The 2018 RIAA Conference has just finished in Melbourne, and the ESG professionals who attended have no doubt spent the last week pondering the complexities of the many issues that were raised. As we return to work and the pace of our daily roles, we all face a similar question: now what?
After a year where the Banking Royal Commission has seen financial services institutions persistently make headlines for unethical behaviour and systemic failures to provide for customers, it may feel as though now is perhaps not the easiest time to fly the flag for responsible investment. There has, however, never been a more imperative time for the RI sector to assert its foundational tenets of responsible capital stewardship, ESG integration and respect for stakeholders.
Events like the RIAA conference are key to replenishing the oft-depleted energy stores of RI professionals all over the country, whether they are chipping away at the coal-face of investment decision-making on board committees, or tucked away in ill-fitting advisory departments neutralised by bureaucratic management processes. RI needs solidarity, and opportunities like the RIAA conference allow us to bring our heads together and ponder a future where capital markets function in a way that doesn’t deplete the planets social and environmental resources.
So, what exactly are we are being asked to deliver? CAER referenced its notes and came up with the following themes that arose over the two days of the conference.
Starting with a heartfelt plea from Saker Nusseibeh of Hermes and the 300 Club, investors were reminded at the outset of the grim challenges quickly cascading from global warming and its impacts on food production and geopolitics. From gender diversity to questioning the fundamentals of the risk-return relationship, Saker emphasised the role of the RI community in inciting better practice from companies and nudging politicians towards appropriate policy.
Nevertheless, is it time we stop blaming politicians and take matters into our own hands? Rosemary Bissett of NAB and Jacki Johnson at IAG certainly think so. Speaking of their work on the Sustainable Finance Roadmap and the participation of regulators in pursuing appropriate action on a range of RI policy issues internationally, Johnson made an emphatic call to RI leaders to step up their game:
“There isn’t a finance gap, there’s a leadership gap”.
What does it mean for RI investors to step up and get the job done in the absence of signals? What would it look like for institutional investors to lead the charge on embedding the goals of sustainable finance or climate change mitigation within their strategies?
Sue Cato reflected on the courage to engage, as she discussed the way investors and other groups holding companies and their leaders to account via shareholder resolutions was gaining traction as a constructive game changer when done right.
Traditional engagement models still have their role in future-proofing investments, as shown by the discussion between Santos, Black Rock and First State Super regarding their work on enhanced climate change disclosure. But how can the engagement space be used to actualise the urgency of responses needed from companies? Are funds opting for too light a touch? Are special interest groups too disruptive? Where can these strengths be leveraged for maximum efficiency rather than ideological capital?
Several sessions raised the challenge of measuring the impact of RI. Kate Raworths’ donut economics model was shared and discussed by a varied panel of Crescent Wealth, CFSGAMs, Pendal and Bank Australia. It was here that we first saw a suggestion for alternative models of economic measurement.
Approached varyingly by the different representatives, the donut diagram below proffers a paradigm shift in thinking about economy and value that extends well beyond measuring impact or the packaging of RI products.
In a session regarding achieving such impacts at scale, Ros McKay of Cbus reflected on the difficulty of measuring impact at a portfolio level. What of the externalities produced by the project? Are negative impacts being measured? Is the investment regarding a direct solution? Does it benefit people or the planet? Such discussions echoed the warnings of Nusseibeh, highlighting the interrelationship between different impacts, community and global objectives.
Clearly an area of ongoing concern, the breakout session on measuring impact also touched on ‘greenwashing’, or the dressing up of business-as-usual products to appear as high impact products. As the Australian RI market hits a new phase of maturity, the relationship between marketing and genuine impact comes into focus. What type of impact is meaningful to report on? How much impact does a product need to make to be defined and marketed for that purpose? CAER discussed this issue in an article earlier this year: ‘Protecting impact from greenwash’.
Getting Clarity on climate change
Of course, climate change was an issue touched on throughout the conference, and part of the daily dose of reading for most RI professionals. In a very timely panel sessions, Anna Skarbek of Climate Works Australia, Kate Mackenzie of Climate KIC Australia and Sean Wright from the Environmental Defense Fund, provided a concise summary of Australia’s progress towards a 1.5 degree scenario. To the exhalation of many investors, Skarbek noted that every State had implemented meaningful emissions targets and that the technology is available for Australia to get there, even with current policy conditions. A new report on what this looks like is due shortly.
