Values and Purpose - the underpinning of sustainable investment
As an industry we spend billions of Dollars/Euro on ESG data, on taxonomies, on ratings, and on studies and reports - pretty much all focused on the how and what of investing. We argue that there is a really important step before this - the why of sustainable investing. How can we decide where our capital gets invested if we don't understand, in detail, the why of the process. What values and Purpose are we looking to advance. And then, we realise it goes beyond this. Once we know the "why", what Autonomy do we need to take a greater of control of the process, and what Mastery do we need, the skills, expertise and support network that enable us to actually deliver our Purpose.
This is an odd blog, as its a mix of investing and psychology. As an engineer and investor this takes me outside of my comfort zone. So, I want to thank Sharath Jeevan OBE for all of his help, thoughts and inputs. Sharath is the reason why Purpose, Autonomy and Mastery are all capitalised -these are key concepts he examines in detail in his excellent book Intrinsic.
But, I am already getting ahead of myself. In this blog I want to start the process of thinking about what we need to do in the investing world to get purpose and values more deeply imbedded. And, equally importantly, how we can learn lessons from outside of our industry, and apply them to investing with purpose.
One last thing before I dig into the topic, Sharath and I are looking for sponsors to help with a trial project, testing our thoughts on this approach to applying values and purpose, and specifically how they apply to asset owners. If you are interested in supporting this work contact either of us, via the website or through LinkedIn.
Given the vital role of asset inflows in delivering revenues and growth for asset management firms, researchers in finance have for decades investigated the drivers of clients decisions to place assets with one firm over another. It turns out that one part of the answer is simple and very old fashioned, its trust. The Trust Mandate by Brodie & Harnack
Despite this, anyone who has an interest in sustainability and ESG who reads the financial press, would have rather rapidly come to the conclusion that trust seems to be the one commodity that is in short supply. We guess not much changes ...
“One can’t say that figures lie. But figures, as used in financial arguments, seem to have the bad habit of expressing a small part of the truth forcibly, and neglecting the other part, as do some people we know.” Where Are the Customers' Yachts?: Or a Good Hard Look at Wall Street. Fred Schwed Jr. First published 1940.
Talking about values and purpose
I want to talk about values and purpose. This might seem a really odd thing for an ex banker to do, but stick with me. I want to convince you that these two words will increasingly be at the heart of the success or failure of sustainable investing over the next couple of decades. This makes it essential that all of us, from companies, though advisors, asset allocators, asset managers and asset owners, understand why values and purpose are so important and how we can apply this knowledge to how we invest.
First up -an ex investors perspective
Values and purpose in investing has been around a long time. From a personal perspective, when I first started in this industry two or three decades ago, we had investors who required us to exclude sectors, mostly tobacco, alcohol, gambling and weapons. They appreciated that it probably meant that, for some periods, they lost out in terms of financial performance, but they were comfortable with that.
Roll forward, and we have a much more complex situation.
First, deciding what should be excluded has become tougher. There are now way too many metrics, and on top of this we have the whole engage/divest debate. On metrics, MSCI (just to pick an example at random, other ratings agencies are available) uses 56 metrics in its simplified ESG model. And this is the stripped down version. So much data makes deciding about values alignment much more challenging.
And arguably, it shouldn't just be about exclusions any more. It should be much more about where do I actively decide to invest my money to make a real difference. This is tougher, and ESG data only helps a little with this. To deliver on this we need to start by thinking about what difference we want to make, and what trade-offs and compromises we are prepared to accept.
And some argue that investing for good is painless
Second, some asset managers, often backed by selected academic or consultant research, now argue that you don't have to sacrifice financial performance. You can do well while doing good. In our view the evidence is actually much more mixed. In some cases and over some time periods it works, but not in all. Regardless of the correctness of this argument, the industry has largely persuaded asset owners that they can largely leave the values and purpose thing to them.
Put simply "you don't have to get involved", just pick this fund or investment vehicle and you get both doing good and doing well. There are no trade-offs. We know that this cannot be correct, but time and resource constraints can mean we buy into this approach.
Asset owners becoming more detached from their investments
When you put the factors together, you can see why many asset owners end up feeling detached from their end investments, and finding that they are invested in ESG badged products that don't really give them what they wanted. And why there are increasing concerns about greenwashing. This is not an argument against ESG, understanding exactly how companies and countries measure up against ESG type criteria is important. But on its own its not enough.
