We could write an entire history book just from what has unfolded since the 2019 holiday season. There has been so much to say it has almost been like too many people trying to crowd through the door at the same time (something we don’t do any more…) and nobody gets through. There is a lot to say and it will be said now that we can turn our focus from just sheer absorption and processing and working with our clients to speak in broader terms about where we now find ourselves. Part of this will be unpacking a new understanding of ESG and regenerative systems to share in the very new world in which we now find ourselves.
Before we do that, time to play some catch-up. A few new articles landed which we have added to the Library, discussing everything from the failure of nations at COP25 to reconciling the rising enthusiasm for sustainable investment solutions with the numbers on the ground and in the market. We have also added the latest piece from The Investment Integration Project (TIIP), written in partnership with the Money Management Institute (MMI) and appearing in the Journal of Investment Advisory Solutions, “Sustainable Investment Products and Due Diligence”, which provides an excellent grounding for gatekeepers and other decisionmakers on how to systematically and fairly evaluate the growing multitude of investment options in the marketplace. It also makes a good starting point for investment boutiques who are trying to address the market to understand and meet expectations and constructively engage with teams making hire/fire decisions for asset management mandates.
Three new articles are posted to the Library — “Collateral Damage”, exploring corporate externalities, the impact on systems, and how those externalities really create internal damage to company balance sheets when looked at properly; “Pulled in Many Directions”, discussing the alignment of stakeholder requirements in corporation and community; and “Breaking Free”, an all-too-brief look at the presence of modern slavery in Western corporate supply chains.
This photograph, entitled “Brothers Carrying Stone — Nepal“, is part of an achingly beautiful but absolutely devastating series of photographs taken by humanitarian photographer Lisa Kristine. Please visit her website and be a patron of her work but also a vigilant supporter of correcting the profound wrongs she has documented. Regarding this photograph, from Ms. Kristine’s website — “Each day, children make several trips down the mountain, delivering stones from higher up in the Himalayas. They use makeshift harnesses out of ropes and sticks, strapping the stones to their heads and backs. Many of them come from families where everyone is trapped in debt bondage slavery. One of the mothers describes what it was like to be in slavery, ‘Neither can we die, nor can we survive.'”
As is frequently the case in the money management industry, we are awash in terminology to address ESG and impact investing, and it all means everything and nothing at the same time. Well-intentioned but not well-considered marketing campaigns have repositioned words like “impact” to mean sustainable investing in the broadest sense, or negated their meanings entirely. Meanwhile, “SRI” has been re-branded as “sustainable and responsible investing” while simultaneously being relegated to the dust-bin as a pejorative for well-meaning but poor performing strategies.
As more people join the discussion we are increasingly talking past one another using language we think means the same things to others as it does to us, only to find out we are speaking different languages, or just plain gibberish. In the securities industry words mean something, and it is probably high time to see some of the discipline and compliance that governs the rest of the language of investing come into play since asset owners, advisors and consultants are making real decisions based on the words we use.
While it may be appropriate to examine pay discrepancies or the imbalance in gender representation in leadership as a starting point, a much deeper examination is required to understand the systems-level constraints preventing equality in the working economy. The naive approach to investing for diversity and inclusion is to simply measure pay parity and the presence of women in the C suite or on boards. Better performance on these metrics may be an indicator of a more progressive enterprise, but it is by no means clearly causal. It could just as easily be that more inclusive companies perform better as it is better performing companies have the latitude to be more inclusive.
From an investment point of view it is necessary to look at everything from HR policies to recruiting and promoting practices to corporate cultures as well as the operational, competitive and other forces that are shaping them. Inclusiveness and equity start at a deeply fundamental level, and comprehensive ESG analysis can be the mechanism for digging to that level and establishing a platform for understanding and engagement to improve performance.
This month’s Citywire column posted in the Library starts to scratch the surface of this challenge, and looks to UN SDG 5 for guidance on what the foundational principles of gender equality and the empowerment of all women and girls looks like in investment terms.
A few additions have been posted to the Library of note. First is an article entitled “Got the Message” on systems-level thinking on markets and sustainability. The short version is that we believe it is more capital-efficient to address the root causes of climate change than to discount the capital destruction caused by it. The free market is capable of pricing climate change risk if it is permitted to do so. Failing to recognize the true cost of capital by ignoring the system in which it exists is short-sighted and destined for ruin.
Next up, a fresh look at the investability of emerging markets through an ESG lens in “ESG and EM”. The transparency of emerging markets has improved significantly, making it easier for fundamental managers to examine environmental, social and governance criteria with the same intensity as in developed markets. Some of this improvement is a credit to the governments and home markets that are driven to attract stable, long-term investment capital from the developed world, and some is thanks to data providers and investment firms working harder to capture and catalog the same material information available to developed market investors.
Lastly, a copy of HR 109 of the 116th Congress, aka the Green New Deal, and an accompanying article, “Small Steps & Giant Leaps” where we make the market case for the Deal. The GND is a statement of direction and purpose to pull the country back from the brink in societal and environmental terms, but is not in itself legislation destined for law. If it never finds its way out of the starting gate, it is still an effective roadmap for communities and markets to mitigate risk and create the next several decades of economic opportunity while improving health and wealth for all. And, the greed motive is entirely in line with the objectives of the Green New Deal. There is a great deal of money to be made by investors that recognize the decadal opportunities it describes.
With the possible exception of Amazon, trying to be all things to all people is less and less a winning strategy. Consumers increasingly pick products and services on more narrowly defined, and more personal, criteria. Companies are responding by picking more narrowly defined customer groups to serve. What this demonstrates is an alignment of social or environmental purpose with good business strategy. Customers and companies get into a virtuous and self-reinforcing cycle of positive change and deeper market penetration as companies respond to customers’ ESG expectations and customers respond to companies that proactively work to reflect their interests.
This article discusses distinguishing between the posers and the prophets using an ESG lens. (In)authenticity is a powerful factor in determining depth of commitment and quality of execution that has profound consequences for both financial and ESG performance. It is posted to CityWire USA’s website here, or can be downloaded as a PDF here.
I have been doing a lot of work on how to relate what and how we consume everything else around us with how we consume financial services. The great divide has been rooted in equal parts in a lack of understanding that the same rules could apply, and in a belief, misguided I will assert, that the sole objective of investing should be financial return.
Maybe this is a byproduct of well-intentioned but heavy-handed regulation, and maybe some of it is the cowardice of investment professionals and fiduciaries who do not want to take a single step outside of the lines inside which they are protected when delivering mediocre or even inferior results. “Here is food. It is nutritious and diversified and portioned according to the US recommended daily allowances. I understand it doesn’t taste good, but my responsibility wasn’t to make sure you enjoyed it. It was to make sure you don’t die of starvation.” We don’t consume anything else where the bare minimum is also the maximum expectation.
There is no reason, even in a well regulated environment, that consumer behaviors that apply elsewhere shouldn’t apply to investing. A movement back to the way we used to make and consume, local and artisanal, is afoot. We want to see the supply chain. We want to know where things came from, that those things were sustainably and responsibly obtained, that they are healthful and mindful, and that they support our local communities. That small-batch mentality, from arts and crafts to food to beer to clothing, has taken hold particularly with Millennial consumers. A local, sustainable, community-oriented focus is available in investment products as well. Read my latest article in CityWire USA pro buyer magazine on how investing small helps to foster sustainability and serve consumer demands while still delivering on core investment mandates.