In a panel discussion on the topic of Taking on the Science in your Portfolio, Arti Prasad from NZ Super tackled the question of how scientific data and evidence can play an integral role in practical portfolio decision making. A key notion of this panel was to discuss ways to combine a range of data sources and information from different organisations with existing ESG data and established investment strategies. Yoram Layani from BNP Paribas closed by highlighting that the bank has consciously chosen to engage and collaborate with a range of organisations to ensure the right experts assist financial analysists’ understanding different perspectives and apply these to financial portfolios and investment decision making.
Understanding new risks and unusual opportunities
While the issue of climate change claimed its rightful place as the key concern for investors, Simon Carter of Morphosis believes that digitisation ought to be an equal first. A machine that can build and lay over 1000 bricks an hour, virtual reality accessibility across large swathes of the population; Carter provided some insight into the immense impact that new technologies will have on work, industry and economy. Investors need to question how these opportunities can be captured in their portfolios and whether these risks should become part of our dialogue with companies.
The other sleeping giant was the issue of plastic waste, which intersected with the traditional array of risk considerations discussed at the conference. Craig Reucassel of Giant Dwarf and known in Australia for his ‘War on Waste’, Gayle Sloan of Waste Management Australia and Nick Edgerton of Stewart Investors walked the audience through the overwhelming reality of plastics pollution in Australia and abroad, highlighting the myths – and opportunities – of recycling.
An issue that is fast gaining traction across consumer markets and global policy makers, the RI market is likely to pick up and integrate this issue swiftly, as suggested for example by a recent research report on single-use plastics by Citigroup.
Challenging the philosophical foundations of economics
While peppered throughout the conference, the subtle challenges to Modern Portfolio Theory and the assumptions of neoclassical economics were articulated most pointedly in the session on inequality presented by Helga Birgden of Mercer and Melinda Cilento of the Committee for the Economic Development of Australia.
Birgden mapped the implications that forced migration due to geopolitics and climate change will have for the labour market phenomena of modern slavery. Complimenting this with a localised perspective, Cilento reported on statistics of expanding wealth disparity causing social inequity and ultimately a lack of faith in economic systems. Investors were told that the growth of the economy was not measurably benefiting the individual, and it was up to investors to reframe that relationship and decide how to evolve economics. To this end, we were suggested reading material: Thomas Piketty’s Capital in the 21st Century, Rethinking Capitalism featuring the likes of Joseph Stiglitz.
Where to From Here?
In his closing address, RIAA Chair Pablo Berrutti reflected on the forgotten social contract of investment, and that there is work needed to reintegrate such considerations into the functioning of markets.
Where are the spaces for investors to begin such reflections? Is it in the boardroom or in the media? Berrutti believes that such change begins with ourselves, referencing gender diversity as an example of how those in roles like his have the responsibility to challenge our own assumptions and limitations.
A seemingly fitting sentiment for a thought-provoking conference during a weary year for investors.
So, what is it we can do from here?
We can challenge ourselves and those leading our organisations, and investee companies, to directly engage the risks that confront our society. Putting aside political labels, we can employ the evidence of research and science to hold market participants accountable for the role they need to play in better long-term governance. We can work with those already acting and put our resources, including the power of fearless thought leadership, to the task. Importantly, we must question the relationship of the strategies we employ to the outcomes we want to see.
Which brings us to impact: we must identify the trade-offs being made to make an investment product fit the ‘green’ profile, as opposed to actually comprising a ‘green effect’. Looking beyond the assumed impacts of our investments, we can employ a donut economics way of thinking to see what constitutes a holistic impact. This may not always show us what we want to see, but it will show us what is actually occurring through the interrelationships of ESG risks we are becoming aware of.
Climate change should still be at the forefront of our thinking, but the timelines are down and the urgency is up. New thinking and products are hitting the market every day. This is the time for resources to be boldly allocated towards engagement with regulators and other actors. As fires and floods hit headlines globally, climate change can no longer be seen as an unknown risk that is ‘coming’, but one that is here now with an imminent impact upon portfolios. We must be confident that everything that can be done, is being done and that we engage meaningfully with those who claim they have found a way.
As should be expected of existential threats, it is timely that we examine the foundational philosophies that are incentivising our actions and beliefs each day. Current economic models have been derived from neoclassical theories through to the neoliberal. We now face the challenge of understanding the shortcomings of this while forging the thinking that will inform what comes next. Far from subsuming to the doldrums that many nine-to-five tasks inhabit, we must look to ourselves again and again to incite the space of change.
As Albert Einstein is famously quoted as saying, we cannot solve our problems with the same level of thinking that created them.
If you would like to catch up on other topics discussed at the 2018 RIAA Conference check out our ‘RIAA Reading List‘
Interested in discussing any of these issues further? Feel free to get in touch.