The Radical Old Idea with Keith Skeoch | The ESG Enlightenment | Event Summary

Keith Skeoch spoke about the ‘ESG Enlightenment’ and the power of finance to translate ordinary people’s savings into a powerful force for good in the world.

In the latest Radical Old Idea session from the Global Ethical Finance Initiative, the former CEO of Standard Life Aberdeen and interim chair of the Financial Reporting Council sat down with Royal London Climate Change Lead Kaisie Rayner to discuss the legacy of capitalism, the challenge of the climate crisis and what we can learn from Adam Smith. Watch the session now, or read the summary below.

At the start of the session, the audience of finance sector experts were polled on their views around sustainability. Over 40% of respondents said that their organisations had only started putting sustainability into their decision making in the past 5 years, with a further 17% saying that they had yet to do so, while 75% of respondents felt that the finance sector was not on track to support the massive economic transformation needed to deliver climate action.

Capitalism has, over its 400 year history, been a success story, argued Keith. It has collectivised savings into a force far more powerful than individual savers could ever be. “There has never been a more important time to invest in your future and the economy’s future and it’s your savings that will facilitate those investments”, said Keith, adding that this was “a story you only usually hear during wartime.”

Reflecting on Boris Johnson’s recent claim that greed drove the development of the new COVID-19 vaccines, the former Standard Life Aberdeen CEO agreed that it represented a victory for capitalism, but argued that the real story was the success of regulated capitalism, not unfettered greed. By tailoring the approval process for the vaccine to the unique circumstances we find ourselves in, the state and the market worked together for the good of humanity.

This is a story, as Keith and Kaisie discussed, that would have been familiar to the intellectual father of capitalism himself, Adam Smith. While some of Smith’s modern advocates paint him as a proponent of pure, unregulated capitalism, this was far from the truth. Smith’s most well-known work is the Wealth of Nations, but he also wrote at length about ethics in his other great work, the Theory of Moral Sentiments, which provides the moral purpose to the Wealth of Nations.

The point of the metaphor of the invisible hand – which he only used once in the entire Wealth of Nations – is not that markets should never be regulated for the good of society; in fact, Smith was in favour of this. Seen in the context of the fragmented markets of his time, the metaphor was simply an argument not to restrict foreign trade.

In fact, context has often been a driver of economic theory, suggested Keith. From Keynes’s response to the Great Depression in the 1920s and 30s, to Friedman’s theories about runaway inflation in the 1970s, economics has always responded to the situation it finds itself in. Ironically, however, in the years since Smith, average long-run growth rates have remained roughly stable. More than anything else, economic theory has affected the distribution of resources in society, rather than the total size of the pie.

While theories have responded to economic stimuli, over time they become intellectual straitjackets, confining thinking to a narrow policy paradigm until an external shock forces a re-evaluation. With the instability we have seen over the past few year, Keith argued that, in fact, “time is ripe for a fundamental paradigm shift” in economics and finance. The question, he suggested was “what should be the future of the new policy paradigm”, outlining 5 key factors needed in this new paradigm:

  1. Economic models which reflect the relationship between finance and other parts of the economy
  2. A responsible and sustainable corporate sector
  3. A view of regulation as something which helps markets by aligning them to the public interest
  4. A recognition that good behaviour minimises the cost of regulation by building trust
  5. A finance sector committed to putting substance into the mantra of “build back better”

Finance has a huge opportunity to make a difference as we build back better. It is the only way we can build trust and the only way that it will be delivered is by everybody taking personal responsibility: sustainability is everybody’s business.


Ethical Finance Round Table | Festive Fireside on Reasons to be Cheerful in 2021

After a year that will live long in the memory for all the wrong reasons, the final Ethical Finance Round  Table of the year discussed reasons to be optimistic about what the future holds, in an event focused on Scotland. The session looked at the newly formed Scottish National Investment Bank and how it aims to tackle inequality, drive innovation and be at the center of Scotland’s transition to NetZero. It also discussed how we have a unique opportunity to determine the future and reignite a fair economy for Scotland. Dame Susan Rice, Chair of the Scottish Fiscal Commission was joined by Willie Watt, Chair of the newly-formed Scottish National Investment Bank (SNIB), and Andrew Wilson of Charlotte Street Partners and the Sustainable Growth Commission.

But, Och! I backward cast my e'e.
On prospects drear!
An' forward, tho' I canna see,
I guess an' fear!

To a Mouse, on Turning Her Up in Her Nest With the Plough, November, 1785 - Robert Burns

After our very own Graham Burnside welcomed attendees in typically Scottish fashion, quoting Burns, moderator Dame Susan Rice explained that she was looking forward to hearing about the ‘what’ and ‘how’ from the speakers. How can a mission led financial institution support business and celebrate outcomes that are both fair and inclusive? What are the opportunities that can reignite the Scottish economy, such as COP26 and the COVID rebuild?

Willie Watt introduced us to SNIB, which opened for business less than four weeks ago. Funded by the Scottish government with £2bn over the next ten years, the bank has three missions:

1) Address inequality in Scotland

2) Invest in innovation

3) Assist in Scotland’s transition to NetZero

The Bank will look for both financial and impact returns from its investments and hopes to be fully self-sustaining in five years. Willie Watt stressed that maximising profit and purpose is no longer an either or – good governance and sustainable business are the path to profit and purpose. While accepting that the Sustainable Development Goals are a good guide to business and asset owners, Willie felt they are too complex to create a successful investment strategy and so the three missions will instead be the focus.

Andrew Wilson, Founding Partner of Charlotte Street Partners and Chair of Scotland’s Sustainable Growth Commission, stated that there has never been a better time to take risks and make big policy changes. While the most powerful force has traditionally been what we did yesterday, the COVID crisis has left us with no choice but to enter an era of reform, accelerating many of the challenges we face, including inequality and deglobalisation.

Andrew argued that we can no longer afford to look to the future with fear. We must instead determine what the future will be with the opportunity afforded to us. One risk is that lending stops at haste post COVID and we do not support the emergence on the other side. While debt is at record levels, the cost of servicing that debt has fallen by half and is historically cheap. The tyranny of short-termism is one of our greatest risks and we must be more honest with society - stop “promising jam tomorrow”, promise hard work for a generation to get this country and others to a point of civilisation that they deserve.

For Andrew, while deglobalisation is a growing – and worrisome – trend, it offers an opportunity to smaller countries to collaborate. For example, Scotland, New Zealand, and Iceland are tied by their pursuit of a wellbeing economy. Another opportunity Scotland has in abundance lies in its natural economy. If the right collaboration took place, Scotland’s natural economy would be within the top three globally.

Andrew also spoke about the need for proper engagement with the developing world. It is not only right but also in the interest of developed counties to help out developing countries. The problems they face will not stay in the developing world. The second big risk Andrew identified was populism, which is driving deglobalisation and selling a myth of the past as an easy solution to the future. He was clear that this is not the solution, the solution is thinking long term and investing.

Dame Susan finished the session, explaining that history shows us that after a major crisis, there will be a shift in values and in how we live. We can use this moment to lead change and that is a reason for hope and festive cheer. Opportunity always exists and we must allow ourselves to test and experiment as we go forward. When she looks at Scotland, Dame Susan feels enormous pride of the efforts made to date. The Scottish Parliament voted unanimously for the world’s most aggressive Net Zero timeline. There is something special about Scotland that makes people come together and make things happen.


