100 ASSET OWNERS TO DETERMINE THE FUTURE OF HUMANKIND

The Asset Owner 100 (AO100) list is produced by The Thinking Ahead Institute (est. 2015), an innovation network founded by Willis Towers Watson. It describes the AO100 list as “the most influential capital on the planet.” The aim of the institute, a not-for-profit research and innovation group, is “to mobilise capital for a sustainable future.”

Members of the institutes “comprise around 60 asset owners and asset managers with collective responsibility for over USD 16 trillion.” To put that figure into some perspective pre-Covid?spending on the national healthcare system (NHS) in England was less than 1% of that amount (0.81%, or ￡129 billion) in 2018/19.

Pension funds dominate the members of this very elite club, with the sovereign wealth funds of nations being the second largest group. But even within the 100, the top 20 controlled almost 55% of the assets under management, and the top 5 manage 24% (2022).

As the institute correctly concludes.....

“Leading asset owners have the opportunity to step up, embracing a new position and commitment, to shape the future of our economies, societies and the environment.”

The question is, do they see the power they have as an opportunity? They certainly do not seem to.

No doubt they would challenge my last statement and provide evidence they are embracing the Environmental, Social and Governance (ESG) agenda. But we only need to dig an inch below the rhetoric to realise that they are not, that many are themselves involved in “greenwashing”, and that they invest in companies that certainly are.?

That said, I would NOT advocate that they embrace the ESG agenda. I have strongly criticised ESG for a long time, as being a completely ill-conceived concept. But I do not criticise it for the same reasons as the right-wing of the Republican party in the US. For more on that, read this .?

What we really need is for the AO100 to just step up and fulfil their fiduciary duty, and ensure those they invest in do the same - to act in the long-term interests of those whose money they manage (not own). It is your money and my money if you have a company or private pension, or as a citizen of a country with a sovereign wealth fund.

We need them to embrace good governance themselves, and invest our money in companies that are well governed. And well governed companies take environmental and social issues seriously, along with all the other good governance criteria they need to care about.?

But what can you and I do to hold these asset owners to account? First, we must make sure they realise they are asset managers, not owners. We are the owners.

Sovereign Wealth Funds are state-owned investment funds that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds...on our behalf.

In the OECD, Pension funds, the largest category of institutional investors, managed close to USD 60 trillion of assets end-2021, and the top 300 pension funds managed $23.6 trillion of that in 2021.Those finds are managed by them, on behalf of pension owners to whom they have a fiduciary duty.

And we should be able to make sure those who manage the pension funds do so in ways we approve of. But the chances are you don’t have a clue how your pension funds are being invested.?

When Adam Smith spoke of the Invisible hand of the market, he was not referring to the AO100 that do what they want with your money and mine without us having any real say, yet their invisible hand has massive power. And how they use that power will determine the fate of mankind.

Should we trust them to act on our behalf? Based on performance to-date the simple answer is no. But the more important question we might ask is do they even have the competence to be able to do the right thing should we demand that they do so? Again, the answer seems to be no.?

Clearly, The Thinking Ahead Institute cannot be too critical of the 60 ‘asset owners’ and asset managers that are their members. Even so they do report what some of the ‘risks’ are. Here are three examples:

1. “Narrow Framing,” when “Analysis fails to capture multiple risk facets.”
2. “Agency Issues,” when they “manage their interests and are not aligned with their clients”.
3. “Measurement.” When “Benchmark, attribution and risk metric choices have shortcomings.” And there is a failure to “identify fundamental return drivers”.

These are not risks. They are reality.

Investment decisions are made based on the consensus (i.e., benchmark) opinion of firms of analysts in most cases, because failure to follow it would require them to explain why they take a different view. This would not be an issue if the analysts had the ability to understand the fundamental drivers of future value in the businesses they analyse on, but they don’t. Nor do they care about the drivers of real value. What they are concerned with is signals that may shift share prices.

This sounds like an outrageous statement, but this is what the CEO’s of several asset management companies told me. In explanation they said, what they care about is not the divers of real value, it is the signals that might shift market expectations, a feature of what Roger L Martin calls ”The Expectations Economy” in his book Fixing the Game.

Since it is the case, that many directors and CEOs are also primarily focused on managing and manipulating market expectations. as Martin suggests, that few directors or executives have any idea what real value the firm creates, who it creates it for, or how it creates it is of little consequence – Another outrageous comment you may think?

As evidence to support my last comment, I have often cited the findings of research by McKinsey, plublished in a Harvard Business Review Article . They found that.....

Of 772 directors of large multinational corporations around the world, "Only 22% said their boards were completely aware of how their firms created value, and just 16% claimed that their boards had a strong understanding of the dynamics of their firms’ industries."

The CEOs of the institutional investors I have spoken with tell me the real number is in the low single digits.?

If you stop and think, this tells us other things.....

The strategies they endorse cannot be worth the paper they are written on, and there is no way they can know what risks they should be managing. It also means they cannot be fulfilling their fiduciary duty, nor can the institutional investors that invest in firms if they know their boards are being negligent.

And what about the “agency Issue?” I am referring to second item in the list above, the risk that institutional investors are managing in their interests, which are not aligned with their clients. Numerous concerns have been expressed for decades, that institutional investors are managing in their interests, which are not aligned with their clients, but these concerns have not been addressed.

So, what can be done to address these problems? Thankfully, “sunlight is the best disinfectant.” Or as the former US Supreme Court justice Lewis Braneis put it, “"If the broad light of day could be let in upon men’s actions, it would purify them as the sun disinfects."

The greater the level of transparency that social media offers, the more intense the ‘sunlight’ these problems are exposed to becomes. In this way, the stakeholders, you and I, can keep the pressure on, and intensify it. In her book, Share Power, the FT journalist Merryn Somerset Webb explains, “How Ordinary People Can Change the Way That Capitalism Works.” And this pressure is also forcing regulators to start to act.

In conclusion, if we wish to see change, we need to become more conscious of the power we have as the owners of the assets invested on our behalf and demand a say in how they get invested. And, with such a large proportion of assets being in the hands of only 100 organisation we would be wise to focus our energies on ensuring they feel the heat constantly and with greater intensity. Why? Because as The Thinking Ahead Institute reminds us,?the “largest asset owners are critical to aiding society’s biggest issues.” They hold “the real key to unlocking net zero,” for example.

In short, the AO100 need to recognise they have a great responsibility and, though they are yet to see it, they also have a great opportunity. They could quickly restore trust and confidence in capitalism, by doing the right thing. In the process they can establish the political, economic, social, technological, environmental and legal conditions in which we, and the businesses they invest in on our behalf, thrive and do so in a way that creates sustainable widely shared prosperity, measured in terms of human flourishing and wellbeing. This is how the Enlightened Enterprise Academy defines Enlightened Enterprise.

Doing so would necessitate major changes, such as a shift from extractive Rentier Capitalism which is unsustainable, to Equitable Capitalism based on regenerative economics, but details on those changes must be for a future article.

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