Also at RIAA’s International Responsible Investment conference was Raj Thamotheram, one of the founders and driving force of the Network for Sustainable Financial Markets (NSFM). Raj presented the NSFM slideshow to an audience of fund managers, investment consultants, asset owners and other service providers.
Just days after the collapse of Lehman Brothers, this was a powerful reminder of the need to make markets work for the long-term. Given the interdependence of financial markets and the real economy, the slideshow suggests that there is a pressing need to rethink the notion of “market efficiency” to ensure that all aspects of social, economical and environmental well-being are taken into account in investment decisions and that markets mechanisms are geared towards delivering value for the long run. Just how much regulations vs. volontary industry initiatives is needed remains an open question - and the focus of the debate.
In this slideshow “premiere”, the NSFM sheds some light on issues ranging from fiduciary duty to climate change and executive remuneration. You can watch the video of Raj addressing the conference delegates, and you should also take a look at the pdf document (nsfm_riaa-melbourne_september-24-20082) if you actually want to see the slides Raj is talking to.
I have been incredibly privileged to work with NSFM coordinators to put this slideshow presentation together and make a meaningful contribution to today’s discussions. Louise O’Halloran has also been a great source of inspiration throughout this process. In the spirit of Al Gore’s Inconvenient Truth and Louise’s Enlightened Self-Interest, individuals who share these beliefs are welcome to use the slideshow to deliver its message to other audiences. All they need to do is fill out a License to Present form on the NSFM website (link to come).
And of course, all your thoughts / comments / reactions are welcome!
Organised by Responsible Investment Association Australasia (RIAA) and my dear friend Louise O’Halloran, its Executive Director, it mobilised the “responsible investment” community at a time of unprecedented crisis in the financial markets - and produced some interesting and challenging thinking.
I’m a big fan of Donald MacDonald, Trustee of the BT Pension Scheme, who may not be “an economist or a financial or investment expert”, but who as “a pensioner and member nominated trustee of a large defined benefit pension scheme” understands the issues like no one else and who offers candid views on the mess we currently find ourselves in.
He reminds us that “one or two people in the RI movement, did, it is said, see the crisis looming, but I think we, as representatives of pension funds, foundations, insurers, asset managers and specialist advisors, have to ask ourselves this; why didn’t we see it coming, in a much more clear manner?
[...] So while we in the Responsible Investment community may express some self righteous indignation at the breakdown of trust and transparency in the financial sector, it does occur to me, that, as shareowners in that sector, as clients of hedge funds, auditors and accountants, as stock lenders, perhaps we, at the head of the investment chain, may have missed some of our own responsibilities in the stewardship and governance area.”
Whilst he rightly questions the RI industry and its ability to have foreseen the crisis (and helped prevent it), he also makes it clear that now is the time to provide leadership and to reaffirms the RI community’s commitment to investing “with a long-term horizon”.
The rest of his speech is worth a read because it offers some lessons from the current crisis. It also reminds us that our success will depend on our ability to develop holistic approaches to tackle interconnected challenges such as climate change, food security and eco-system balance. This is something we tend to lose sight of at a time of short-term panic-driven thinking.
Finally some timely contributions from the wide-ranging community of sustainability practitioners:
1/ A very interesting webinar on the potential credit cards default crisis, hosted by Innovest’s financial analysts Greg Larkin and Laura Nishikawa. In their own words: “Innovest, which was early with its call on sub-prime mortgages, has determined that what Wall Street and the Federal government are diagnosing as a mortgage problem is, in fact, a symptom of a deeper crisis of deteriorated consumer financial health”. The full report is available here (innovest_credit_cards).
2/ John Elkington, one of the most established thought leaders of the sustainability movement (and founder of UK SustainAbility think tank), offers a comprehensive picture of some of the fundamental issues that lie at the core of today’s crisis. Drawing on their scenario analysis “Raising our Game: Can we sustain Globalisation?”, they question whether democracy has shown its limits when it comes to our collective ability to respond and pre-empt crises (be it the credit crunch or climate change, the impeding “ecological credit crunch”). Their conclusion is worth quoting.
“We desperately hope we are wrong, but our analysis is that the current meltdown is not yet the sort of crisis that will force our leaders to the point where [...] they (and we) break frame, do the completely unexpected—and invest in the future as if our futures depended on it. Meanwhile, there is a growing (if unwelcome) opportunity to learn and spread the relevant lessons from the still-evolving credit crunch, both in terms of how to develop and run our economies in ways that are financially sustainable and, longer term, in ways that are also socially and environmentally sustainable.” John Elkington & Mark Lee, SustainAbility.
3/ At the same time on the other side of the pond, Mindy Lubber, President of Ceres, “a leading U.S. coalition of investors, environmental groups and other public interest organizations working with companies to address sustainability challenges such as global climate change”, speaks about the problems of short-termism in the markets, lack of board accountability and excessive CEO remuneration on the Harvard Business School blog.