The Path To COP26 | One Year To Go Event

Speakers at the ‘One Year To Go’ event for GEFI’s Path to COP26 campaign discussed how the finance sector can practically support action on climate change ahead of the COP26 summit next year in Glasgow. The session offered perspectives from banking, asset management and COP insiders, with Gail Hurley of GEFI joined by Cambridge University Visiting Fellow David Pitt Watson, Ingrid Homes of Federated Hermes, Isabel Fernandez of ING, and discussion moderator Hamish Patrick of Shepherd + Wedderburn. Click on the links to watch videos from the event, including all the presentations, the Q&A, and individual presentations from David, Isabel and Ingrid.

Gail Hurley introduced the Path to COP26 campaign, which seeks to ensure that the finance sector plays a leading role in the most important COP since Paris. Over 40 organisations have joined the campaign, representing £2.7 trillion of assets; click here to find out how to get involved

Gail highlighted a recent UN publication, which gave a damning report on the financial sector’s efforts so far to get funding to where it is needed. It has come up short in dealing with both climate change and development in the world’s poorest countries, despite positive signs across the sector.

David Pitt-Watson, investor, Cambridge Judge Business School Visiting Fellow and former UNEP FI chair during COP21 shared his practical experience of COP, and stressed that climate matters for finance. Finance needs to move money from where it is, to where it needs to be, but at present there is not enough green finance and far too much brown finance is still taking place.

COP is important because finance cannot solve the issue of climate alone, but needs support from policymakers, and it is important that discussions for ambitious climate agreements take place before the conference itself. The finance sector will likely be looked at with some cynicism and suspicion, in part because£100 billion was promised to the developing world as part of the Copenhagen Accord agreed at COP19, but evidence of its influence is hard to find.

David stressed that there is genuine progress in the finance sector, particularly on reporting, but more needs to be done. One area he felt that we can improve at COP is stewardship. Divestment diminishes the power we hold by maintaining equity;by using the votes equity holders have to appoint Directors, we can vote for those that align their organisations with the Paris Agreement. The onus is on the finance industry to demonstrate that we are doing the right thing: delegates will not be interested in virtue signalling.

Isabel Fernandez , Member of the Management Board and Global Head of Wholesale Banking at ING spoke about how the banks sees the pandemic as a chance to ‘hit the reset button’ and on issues including biodiversity loss, climate change and inequality.

While there are many commitments out there, it is action that counts and Isabel argued that ING have taken the lead when it comes to aligning lending portfolios with Paris.  They have done this by creating an approach called Terra, which uses scenario analysis to determine the impact of different sectors on the climate. Assessing the gap between the technology required to meet the Paris Agreement targets and those used currently by clients, Terra shows how far each sector is along the path towards Paris. This allows ING to finance the technology and innovation clients need to move their business closer to achieving the goals set,steering key sectors towards a low carbon future.

The second progress report on Terra has been released, showing that across the nine sectors which are contributing the highest emissions, most are on track to align with Paris. They have found that many clients are actively looking to develop sustainably so have bought in readily to this approach and the advice which ING have given. Terra is all open source to increase its reach and open collaboration across the banking sector. Isabel explained that ING believe that it is not where clients are today, but where they are heading which is most important.

Ingrid Holmes, Director – Policy at Federated Hermes opened by sharing some of the issues that they are dealing with. For instance, what needs to be done to commit to net zero, when they should be trying to achieve that goal, and also when they should be committing to becoming a Paris aligned firm.

There are six key things Federated Hermes expect every company to be thinking about:

  • Disclose in line with the TCFD
  • Sufficient governance and capacity to move forward with climate management
  • Embrace the complexity of the issues
  • Look beyond operations and strategy into supply chains
  • Use public policy influence positively to engage with government with new market rules
  • Commitment to science-based targets, with interim targets also established

Federated Hermes feel some activities are unjustifiable, such as thermal coal, and will be withdrawing capital from them. Controversial investments, such as those burning fossil fuels but in the process of transition, will require a business case to ensure the transition comes to pass or divestment will occur.

The session closed with a Q&A moderated by Hamish Patrick of Shepherd + Wedderburn, who asked the speakers how the trends and push towards climate finance that we are seeing is helping the developing world. David answered that this is a very difficult position where, with justification, the global south is looking at the north to fix the problem they have profited from. Promises of funding have not materialised and we need to get funds flowing to global south sustainable development projects. Isabel spoke about some of the feedback she has had from the global south, that the developed world has had 50 years of pollution to get to its present state, but nonetheless she has seen their determination and enthusiasm to develop sustainably. It then becomes ING’s role to help wherever they can.

Regarding the products needed for a transition, Ingrid spoke about the desire to see more thematic products with an explicit Paris alignment to them, adding that while there are an increasing number of products out there, we need to stop greenwashing. David argued that we do not need more complex products: the finance sector’s job is to manage the money of the millions of people who have invested money, often through their pensions, and to move it to where it needs to be. We have a set of financial institutions that are ‘Institutionally fossilist’ – institutions that have grown to up to be able to finance the old economy. Now we need to get the new systems that will finance the new economy.


Ethical finance poised to unleash the green recovery

Ahead of next week’s Ethical Finance summit, Shepherd and Wedderburn Senior Associate Peter Alderdice and Solicitor Daniel Boynton explore the challenges and opportunities of green and responsible investment – and how pension funds are uniquely placed to deliver ethical finance and support the transition to a decarbonised economy. Click here to reserve your free place.

The COVID-19 pandemic has made one thing abundantly clear: when disaster strikes, major societal change is possible overnight.

The measures taken around the world to save lives and protect public health systems – such as shuttering non-essential businesses, furloughing almost 10 million workers in the UK and putting children’s education on hold – had been the preserve of dystopian fiction until earlier this year.

As governments start developing policies to rebuild our economy after this time of unprecedented disruption, we should not lose sight of the lesson that fundamental transformation is not only possible within a short period; sometimes it is essential.

That lesson and, in particular, the need for a green recovery, is of critical importance for achieving the targets set by the Scottish and UK governments of reaching net-zero greenhouse gas emissions by 2045 and 2050, respectively.

The challenge posed by those targets is enormous – not least in the midst of the biggest public health and economic emergency in recent times. However, the coronavirus pandemic has demonstrated that society can adapt to major change when it has to. As the saying goes, “needs must when the devil drives”.

If we are to succeed in achieving net-zero by the target dates, then the economic recovery from COVID-19 must be green. A key challenge in achieving this will be finding the investment required to turn ambitious targets into reality.

The transition to a decarbonised economic system will require unprecedented levels of investment; estimates from the Committee on Climate Change suggest that investment in the UK’s power sector alone needs to rise from around £10 billion to £20 billion annually to achieve this goal.

However, green investment is required not only in the energy sector, but across all areas of the economy if we are to tackle the impact of COVID-19 and climate change at the same time.

While some investment will come from government funds, measures to tackle the immediate impact of coronavirus have left the Exchequer’s coffers depleted. The scale of the net-zero challenge means the private sector has an essential role to play.

Many businesses may be contemplating restructuring to take advantage of the opportunities that the green recovery presents and need to be confident that investors are with them for the long-term in supporting the radical steps required to make the green recovery a reality.

