-1.svg "Close Icon (3)-1")
.svg "Close Icon (3)")
- Share
-
Fair capitalism: an oxymoron? Or the next big thing in investment – if we can find the courage to make the hard decisions based on the investors’ interest, not the vested interest. Sound hippy trippy? You might be surprised.
You don’t get much less hippy trippy than Mercer. And it was Jillian Reid, Principal of Responsible Investment at Mercer, who laid out what she sees as an imperative for genuinely sustainable investing to an audience of some hundreds gathered to hear speakers on the topic at a recent lunch hosted by Women in Super.
The relationship between investors and ideas like ‘ethical investing’, ‘socially responsible investing’ and ‘ESG (environmental, sustainability and governance) investing’ is a complex one. Historically, it’s one that’s run hot and cold.
It is also a longstanding relationship. As Jillian Reid pointed out in her address, the idea of ‘ethical investment’ dates back as far as the 1800s, when certain investor groups would decline, on moral grounds, to invest in purveyors of certain products: alcohol or tobacco, for example; or in companies whose standing was viewed as in some way dubious – due to religious, political or other reasons.
There are also differences between the various ‘schools’ of what we might call sustainable investing. Again, according to Jillian Reid, while not mutually exclusive, broadly speaking:
- ethical investing involves negative screening as described above
- socially responsible investing involves both positive and negative screening and ‘themed’ investments – for example into clean energy stocks and so on
- ESG investing focuses on preserving long term value by addressing ESG factors in investment decisions via a governance framework.
Investment, sustainability and returns – an intimate connection
In each case, while returns from the investment concerned may be treated slightly differently, returns are always important (that’s what makes it an ‘investment’, right?).
Further, an increasing number of investment leaders now understand not only that factoring sustainability into investment does not automatically equal sacrificing returns. They are also coming to appreciate that due focus on various sustainability-related factors in investment choices can in fact lead to higher returns. And crucially, returns that are likely to be repeatable over the long term.
The fact is that in recent years the definition of ‘return’ has become a far more subtle and layered one than a simple question of percentage, yield, ROI, ROE and all the rest of it.
The question has in essence become: what price short term high returns if the activity that generates them results in long term destruction of the source of investment return? Or worse, actively generates the kind of harm that will cost all investors far more in the long term? Or destroy the investor base itself? Or often: all three?
What Jillian Reid highlighted on this question is what she terms ‘sustainability megatrends’ and the implications of either ignoring – or contributing to – them in investment practice. Among others, she cited issues such as climate change, population growth and other demographic factors, intensive urbanisation and associated deforestation and food, energy and other resource scarcity.
The impact of sustainability megatrends
The likely impact of these megatrends on business is profound, touching as they do on every investment sector and at the very heart of the principles of supply and demand. We’re looking at a world in which entirely new and different markets will be seeking products and services generated in an environment that’s characterised by an entirely new set of risks – some of which are arguable unprecedented.
Against this backdrop it’s not hard to see why some in the investment community see only the challenges (hey – right there next to the too hard basket!); and many others stick their heads in the sand and continue to focus purely on what they know – maximising short term gain (hey – we’re not gonna be around in the future anyway!).
However, another – and growing – group, Mercer among them, is taking a clear-eyed look at the realities and seeing not just the challenges, but the opportunities. (We’re not even going to mention deeper morality and ethical considerations here.)
In so doing, this group recognises that finding and capitalising on such opportunities now, with a view to ensuring long term income streams that also help support the environments (economic, social and physical) that generate them, may in fact be the smartest play of all.
New growth in demand to supply long term returns
As an example, Ms Reid pointed to the oft-cited rapid rise of the middle class in emerging markets, current and projected. In the largest and fastest growing region, the Asia Pacific (yes, our very own) she says we’re looking at a rise of the middle class of .525 billion in 2009 to one of 1.740 in 2020 and 3.228 billion in 2030 – around 75% of the middle glass globally.
While on the one hand this growth will create many of the challenges already mentioned, so too does it create opportunities: in terms of access to new capital, that can be used to create and innovate products and services that will be consumed by new markets.
The result? According to Ms Reid growth in new demand: for renewable and alternative energy; for water infrastructure and technology; for waste management and pollution control; sustainable resource management innovation and practice … and the list goes on.
The issue for the investment community – and the superannuation community in particular by virtue of its sheer size and inherently long term fiduciary obligation – is how to translate this desire to build long term, sustainable opportunities into reality.
Fair capitalism the solution?
That’s where the notion of ‘fair capitalism’ comes in. It’s a concept (drastically simplified here) that proceeds on the basis that returns must be generated with a long term view and on a sustainable basis.
What does that mean in practice? Jillian Reid sketched out the following.
For asset managers, among other things, it means longer-term mandates and stock holding periods and less frequent performance reporting. It also means caring about what you invest in and taking an active interest in it.
For the system in general, it means payment for – and reporting on – real performance, not projections and not short term anomalies. In other words, rewarding patient capital.
So back to the question of how to make it happen. As Ms Reid pointed out, bucking entrenched vested interest is never easy – and nor has she found it so. And make no mistake, vested interest is the intransigent in this scenario.
Dislodging preconception: step one
Her suggestion to help dislodge it? Question it. Question the conventional wisdom, seek the evidence – and make decisions based on the evidence, not the establishment.
Specifically, she suggests exploring the following questions:
- “Green investments lose money.” Do they? “Brown investments make money.” Do they?
- “We need to deliver returns not worry about climate change.” Really? They’re my only options? There’s no connection?
- Ask your trustees, your portfolio managers, your colleagues, your legal team, your member education team: what are we doing? Are we keeping up with the times?
Simply put, it’s a case of the virtuous versus the vicious circle. And, as we all know, the latter is so named because of the difficulty of breaking out of it – and its relentless, ultimately self-destructive course.
You can read Jillian Reid’s presentation to the Women in Super lunch here.
