Long Term Matters: What my illness is teaching me about investment
I first wrote about my cancer in IPE one year ago. It had grown imperceptibly into something large, ugly and life-threatening. Being diagnosed in the same week as President Trump’s election, its nickname was obvious: ‘My Inner Trump’.
I’ve been touched by the warmth of so many people, including IPE staff and readers. One colleague asked me: “What have you learnt that’s relevant for investment professionals?” Four things come to mind.
First, I’m learning to live with existential uncertainty, bad odds and, sometimes, bad news. When diagnosed with life-threatening conditions, we can be devastated, run from the diagnosis or embrace it and adapt. No prizes for guessing the smarter choice. The same goes for investment decision-makers today.
The UN’s 2015 Paris agreement gave humanity a one-in-two chance to keep global temperature rises below the 2°C threshold. Beyond this, things get scary for human civilisation. When told that my chemotherapy also had a one-in-two chance of working, this really shifted how I relate to climate risk. Would you take a flight with a one-in-two chance of arriving? Yet we seem happy to put human civilisation, perhaps with the exception of the 0.1%, on that plane.
We are living beyond our social and environmental boundaries in many areas: water scarcity, income inequality, antibiotic resistance are just three significant systemic risks. We sort of know this. The World Economic Forum reported that all five environmental risks – extreme weather events and temperatures; accelerating biodiversity loss; pollution of air, soil and water; failures of climate change mitigation and adaptation; and risks linked to the transition to low carbon – are now in the top quadrant for both likelihood and impact for the first time.
Every year, indeed every month, that we delay taking action increases the costs and risks significantly. But wilful blindness, whether explicitly or through support for incremental change (‘predatory delay’), is still our dominant response. Complacency about climate risk is particularly high in oil states like the US, UK and Norway. Only 6% of US directors think climate change is a material risk and the mega US financial houses are still lagging their European peers in pushing for norm changes that would encourage investee companies to adapt.
Second, I’ve learnt that ‘it’s your purpose, stupid!’, to paraphrase former US President Bill Clinton. Faced with a life-threatening disease, life’s purpose is what you think about.
So what’s the purpose of the investment industry? Remove the fancy words and look at where the sector invests its financial and management resources: growing assets under management, beating competitors on short-term benchmarks, getting high-profile clients and paying its ‘important’ staff.
An industry that invests sustainably and responsibly, with the long term in mind, is obviously what is needed. Much is known about integrating sustainability but there’s still a major gap: addressing systemic risk. Look out for The Purpose of Asset Management, a paper by Jon Lukomnik and James Hawley. It’s the second of a multi-year project, the Purpose of Finance, sponsored by the Pension Insurance Corporation (PIC). It shows how modern portfolio theory has created an industry with a fatal flaw and what investors can do.
“So what’s the purpose of the investment industry? An industry that invests sustainably and responsibly, with the long term clearly in mind, is obviously what is needed”
Third, tough choices have suddenly become quite common. I’ve stopped work, called in my pensions, and am getting a dog now, not at some perfect future time. My new life regularly shouts at me: “Get real!”
The really tough choice for investors today is whether they will act as real stewards and expand their understanding of fiduciary duty to include systemic risk.
Even climate-aware investors are happy to do the things that are easy to justify – portfolio decarbonisation, green funds and the like – but many run a mile from doing stewardship on a scale and with a seriousness that matters. Why do they get away with it? Because their clients and their investment consultants ignore/reward this dysfunctional behaviour.
Fourth, I’m learning – and re-learning – the importance of hope. Not happy-clappy, inauthentic optimism, but real hope based on, for example, advances in western medicine or learning to thrive with the help of complementary therapies and the support of loving friends and family.
In the investor field, hope relates to the fact that the biggest global investors, mainly in the US, are finally waking up. Here is one of Fidelity’s new core beliefs: “As a responsible allocator of capital, active asset management plays a key role in sustainable economic growth and job creation. This is at the heart of what we do.”
Fidelity is not alone. BlackRock’s CEO wrote to all the firm’s investee companies asking them to consider their societal impact. And there’s been an explosion of long-term investing projects, including Focusing Capital on the Long Term Global, a not-for-profit organisation set up with the support of BlackRock and others; Strategic Investor Initiative (with Vanguard leading on this one), and the Principles for Responsible Investment’s (PRI) systemic risk programme.
“Every year, indeed every month, that we delay taking action on environmental risks increases the costs and risks significantly”
The hope is that this industry’s weakness – its herding tendency – could become its saving grace. All that’s needed is for a few of the biggest asset owners, investment consultants and managers to move, and not simply pay lip service or foster incrementalism. Their momentum would drag smaller players along.
Why does ‘talking’ about long-term investing not always translate into ‘walking the walk’? A few investment leaders are ideological or ill-informed but mostly it’s fear of upsetting important clients or politicians, namely conflicts of interests. Thankfully, the space for hiding behind ‘ESGwash’ is fast disappearing, as Oxfam is the latest to discover. Organisations that fail to act in alignment with their stated values will – sooner rather than later – come under scrutiny, with millennials leading the push on ‘socially acceptable returns’.
If God has a sense of humour, it’s certainly a wicked one. I get a cancer of the fat tissue when I am one of the slimmest people I know and I (and my doctor) missed this dangerous surprise. And yes, my passion is about ‘preventable surprises’!
Wouldn’t it be a great celestial joke if investors were the cavalry that saved human civilisation? At last, the ‘lords of finance’ have caught a whiff of the crises around us. Can we summon them to act fast enough to avert disaster?
Every reader has some power to do this and systems fail because individuals blame others or sit on the fence, hoping others will act. If now isn’t the right time to live adventurously, when will it be?
Raj Thamotheram is CEO and founder of responsible investment think-tank Preventable Surprises