 Brie, State Street Global Advisors (SSGA) has issued a call for more than 3,500 companies in which the firm invests - representing more than $30 trillion in market cap - to increase the number of women on their boards. This is welcome news, although it is interesting that investment management is a particularly tough industry for women and penetration at senior levels is still relatively low. Oliver Wyman, for example, found that it will take until 2048 to reach 30% female representation on executive committees in the financial services industry. What do you think are the main reasons for the particularly low representation of women in the investment management industry? Historically, within the financial industry, there has been a gender bias (whether it be conscious or unconscious) toward males in the workplace. However, there has certainly been a positive move from companies being accepting of diversity to actively promoting it. There has also been a great deal of work done through trade bodies, government initiatives and industry groups. All with good reason. Numerous studies have shown that companies with a strong culture of diversity and inclusion are more successful than companies that don’t. Negative perceptions also need to be addressed, such as mistrust of the banking and investment industry fuelled by factors such as the crisis; alongside a general misconception that having a work/life balance, and being a working mother are difficult for a successful career in asset management. We need to enhance the industry's reputation among millennials from these misperceptions to nurture and developing a sustainable pipeline of female talent. Whilst there is a lot of work to do, the industry is certainly on the right trajectory to achieving it.
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 Investors should be cheering Unilever’s victory over Kraft Heinz and placing a greater value on the kind of corporate sustainability and resilience Polman’s leadership has created. Lessons from other companies should act to warn investors looking for short-term gain to be very careful what they wish for.
The remarkably short-lived take-over attempt by KraftHeinz (KH) of Unilever raises some very interesting questions for investors. What price does focussing on short-term gain extract from shareholders? Unilever’s CEO Paul Polman is well-know for his brand of responsible capitalism, putting long-term sustainability above short-term profit. The Unilever Sustainable Living Plan (USLP) he introduced in 2012 laid out a bold plan to double revenues over a decade while slashing carbon emissions in half. This means moving to sustainable product packaging, wide-spread efficiency gains and ensuring high social and environmental standards across the whole supply chain. The plan should create a positive impact for 5.5 million people, but its impact on Unilever’s bottom line should also catch investors’ eyes. Delivering the goods By April last year, the plan had already led to a saving of 1 million tonnes of CO2 and €100 million through more efficient manufacturing. The company also sent zero waste to landfill across 600 sites in 70 countries, saving a further €200 million. The introduction of compressed deodorant cans reduced the aluminium and propellant gases needed by 25% and 50% respectively. (Polman also waived the patent on the can design to encourage competitors to follow suit.) Over the last five years, under Polman’s leadership, the company’s share price gain has dwarfed that of the FTSE 100.  The potential rise of the populist movement in developed economies will create clear and lasting costs for investors. As well as the social and political consequences, there are also risks to investment returns.
The tide of populism will bring with it a profound shift in the political and economic environments, which will have far-reaching implications for investors, both potentially positive and negative. The focus on fiscal, rather than monetary, actions resulting from the populist vote increases the likelihood of inflation, but also brings the threat of stagflation, an aggressive bond market correction and greater financial market volatility. Steepening yield curves, meanwhile, would provide many investors with much-needed relief as discount rates improve – as long as they can tolerate the downside pressure on bond prices. However, if populism were to threaten the eurozone, investors could face heavy losses. Inequality sits at the heart of populism. We have been through a period where the gains of the meagre economic growth achieved since the financial crisis have been unequally shared, with the elite getting the lion’s share. The benefits of globalisation have accrued to the top 1% of earners and emerging markets primarily, while the bottom 50% of earners have seen below-average income growth. READ MORE in this month's Portfolio Institutional magazine.  Tax risk presents a material threat to financial outcomes that investors are largely ignoring.
Stick with me here… I know I’m prone to droning on about the importance of corporate tax in solving the world’s ills, but there is also a very strong risk management angle to this story. It boils down to this: corporate tax risk is a growing threat to financial returns and, by extension, sustainable investment. But it is not being taken seriously enough. New research from MSCI has found that a quarter of companies in their ACWI Index have a large tax gap (531 out of 2,160) and are paying an average rate of 14.3% versus the 31.8% that would be expected based on the jurisdictions where they generated revenue. Furthermore, 71% of those with large tax gaps were multi-nationals. Were the entire gap to be plugged by regulatory reform, the report says, MSCI ACWI Index constituents would have faced additional annual tax liabilities of up to $220 billion in aggregate. $150 billion of that would fall on multi-nationals. This is no small sum. And should serve as a wake-up call to investors who, to date, aren’t paying enough attention to the risks associated with corporate tax. To put this into some kind of context, $2.7 trillion in assets was benchmarked to the MSCI ACWI index family alone in June 2016.  As global head of stewardship, what do you think the main priorities should be when it comes to engaging with companies? Would it, for example be climate change, exec remuneration, corporate tax, or something else entirely?
It is important that we engage on material issues, as we want to be sure that we are raising issues that could impact long-term value creation. Due to the range of issues, there isn’t a one-size-fits-all approach. Climate change is one of the major long-term issues and now that COP 21 has been ratified by so many countries we are going to start to see policy implementation that will create a very different backdrop for the extractive industries. We are pushing with partners like the Aiming for A coalition to get much better disclosure and reporting on companies’ transition plans. There are also geographic differences. For example, with emerging markets we have just completed a project looking at bribery and corruption risk and have had a number of good interactions with companies on the topic. We have identified potential weak spots in our holdings and entered into discussions on the topic. One of the most important things for us is that the requests we make are founded on strong economic logic.  Investors are uniquely placed to engage with government to push for more responsible fiscal policy for the good of the savers they represent. After all, capital cannot sustainably grow without a functioning society. Corporates need to share the burden of funding that society.
