It's Time to Jump Steward-Ship

Collective Responsibility

What are your views on Collective Responsibility? If you type the term into Wikipedia you get presented with a number of warnings including “This article has multiple issues” , “This article needs attention from an expert in sociology” and my favourite “This article's factual accuracy is disputed”. I say that’s my favourite because experience of pretty much any important but complex topic in recent years seems to suffer from this accusation despite not actually suffering from said warnings in the internet’s dictionary of choice. Wikipedia (this disputed version) suggests “Collective Guilt” is a an alternative or even better term. I can see why.

Let me try out a couple of recent real-life important examples to illustrate this , which I’ve cherry picked from recent news-flow; both relate to the idea of collective responsibility inside and outside of national boundaries and by any measure are very important topics.

Example 1 – Moral Global Leadership League Tables

First up , ex Prime-Minister Theresa May’s attack on incumbent Prime-Minister Boris Johnson where she accused him of abandoning Britain’s position of moral global leadership. Incidentally I get the sentiment but I couldn’t actually source the current official league table of global moral leadership anywhere. No doubt if it was on Wiki the factual accuracy would be disputed but my guess is that recently America has not been first in that category precisely because of the “America First” mantra and that maybe New Zealand has made a bit of a surge up this hypothetical league table. 

So for anyone unfamiliar , the two points of evidence used by Mrs May were Britain threatening to break International Law during the Brexit trade negotiations and backing out of the foreign aid target. Both things May argues will see Britain lose respect from other nations. (Shall we assume that respect was there and not just a function of Britain’s self belief and historic position in world order).

The counter arguments from the UK Govt’s incumbent leadership are , in short form, “Britain First” at this time of utter National crisis (within a Global crisis).

So I presume Collective Responsibility can be deferred or alternatively Collective Guilt can be lived with while we first sort out our own pressing back-yard issues. Indeed such thinking might even be applauded and expected by many of the UK’s citizens or voters. And besides Mrs May is history.

First among Firsts?

One difference between Former President Trump’s / the Republicans vision of America First and Prime Minister Johnson’s unstated equivalent “Britain First” approach perhaps comes in the next layer down. Here Johnson wishes to promote a “levelling up agenda” whereas (I think) the typical Republican DNA sees things like big Govt interference, especially of the taxing kind to help the worse off through a welfare provision , levelling-up and centrally funding eg universal healthcare as an anathema to free market survival of the fittest beliefs. So Collective Responsibility may work better inside the UK than inside the US and both struggle beyond the national boundary.

Then again, President Biden and the Democrats are now in charge and early actions indicate a strong desire to bring America back to the global table – a move in the direction of collective responsibility I suggest (Paris Agreement being an obvious example) . The wafer thin majority won’t help his ongoing agenda however as Theresa May certainly discovered to her cost.

But wait – I have my second real-life example to offer that will surely challenge both Biden and Johnson , plus any other leader of a wealthy state.

Example 2 – Catastrophic Moral Failure - Vaccine Wars

This example comes from Dr Tedros Adhanom Ghebreyesus , the head of the World Health Organisation (WHO) stating that the world faces a "catastrophic moral failure" because of unequal Covid vaccine policies. We are already facing vaccine wars as the EU turns its legal guns toward Astra Zeneca for essentially favouring supply of vaccines to the UK over the EU. Meanwhile Biden promises 100m vaccines in 100 days for his folk – so he won’t be encouraging the US Pharmas to prioritise non-US over US supply surely. Great news on Vaccine #4 by the way , Novavax emerging promisingly, a US brand but with a UK production capability where we've bagged a big supply...

The leaders are simply doing what their people want and need , right? Prioritising the health of the nation. Collective responsibility in this instance seems to very much have national boundaries not global ones despite the WHO's pleas.

Meanwhile it is reported that South Africa has to pay 2.5 times the EU cost for the AZ vaccines. But with supply being a limiter , will we want our younger adults and teenagers vaccinated before emerging economies can afford to start their programmes for their vulnerable people? How is our sense of Collective Responsibility or guilt? How is our worry about global moral leadership when we so crave for a return of our old freedoms and normality.

This is a key behavioural facet of collectivism – that when individual priorities intersect and conflict then the moral compass just goes into a tail-spin.