4/ Finally some blue-sky thinking is coming out of SoCap08 in San Francisco. The Social Capital Markets Conference 2008 is buzzing with blogging excitement. Taking a helicopter view, sessions focused on how capital can be deployed in a way that serves the investor’s values and the social good, and whether social values can drive more effective investments. We certainly look forward to finding out more about the outcomes of the conference in the coming days.
After a marathon weekend to rescue the banking system from complete meltdown, the various headlines of today’s FT seem to point to some convergence of thinking (finally). Here are some of the highlights:
“There was a strong sense that a serious regulatory backlash was coming and that the best the sector could do was to get ahead of the game and promise to clean up its own act”. According to an article in today’s FT, this was the dominating perception amongst finance practitioners attending the Institute for International Finance’s dinner in Washington last night.
Josef Ackermann, Deutsche Bank chief executive and Chairman of the Institute, unequivocally stressed that “we want to be one of the frontrunners in improving our industry before we get asked by the regulators and governments to do so”.
Meanwhile, also in today’s FT, George Soros offers a detailed plan to recapitalise the banking system using the US$ 700bn bail-out package agreed by Congress. He also warns that “time if of the essence” and that “only by promptly announcing a comprehensive set of measures and executing them vigorously can the situation be brought under control”.
Clive Crook, in his article, puts forward an idea promoted by Pr. Avinash Persaud, Chairman of Intelligence Capital Limited and a member of the Network for Sustainable Financial Markets, to introduce “contra-cyclical capital requirements” which would “force banks to build up capital faster when their lending is expanding most rapidly.. [effectively] taxing the expansion of credit and building a bigger cushion for any bust”.
Finally, the FTfm dedicated a section to global pensions and published an article highlighting the fact that 3/4 of UK pension funds had a responsible investment strategy (according to a survey conducted by the UK Social Investment Forum). In the case of Barclays UK Retirement Fund, this strategy may have paid off; the emphasis on good governance has helped the fund win important mandates, according to its fund manager Mark Hyde Marrison (watch the video here).
Similarly the UK Environment Agency (a pension fund with £1.5bn AUM) has also announced that “it would only hire UNPRI signatories for future mandates”. This anecdotal evidence is encouraging because it suggests that the principles that underscore sustainability investing can have a material impact, not only on investment returns, but also on asset managers’ ability to attract new clients.
Whilst this starts to provide a systemic approach to the industry, we have yet to hear more concerted voices from the responsible investment community on other industry-wide issues that require collaborative efforts with a view to improve financial market mechanisms for the long-run.
Yesterday we pointed to the fact that there was relatively little analysis and self-criticism coming out of the ESG/SRI community or the broader financial community with regard to the current crisis. So it was refreshing to see an article from the WBCSD President Bjorn Stigson, in today’s FT Sustainable Business section, on the parallels between the climate change negotiations and the financial crisis.
Stigson sees the current financial crisis “as the result of unsustainable business models in the finance sector.” In his opinion, “the finance industry has lagged behind in addressing sustainability issues” and “the current financial crisis is shedding light on the flaws of the current business models in the finance sector and the enormous extend to which public trust has been damaged”.
He goes on to say that “to regain this trust, the finance industry will need to revisit its role in society and deliver updated business models that consider current societal expectations of open and transparents businesses that demonstrably deliver value to society”.
Whilst some of this rings true, it fails to capture the complexity of the finance industry and financial services. Do fund managers share the same responsibility as hedge funds, investment bankers, traders, mortgage lenders or credit rating agencies? As Hendrik du Troit, CEO of Investec Asset Management, pointed out recently in the FT “the attack on Wall Street is indiscriminate”. Yet he also admits that “we’ve been part of pushing banks to make more profits instead of making sure they were building more stable businesses.”
So there is a need for a little more soul searching in the industry. And this also present a significant opportunity for the SRI/ESG community to assess the robustness of their research model and investment philosophy. Surely there are some lessons to be learned for all of us involved.
At a time of unprecedented crisis in the financial markets, where the US Treasury Secretary Hank Paulson goes as far as saying that “we have a regulatory system that is broken, outdated and which doesn’t fit the world we live in”, it is surprising that we are hearing so little from the finance community itself about what’s gone wrong and how it can be fixed. I’m sure a lot of people who work in the financial markets have great insights that we could all learn from. If they do not actively engage in the debate, we run the risk that politicians will step in under public pressure and support the type of regulations that might offer “quick fix” solutions, but which fails to address the root causes of the current crisis and provide long-term solutions.
In an effort to stimulate this debate, AQ Research - an independent research agency - has developed a survey which seeks to explore what investment professionals really think about the crisis, and possible ways forward. It’s short but it really forces you to think about the big picture.
Anyone who works in this field should take this opportunity to share their views (and to circulate the survey widely) so that we can all benefit from the collective wisdom. We need to bridge this gap of understanding between practictioners on the one hand - and regulators and the general public on the other hand. If this is about restoring trust and confidence in the markets, then we absolutely need to foster that dialogue. And only then will we be able to come to the right decisions about the reforms that are needed to build a healthy financial system that is adapted to the realities of the 21st century.
I look forward to sharing the results back with you, which will of course be anonymised and aggregated.