Matthew Parris raises some very compelling arguments in his piece in last Saturday’s Times The squeezed middle must pay more tax. He is right that a civilised society makes sure its seniors are at least comfortable and pensions need to be a key focus for government. However, I’m struggling to agree with the headline. More income tax is not the solution to creating a stable, fair society in which businesses and wealth can flourish to the benefit of all. The suggestion that individuals should carry this burden is frankly bewildering given income tax already represents 60% of government revenue in the UK. Workers are increasingly self-reliant for securing their financial futures while the protections they enjoy as employees are going backwards. This breeds discontent towards companies and politicians, neither of which is good for society as a whole.  The rise of passive investment presents some serious challenges to asset owners, fund management firms and society as a whole. For the shift to create a more sustainable investment environment, a new balance needs to be struck between better capital allocation decisions, better passive offerings and a more equitable sharing of risk and reward. Without that, the rise of passive could do untold damage to long-term returns.
There’s good news and bad news: passive is on the rise. According to data compiled by Morningstar for the FT, passive funds grew 4.5 times faster than their active counterparts during 2016. Meanwhile, research from Moodys shows index tracking could become the dominant form of investment in the US by 2021. This may spell good news for savers whose assets have suffered as a result of high active management fees in the past, but it is potentially very bad news for both economies and societies as a whole.  Andrew McNally is Chief Executive Officer of Equitile Investments and author of Debtonator: How Debt Favours The Few and Equity Can Work For Us All.
Andrew, in your book Debtonator: How Debt Favours the Few and Equity Can Work For All of Us, you discuss how the widespread over-reliance on debt – brought about by corporate tax regimes that favour debt, central bank action that keeps credit costs low and an ingrained, but misguided orthodoxy among bankers and business owners alike that debt is better than equity – is damaging both business and society because it focusses wealth in the hands of the few. This contributes to extreme inequality of both wealth and asset ownership, and undermines corporate sustainability. In explaining this debt-addiction, your book points to unrealistic assumptions within the economic theories that underpin financial models still dominant today. Yet, over the last few years, we have increasingly read in the press and heard from those in the financial industry that the economy is functioning differently from how it used to. To what extent do you think economic models have moved on to reflect this new economic normality? Economics as a discipline is in a state of turmoil and on the cusp of the sort of revolution historically seen in other sciences. However, economics is still taught the same way it was 30 years ago. Equilibrium as an idea has become cast in stone and is based on the idea that humans are rational calculating machines. Nothing could be further from the truth though. Despite that, central banks’ models and those used in the banking and asset management sectors to measure risk, are still sticking doggedly to this idea of equilibrium. Scrapping the idea of rationality would, therefore, upend most of the models used in finance today. Long-term companies provide superior financial returns, better fundamentals and a more positive impact on the economy and society. Fund managers, in turn, need to take a longer view, exploit the outperformance offered by long-term firms for the benefit of their clients, and encourage more corporates to think long-term.  A few days ago I was chatting to a fund manager at one of the biggest UK fund houses. There was gin involved so I can’t recount the whole conversation word for word, but he did say something that stands out. We were talking about the need for long-term investors to consider the wider implications of their allocation decisions and think long-term – or at least this was what I was banging on about – when he said: “I see a 20 year investment horizon as a collection of 4-5 year investment horizons. There is what we ‘should’ do, and then there is being pragmatic.”
This got me to thinking: Does pragmatism force investors to take a short-term view? Not according to the McKinsey Global Institute. Their report Measuring the Economic Impact of Short-Termism, issued a day after my conversation with this fund manager, summarised the findings of their research thus: “Our new Corporate Horizon Index provides systematic evidence that a long-term approach can lead to superior performance for revenue and earnings, investment, market capitalization, and job creation.” The report rolls from one finding in support of long-termism to another: long-term firms exhibit stronger fundamentals, growing their revenue cumulatively 47% more on average than other companies and in a less volatile manner, allowing them to weather the financial crisis better; they continue to invest in difficult times, spending significantly more on R&D, which helps them maintain consistent and sustainable sources of growth - key goals of long-term planning (see charts below).   Faith Ward is Chief Responsible Investment and Risk Officer at the £3 billion Environment Agency Pension Fund (EAPF).
Faith, the EAPF has been an actively responsible investor for over 10 years. To what extent do you think considering ESG factors is central to fiduciary duty? It is absolutely central. Those with fiduciary duty need to look at all the ESG-related risks and how materially they could impact an investment. That means really looking at the risks and opportunities, not just the traditional metrics. Do you think the definition of fiduciary duty needs further clarification when it comes to ESG? The Law Commission review in the UK made it clear ESG risks have the potential to be significant, but reinforcement through other mechanisms would help. The existing regulatory framework, for example, needs to reinforce that message. This reinforcement needs to happen globally. Do we need more regulation regarding ESG? A lot of the framework is already there. The critical point, though, is how those rules are interpreted, implemented and reinforced. Making them matter and interpreting them in a more positive manner is an important next step. |
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