
Thank you for having participated in this two-day event on long-term investing!