Rebooting the Investment System How Academics and Practitioners
Rebooting the Investment System: How Academics and Practitioners can Collaborate to Achieve this Raj Thamotheram 16 May 2013 Financial Sector Governance for Naturalll Resource Sustainability
Thank you for listening! A “sceptical” academic!
The Eco-Resources Crunch 3
The Great Disruption s “The hallmarks of tomorrow’s world will be scarcity – of land, oil, food and ‘air-space’ (for greenhouse gases)” US NIC, 2008 The ‘Perfect Storm’ (UK Government Chief Scientist, John Beddington, 2009) [Climate change risk] “should compel all elected leaders to take immediate action” Mayor Bloomberg, 2012
Views from the Frontline Accenture http: //www. guardian. co. uk/sustainable-business/video/peter -lacy-business-strategy-sustainable-investment-systemicchange? INTCMP=ILCNETTXT 3486 (0: 35 – 3: 30) Unilever http: //www. youtube. com/watch? v=ok 7 j. X 188 Pd. E&feature=pl ayer_embedded#t=1516 s 5 (25: 20 – 26: 57)
Investors = enablers of dysfunction? Investors are more important than even regulators in shaping directors’ priorities. Pw. C, Annual Director Survey 2010 “[…] the destruction of shareholder value through legal means is pervasive, perhaps even a routine way of doing business. Indeed we assert that the amount of value destroyed by companies striving to hit earning targets exceeds the value lost in these high-profile fraud cases. ” John GRAHAM, Campbell HARVEY & Shiva RAJGOPAL “Value destruction and financial reporting decisions”, Financial Analysts Journal, Vol 62 No 6, 2006 “Investors don’t care about Sustainability” Business Week, 9 th Nov 2010 (Global Compact / Accenture survey)
“Why the World Faces Climate Chaos”
1. Some role models to avoid?
• Frederic Mishkin, Professor, Columbia Business School http: //www. youtube. com/watch? v=8 l. Hv. TKzfu 8 Q&feature=player_embedded#t=0 s • Glenn Hubbard, Dean Columbia Business School http: //www. youtube. com/watch? v=Ca. XNq. Gg. Icg&feature=player_detailpage#t=6 s
But Good Guys Can Also Mess Up!
2. So what does help?
Jeremy Grantham – “Be Arrested” “Scientists are understandably protective of the dignity of science and are horrified by publicity and overstatement. ”
Alice Stewart – Challenge Convention “Pioneering woman scientist whose research into the dangers of x-rays and nuclear radiation shook the Establishment” (GUARDIAN OBITUARY) "We have already doubled the level of background radiation today. What is the effect on human genes? That is the really important question: it won't show up for two or three more generations. ”
Anat Admati – Focus on What Matters http: //www. youtube. com/watch? v=SJgwj_e 3 u. TA&feature=player_embedded#t=170 s 2: 48 - 4: 00
Campbell Harvey – “Bridge the Gap!” “Often academics don’t know the important problems facing industry” Survey methodology to bridge the gap Disguised the real question Big impact – earnings management isnt primarily by accounting but rather by cutting budgets 1900 google cites (2006 paper)
3. Who Should Set the Agenda? Are academics paying attention to what matters?
Kay Review – Intermediaries Dominate 17
Kay – Momentum Out of Control Intrinsic investors Mechanical investors Traders Deep understanding of strategy/sector Mathematical formulae (incl index & closet index) Bet against market with regards to news More like to support management thru ST volatility Supporting or not supporting management isnt part of their reality Interested in earlier access to better news 20% of market 30% 35% 4 -10 positions 100 -150 positions 20 positions 18 Adapted from Mc. Kinsey & Co
Research and Practice Failures Galore Corporate Governance 19 Copyright © 2011 © Richard Leblanc. All rights reserved.
What Drives Preventable Surprises? Is ESG as we currently understand it a good enough framework? Narrow Conception of risk Weak concern for negative externalities Outdated approach To safety Focus on riskier and dirtier O&G SYSTEM O&G SECTOR Ineffective regulation Regulatory capture Shareholder value fundamentalism M&A and Outsourcing/SCM BP Saviour CEO Weak safety culture Organisational Learning disabilities Leadership & Governance failures
Exploding Inequality “A hungry man is an angry man” Bob Marley
What interests ESG Academics Today? • PRI Academic Network 66 papers from academics past two conferences (2011 and 2012): • 1 of the 66 papers focus on the ‘gatekeepers’ of information (sell side, credit ratings, investment consultants). • 15 of 66 address systemic problems (behavioural, cultural and institutional) • 7 of the 66 papers address public policy • What is getting attention? Doing well and doing good- that is, how integrating ESG can lead to better financial performance, using the same old models. • E= G>S • Fundamental investors > Index/Trading Investors Thanks to Heather Hachigan
4. How to do academic research that is more disruptive/progressive?
Important Caveat! • Good research is not a magic cure to dysfunctional investing • Behavioral specialists have long documented the human tendency to discount facts that contradict one’s worldviews.
The Key Question! WHY AREN’T WE RESPONDING? “the crisis is in implementation” Kofi Annan (2002)
Blocks to Good Investing & Way Forwards • Cap weighted indices • Monitoring relative performance over ST • Achieving best return over the quarter/year • Risk metrics based on prices • Unlimited use of derivatives instruments for momentum investing • Performance fees based on ST results and peer benchmarks • Fundamental benchmarks (e. g. , real GDP growth + local inflation • Monitoring critical inputs (e. g. engagement results) • Achieving best risk-adjusted return over long-term • Risk metrics based on cash flows of assets over time (requires attention to ESG) • Restricted use of derivativesfor hedging purposes • Rewards aligned with benefits for end beneficiaries Adapted from Paul Woolley
Some Under-Explored Themes • Governance failures & CSR teams • Explore incongruences in business school teaching • ESG/CSR Commitments & Implementation • ESG access to research budgets • Performance Metrics & Remuneration design • Whose risk counts (metrics & decision making processes) • Corporate strategy • Pension funds of pro sustainability companies
Academics as agents of social change What is your theory of social change? What outcome do you hope to see/contribute to? ST? MT? LT? Who are you targets? Who are you allies? How can you help them? Who are you critics? How can you reduce their opposition?
“It’s the Communication, Stupid!” Advice from Richard Duncan: • Write books, articles and blog. • Lots of media interviews. This requires cultivating relationships with journalists. • Hired PR firms. • Website • Speeches • And now my Course on Udemy. com
An idea for SSEE…. . A global intellectual dating site between real world academics and reflective practitioners who want to show positive deviant leadership http: //blogs. hbr. org/ideacast/2010/06/positive-deviance-andunlikely. html (0: 22 - 1. 43) In partnership with action-oriented networks (SFM, Preventable Surprises, Long Finance Initiative, Capital Inst, Theb 300 Club…. )
4 Personal Priorities Engage with a practitioner/academic who cares about what you care about Show relevance to the debates that matter in your field/firm “Tool up” to understand systemic change Find a mentor who is “part of the solution” 31
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