Dr Tedros noted (18th Jan) that over 39 million vaccine doses had been given in 49 richer states - but one poor nation had only 25 doses. He said a "me-first" approach would be self-defeating because it would push up prices (tick) and encourage hoarding (tick). Yet ultimately, these actions will logically only prolong the pandemic, the restrictions needed to contain it, and human and economic suffering. (probable tick).

So this is an argument that doing the right thing for all is ultimately doing the right thing for yourself. This is collective responsibility. How then to match behaviours with logic? Too hard? Its a familiar dilemma but the pandemic version sharpens the debate over say the climate version. Its a tragedy of the commons type of issue and acting independently comes so naturally in our free market system.

“Nothing to do with my fiduciary duty job”?

So it is here that I am going to make the segue into my comparatively narrow world of Institutional Investment Management and Trustee Boards to make exactly this case. This case which understandably has suspicion or just feels like “nothing to do with my job” and is historically not the starting point of textbook fiduciary duty. This is the case for active Stewardship at levels previously not considered. This is the case for raising everyone’s standards in order to improve everyone’s outcomes. This is the case for collaboration and this is the case for fully playing your part. The case that collective failure in the system damages us all and making the case that collective fiduciary duty is actually a thing.

Stubborn barriers .....

Just as we moved into the final month of that dreaded 2020 , the Minister for Pensions and Financial Inclusion . Guy Opperman announced a DWP Working Group to address the barriers in Stewardship amongst UK Pension Scheme Trustees. He said “I firmly believe the days of trustees leaving everything to asset managers without scrutiny must come to an end. We need to do more to improve pension schemes’ and asset managers’ stewardship and engagement with companies to ensure they are fit for purpose in the 21st Century”.

Opperman added “I see no reason why trustees shouldn’t be able to determine their own high level policies – on areas such as climate risk management, diversity, or pay – and find an asset manager to implement it.”

Sometimes a Pensions Minister can make me happy. This was one such time.

The purpose of the asset management industry

Now Opperman’s initiative came in the month after the publication of “Investing with Purpose” (see link here https://www.theia.org/sites/default/files/2020-11/Asset%20Management%20Taskforce_proof7.pdf) from the Asset Management Taskforce chaired by Opperman’s colleague John Glen MP , Economic Secretary to the Treasury. He had a year earlier been tasked with establishing how stewardship and responsible investment could be strengthened in the UK. There’s a lot of richness in the report and it includes the commitments (I presume) of an illustrious list of asset management brands alongside known leading protagonists for ESG / Sustainability. Those managers actions are being watched and it’s a tricky transition – perhaps the worlds biggest , BlackRock , is feeling the public heat the most but this applies to all. Annual letters from CEOs are insufficient. .

The asset management industry moves dead-slow though doesn’t it , partly because its a wealthy business model that still rewards mediocrity handsomely and has often been shown in certain cases to put its own interests ahead of its clients. However beyond that, fragmentation instead of collaboration or competing ideologies over collective responsibility might explain why trillions of dollars of institutional assets largely still get managed and monitored in the same way as they always have.

Leading the world in stewardship standards ..... ?

So “Investing with Purpose” is another meaningful report (maybe the best yet) in a long line of reports focused on asset stewardship running back decades (Cadbury, Walker, Kay et al from the top of my head...) . Here the irony is not spotted that this report back-slaps the UK for its world leadership in stewardship standards as it endorses the latest incarnation of the FRCs Stewardship Code and yet makes more important recommendations. However crucially these are focused at putting stewardship at the heart of all investment decision taking rather than as some kind of bolt-on health-check.

Why more effort? Because as yet the collective failures have not been halted and corporate excesses involving egregious rewards , environmental destruction and social inequality have continued to be funded by institutional and consumer capital , mostly in an uninformed and unintended way.

 Asset managers may well point to asset owners (and their intermediaries and other agents) for not intervening or being the change that is required. Fair challenge and although the same issues of fragmentation apply this is why Opperman’s direct words made me happy.

Testing traditional governance models to the limit

Trustees are therefore now facing a barrage of incoming regulation , recommendations and new reporting frameworks. Too many to mention here but some are not optional and most require behavioural change. These higher expectations will test traditional governance models to the limit and strong well resourced intermediation should also assist here.

The purpose of the consulting industry.... ?