To get a sense of what the Network for Sustainable Financial Markets (NSFM) focuses its energy on, check out its Open Letter, published on the Responsible Investor website last Friday.
This quote sums it up pretty well: “The Network for Sustainable Financial Markets maintains that the financial system failed because insufficient attention has been paid to sustainable wealth creation. [It] seeks to interject in the debate the views of long-term investors who, of all the players in the financial system, best reflect the needs of ordinary savers”.
For instance, at a pragmatic level, the Network is providing guidance to the OECD on the necessary reforms in pension fund governance. Although the Network points to some inherent flaws in the current system (e.g. executive remuneration, conflict of interests, short-term vs. long-termism… ), its fundamental belief is that the financial markets, if they are designed appropriately, can deliver sustainable solutions and sources of value creation. So this is what the reform agenda should focus on: creating the mechanisms that will in the long-run make the financial system as a whole more accountable, more efficient and more sustainable.
“Sustainability investors” generally fall into 2 camps. Those who believe that investing according to sustainability principles will produce better returns (i.e. more alpha) and those who believe that there are systemic issues in the financiall markets that need to be addressed to make the whole system more sustainable.
So it is only appropriate that, in the midst of the global financial crisis, the Financial Times today published 2 articles on these approaches in its fund management section.
(1) Sustainability reaps rewards by Dutch asset manager Robeco and Zurich-based sustainability investment boutique Sustainable Asset Management (SAM).
(2) Responsibility gains weight which highlights the merger of the Enhanced Analytics Initiative (EAI) with the UN Principles for Responsible Investments (PRI), two of the main international industry initiatives that have driven the integration of environmental, social and governance factors (ESG) in investment decisions.
Whilst the first article focuses on alpha generation (sharing some of the findings of SAM’s sustainability research and Robeco’s quantitive analysis), the second one highlights the need to mainstream this approach and embed it along the entire investment value chain with a view to make the financial markets more sustainable as a whole.
In my view, the 2 approaches are complementary. The alpha generation approach can be seen as a “transition” strategy that aims to make the business case for “sustainability investment” and to provide proof of concept (see the ongoing debate on the performance of sustainability funds). It rests on the assumption that the markets are inefficient at pricing externalities, resulting in the mispricing of securities (as compared to their fair value). By incorporating ESG factors into valuation, sustainability investors can reap the benefits of this information asymetry and enhance their returns (hence outperforming the benchmark). But as this approach becomes more mainstream, it can be expected that externalities will be “priced in” more efficiently, thereby limiting the opportunities for alpha generation.
The second “systemic” approach suggests that there are still some major structural issues with the way financial markets operate that make it really difficult for sustainability to be mainstreamed in asset management, and financial services more broadly. These issues relate to accountability and incentives schemes along the whole investment chain, as well as the need for regulatory frameworks to enable market mechanisms to work more efficiently and allocate resources appropriately, for instance by taking into account the cost of climate change, the value of fresh water and eco-systems services, and the benefits of social equity.
As mentioned in the FT article, the Network for Sustainable Financial Markets (NSFM), an informal group of practitioners and academics seeking to act as a think-tank, is doing some interesting work in this area.
We have seen a serious rollercoaster in the financial markets since I joined this industry about 2 years ago - from the peak of the bull market to a major financial meltdown with seemingly no end in sight. One part of the industry (arguably the only one) that is benefiting from the current situation are the reporters and commentators. The internet and blogsphere is awash with analysis of the crisis and opinions about ways forward. It’s all pretty overwhelming.
It is a steep learning curve for all of us inside (and outside) the industry, and because we all have limited time on our hands, I simply want to flag some of the best analytical overviews I’ve come across in the past few days. All of them take a big-picture / long-term view of the industry and seek to address some of the systemic issues that have recently (re)surfaced.
What is the major take-away in my view? Most people now agree that we need a fundamental rethink of the primary role of the financial markets (i.e. to allocate resources efficiently) and that we need to design financial markets mechanisms that will fulfill that role. The paradigm shift is that the 21st century notion of “efficiency” is (finally) being updated and upgraded to reflect the realities of a much more complex and inderdependent world, where the impacts on the real economy, on people’s livehoods and on nature’s eco-systems have to be accounted for in every investment decision. This is the only way markets can help create real sustainable value. It could also improve the sustainability of the financial sytem itself as a result, and make it less prone to booms and busts.
Where opinions continue to diverge is on the need for reforms and regulations. The following also make some great contributions to the pros and cons of strengthening regulatory frameworks. Over to the experts:
This last video in the PRI series stresses the evolving nature of the notion of fiduciary duty. CEOs of leading pension funds such as Else Bos (PGGM) and Steve Gibbs (ARIA) recognise that trustees’ fiduciary duty is not confined to securing a pension for their members; it also needs to consider what world they will live in - and what they will be able to afford with their pension in the future.
Also at RIAA’s International Responsible Investment conference was Raj Thamotheram, one of the founders and driving force of the Network for Sustainable Financial Markets (NSFM). Raj presented the NSFM slideshow to an audience of fund managers, investment consultants, asset owners and other service providers.
