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In search of a new form of capitalism

The Davos Paradox: Executives have completely failed to show 'responsive and responsible leadership'

18/1/2017

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Executive pay is a clear indication that top executives are failing shareholders and employees. The theme of this year's World Economic Forum of 'responsive and responsible leadership' appears somewhat paradoxical in the context of the widening inequality gap between the wages of top executives and their own employees.




I often struggle to find affinity with the Daily Mail, but every now and then something catches my eye. Hugo Duncan’s piece on 16 January about a group of UK CEOs, who collectively earned £145 million in 2015, flying to Davos to tackle poverty, was one such piece (read it here).

It does seem rather paradoxical. After all, the theme of this year’s World Economic Forum is ‘responsive and responsible leadership’.

This group of CEOs have proven to be neither responsive nor responsible when it comes to their own pay packages. Recent years have seen a good number of shareholder rebellions over fat-cat pay including (but in on way limited to) Martin Sorrell’s £70.4 million award (WPP) and Bob Dudley’s £16.1 million pay deal (BP). Yet, despite those calls for restraint from some of the leading global investment houses and the UK government, CEOs continue to enjoy exorbitant increases in pay.


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A matter of tax - corporate tax reform is essential to sustainable investment returns

16/1/2017

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It has long been held as gospel that cutting corporate tax fuels investment and growth. However, without fundamental reform, business tax cuts may hinder rather than boost economic progress and investors can ill afford to ignore the consequences.

Governments, in their efforts to boost domestic economies, are offering tax cuts left, right and centre. Brexit-bound Britain, for example, saw its Prime Minister, Theresa May, promise to cut business tax to the lowest level in the G20. President-elect Donald Trump has also promised to cut corporate tax rates. The main reason for the ‘race to the bottom’ in corporate tax? That attracting companies to locate their operations in a country will mean growth and prosperity for those who live there (and vote there).

But does it really work?


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A Kodak moment:  Long-term returns are inextricably linked to societal impact

11/1/2017

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If we don’t start to adapt our policies, economies and investment approaches to address the widening gap between the haves and the have-nots, the likely political, societal and financial market ramifications will make Brexit and Trump’s election success look like child’s play.


Rifling through a box of old bits and bobs over the weekend I found my old film camera. Boy, did that bring back some memories, but it also got me thinking: even within my short (ok, short-ish) lifetime, technology has had the most profound impact on how our societies function. I remember buying Kodak films, which I then had to take to a shop to be processed. From purchase to printed product, I typically interacted with at least three people employed to service this hobby. There were of course countless others I never saw. Where have those jobs gone now? Kodak went from employing 170,000 people to being bankrupt within a few years.

And they won’t be the last. Amazon has tolled the death bell for many a high-street brand. How many hotels have been threatened by the Airbnb revolution and what happens to all the people employed in the hospitality sector as margins are squeezed ever tighter? Uber has completely changed the face of taxi services across the globe and, with driverless cars just around the corner, how many more jobs will be lost in that and other transport-related sectors in the coming years and decades? Can the big traditional car companies survive the shift? What happens to all those jobs – and the people doing them?


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Have your say

10/1/2017

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    Should we judge the success of investment not just in financial terms, but also for the social and environmental impact it creates?
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The green bond revolution

8/1/2017

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Green bonds are likely to play a key role in how investors switch to clean energy, but is the asset class right for everyone?
Article written for Portfolio Institutional, published 6th January 2016

Green bonds look set to revolutionise not just the speed at which the world transitions to clean energy, but also how broader bond markets work. The rapid growth of the asset class, which is well supported for continued acceleration, underlines asset owners’ increasing interest in accounting for climate change risk in
their portfolios.
According to the Climate Bond Initiative (CBI), there are now $694bn in outstanding climate-aligned bonds, an increase of $96bn (or 16%) since the same analysis was conducted the previous year. Within that total, $118bn are “labelled” green bonds – those that have been certified by the CBI to say the funds raised from their issue will be used to finance new and existing projects with environmental benefits. Green bonds saw record issuance during 2015 with $42bn issued, meaning this sub-section of bonds now account for 17% of the broader climate bond market, an increase from 11% the previous year. Read more here

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Spill the beans: A quick cuppa with Roger Mattingly, Director of PAN Trustees

4/1/2017

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Roger Mattingly is Director of PAN Trustees, a leading firm of independent trustees working with some of the largest pension schemes in the UK.

Roger, you’ve been working in the UK pensions industry for 37 years. In your experience, are pension schemes taking environmental and/or social factors into account alongside financial returns?
There is a fairly cosmetic approach to these issues. Many schemes pay lip-service to them in their investment principles saying that those factors are taken into account, but, to date, this has mainly been a box-ticking exercise. The Law Commission review (Fiduciary Duties of Investment Intermediaries) in 2014 stipulated that social and environmental impact and ethical standards should be taken into account, but ultimately it is performance that matters.
That said, there has been an increase in the focus on such responsibilities among investors. A trend took root a few years ago, but so far there has been a lot of rhetoric. Have things really changed materially? Not really.
We may see an inflection point where it is taken more seriously and investors have to evidence that environmental and social impacts have been meaningfully considered and taken into account. There will be an acceleration in this regard and a mandatory requirement may also come to fruition.