Here too I am a big advocate of collaboration between consulting firms. As I mentioned in another article I take great satisfaction in being part of a collaborative group (abiding by Competition Law) of 17 UK investment consulting firms on the Investment Consultants Sustainability Working Group (ICSWG) and I also find many other cross industry forums and academic think tanks to be productive and progressive. It is a time for change.

Here is a new output from the ICSWG – a guide for Trustees to assess a consultants Climate competency. The Aon press release of this initiative is planned for Monday , so instead I’ll provide a link to the already media released LCP version here. After all its a collaborative effort and I’m presuming there will be 17 releases eventually!

Investment Consultants Sustainability Working Group (ICSWG) launches a trustee guide for assessing consultants’ climate competency | Lane Clark & Peacock LLP (lcp.uk.com)

Fragmentation is an enemy to progress

For too long fragmentation , competitive or incidental has been a barrier to collective progress. Of course we need a mix of opinions from diverse sources in any conversation to more fully understand complex subjects but then we need collective action and collective responsibility to achieve momentum. Otherwise there is confusion and inertia which characterises the past.

One such fragmentation is the thousands of trustee boards in existence which unintentionally supports a vast array of service providers ( 17 consultant firms included – red face emoji). Institutional money , moving at scale is a very powerful mechanism of change, but divided and stuck it can inadvertently support things that sometimes can surprise and even shock the beneficiaries when revealed.

An individual sport ...

Various forms of consolidation model have emerged lately to tackle this within pensions but none I believe as yet have put stewardship front and centre , this should change

This is partly because investment is inherently an individual sport , where the smartest thinker and the fastest mover are expected to have an advantage over their slower and dumber peers. Where the idea is to win at the expense of someone else losing. This is deep seated stuff and so the idea of imposing collective responsibility on investment programmes (whether trustee pot , fiduciary management or superfund ) and raising the bar of common standards for all in order to improve the outcomes for all can feel , well , anti-fiduciary.

This mindset has to change and I hope my introductory illustration makes the case that raising everyone’s standards , can raise individual outcomes for all. 

Consequences to stopping this caucus race

There are other consequences to the feeding chain however , for example the world’s investors do not need tens of thousands of investment managers with tens of thousands of CIOs each believing they have a special market insight only to ultimately disappoint yet take their fee. There needs to be enough for competition and market efficiency but not so many simply adding to costs. Fee compression (an allowable function of sufficient scale) achieved via transparency could point the way for necessary consolidation.

There is a collective failure in the status quo of this institutional caucus race that needs to deliver financial stability for its asset owner beneficiaries in a future world they can enjoy and not just provide richness to the agents now. 

Other Actors?

There are plenty of other actors in this web of collective responsibility of course but I would like to reserve a special mention for one. Company board directors. In its 2020 Annual Corporate Directors Survey , PWC found that only 38% of board members think that ESG issues have a financial impact on a company. If you think that 62% are right then I know you would be unlikely to be reading this. However 38% is misleading too. Some interesting research from Harvard reveals that not only are company boards stubborn outliers when it comes to embracing sustainability but that crucially board members across the board (can I say that?) lack the expertise. Across 1,188 Fortune 100 board directors studied only 5 had relevant experience in E issues (climate , water etc) . The S had more expertise but still only amounted to 5%. So unsurprising HBR issued this piece called “Boards are Obstructing ESG – at their own Peril”

Boards Are Obstructing ESG — at Their Own Peril (ampproject.org)

Tragedy of the horizon

So we are not finding the way to use institutional capital , and board decision making to address what Mark Carney referred to as “The Tragedy of the Horizon”. Yet it is so possible. Trustees should be open to various forms of consolidation , collaboration and outsourcing , they should see that active stewardship is part of fiduciary duty and that raising the bar leads to better outcomes for all. They should (collectively) be examining the expertise and credentials of the board members of the companies they invest their capital in.

Where can this collective action be felt most – well did you expect me to write this far without referencing those letters E , S and G ? I am encouraged that we are seeing focused effort and solutions around the E now (2021 will be a big year for Climate related reporting and the ICSWG I mentioned earlier has just published its “Climate Competency Framework for consultants” as another practical contribution to existing mega standards (TCFD , TPI etc). I will not expand on that.