Pension funds – whether in the traditional defined benefit sector, or up-and-coming master trusts in the defined contribution space – are uniquely placed to help meet the challenge of delivering ethical finance to support the green recovery:

  • They have the capital. Thanks to automatic enrolment, more people than ever are actively saving for retirement and already by 2018 the value of UK pension wealth stood at more than £6 trillion. A green recovery offers many new sustainable investment opportunities for pension fund trustees and managers, such as green bonds.
  • Members are demanding change. New disclosure requirements mean those running pension funds now need to explain how environmental, social and governance (ESG) factors are used in investment decisions. Recent high-profile campaigns have resulted in investment changes at the largest pension funds, and the pressure is set to build with greater public awareness of impact investing and fossil fuel divestment strategies.
  • It’s good for business. A growing body of evidence indicates businesses that prioritise ESG factors perform better in the long-term. Being environmentally sustainable, socially responsible and well governed reduces business risk and ultimately improves the bottom line. At a time when historically low interest rates and gilt yields make returns harder for pension funds to find, harnessing the green recovery promises better outcomes for their members.

While these factors present pension funds with a great opportunity, more needs to be done to make sure that opportunity is seized:

  • Pension scheme trustees can work with their advisers to develop better reporting tools to help them understand the ESG impact of investments.
  • Automatic enrolment providers can offer default funds taking account of environmental factors and ensure that pension savers have the right information on those ESG points available to them.
  • The UK Government and the Pensions Regulator can support pension schemes in their green recovery journey, recognising the importance of this issue to members.

As well as the patient capital offered by pension funds, the green recovery will also depend on businesses having access to working capital and shorter-term finance from sources such as banks.

The global financial crisis that befell us in 2008 led to systemic reform of the banking sector to rein in unethical behaviour and excessive risk-taking and to improve corporate culture and individual accountability in financial institutions. The increased regulatory scrutiny since then on responsible and sustainable conduct means the banking sector is now better placed than ever to meet the financing needs of the green recovery in an ethical way.

The deployment by banks of tools such as ESG ratings, more commonly seen in the asset management industry, to inform lending decisions is still in its early stages, but initiatives are already underway to help banks proactively accelerate the transition to a green post-COVID economy.

The Loan Market Association, a trade body for the syndicated loan market, has developed Green Loan Principles to promote the development and integrity of the green loan product.

On the international stage, the United Nations Environment Programme Finance Initiative (UNEP IF) is working with signatories to the Principles for Responsible Banking to increase lending that supports socially and environmentally sustainable economic activities.

The root-and-branch reform of our economic system required to achieve net-zero targets is daunting, but policy-makers should not be timid when it comes to proposals for the post-COVID recovery. Change is the only constant in life, as they say, and ethical finance stands poised to unleash the green recovery.

Shepherd and Wedderburn’s Head of Clean Energy, Clare Foster, will be speaking with Chris Stark, Chief Executive of the Committee on Climate Change, on climate action and the path to net zero at the opening keynote interview of the Ethical Finance Summit on 5 October. Click here to reserve your free place. You can find out more about the firm’s Clean Energy Group and the contribution it and its clients are making to a green recovery here.


Accounting for Sustainability at Ethical Finance 2020

“If you can’t measure it, you can’t improve it”. This quote, often attributed to Peter Drucker, gets to the heart of why accountancy is key to the sustainability revolution gripping finance and business. If we want to understand the impact that business activities have on climate change, biodiversity, society and more, we have to be able to measure that impact, and report on it in financial statements and annual reports.

At the Global Ethical Finance Initiative (GEFI), we are seeking to bring in the perspectives of accountants, as well as others from across the financial services ecosystem, for Ethical Finance 2020. Taking place on 5th-8th October 2020, the summit features an impressive list of speakers, including NatWest’s Alison Rose, Aberdeen Standard’s Keith Skeoch, Professor Michael Mainelli and Kate Forbes, Cabinet Secretary for Finance in the Scottish Government.

While accountants might not fit the public image of what a climate activist looks like, it is increasingly recognised that their participation is essential to creating real action on climate change. The WEF at Davos earlier this year saw a major step taken, with a push from the Big 4, along with other partners, to standardise ESG (environment, social and governance) reporting, creating consistency internationally and moving away from the current status quo where firms are faced with a plethora of reporting standards.

Several sessions at Ethical Finance 2020 will focus directly on the issue of sustainability in accounting, including GEFI founder Omar Shaikh (CA) interviewing Professor Michael Mainelli. Anne Adrain of ICAS and Louise Pryor of The Institute and Faculty of Actuaries will be showcasing the Green Finance Education Charter, a commitment from professional bodies including ICAS to include environmental skills in their curricula. Taking a wider perspective, Jeff Hales of SASB will be explaining collaborative efforts to standardise sustainability reporting worldwide.

These sessions will discuss a range of issues, including whether we need to rethink our idea of the going concern. In the face of devastating climate change, as well as related issues such as biodiversity loss, is the traditional horizon of 12 months appropriate? Environmental damage, including climate change and deforestations, is already impacting supply chains, and stands to cause even more harm if left unchecked.

Then there are technical questions, such as how exactly to measure carbon footprints and other ESG impacts for alternative asset classes. Measurement and disclosures for listed equities are still imperfect but have improved markedly. The level of transparency is far lower in the world of private equity, debt and other asset classes, creating huge data challenges for ESG accounting.

Taken together, this raises the question of whether we are adequately reporting the negative environmental impact of business operations sufficiently. If we are depleting the natural resources of the planet or mistreating people, then the true costs of that are unlikely to be reported in accounts, which reflect the income generated but not the corresponding loss to natural resources. There are efforts to remedy this inconsistency at the national level, through initiatives such as ‘Gross National Happiness’, or the Scottish Government’s drive to measure natural capital.

These discussions are underpinned by the assumption that things can actually be measured: that we can “put a number on it”. But what if the fundamental data is qualitative, rather than quantitative? One area where ESG risks can easily be compared is the carbon emissions held responsible for climate change. The impact of finance on social issues and other environmental issues such as biodiversity and extinction is much harder to quantify.

The last few months have demonstrated the deep inequalities that exist within our society, with the Black Lives Matter movement being the most prominent example. In this climate, ignoring social issues simply because they are difficult to quantify is unacceptable. This point is underpinned by the recent Boohoo scandal around COVID. Despite being linked to unsafe working conditions, and labour rights abuses, the company had scored highly on ESG, ranking in the top 15% of their MSCI peer group index.

What does all this mean for ICAS members? Their involvement is key and they can make a huge impact, but to overcome some of the issues mentioned, accountants may need to broaden their skillsets beyond traditional financial accounting, into environmental, and social accounting, highlighting the need for education and training.

Reflecting our ambition to curate open, accessible debates, Ethical Finance 2020 will be free to attend. To find out more, including our full range of speakers and agenda, visit ethicalfinance2020.com now, or visit https://www.eventbrite.co.uk/e/ethical-finance-2020-tickets-82579199609 to reserve your free place.


NEWS RELEASE FROM THE GLOBAL ETHICAL FINANCE INITIATIVE

 

 

 

 

NEWS RELEASE FROM THE GLOBAL ETHICAL FINANCE INITIATIVE

THURSDAY 10TH SEPTEMBER 2020

GLOBAL SUMMIT IN SCOTLAND TO BUILD ETHICAL FINANCE SYSTEM

A major global summit will be convened virtually from Scotland next month to bring together over 500 leading professionals to shape a more ethical finance system. Ethical Finance 2020 has the theme ‘protecting our future’, with a key focus on delivering a green recovery after COVID-19 and seizing the opportunities of COP26 in Scotland.

