I didn’t intend to get a permanent job in ‘responsible investment’: my pitch for a consulting contract got misfiled in a recruitment folder and the rest really is history. Having held two good jobs in the sector, at USS and Axa Investment Management, I appreciate the 12 years I’ve spent inside the investment world.
Sustainable investing – or whatever it ends up being called – will become one of the most interesting experiments in the financial world since Jack Bogle’s invention of index funds.
I’ve been honoured that colleagues seem to value my contribution. I’ve been named “one of the 10 most influential figures in the corporate governance field” by Global Proxy Watch (in 2004 and 2008) and voted one of the top 10 “Most positive contributors to SRI & CG” in the Independent Research in Responsible Investment poll (in 2017 and 2018). So the fact that I find myself at odds with some well-informed colleagues in the ESG community is disconcerting. Here are three examples that are top of my mind at the moment.
First, there’s the never ending list of corporate ‘preventable surprises’, the most recent being boohoo, the fashion company found to have been using suppliers who abused their staff in Leicester and helped create a COVID-19 hotspot. Bloomberg, FT and other journalists have documented how this, far from being a surprise, could and should have been prevented. Yet ESG rating agencies gave boohoo a positive assessment. Why? Because they focus on defensible metrics using corporate reporting and ignore stakeholder feedback, from people who really know. This is the latest in a long series of similar cases including BP, Tesco, VW and Carillion. Investors simply don’t care and disappointingly, this is true for most ESG investors as well.
Second, there is the mis-selling of ESG integration as something that helps in the real world when really it’s nothing more than chasing ESG alpha. This is a biggie and goes to the heart of how most ESG firms justify and market themselves. Thankfully, journalists are catching on and in a hard hitting op-ed, “What Wall Street really means when it talks about ‘Climate Risk’: Deciphering the jargon of white-collar gamblers”, the author explains: “Managing the investment risk of climate change, in short, does not mean fighting climate change. It means making sure that your investment portfolio earns the highest returns despite climate change or even from climate change.”
Portfolio decarbonisation and the asset owner equivalent of this – Net Zero Asset Owner Alliance – is, without doubt, much better than actively seeking to align portfolios with 3°C or more of global heating. But this technological approach to divestment has the same disadvantage – shifting ownership of greenhouse gas emissions to different investors, typically index managers.
This doesn’t result in rapid real-world decarbonisation. And it doesn’t have the political effect that naming and shaming companies or sectors has. Tellingly, the strategy that could best catalyse a reallocation of capital – forceful stewardship – is not a priority for most advocates of portfolio decarbonisation.
And third, there’s the debate about scenario analysis as the main tool for dealing with the climate crisis when in many cases it’s yet another opportunity for corporate procrastination. As we are now recognising with apparently neutral tools like cost benefit analysis, scenario analysis comes with many hidden assumptions and weaknesses. In an under-stated critique in Bloomberg, Kate MacKenzie recently highlighted several of the technical challenges.
Even more problematic is the impossibility of assessing the resilience of assets and, even more so, portfolios. No-one knows how to estimate the social, political and economic disruption of, say, a 3°C world. How many failed states will there be, for example, and what will be the knock-on effects on political and economic instability?
When I look at those with whom I have worked closely in the projects that I have co-founded (such as the Enhanced Analytics Initiative, Pharma Futures, IIGCC, Network for Sustainable Financial Markets and Preventable Surprises) what I see are four common characteristics to these ‘positive mavericks’.
First, despite the day job generally not requiring it, like-minded colleagues focus on beta, as well as alpha. But it’s a dance: the latter is how they are measured and where they gain the legitimacy to keep doing what really adds real world value. They are, however, ‘universal investors’ at heart, whether they embrace the term or not. A recent example is the Global Industry Standard on Tailings Management. Kudos to John Howchin and Adam Matthews.
Second, positive mavericks have been fortunate to find mentors. I’m delighted to name check just three of them: Bob Monks, one of the sector’s intellectual heavyweights and a true ‘traitor to his class’ as a Republican and former overseer of the US pension system; Peter Moon, the former CEO of USS, who practised what he believed – namely that individuals matter; and Jean-Pierre Hellebuyck, the defacto founder of AXA IM, who demonstrated the art of managing organisational and collaborative politics. Sadly I don’t have space to do justice to all those who influenced me.
Third, positive mavericks have taken an active decision to reduce the self censorship by actively embracing the career risk of being a positive maverick. They put into practice Jack Bogle’s advice – which repeats what every wisdom tradition has taught – namely to manage greed by focusing on the “true measures of money, business and life”. If you haven’t read his last book, Enough, you really should.
This creates the conditions for courage. And as the lucky ones have found, whilst some doors may close when you are a positive maverick, others open.
Fourth, they have personal values about companies respecting their staff, especially those who are marginalised – communities and the environment – while they make profits. Sometimes these values are religiously grounded but often colleagues “just know it’s the right thing to do”.
While personal values are important, I put mental models first. This may disappoint those who hope that the debate about the purpose of companies will deliver the necessary changes. My experience is that I have often been disappointed by those with whom I share many personal values on a Sunday afternoon but who fail to act on a Monday morning. Simultaneously, I’ve been surprised to be able to work with those from the right-of-centre politically but have a shared view about how markets can support social progress.
If you are reading this and wondering ‘what can I do?’, here are three suggestions to get you going:
• Appoint a positive maverick, ideally someone who has proven their ethical backbone by engaging in ‘intelligent disobedience’ or whistleblowing.
• Mentor a next-generation staff member who has signs of being a positive maverick.
• And walk the talk: focus on the systemic risk that worries you the most and speak to challenging experts to find out what your firm could be doing to be a bigger part of the solution.
Raj Thamotheram is a senior adviser to Preventable Surprises