Matthew Kiernan, Inflection Point Capital Man. & Paul Clements-Hunt, The Blended Capital Group:“Investors who fail to develop systematically aware investment processes risk commercial extinction”
There is no shortage of high-wattage brainpower directed to the promotion of longer-term finance and investing.
We have just seen the OECD, the Paris-based rich economies club, convene a high-level roundtable on the topic in response to a G20 request. The resulting OECD report and draft guiding principles were debated at the G20’s St Petersburg summit in September.
The European Commission has delivered the inevitable Green Paper on the policy framework needed to foster long-term finance, and that follows hard on the heels of the UK government’s Kay report.
In March 2013 the G30, the key private sector interlocutor with the G20, issued what is arguably the most interesting report of the lot providing 15 explicit and pragmatic proposals to hard wire longer-term financing mechanisms into our global financial system.
In short, there is a palpable and pervasive sense of angst in governmental, multilateral, and investment industry circles about what is – accurately, in our view – perceived as excessive short-termism in the financial markets, not to mention a corresponding short-term bias among company boards and executives.
The litany of proximate causes (and symptoms) is by now well known. The targeting and rewarding of short-term financial performance; the almost universal working definition of ‘risk’ as the level of deviation from momentum-fuelled, capitalisation-weighted benchmarks; the concomitant impatience by clients with underperformance; herding behaviour by board trustees and asset owners alike; the dominance of algorithmic trading in major public stock exchanges; and so on.
Perhaps a somewhat different perspective on the problem might be of some use. In our view, a partial solution is already at hand – strategically-aware investing (SAI). The investment thesis is quite straightforward. A powerful series of secular global megatrends is rapidly re-shaping the environment in which global companies compete. This transformational environment requires an entirely new set of capabilities. Qualities such as innovation capacity, adaptability and responsiveness, and ‘stakeholder management’ are the new currencies of competitive advantage in a world of high-velocity, high-transparency hyper-competition.
Investors wishing to distinguish between tomorrow’s winning and losing companies must therefore do two things:
• They must pay much greater and more systematic attention to these game-changing megatrends;
• They must pay even closer attention to their highly differentiated impacts on and implications for individual companies. Even within the same industry sector, those impacts can vary from company to company by 30 times or more.
Investors face a simple, binary choice. Do they wish to explicitly acknowledge the changing characteristics of the world in which they work or not? But most remain wedded to precisely the same investment assumptions, analytical models, tools, and information sources they used 20 years ago.
Just think about the various global megatrends now reshaping the competitive landscape for both companies and their investors:
• The dramatically increased complexity, transparency, and velocity of change in companies’ competitive environments, which places an unprecedented premium on strategic management, innovation, corporate adaptability and responsiveness;
• Substantially increased demand for energy, as well as water and other critical natural resources, driven by a combination of explosive population growth, urbanisation, industrialisation, demographic shifts, and growing consumer affluence and consumption, particularly in emerging markets;
• A general decline in both the credibility and financial capacity of governments worldwide, with a corresponding increase in the necessity for corporations to shoulder more of the responsibility for tackling environmental and social challenges, while working to rebuild reputations deeply tarnished by scandals and crashes;
• Substantially increased stakeholder expectations for improved sustainability performance from both companies and investors, accompanied by much greater information transparency with which to assess that performance, and the ‘death of distance’ thanks to social media;
• An inexorable shift in the world’s centre of economic gravity towards emerging markets, where sustainability-driven risks and opportunities are greatest;
• Growing threats to social and political stability, driven by income inequality – the world’s 10m rich and super-rich doubled their assets from $22trn (€16trn) in 2000 to $47trn in 2012, or more than 25% of global financial assets – and chronic public health issues such as HIV/AIDS and malaria;
• The incipient trend among state and sovereign wealth funds, especially in Asia, to diversify and internationalise their investment strategies, in search of the higher returns necessary to provide adequate retirement and health benefits for rapidly-aging populations;
• The emergence of a new fiduciary paradigm for investors, requiring much greater transparency and attention to sustainability issues.
Let us put the case succinctly: investors who fail to develop processes and practices capable of systematically identifying the new company skill sets required to compete in 2013 and beyond risk commercial extinction. A shift to strategically-aware investing is surely just simple common sense.
Dr Matthew Kiernan was the founder in 1995 of Innovest Strategic Value Advisors and in 2009 established the asset management boutique, Inflection Point Capital Management (IPCM). Paul Clements-Hunt is the former head (2000-12) of the United Nations Environment Programme Finance Initiative (UNEP FI), the original UN backer of the Principles for Responsible Investment (PRI) and a PRI Advisory Board Member for six years (2006-12). Clements-Hunt co-founded The Blended Capital Group in 2012, and is a senior global strategic adviser to IPCM.