Over 300 organisations, representing over £22 trillion in assets and including some of the world’s largest banks and asset managers, are taking part in the summit to help develop a sustainable finance system that works for people and the planet. The summit is staged by the Edinburgh-based Global Ethical Finance Initiative (GEFI) in conjunction with the Scottish Government and the United Nations Development Programme (UNDP). The Royal Bank of Scotland is the host partner and the global event is supported by Chartered Banker and the Chartered Institute for Securities & Investment. Speakers include filmmaker and campaigner Richard Curtis, NatWest Group CEO Alison Rose, Banking Standards Boards chair Dame Susan Rice, Baillie Gifford partner James Anderson, Aberdeen Standard Investments CEO Keith Skeoch and Bank of England director James Talbot.

GEFI is the driving force behind the ‘Path to COP26’ campaign, as well as a campaign for greener pensions. The Ethical Finance summit will be held over four days from October 5 to 8 and will explore how financial institutions can take practical steps to support inclusive economic growth without depleting natural resources or leaving anyone behind. GEFI works towards a fairer finance system for people and the planet, focusing on sustainability, climate change and social justice. Ethical finance in the UK is valued at around £40billion, creating thousands of sustainable job opportunities. Scotland has a long history of social enterprise with a growing reputation in ethical finance. A recent report from the Ethical Finance Hub found that Scotland’s £9.5billion UK-domiciled responsible investment represents 11 per cent of the UK responsible investment market, compared to the country’s 7 per cent share of the total market. There has been rapid sector growth of around 27 per cent per year since 2004, mainly in climate, impact and Environmental, Social and Governance (ESG) funds.

Gail Hurley, senior advisor to the Global Ethical Finance Initiative, said:
“It is now widely recognised that the financial services sector has a fundamental role to play in delivering universally supported targets such as the Paris Agreement and the UN’s Sustainable Development Goals, as well as supporting economic recovery from the COVID-19 pandemic. However, despite its potential, the current financial system can be a cause – rather than a solution – to some of the pressing challenges our planet and its people currently face. Ethical Finance 2020 will explore how the financial sector can support inclusive economic growth without depleting natural resources or leaving anyone behind. Scotland’s proud history in ethical finance makes this the right location for such a major summit, and with COP26 coming here next year it is vital that we come together to deliver a sustainable finance system for people and the planet.”

Thom Kenrick, head of social strategy at the Royal Bank of Scotland, said:
“Royal Bank of Scotland is delighted to be host partner for the Ethical Finance Summit once again this year. Over the past four years we have seen the conversation around ethical finance develop and mature at an incredible pace.  Ethical Finance is a truly global summit of leading thinkers who are committed to developing social and sustainable financial systems. As Scotland looks forward to 2021 and COP26, this event is more relevant than ever. We look forward to being part of the conversation as we continue to embed purpose and sustainability into our strategy.”

Simon Thompson, chief executive officer at the Chartered Banker Institute, said:
“Ethical and sustainable finance are more important now than ever before, as we rebuild businesses, communities and lives impacted by COVID-19 whilst continuing to meet the challenges of the climate emergency. Building a global community of finance professionals committed to embedding ethical and sustainable finance within their own professional practice, in their organisations and across finance as a whole is core to our purpose at the Chartered Banker Institute, and it’s one of the core aims of Ethical Finance 2020 too. That’s why I’m delighted to support the summit, and look forward to welcoming a large global audience to Edinburgh virtually in October.”

Photo for publication is available here. L-R, Simon Thompson, Gail Hurley, Thom Kenrick.

More information is available here: www.ethicalfinance2020.com

More information on Path to COP: www.pathtocop26.com

What is ethical finance?
A fairer system of financial management that combines profit with better outcomes for people and the planet. The full working definition of ethical finance: A system of financial management or investment that seeks qualitative outcomes other purely the management of returns. Outcomes sought may reflect ideas from faith, environmental and governance theories.

Why does ethical finance matter?
Although ethical finance is not a new concept the financial crisis has led to a growing interest in sustainability, climate change and social justice. This has seen a collective desire to create a fairer, more inclusive and responsible global financial system. Trust in banks is diminishing and today’s generation of consumers believes that investment decisions should reflect the issues they care about. Ethical finance in the UK is valued at around £40 billion, creating thousands of sustainable job opportunities. Today, with the world facing a climate emergency there is a pressing need to develop environmentally sustainable financial solutions.

Contact: Alan Roden at alan@quantumcommunications.co.uk or 07753 904 531


Ethical Finance Round Table: Impact Investing – Can it save capitalism?

The 24th Ethical Finance Round Table was hosted virtually on Wednesday 26th August 2020. Before introducing the session, GEFI Global Steering Group member and event chair Graham Burnside reminded us of the opportunities the virtual round tables have provided us, with the speakers taking part from three different countries.

Entitled ‘Impact Investing – Can it Save Capitalism?’, the session considered the role of impact investing as we shift from ‘shareholder capitalism’ towards ‘stakeholder capitalism’. Impact investing is an exciting and rapidly growing industry powered by 1,300+ investors (such as asset managers, foundations, banks, development finance institutions, family offices, pension funds and insurance companies) who are determined to generate social and environmental impact as well as financial returns. This is taking place all over the world, and across all asset classes.

The first speaker was Dean Hand, Research Director at The Global Impact Investing Network (GIIN). Presenting from New York, Dean introduced GIIN’s 2020 annual Impact Investor Survey report, which places the impact investing market size at roughly $715 bn. She focused on two key findings of GIIN’s research:

  1. The first was that whilst impact management and measures (IMM) practices have matured, opportunities remain for further refinement. Respondents to the survey highlighted substantial progress in research and the sophistication of IMM over the last decade. By far the biggest concern over the next five years, was the threat of “impact washing”. Almost all investors target social impacts (96%) and 60% targeted both social and environmental, which, Dean suggested, demonstrates how interrelated the two are for market investors. The most common SDG targeted was found to be SDG 8 (‘decent work and economic growth’) followed closely by SDG 1 (‘no poverty’). A number of frameworks to measure and manage impact have emerged in response to the growing interest in impact investing. 89% of respondents now use external frameworks, with the UN SDGs the most popular. This could go some way to address the issue of impact washing.
  2. The second key finding Dean covered, was that impact investors hold a positive outlook for the future, despite the headwinds. 99% reported that their impact was in line with or outperformed expectations and 88% also highlighted that this was also true of financial performance. Although many expect a financial underperformance as a result of the COVID-19 pandemic, 18% felt that their impact performance will still exceed expectations. The majority plan to maintain their capital commitment plans for 2020.

The next speaker was Tribe Impact Capital’s Amy Clarke. Amy started by posing the question as to whether we should save capitalism and whether it was the right tool for the challenges ahead? She positioned inequality and inequity as unintended consequences of the current financial system and, argued that while impact investing is part of the required system upgrade, it is not the whole solution.

Amy gave examples of several trends she has observed in the impact investing sector. The Make My Money Matter campaign was offered as an example of citizen empowerment where consumers are provided with the knowledge and tools to demand to better influence where their pensions are invested. According to Amy changing human capital is coming in the finance sector and the focus on increasing diversity and inclusion will ensure that financial institutions better represent the societies they serve. One thought that Amy felt would be controversial was that GDP should be laid to rest with real measures emerging as an alternative. Some cities are already transforming using Kate Raworth’s doughnut economy model. Amy concluded with a question around whether capitalism can survive the wave of change coming, or will it emerge as something different?