Its increasingly clear that there is a material disconnect between the providers of the capital, the asset owners, and the investments that their money supports. Dirk Schoenmaker, from the Erasmus University Rotterdam, discusses this a lot, including a recent short paper for the Bruegel think tank. This disconnect is partly reflected in what assets get selected for our portfolios, but also, perhaps equally importantly, in how and why engagement actually happens.
This disconnect is not anyone's fault, but with each step along the investment chain, the initial objectives get eroded, information flow gets corrupted and incentives become less and less aligned. It was already a challenge when we just worried about financial risk and return. Now we have to communicate our values and purpose to organisations that we are two, three or even four levels detached from. This would be a tough ask, even if we could find a way to be really clear about what it is we want.
Investment chains too long, with confused incentives
In many cases this erosion is not intentional, its just a natural consequence of the length and complexity of the investment chain. Plus, many asset owners struggle to express their objectives in clear investing language, and often don't have the right framework and resources to monitor the effectiveness of their investments. And many asset managers don't see purpose and values as a core part of their role. They are measured on their financial performance, their alpha generation or their asset gathering success. And lets be honest, as an industry we are often not the most empathetic people in the world.
Having spoken with a number of experts in the field, we argue that the time is now right for a more considered approach to how we align our investments with our values and our purpose. One that goes beyond the simplified notion of an ESG score, that instead starts from the simple question of "why do we want to invest sustainably".
Empowering asset owners
This thinking very neatly leads onto the question, what things do we need to do differently? We argue that an important part of this is asset owners taking back some control. Its our money after all and we should have more say over how its invested, and in how it aligns with our values and purpose. But to do this we need to think differently about our role in the investment process.
This is where we switch from sustainable investing to psychology.
My lightbulb moment was when I meet and talked with Sharath Jeevan. I am guessing that Sharath might not be known to many of you. He is not an expert on investing, but his work potentially has massive implications for how we align purpose with sustainable investing. This linkage will be key if sustainable investing is actually going to deliver its potential.
Sharath is one of the world’s leading experts on intrinsic motivation. He founded and led STiR Education, which reignited the motivation of more than 200,000 teachers in 35,000 schools, impacting seven million children. For this work he was awarded an OBE in 2022. He is also the author of a really good book, Intrinsic: A manifesto to reignite our inner drive.
What has this got to do with investing
Now you might be thinking, what has more motivated teachers got to do with asset owners. To me its really simple. Like the teachers in India, where STiR started, asset owners also need to reignite their passion for investing. It should not just be a mechanical and abstract process. Our objectives, the why we invest, are increasingly important. Nearly all asset owners have the objective of helping and serving others - what Sharath calls purpose. It might be their family members (including future unborn children), or the beneficiaries of their endowment, or the stakeholders in their pension scheme. In some cases its even wider, with asset owners such as sovereign wealth funds concerned about the economic wellbeing of their countries.
But, as Sharath frequently reminds me, its about a lot more than "just" being clear about your purpose. There are other elements that we need to weave in.
Autonomy - believing in your ability and agency to actually change things for the better - this must be a big one for most asset owners for whom the challenge must at times feel overwhelming.
Mastery - the sense of being on a continual journey to be the best version of yourself you can be, constantly learning, and
A support network, meeting with others in a similar position to you to share the challenges and the success, even the small ones.
One final thought.
So much of what we read and hear about purpose is focused on companies, so mission statements and getting buy in from employees and customers. This is similar, but at the same time different. And so different tools are needed. This is why Sharath and I are looking for sponsors for a pilot project to identify how this thinking can be applied to asset owners, what we need to approach differently, and what things are the same.
Yes, financial risk and return are important. And for some asset owners, such as some pension funds, the whole fiduciary duty debate can get in the way. But for those asset owners who have greater freedom to act and decide, we can do more.
Finally, and very importantly, nothing in this blog should be construed as providing investment advice. For company and/or fund specific investing advice and recommendations, you need to look elsewhere. In more formal language, this blog does not constitute Investment Research as defined in COBS 12.2.17 of the FCA’s Handbook of Rules and Guidance (“FCA Rules”). See the end of this blog for links to important information and disclaimers.