Discussions are popping up all over the news about reopening the economy and getting back to normal, even with the threat of a second wave of the pandemic. If there is anything we have learned in the last four months is that economic “normal” may require a new definition. Many pundits refuse to see that the world may have changed and all the winners of the current economic system, especially investment professionals, are keen to see profitability get back on track. Could this be an acute case of confirmation bias coming from actors who interpret all data as evidence of what they would like to see happen?
If things are to get back to some semblance of “normal” in the economy in general and in investing in particular, then based on developments that were taking place before the pandemic, the lockdown, the social unrest and the economic backlash (um, Main Street not Wall Street), there is evidence that some things might become mandatory.
ESG Assessment & Integration
The absence of the integration of the non-financial factors such as environmental, social, and governance issues and the framework with which to assess these factors would be a mistake. The huge wave of condemnations of corporate behavior following the pandemic, from the treatment of employees to the support of systemic racism, should have made clear that companies can no longer operate in a cocoon of morally-neutral money. Their behavior affects the consumer and the consumer has a voice that can, in turn, influence the stock price. ESG radar is part of the basic investing toolbox.
Our investments that were previously entirely focused on the maximization of profits, now need to remember that they are occurring in a natural biosphere that is critically ill. As investors, we should protect our assets against the looming catastrophes that climate change have predicted and which are already on our doorstep. Denial is more of the confirmation bias at work and will end very badly for all. How the investment industry can shoot itself in the foot in the interest of short-term profit is mind-boggling. We’re not talking about just measuring carbon footprints and dedicating a paltry percentage of our portfolio to a fund or an exchange-traded fund with “ESG” in the name. Or throwing some obscure scores and metrics into a portfolio that holds almost all the same securities as before. We’re talking about taking action to change the system that is leading us towards catastrophe at an alarming pace. Not a whole lot of that is going on in the investment management practices. After all, why change a system that generates great returns with little or no risk (for the managers) and to which asset owners are captive investors?
Rethinking Benchmarks and Stuff
Yes you read correctly — captive investors. Almost all major institutional investors and a good portion of professional long-term private investors are all comparing themselves to the same benchmarks. This also pinpoints the “little” risk of investment managers, who either beat or underperform the benchmark without having a crystal ball. With a big name in the industry, there is always a way to explain away the performance and retain the assets. We will have a harder time explaining away rising sea-levels, extreme weather, and food shortages due to droughts — all consequences of climate change. Anyone notice the off-the-chart seasonal temperatures in Siberia this year? By selecting best-in-class companies and reporting on the carbon emissions of our portfolios, we are not addressing the elephant in the room: Unbridled consumption in the name of infinite growth with excessive greenhouse gas emissions.
We choose not to look at the elephant in the room and prefer to push onward in collecting fees for increasingly complex investment strategies without questioning the system. We now have ESG Benchmarks and Black Lives Matter-Benchmarks, coming soon to an investment manager near you. Justifications abound on keeping things the same and getting back to that “normal”. If and when there is the slightest inkling of self reflection and criticism, which is a tough ask among the winners. Most are taking the system for granted, and dismissing any attacks as “socialist” or anti-capitalist straight off the cuff.
There exists ample literature on the systemic basis of ESG concerns, yet very little is done to address the systemic issues that ESG consciousness raises, of which the “E” has become synonymous with climate change, and the “S” with COVID-19 employee treatment and racial inequality. The “G” has been practically put on hold while the corporate bail-outs are lining the pockets of executives as they fire employees and evacuate the building. The industry self-congratulates itself for the explosive growth in ESG assets without looking carefully at the consequences. Or the lack of consequences that such cosmetic changes have on the real concerns.
Unfortunately, the world might just be a little bit more complicated than the win-win-win solutions that we have all been conditioned to buy into. Environmental issues are threatened by more than just greenhouse gas-emissions (like biodiversity, overfishing, and water pollution). Social issues are not just about racial injustice but there is systemic violence against employees and excluded members of society in all flavors and colors, such as the homeless, the unemployed (still their fault?), and the poor with limited or no access to whatever might have given them an opportunity to change their lot.