The third and final presenter, Azman Mokhtar, was speaking from Malaysia and offered his experiences of delivering true value in the wake of the Asian financial crisis. Azman began working at Khazanah Nasional in 2004, developing an investment style called ‘Building True Value’, delivering through financial, economic, and societal returns.

The project ran from 2004 to 2018, with the portfolio increasing in value 3.5 times, despite no inflow of funds. It also saw economic returns through job creation, transformation of strategic companies and knowledge development. Societal returns were improvements in education, poverty alleviation and reskilling. One example of the project’s work given by Azman was after the restructuring of Malaysia Airlines following two high-profile air disasters. The restructure meant laying off 6,000 employees and through the project, $50m was invested in a reskilling centre for those no longer working. To conclude, Azman felt that the project demonstrated that it is possible to deliver ‘true value’ over long periods of time.

As ever there was no shortage of questions during a lively Q&A session. Which covered topics including the drivers behind the confident outlook for the impact investment sector and how to develop an environmental impact investment approach in mature political economies.


‘Putting the ‘eco’ back in economy’: Finance for Nature Virtual Global Series Kick-off

The kick-off of the Finance for Nature Virtual Global Series on 20 & 21 July brought together industry champions from finance, insurance, consumer goods companies, and standard-setting regulators, to tackle two questions on how to accelerate nature-friendly finance: (1) Why should nature be positioned at the heart of the finance and green recovery agenda? (2) How can private capital and corporations unlock nature’s potential to achieve impact for the planet and prosperity for its people?

Key takeaways from the series include:

  1. The financial sector is increasingly well informed on the impact of climate, but less so about how to account for biodiversity and nature in its portfolio. Industry champions called for the inclusion of nature and biodiversity loss, as climate change cannot be fully addressed without it.
  2. To move beyond the individual asset-based disclosure requirements, a framework for more systemic nature-related risk disclosure is needed, following the trajectory of mandatory climate disclosure.
  3. The finance community needs a greater focus on traceability of corporate supply chains around climate, deforestation and other nature-related issues. It also needs to build in systems of accountability such as standards, or certifications (e.g. RSPO for palm oil).

What’s the point of my pension fund if it contributes to a dead planet? We’ll finance ourselves into extinction. We need to put the ‘eco’ back in ‘economy- Andrew Mitchell, Global Canopy

Why should nature be positioned at the heart of the finance and green recovery agenda?

Susan Gardner, Director of the Ecosystems Division at UNEP and Omar Shaikh, Founder of the Global Ethical Finance Initiative expressed the urgent need to move nature further up on the finance agenda and to play a core role as part of the green recovery. And the audience agreed, with 87% of respondents to the live poll noting that their organizations consider climate and nature as interconnected in the context of investing. Further, when asked if they have a policy in place that integrates nature-based solutions into decision-making, 52% said Yes, 28% plan to have a policy in the future, and 21% do not have a policy.

Inger Adersen, Executive Director of the UN Environment Programme (UNEP), provided the opening keynote address, highlighting that the Covid-19 pandemic provides a stark reminder of human’s reliance on nature, particularly for health. About half of the world’s GDP is directly or indirectly reliant on nature, and the finance sector’s recognition of the physical risks posed by the destruction of nature is a positive step but more urgent action must be taken. Inger urged governments and the private sector to use the UNFCCC COP26 in November 2021 as a target to steer economies towards a green transition that maximizes growth, employment and resilience.

UNDP Administrator, Achim Steiner, stressed the importance of nature for sustainable and equitable development and recovery from Covid-19, noting that 2.5 billion people depend on nature. Failure to seize the opportunity to place nature firmly on the green recovery agenda could lead to delayed progress by up to 10 years and failure to achieve the Sustainable Development Goals (SDGs). Accelerating decision-making and delivering impact at scale will require rebalancing the economic system with incentives and frameworks to ensure nature is not a marginal consideration operating in a parallel economy but a valuable asset that is understood, measured and incorporated into transformational policy strategies.

De Nederlandsche Bank recently published its ‘Indebted to Nature’ report which highlights the Dutch financial sector’s exposure to risks from biodiversity loss. The report estimates that Dutch financial institutions have over €500 billion in exposure to companies with high or very high dependence on ecosystem services, or approximately 36% of the examined portfolio. Executive Director of De Nederlandsche Bank, Olaf Sleijpen, stressed that although the world is in the midst of global health and economic crisis we cannot lose sight of the threat posed by climate change and biodiversity loss. The current situation presents a unique opportunity to take steps towards creating a carbon neutral economy. Olaf called on other central banks to build on the approach taken in the Netherlands to further explore and develop best practice to enable financial services to catalyse change and to promote consistent standards and frameworks for biodiversity risk measuring and reporting.

Biodiversity and nature loss pose major economic, social and environmental threats that we cannot afford to ignore. - Olaf Sleijpen, DNB

The audience also heard from an expert panel, moderated by UNDP’s Head of Climate Promise, Cassie Flynn, with representatives from the banking sector, insurance, asset managers, and leading thinkers on sustainable investing. Speakers included, Philippe Zaouati, CEO of Mirova; Brooke Barton, Vice President of Innovation and Evaluation at Ceres; Stephen Hibbert, Managing Director at ING; Veronica Scotti, Chairperson Public Sector Solutions at Swiss Re; and Diandra Soobiah, Head of Responsible Investment at Nest Pensions. The keynote speakers outlined a vision for a nature-forward future and panelists discussed the key practical solutions needed to position nature in the finance agenda.

Firstly, as we have now reached a tipping point where the impacts of deforestation and climate change may be irreversible, deforestation must be recognised as a risk that is embedded across commodities, asset classes and industries. Ceres presented the Investor Guide to Deforestation and Climate Change: a tool which provides timely guidance for financial institutions to divest from deforestation and to engage with their portfolio.

Secondly, there is a need to build robust impact measurement indicators that could address the complexities in measuring biodiversity. Mirova is currently joining forces with other partners to develop a tool that includes impact measurement on biodiversity for listed companies, which could help reduce the risk of greenwashing in the industry.

Thirdly, coordinated efforts across asset classes will be essential to improve the existing toolkits and develop new methodologies, metrics and taxonomies to integrate nature into financial decision-making. As noted by Swiss RE, insurers have a key role to play in leading this movement: they understand risk and invest in the long term, so they are well placed to embrace finance for nature. Building from the TCFD experience for climate, ING highlighted that this collective effort for nature also needs to involve actors from the scientific and data communities, who can support the financial sector to address this challenge with greater confidence. Civil society and global investor movements are already calling asset owners to redirect finance flows to nature-friendly investments. Among them, NEST Pensions supports the Make My Money Matter campaign that is calling on pension providers to think of the planet and its people alongside making a profit.

Audience Q&A topics:

    • Best practice in communicating effectively with customers
    • Obstacles to achieving a pipeline of investable projects
    • The role of central banks in the green recovery
    • Ensuring that no one is left behind through the protection and creation of livelihoods.

How can private capital and corporations unlock nature’s potential to achieve impact for planet and prosperity?

