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Have your cake and eat it…

11 May 2022

One of the things I’m asked all the time as the founder of a fund management business is ‘where’s the market going?’ My unhelpful answer is always the same. ‘I haven’t a clue’. As the economist Galbraith so aptly explained ‘the only point of economic forecasting is to make astrology look respectable.’

I will, however, make this prediction. The most valuable companies of the future will be those that not only solve some of society’s biggest problems but also behave in a way that is reassuringly human. The world is now so connected and so transparent that people (whether they’re employees or customers) can see not only what you do as a business but also how you do it. The walls which companies used to build around themselves to stop people from seeing in have been ripped down. Behaviours – good or bad – will be exposed for everyone to see.

The investment industry has woken up to this fact and is starting to assess the behaviour of businesses through the lens of environmental, social, and governance (ESG) issues. ESG, in my view, is struggling to work quite as we’d like it to. At its heart, ESG should be about ensuring that businesses are doing the right thing, even when no one is watching. As such, it’s inherently about the culture and the values of an organisation.

Unfortunately, the financial services industry is turning ESG into some kind of giant spreadsheet exercise. It’s all head and no heart. That shouldn’t surprise anyone. The financial services are full of people who are very smart and who tend to think in a very analytical, logical way.

It means that every investment manager has their own interpretation of what ESG means and how it should be measured. Across the industry, huge teams are spending their days asking for thousands of pieces of data before presenting them back to investors in a whole host of graphs. We’re drowning in data and precious little time is being focused on values and culture – the backbone for how decisions are made in an organisation. The companies that get this foundation right build more valuable businesses because they naturally make decisions in the interests of all their stakeholders.

We’ve been here before

To some extent, the situation we’re in today is similar to the introduction of accounting standards. Accounting standards were born from the ashes of the 1929 Great Depression. Pre-depression, there were a gazillion accounting firms, and they all had their own way of doing things.

In fact, companies didn’t even have to disclose financial information – it was voluntary. Companies kept numbers to themselves in the belief that it was information their competitors would use against them. Anyway, we all know what happened next. Lots of borrowing, lots of investing and then a crash that sent a huge percentage of the population to the breadline.

When accounting standards were introduced to prevent a future crisis, everyone pushed back. Accounting companies claimed it was impossible to create one size fits all standards, and companies claimed they were unique and needed an approach that reflected their specific industry.

Well, we got there and today these standards are the backbone of our capital markets that everybody takes for granted. They allow us to make apples-to-apples comparisons, auditors can confirm that they were implemented correctly, and investors can rely upon them to make informed decisions.

Today, we’re going through a similar transition, ESG is becoming a cornerstone of business. While we’re supportive of the shift to make ESG information as transparent and as standardised as a company’s profit and loss. We think it’s important that we don’t lose sight of what matters most in the process – a company’s values and culture.

As a B Corp, we’ve changed our Articles of Association to consider the interests of our five core stakeholders (our employees, customers, community, environment, and shareholders) in every decision we make. It’s an approach that extends into how we manage money. We’re very conscious of the hugely privileged position we’re in. With more than £12 billion of our investors’ money to deploy, we want to ensure that we’re invested in the companies which are helping to build a better tomorrow.

Partly because it makes us feel proud of what we do, but also because we know that’s where we’ll generate the best returns. It’s one of those very rare moments as an investor when you can have your cake and eat it.   

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