Managers invest in the environment
Glenn Silverman, chief investment officer at Investment Solutions, is by his own admission a hard-core capitalist who fundamentally believes in maximum returns for investors. However, he started to question the focus on maximum profits and return, as well as the inherent conflict between short-term gains and long-term sustainability.
He realised he could make a difference by creating a responsible investing ethos at Investment Solutions, which manages 200-billion in assets. By using its formidable investment power, Investment Solutions could take the lead in creating investment policy that would get asset managers asking the right questions and making investment decisions based not only on next quarter profits, but also on long-term profitability.
“I came to the realisation that the world is in a mess. Most people are sensitive to the problem but do not know what to do about it,” said Silverman, who underwent a Damascene transformation when he read a book by Australian environmentalist and businessperson Paul Gilding, The Great Disruption.
This book addresses some of the environmental, social and governance issues at large, and their potential impact on the global economy.
“It is a wonderful, easy read, tough and quite terrifying at the same time,” he said.
Call to action
Silverman had read Al Gore’s An Inconvenient Truth. However, like most people, the message and call to action got lost in the busyness of everyday life. He subsequently met with David Blood of Generation Investment Management, a British-based investment house co-founded by Gore, which focuses on sustainable investing. This meeting was part of Investment Solutions’ research into identifying companies to include in its global equity fund, rather than the sustainability aspect.
The message only really hit home when he read Gildings’ book.
“It really got me thinking that, not only is the current approach to the environment unsustainable, but that when these are combined with the other major, unsustainable, macroeconomic issues at play, the challenges we, as investors, face are far greater. Maybe we are not pessimistic or bearish enough?” said Silverman, who believes the global financial system is increasingly dependent on short-term, unsustainable “fixes”.
A key one is a total dependence on the need for both growth “at any costs”, and the related growth in the overall levels of debt, primarily in the Western world, to try to sustain such growth. Markets are being openly manipulated by the authorities – a form of “financial repression” – to keep the Western consumer spending, in order to try to sustain growth.
Yet, as Jeremy Grantham of GMO – a large, more than $100-billion United States-based asset management firm – said: “Rapid growth is not ours by divine right … it is not even mathematically possible over a sustained period.”
Mobilise the capital
“Only once investors start to look at environment issues in terms of how they affect your savings and retirement will it result in any change,” Silverman said.
“Generation Investment stated in its recent white paper that ultimately it would be companies and investors that would mobilise the capital needed to overcome these challenges. As individuals we are limited in what we can achieve but as a collective we can make a big difference, especially if the likes of Investment Solutions adds its muscle to the equation,” he said.
Tasked with putting together a presentation on responsible investing for a conference, Silverman started on a steep learning curve at the beginning of this year, and presented his findings and concepts to the executive committee at Investment Solutions. The response was “electric”.
“I realised that many others were thinking along the same lines and that we could use the R200-billion under management to mobilise capital,” he said.
Today Silverman has a responsible investment committee of 12 people who come from various areas of the company.
“It is early days but we are very excited. We are on a path and we have a mission,” said Silverman, who admitted that the first challenge was to get their own house in order. “We have started looking at our own business processes and how we can improve the sustainability aspects of our own company.”
The next step was to send a questionnaire to about 45 fund managers who have mandates with Investment Solutions, locally and globally, to better understand their perspectives and approaches to sustainable investing strategies. Silverman said most managers responded to the questionnaire, and his team was reviewing, collating and summarising the key results and findings.
Once this was completed, the output would be used to engage the fund managers on how to move forward. They would then release the overall conclusions more broadly, including to the media.
“Until now we have largely left our fund managers to vote our proxies as they saw fit, within certain guidelines. We may now, though, as a consequence of our research and focus, wish to provide a more specific mandate around how to vote in terms of responsible investing,” said Silverman.
As a general rule US fund managers were not only uninterested in shareholder activism but also quite vocal in their disdain and focus on what Silverman described as unfettered, short-term capitalism.
“It has been very disappointing. The response of most US managers was: ‘If we are not happy with the way a company is being managed we simply sell the shares.’”
The reality is that, given the short-term nature of chief executive incentives, they are often thinking more about their own back pocket than the environment or other more “slow burn issues”.
Silverman said fund managers in Europe, which had a greater social and environmental awareness, were far more sensitive to sustainability issues and investors there often demanded an explicit strategy for this. However, with the turmoil in the euro area, they may well have other, as big, issues on their minds.
Silverman said one of the more pleasing surprises were comments from international investors about how “leading edge” the South African fund management industry and investment regulations were.
Local pension funds are governed by Regulation 28, along with the recently released code for responsible investing in South Africa, both of which discuss investors’ duties to consider environmental, social and governance aspects when investing. Regulations on the fair treatment of customers are in the offing too.
Silverman said that most fund managers, including the South African ones, would like to do the “right thing”. The challenge was to define what exactly that was and how best to implement it, especially when many investors took a very short-term approach to investing.
“I am absolutely convinced about the case that a focus on sustainability can reduce risk, and quite materially so. The case for additional returns is less clear, though there is mounting evidence that even returns are enhanced with a focus on sustainability. If we can get managers to simultaneously focus on raising returns while reducing risks, and at the same time assisting the global environment, then that would really be the investment holy grail. I think a dedicated focus on these issues takes one a long way down that road,” said Silverman.
He said Investment Solutions was still working on its formal responsible-investing manifesto and that there was still much more work to do. “This is an evolution not a revolution, the practicalities are tough but we simply have to find a better solution – the current one is simply not sustainable.”
Sustainability or responsible investing mean different things to different people. But ultimately it is about investing in businesses that make investment decisions that take into account good corporate governance as well the effect on the environment and society, which will improve their long-term profitability and lessen risks.
Silverman quoted Michael Power, strategist at Investec Asset Management, who argued that it was unacceptable that we had reached the height of arrogance in believing that we could print money to fund our unsustainable lifestyle, knowing full well that our children would pay for it in future.
Silverman is going through what he describes as a personal paradigm shift, yet his greatest challenge is not convincing fund managers about the importance of responsible investing but trying to convince his 17-year-old daughter why she does not need that additional pair of shoes she so desperately desires, and what her choices today mean for her future.