Almost none of those issues are built into the gospel-like benchmarks that the investment management industry is collectively trying to beat. And if and when those benchmarks are beaten, what good are the pats on the back if those celebrations are on a barren, plundered, inhumane planet?
The recent pandemic has provided an opportunity to reassess, question and make some drastic changes to how we do business and invest. We all need to eat, protect our kids and send them to school, stay healthy without going bankrupt, and hopefully thrive. Why aren’t we talking about how to achieve these things in a way that preserves the very conditions that are necessary for continued long-term collective success? Instead, we blindly or greedily precipitate our return to, and double-down on, the system that we unquestioningly support to solve all our problems by boosting GDP growth and resuming frenetic consumption. If you think everything was copacetic before COVID-19, then you’re not looking at all the data, and you might be deluding yourself into confirmation bias and economic tunnel vision.
Not How It Works, But Why?
Some might think I’m being overly critical of well-intending investment managers who are contributing the 1-in-4 dollars that are being devoted to ESG investment. There has been a rise in shareholder, excuse me stakeholder, activism — engaging with companies, and voting in shareholder meetings. Investments are increasingly going towards clean energy and healthcare and everyone is celebrating the withdrawal of products that were overtly racist for the last 120 years.
Artificial intelligence together with better company disclosures and complex algorithms now allow some investment managers to beat the indices by many percentage points! Phew, we finally put the performance issue about ESG being financially noncompetitive to rest! Not really — we now know that ESG-branded investments will outperform, faced with a crisis such as COVID-19. But does anyone see that it might not outperform, faced with climate change?
Maybe I am being overly harsh, but that might be because, despite all those commendable efforts and even if all institutional money was invested in ESG investments in their current form, the end of life on earth as we know it would still come about pretty soon. Maybe a little slower, and with infinite brownie points and stars for good behavior and great intentions. Does that make any sense to anyone? Of course, I can be dismissed as a radical, liberal, destroyer of the founding principles of capitalism (hmm, worth a re-read), etc., but at the end of the day, why are we so hell-bent on accelerating ourselves into extinction without taking a step back and examining exactly what we are doing?
Not the role of the investor, I hear you say. OK, not the role of government because they couldn’t organize a piss-up in a brewery or so we’re led to believe. Not the role of senior corporate executives because they’re too busy collecting billions of dollars in unaccounted for, corporate bailouts. Not the role of employees because they need a job and won’t bite the hand that selectively employs, and occasionally pays them a living wage. So maybe the only responsible adults left to take the lead for change are board members and trustees. But wait — they are predominantly wealthy white males over 50 and benefiting from the way things are at the moment — so why would they change anything? And before the predominantly wealthy white males over 50 get angry, just know that I understand your pain and feel your dilemmas. You are, however, at the top of the food chain and the time has come to earn your status.
How these ideas fit into a coherent investment strategy is complex and probably specific to each investor, should they even care to contemplate any of these problems. It would require a culture of humility and self-criticism that is in short supply on Wall Street. We might consider educating ourselves on just the mere vocabulary of alternatives — on the vast literature and ideas that have been put forward by smart people seeking solutions to our current predicament. Just saying. Open your mind and step outside of the microcosm of the traditional, overconfident investment community and into a lofty world of academia and minority voices for change where there exist a plethora of ideas and suggestions. But who among the winning investment community has the courage and the temerity to make that move? Who wants to play chicken with an entire economic system? Will the real leaders please stand up!?
Originally published on Medium June 19th, 2020 https://medium.com/@jonathanjenny1/are-there-alternative-visions-of-post-covid-19-investment-management-ffd692108e52?source=friends_link&sk=09de48ce0c822eb4b33b651036eb494a