Global financial regulatory reform is a priority at this week’s G-20 summit in London. What Bloomberg calls “an effort to rewrite the rules of capitalism” was called a “non-negotiable goal” by French President Nicolas Sarkozy and German Prime Minister Angela Merkel.

This is welcome news for investors represented by the Social Investment Forum (SIF), which has argued that regulatory reform is a necessary response to the global recession. “Systemic weakness after a generation of deregulation is a significant factor in the crisis,” said Damon Silvers, AFL-CIO Associate Counsel and vice chair of the Congressional Oversight Panel (COP).

As part of an April 1 SIF conference call, Mr. Silvers described the priorities of COP, which Congress created in November as part of its bank bailout plan. He was joined by Smeeta Ramarathnam, Counsel to SEC Commissioner Luis A. Aguilar, who presented her view of the prospects for regulatory overhaul.

Both speakers emphasized that reform must address questions of jurisdiction: Who regulates what, and in whose interests?

Protecting Investors, Not Just Institutions

Mr. Silvers said that reforms should improve both crisis management and “day-to-day regulation of the financial system.” While Treasury Secretary Timothy Geithner and others have focused on “systemic risk,” Mr. Silvers asserted that better “day-to-day” oversight would forestall crises that threaten the entire economy.

“How you define systemic risk defines your approach to regulation,” said Ms. Ramarathnam. She described the SEC as investors’ “first line of defense,” and faulted regulatory efforts that “focus on institutions, not investors.”

Mr. Silvers believes that this focus on shoring up individual banks, hedge funds and other financial institutions was a hallmark of the “generation of deregulation.” He said that there can be tension between bank regulators (such as the FDIC and the Federal Reserve) and the SEC. Consumers and investors often seek more transparency from banks, insurers and credit card issuers. Conversely, Mr. Silvers said that if, as a regulator, your first priority is the stability of individual banks, “you resist full disclosure of every bank liability.”

For too long, pro-institution regulators have held the upper hand, Mr. Silvers believes. Mr. Silvers cited the example of the home lending market, where “regulating mortgages was not a job for grownups to do.”

The problem was not confined to the public sector. He also criticized credit rating bureaus for understating risk because they had “a stake in increasing volume in the bond markets.”

The Prospects for ESG-focused Reforms

Both speakers believe that coming reforms will reflect the priorities of SRI/ESG investors. Mr. Silvers endorsed new SEC head Mary Schapiro, and approved of her appointments to “key policymaking positions.”

A key question for SIF members is how the government defines the fiduciary obligations of trustees. In the past, some SRI opponents have argued that trustees of pension plans may violate their fiduciary duty by considering non-financial ESG factors in their decisions. In response to a question from Jonas Kron of Trillium, Mr. Silvers said that attorney Phyllis Borzoi was now responsible for such questions as would arise under the Employee Retirement Income Security Act (ERISA). He said that there was “no better person on the planet” for the job.

“I’m confident she will do the right thing by this group,” Mr. Silvers said.

Mr. Silvers is wary of proposed reforms that may actually enhance the power of the Federal Reserve – an idea that he called “peculiar.” In response to a question from SIF Chair Lisa Woll, Mr. Silvers said that investors should be concerned “if bank regulators, who we’ve already seen are too close to the banks, are given power over a consumer protection agency like the SEC.”

“Is the lesson of the crisis that we should give the Fed more power? We think the Fed is an insufficiently public institution for the power it already has.”

A Call to Act Globally

To coincide with the G-20 summit, SIF and five of its global sister organizations issued a joint release on building a more sustainable world economy. The forums’ release described a platform of “long-term financial re-regulation,” and then summed up what’s at stake:

“Without recognition of these issues and measures to ‘hard-wire’ them into the stimulus and financial re-regulation packages, we believe that world leaders will miss an historic opportunity for reform. Such neglect will permit fundamental conditions that contributed to the current downturn to remain in place. Unchanged, these conditions could herald the next catastrophic episode for financial markets and the global economy.”