A case for the S

Instead I want to make a case that with heightened Stewardship comes better S – for Social. In institutional Investment agendas the S will be a fast follower to the E . But , adding a little personal spin without any intention to fragment, I would argue that this word struggles to convey its intention. Social can be a word that readily separates itself from financial Investment thinking. Going for a social is a fun and frivolous event perhaps ( ironically we are now socially distanced). Alternatively being a socialist has a very different connotation , a total insult to many in the US quickly conflated with communism despite the label applying to a right of centre Democrat philosophy when considered within the world spectrum of political beliefs. (I can’t find that official graph either though!).

So I’d like to make the case that when thinking about S we should always think about the word “Inequality”. When those three letters ESG were originally smashed together , the thinking was nothing like as progressed as it is now, It was even thought of as "an asset class"! The acronym will stick but investors should be thinking about words like People and Planet , like Inequality and Climate etc when it comes to stewardship.

Inequality

There are many inequalities which capital flows can help to tackle and achieve financial rewards . My US Aon colleagues like the phrase “doing well by doing good”. But first the inequalities have to be identified , measured and monitored. While E is making headway and we can increasingly measure things like the Carbon intensity of investment portfolios , the data on the S is often missing. (Mind you not so long ago this was true of E too).

People like my colleagues at the Cambridge Institute of Sustainability Leadership (CISL) Investment Leaders Group — Cambridge Institute for Sustainability Leadership are thinking ahead and working hard on these challenges. Issues like modern slavery , supply chain transparency , gender and racial equality will have metrics in the future reporting packs like we do today for return and volatility.

DC ahead of DB

I must accept that in pensions space the thrust is more likely to come from DC assets than DB assets. The latter being often in an end-game decommissioning trajectory. However even there the life-path of members benefits is sure to stretch out decades and so these issues will bite in DB rooms too.

Feeling the Pinch

What makes me lean more towards DC as the vanguard here is age profile. An example of our many concerning global inequalities is intergenerational inequality. One of my favourite books which was the first to engage me into a sense of understanding intergenerational inequality was “the Pinch” written by David “Two Brains” Willetts published over a decade ago in 2010.

Ever since then , intergenerational inequality has been the subject of earnest industry conversation and yet absence of corrective action , as inevitably the (pensions) industry continued to favour the old over the young. The Baby Boomers (of which I am a member) continue to take our children’s future and not give it back. Climate Change only received passing references in Willett’s book but is possibly one of the biggest burdens we leave with future generations and of course the Brexit that the younger folk did not want was not even possibly in the crystal ball of “Two Brains” back in 2010.

The Covid experience

Nor were pandemics in his book. The recent Covid experience is only exacerbating the intergenerational inequality problem whether its lost education without the lost educational debt , or the unbearable guilt trip that their asymptomatic carrying might be killing their Grandparents. Yet this generation has to be at the back of the vaccine queue in addition to the property , pensions and employment queue etc. What can institutional money do to level up this inequality and deliver something approaching the future financial security to Gen Z that the Boomers enjoy now?

Easy said ....

Am I so altruistic that I ask for my accumulated wealth within a golden generation to now be extracted and redistributed? No , I do not. I know also that I look forward to getting vaccinated and at some point returning to international travelling noting the carbon footprint that entails. Hypocrite?

But I am absolutely ready for more compromises and more consequences. In business Collective Responsibility is widely applied in corporations, where the entire workforce is held responsible for failure to achieve high level corporate targets (for example, profit targets – other measures may apply), irrespective of the performance of individuals or teams which may have achieved or overachieved within their specific area.

In my industry field of Investment Management the terms “Corporate Social Responsibility (CSR) and just plain Corporate Responsibility are increasingly commonplace. We have a blueprint for the kind of the metrics we should be aiming for , for all , informed by the 17 UN Sustainable Development Goals (SDGs). That will be what success looks like.

Theresa May did say something that resonated for me when challenging Boris – she said “We have been sliding towards absolutism in international affairs: if you are not 100% for me, you must be 100% against me,” she said. “Compromise is seen as a dirty word.”

Well let me add that trust has also gone missing , even threatening our democratic processes. But trust is by definition present in Trustees.

Collaboration points the way

So if we are to transition economically and socially , environmentally and politically then compromise and trust needs to return , and collective responsibility needs to be seen as symbiotic to fiduciary duty. Collaboration can point the way.

John Belgrove , Aon. 29/01/2021