The second day of the series focused on the financial risk of biodiversity loss and the role of the private sector to take action. Midori Paxton, Head of Ecosystems and Biodiversity at UNDP and Andrew Mitchell of Natural Capital Finance Alliance and Global Canopy facilitated the discussion. Elizabeth Mrema, Executive Secretary of the Convention on Biological Diversity (CBD), opened the session with an uplifting reminder that 2020 is still the ‘Super Year’ for nature. Now is the time to reassess human’s relationship with nature and to recognize that nature is a public good which has been over-exploited. $44 trillion of economic activity is largely dependent on nature, providing the economic case for increasing nature-friendly finance and since the private financial sector is a critical enabler of markets it can contribute positively to halting biodiversity loss. Ms. Mrema urged the financial sector to ensure that financial disclosure initiatives contribute to the 2030 Biodiversity Framework to protect 30% of earth’s lands and seas.

A new reporting framework called the Task Force for Nature-related Financial Risk Disclosure (TNFD) was announced by Minister Zac Goldsmith, UK Minister of State for the Pacific, International Environment, Climate and Forests, and Animal Welfare. Ten financial institutions, the World Business Council For Sustainable Development and the UK and Swiss governments have backed the initiative, supported by UNDP, UNEP, Global Canopy, and WWF. It aims to increase financial flows at scale towards nature-positive investment and lending opportunities to allow people and the planet to flourish. In an audience poll, 89% of participants voted ‘Yes’ that disclosure of nature-related risk can drive real change and is not just a mere box-ticking exercise.

The pandemic is one symptom of our dysfunctional relationship with the natural world and we need to reset the relationship with nature. - Zac Goldsmith, UK

The expert panel included industry champions from private financial institutions like banks and insurance, and experts in private sector nature-related risk disclosure, including, Adam Kanzer, Head of Stewardship at BNP Paribas; Sonja Gibbs, Sustainable Finance Working Group at the Institute of International Finance (IIF); Mark Kenber, Managing Director at Climate Advisers; Rowan Douglas, Head of Capital Science & Policy Practice at Willis Towers Watson; and Bas Rüter, Director of Sustainability at Rabobank.

The three leading experts from the financial sector - BNP Paribas, Willis Towers Watson, and Rabobank - shared their insights on a private sector perspective of nature-related risk. They recognize the role of increased accountability to drive action and noted the role of government to provide the necessary enabling conditions but also of banks to fulfill their obligation to deliver valuable, long-term investments to clients and investing in nature is a valuable, long-term investment. They urged that climate risk disclosure should go further to account for nature as a climate change adaptation, not just mitigation. For example, Willis Towers Watson noted the importance of accounting for the physical risk of coral reefs or mangroves degradation which protect coastal communities and ecosystems from storm surges. When this risk is valued, there is much higher incentive to address it and prevent it.

The risk the world faces is not just biodiversity loss but the collapse of nature all together...We cannot preserve shareholder value without preserving nature and biodiversity.- Adam Kanzer, BNP Paribas

Deforestation is a major threat to biodiversity loss, mainly driven by cleared land for industrial agriculture and urgent action is needed to divest from deforestation. Banks have a role to play by providing the right incentives working with companies to create a better market price for sustainably-produced goods. One example is Rabobank’s efforts to offer lower interest rates for sustainable production in Brazil, where deforestation rates are high. Direct engagement with clients to ensure soft commodity supply chains are nature and climate-friendly, through a regional approach that fits the local context, is an impactful way investors can take action. However, there is a gap in knowledge on deforestation in supply chains - few investors are aware of the deforestation risk in their investment portfolio and the financial cost of that risk is high.

According to Orbitas Finance, presented by Climate Advisers, 44 financial institutions each have over $300million invested in palm oil alone and investors in 13 companies have at least $23 billion at risk. Orbitas provides a tool to assess deforestation risk in investor portfolios. Other related resources for assessing supply chain natural capital risk, noted throughout the series include: Encore and Gist Impact. A trend towards increased supply chain transparency, where companies are required to show where their assets are located, is helping to put pressure on companies to take action. Willis Towers Watson noted that the emerging use of spatial data to assess financial risk can help accelerate that pressure. Other examples of financial products and investor actions, as noted by IIF include, social bonds, debt for nature swaps, and biodiversity offsets and all rely on proactive and consistent measurement and reporting of risk. Ultimately, to account for nature loss, a collaborative and common approach to natural capital risk reporting and disclosure is needed and panelists underscored that a nature-related financial disclosure system like TNFD is a promising step. Just as the climate change financial risk task force helped channel private sector behavior through the TCFD overarching framework, this is what is needed for nature, and it must use the TCFD momentum.

Nature to be embedded into classic macroeconomic analysis...[We need] a nature-equivalent of scope 3 emissions for climate, e.g. ‘scope 3 depletions’ - Sonia Gibbs, IIF

Audience Q&A topics included:

    • the methodologies for putting an economic value on nature assets and potential externalities
    • the gaps in understanding nature-related risk and implementing actions to avoid it
    • the role of governments to regulate nature-related risk

Finally, Nigel Topping, UK High-Level Climate Action Champion, expressed hope for a nature-related financial risk disclosure platform as the next big step for finance and invited the audience to join the Race to Zero November Dialogues, where discussions about finance for nature will continue and hopes that these discussions will influence positive outcomes for finance for nature at the UNFCCC COP 26 in November 2021.

The two inaugural sessions of the Finance for Nature Virtual Global Series laid the groundwork for future discussions that aim to advance the integration of nature-related risks and considerations in the international financial policy and regulatory agenda. Covid-19 presents a unique opportunity to build back an economy that repairs our relationship with nature and addresses biodiversity. The evidence is clear - $3.6 trillion in business opportunities from sustainable food, land and ocean use, representing 191 million new jobs over the next 10 years, and more than half the world’s GDP and 2.5 billion people depend on nature - Nature-friendly investments must be scaled up to protect people, planet, and prosperity and to ensure a green economic recovery.

 

More sessions in the Finance for Nature Series will be announced soon. You can view the full event report and recordings from the sessions on the event web page here.

About The Finance for Nature Virtual Global Series: Designed as a series of high-level, quarterly, virtual dialogues leading up to COP26, the Global Series will look to advance the integration of nature-related risks and considerations in the international financial policy and regulatory agenda. It brings together industry champions from finance, insurance, consumer goods companies, and standard-setting regulators, and aims to drive practical commitments on investing in nature. This series is organised by UNDP, UNEP, the Scottish Government backed-Global Ethical Finance Initiative, Climate Advisers and partners of the New York Declaration on Forests.

 


The Radical Old Idea | Responsible Business in a Time of Crisis with Prof. Alex Edmans

The Global Ethical Finance Initiative’s inaugural Radical Old Idea virtual event took place on 23rd June 2020. Professor Alex Edmans of London Business School discussed how to be a responsible business in a time of crisis in a session chaired by Eva Cairns, ESG Investment Analyst – Climate Change at Aberdeen Standard Investments.

The COVID-19 pandemic has seen some inspired corporate responses, such as Unilever donating €100 million of food and sanitizer, and guaranteeing the jobs of all 150,000 workers including contractors. But what if you’re a small business without millions to donate? Or in an unrelated industry without relevant products to give? Professor Edmans discussed what it means to be a responsible business, for companies of all sizes and in all industries. He also explain the business case for responsibility in normal times as well as crisis times, and how companies can ensure that responsibility is consistent with long-term shareholder value. Professor Edmans drew on rigorous academic research, real-world examples, and his new book, “Grow the Pie: How Great Companies Deliver Both Purpose and Profit”.