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New year, new resolution: give more, take less

3/1/2017

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​Another year dawns bringing with it the opportunity of another resolution and I am a sucker for this particular tradition. For 2017, mine will be to give more and take less. I like this one for its simplicity. It works on a multitude of different levels – dieting, philanthropy, the marriage, the kids…
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But it also works in the context of my finances and, in that regard, perhaps the most pressing application will be to give more thought to long-term sustainability and take less of a short-term view.

Tempting as it is to spend two weeks driving a sun lounger this summer, I can’t help thinking about the bigger costs coming down the pipeline: university fees for my offspring, and my own retirement to name just two. Suddenly, giving more to my mortgage lender and savings account seem like the more sensible option.


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How capitalism failed

2/1/2017

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Traditional capitalism failed so many for so long because it failed to capture the unintended consequences of how it functioned. We need a more informed version of capitalism, under which investors recognise the wider risks they create in societal and environmental terms and take responsibility for managing those risks.

Last week, while engaging in a little commentary on LinkedIn, I suggested that populism was a growing concern across Europe because ‘our capitalist system has failed so many for so long’. Another member subsequently posed the question: Why has capitalism failed? Europeans/Westerners still enjoy the best standards of living in the world.
 
While I would agree with the latter part of this response, I feel it warrants further exploration.
 
Simply put, my answer to this question is that traditional capitalism failed so many for so long because it failed to capture the unintended consequences of how it functioned. Instead, capitalism has focussed almost exclusively on financial return.
 
Capitalism, at its heart, is about investment – allocating capital in order to increase that capital. It is an absolutely essential part of what makes economies and societies work, but capital cannot exist in a bubble measured only in financial terms. Every investment, whether in extractive industry stocks, green bonds, property or even handbags, has a much wider impact on the economy, society and the environment. Unless that wider context is considered, financial returns become almost meaningless. (What good is a 50% return on a pension pot, for example, if our collective global investment decisions have driven up the cost of living by 60%?)
 
Because traditional capitalism has largely ignored those unintended consequences (risks, by another name), we have ended up in a world where inequality is growing, our climate is changing rapidly to our detriment, companies are not being held to account and populations are not adequately prepared for greater automation.
 
(Governments and central banks have a lot to answer for too, but those subjects will be covered in future posts.)
 
The narrow focus of traditional capitalism may also, ironically, end up being its undoing as financial returns become unsustainable. Risks ignored are risks that build and eventually come back to bite.
 
Those issues, particularly inequality and global warming, are already manifesting themselves in the financial rewards the traditional capitalist approach was meant to generate. But, rather than driving returns up, they are doing the opposite.
 
MSCI, for example, calculated mid-last year that the spread of populism through Europe and the US over the next two years could result in heavy financial losses. Under their scenario, one outcome may be a lowering of global growth by 3% annually while inflation surges. The potential damage this would wreak on a diversified, multi-asset class portfolio could be a decline of over 11% as equities lose 15.6% and fixed income securities fall 4.6% (although I suspect Trump’s first week in office, and the financial market response to that, could mean the outcome of MSCI’s scenario may look considerably worse now).
 
The lack of credible and standardised metrics to capture and measure the unintended consequences of investment is at least part of the reason why so many of those risks have not been recognised or managed. This works at the policy level too.
 
I can’t help thinking though, that if the traditional capitalist model has been more open-minded, those metrics would have been found long ago. And, even where they do exit (data showing growing inequality has existed for some time now), they have still been ignored. As Andrew McNally points out in his book, Debtonator: Since the 1970s the Western World has seen the most prolonged rise in inequality, both in income and wealth, since the 1800s.
 
So while we in the West might still be enjoying the best standards of living globally at the holistic level, the picture is far from simple and the risks to those living standards continue to build.
 
What we need now is a more informed version of capitalism, under which investors – and by this I mean anyone who makes decisions about how capital is allocated – recognise the wider risks they create in societal and environmental terms and take responsibility for managing those risks. This includes lobbying government and central banks to push the policy agenda in the right direction.
 
We desperately need better, more standardised and credible metrics to measure societal and environmental impact so those risks can be robustly analysed and managed, and can begin to take their rightful place alongside financial returns in judging how successful an investment has been. But we also cannot ignore the warning signs that are already flashing before our eyes.

(Debate is an absolutely essential part of finding solutions to the challenges we face. Please don't hesitate to post your thoughts below if you like or dislike this perspective, but also if you want to share your own thoughts on how we can address those challenges.)


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Corporate tax risk: poking the bear

1/1/2017

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Corporate tax is increasingly in the news, but are investors guilty of complacency over the risks it poses?

If you poke a bear with a stick too many times, eventually it will turn and bite you. In a world of rising government debt and social inequality, in which institutional investors are increasingly struggling to find sustainable returns, that bear is the tax man. And, as the mood begins to change, corporate tax risk is on the increase.

Companies including Apple, Facebook, Starbucks, Amazon and Vodafone have all come into the firing line in one way or another over their tax policies in recent years and the sums in question are not negligible. In August the EU ordered Apple to pay €13bn to the Irish authorities after it found the company was the beneficiary of illegal state aid.
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Yet, despite the eye-watering sums and the scale of brands facing questions over their tax policies, Richard Murphy, director of Tax Research UK warns of a “deep complacency” about the dangers rising corporate tax risk could pose to institutional investors.
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