Professor Edmans was introduced by the session chair Eva Cairns and he started his presentation with an interesting example as to the role the media plays in informing the public’s perception of responsible business. In 2007, Vodafone created the innovative M-Pesa mobile money service that, through a mobile phone, provides access to financial services to over 37 million people who previously had only limited access to bank accounts, while in 2012, they were the first telecoms company to release a tax transparency report highlighting its contributions to the public finances in the countries of operation. Professor Edmans posed two questions:

  1. Which of these decisions created most value for society?
  2. Which of these decisions, if not taken, would have led to most public outrage, or worsened Vodafone’s CSR rating / reputation?

Public and media anger was focused on the issue of tax – relating to the fair division of the pie. Whilst this is important, Professor Edmans proposes that it is time to change the thinking about responsible business and move from a “doing no harm” approach to “actively doing good” by growing the pie with socially beneficial projects like M-Pesa.

Professor Edmans then introduced the concept of “pieconomics” where companies seek to create profits only through creating value for society, rather than simply extracting value from other members of society such as employees.

What is the evidence for this? Employee satisfaction studies have shown that over 1984-2011 the “100 Best Companies to Work For in America” beat their peers by 2.3-3.8% / year. Professor Edmans suggested that qualitative factors (such as trust in management, camaraderie etc) are as important as quantitative factors (such as pay and benefits) in successful companies.

For companies, creating stakeholder value is therefore an issue for CEOs, not CSR departments, and for investors, a company’s stakeholder capital is a financial issue for all investors, not a non-financial issue for “socially responsible” investors.

To make decisions under ‘pieconomics’ Professor Edmans cited three principles:

  • Multiplication
  • Comparative advantage
  • Materiality

He focused on materiality. To introduce the topic, he discussed the meaning of purpose. The common perception is that purpose is about altruism and serving society. Some companies have a purpose that aims “to serve customers, workers, suppliers, the environment, and communities while generating a returns to investors.” However, Professor Edmans contends that purpose is about being targeted, focused and deliberate – focusing on the most material stakeholders rather than trying to be all things to all people. Purpose is the answer to the question: “how the world is made a better place by my company being here?”.

The importance of materiality was demonstrated through the work of Khan, Serafeim, and Yoon (2016) who found, through analysing ESG data, that firms that score high on all issues outperform by 1.5% / year, which is statistically insignificant. However, firms that score high on material issues and low on immaterial issues outperform by 4.83% / year. This research highlights the importance of having clarity in purpose.

Professor Edmans then applied the insights to the pandemic. Some companies have responded by splitting the pie differently – giving up profits to pay furloughed workers and or donate products to customers. These actions are laudable, but not every company can split the pie – they may be small companies that don’t have millions to donate, or large companies in unrelated industries. This highlights the importance of viewing responsibility as growing the pie through innovation – for example, a perfume company pivoting to make sanitizer.

To conclude the formal presentation Professor Edmans made a passionate call for to support companies that do no harm AND do good. There is a lot of energy around responsible business and to grow the pie, rather than being viewed as the enemy, investors and profit have the greatest role to play in repurposing businesses and creating a sustainable economy.

The formal presentation was followed by a question and answer session that was moderated by Eva Cairns. Topics covered included:

Professor Edmans motivation for the writing “Grow the Pie”

  • Huge movement against business and view that business not serving wider society
  • Business can be a big force for good so important to work with and not against business
  • Much of the research had already been done so it was timely to write it up

Challenges of change mindsets

  • The pie splitting mentally is engrained in us from childhood (win / lose games). Indeed, one of the most successful manufacturing innovations is Ford’s assembly line, which aimed to extract as much effort as possible from workers
  • Whilst investing in employees reduces short term profit we need to extend the horizon to consider the long term benefits of growing the pie

Role of climate change in responsible business

  • Environmental factors have a weaker link to long-term profit than Social and Governance factors
  • However, investors (such as pension funds) may have goals other than pure profit. Thus, even if combating climate change does not improve profit, even in the long-run, doing so can still be in shareholders’ interest

Surprising results from the book

  • As the book was based on research conducted over the last 13-15 years there were no major surprises
  • The popularity of responsible business means that lots of talking heads now want to write about it, even if they have not conducted rigorous research on this topic. In contrast, the book is based on decades of rigorous research by Professor Edmans and others

Approach to remuneration

  • We need to be careful about linking pay to measuring things like climate impact, gender diversity etc as by focusing on specific outcomes may come at the expense of others
  • It is better to align pay over the long term (5-7 years) to allow companies to best serve society (this can include investing in intangible assets)

Assessing stakeholder value

  • SASB recognises metrics around stakeholder values and launched a Materiality Map that identifies sustainability issues that are likely to affect the financial condition or operating performance of companies within an industry
  • It is important to have boots on the ground as this provides greater context to the measures
  • The Blueprint for Better Business provides 8 questions that should be asked to get beneath the skin of whether a company is genuinely pursuing a purpose beyond profit

Role of Government

  • Requirement to address three sources of market failure:
  1. Lack of competition (employees / customers are locked into purposeless companies)
  2. Lack of information (investors and stakeholders cannot hold firms accountable, e.g. for environmental impact)
  3. Externalities (companies’ impact on society that does not affect profits, even in the long term).

The Friedman Doctrine

  • Friedman’s article, “The Social Responsibility of Business is to Increase Its Profits” is widely misportrayed. It does not advocate exploiting stakeholders; instead, it stresses that investing in stakeholders can increase long-term profit
  • However, Friedman’s approach to investing in stakeholders is instrumental – you do so only if you can calculate the impact on profits. Pieconomics’ approach is intrinsic – you do so in order to create social value; profits are a by-product

Purpose driving performance mechanism

  • Human capital is the most important asset of the modern firm an a critical success factor to motivate, reward and retain
  • Google provide intrinsic motivation by encouraging employees to spend 20% of their time working on what they think will most benefit Google
  • The profits of responsible businesses systematically beat analyst expectations as they do not incorporate culture measures

Data

  • The 100 Best Companies to Work For was initially published in a book in 1984. In 1998 it was published in Fortune Magazine. If markets were efficient, then the returns to investing in the Best Companies should be lower after 1998, as the information is more public
  • Instead, the returns increased after 1998, suggesting that markets are not efficient – they ignore intangible information. Instead, the increase could be because the world is changing, with human capital particularly important in the 21st century firm

Good media attention

  • There is a tendency to focus on failures, which are commonplace when innovating, and the media thrive on negative stories
  • Instead of “naming and shaming” companies that make mistakes, the media should “name and fame” companies that innovate courageously

Shareholder primacy

  • Many writers on responsible business (e.g. Bower and Paine in the Harvard Business Review) pit businesses against investors. They argue that companies focus too much on shareholder value and that we need to radically reform business away from shareholder primacy. These views are often accepted uncritically given “confirmation bias” – people often like to think that shareholders are greedy terrorists, and pundits who suggest radical changes are seen as revolutionary.
  • However, these views are often not backed up by rigorous research. It is critical to focus on the highest-quality evidence, rather than articles that confirm what we think to be true. Harvard Business Review is a media outlet rather than a research publication; it is not peer-reviewed.
  • A decade of evidence, published in the most stringent academic journals, finds that hedge fund activism increases stock prices in the short AND long term. This was not down to tax savings or cutting wages, but instead increases in productivity and innovation.

Virtual Ethical Finance Round Table: the Role of Ethical Finance in Rebuilding the Economy after Covid-19

In response to the coronavirus pandemic, on 21st May 2020 the GEFI team hosted its first virtual Ethical Finance Round Table to explore the potential role of ethical finance in rebuilding the economy post Covid-19.

The coronavirus pandemic has impacted financial markets with unprecedented speed and ferocity. It has led to a re-evaluation of many assumptions about the global economy, with health security now joining the climate emergency as the most pressing challenges of our generation. This session provided an opportunity to hear from leading global experts on how the macro-economic impact of Covid-19 might catalyse financial institutions and economic systems to better serve people and the planet.

The session opened with an update from Rupert Watson, Head of Asset Allocation at Mercer. With their AUM totalling $304.5 billion and advising on a further $15 trillion in assets Rupert was able to provide a unique insight into Mercer’s economic and market outlook. Mercer has identified three interdependent high level economic impacts of the coronavirus crisis:

  1. Direct impact – what we see with our own eyes resulting from the enforced temporary shut down of the economy
  2. Indirect impact – businesses in a vulnerable financial position are placed under additional stress, often requiring increased borrowing as consumers become more cautious due to the economic shock and threat of job losses
  3. Policy impact – unprecedented financial support from Government and central banks has attempted to freeze the economic picture and restart it three (or more) months later.

Despite the high levels of discretionary fiscal easing, unemployment in the US will jump to its highest level since the depression. Although global GDP and corporate profits will undoubtedly plunge in Q2 Rupert nevertheless expects the recovery to begin in Q3 as activities start returning to normal. The US is likely to experience a slower recovery than the UK due in part to the job retention scheme helping to sustain UK employment and consumer spending power.

In terms of the recovery, Rupert suggested that not only what consumers are allowed to do as the lockdown eases but what they are willing to do would be of significance. The speed of the rebound will therefore depend on reaching the point where the population’s fear of Covid-19 infection is substantially diminished. A critical success factor is the availability of an effective vaccine and this is not something Rupert expects this calendar year.

Michael Moe, CEO of Silicon Valley-based GSV Asset Management and one of the world's pre-eminent authorities on growth investing, followed Rupert with his views on the response from asset managers. Adam Smith’s "The Wealth of Nations" marked the birth of modern free market capitalism which, according to Michael, has created unprecedented prosperity and inequality.

Although as many people will have died over the period of the lockdown through lack of access to clean water as have died from Covid-19, the fact that virtually the entire planet been impacted by the pandemic has led to an almost immediate global response. Covid-19 is a ‘game changer’, a mind-altering event similar to Hiroshima and 9/11 that will result in permanent global change. Michael distinguishes this paradigm change as BC (Before Coronavirus) and AD (After the Disease).

Michael highlighted that BC the venture capitalist mindset of optimising shareholder value was already under attack and in his view as we enter AD there will be a surge in recognition that the best businesses will generate a profit (as required by shareholders and for sustainability) with purpose (serving the needs of employees, communities, customers and the environment). This is not a purely philosophical idea: it is here and now. The best companies will combine the drive of for profit with the heart of a not-for-profit.

For Michael, expediting and accelerating important trends (such as the overnight shift from physical to digital and to profit with purpose) is an exciting outcome of the coronavirus pandemic.

The final speaker was Liz Grant, Professor of Global Health and Development at the University of Edinburgh who presented on the role of well-being and compassion in the new economic paradigm. Messages around compassion and well-being have gained prominence during the coronavirus pandemic.

According to Professor Grant the concept of compassion is best articulated by a quote from CS Lewis’ commemorative stone in Westminster Abbey: I believe in Christianity as I believe that the sun has risen, not only because I see it but because by it I see everything else.”

The coronavirus pandemic has turned humanity upside down, shining a light on an economic system that increases rather than reduces inequality. Although mortality rates for malnutrition, malaria and HIV are far higher, due to its global proliferation, the response to Covid-19 has been unprecedented in terms of the speed and range of health, social and economic measures taken.

As we look to the future the SDGs provide a blueprint and ‘meta-narrative’ for a new and better society. The Global Goals are underpinned by planetary health through a recognition that the health of humans is interconnected with the health of the environment. Professor Grant offered a sobering reflection by challenging the notion that we have mortgaged the health of future generations for economic gains in the present by suggesting that we have in fact now entered the territory where we are suffering today.

Compassion is not merely about acts of kindness or goodness; it is about seeing the world through someone else’s viewpoint. Professor Grant suggested a 4 step process for demonstrating compassion:

  1. Notice
  2. Interpret
  3. Empathise
  4. Alleviate

Professor Grant then pointed to the legacy of Francis Hutcheson, a major exponent of the theory of the existence of a moral sense through which man can achieve right action.

As we look beyond the pandemic Professor Grant argued that, as a global family, we must both care for ourselves and use compassion to awaken and drive action to reduce the suffering of others. Although the SDGs set out the end game they do not define our individual and collective roles. Embracing compassion can therefore be a transformative strategy and a mechanism to shape the way we see the world and provide motivation to do things differently.

The session concluded with an engaging question and answer session of which these were some of the key points emerging:

  • Timescale for economic recovery (Rupert)
    • Near term – watch the speed of the lockdown unwinding
    • Income maintenance – Governments making up shortfall so preserving capacity for people to spend when lockdown eases
    • Little desire for immediate period of austerity
    • Policy approach is to grow out of crisis (higher inflation) and reduce the level of Government debt (cf. post WW2)
    • Some possibility of severe austerity of up to 10 -15 years but reasonably confident that economy will come back quickly
  • Resilience of asset managers (Rupert)
    • Trying to avoid moving client and investor money too frequently
    • Positioning clients so they are reasonably protected across all eventualities
    • Stress test – imagine what might go wrong, test and do not panic!
  • Resilience of asset managers (Michael)
    • Difficult to know what will happen in the market so focus on fundamentals of business
    • Level of fear has created opportunities for those who can take a long term perspective
    • Challenging and exciting times for growth investors as ‘future accelerated to the present’
  • Shifting towards action in the finance sector (Professor Grant)
    • Individuals
      • Define their inward motivation (what is it that each of us find meaning in life / why are we doing what we are doing?)
      • Identify their inner journey (does it matter that there is inequality, injustice etc and do I see my connection to that?)
    • Institutions and organisations
      • Recognition that there has to be a different way of being
      • Model of compassion - not just about employees but about the practice of work
      • How important is profit and should it be at the expense of someone else / is it destructive?
      • Proactively embed a culture of compassion as compassion fundamental to sustainability
  • Shifting towards action in the finance sector (Michael)
    • Introduction of B-Corp is well-intended but does not go far enough
    • Need to incorporate approaches that can be embedded into how businesses operate
  • Impact on Europe (Rupert)
    • Lingering worry that EU may be pulling apart but Italy withdrawing would be devastating for the country and the EU
    • Publication of joint statement by France and Germany on supporting the broader region (health strategy, recovery fund, green / digital transitions and single market resilience) is a positive development and critical for Italy to achieve economic growth for living standards, employment, welfare.
  • Human (Professor Grant)
    • Consider unintended consequences of intended good action – think collectively and ethically through a lens of compassion
  • One thing to lose post-coronavirus (All)
    • Business travel (Rupert)
    • Quarterly earnings reporting (Michael)
    • Replacing thinking about what we want and need with what others want and need (Professor Grant)