Despite Brexit being in full, or at least half, swing it’s interesting to see that European funding is still filtering down to promote further economic development. As an example I came across a statement recently announcing that £14.35M was being granted by the European Regional Development Fund to the Local Enterprise Partnership ‘Coast to Capital’. Part of this included a commitment of £4m to support low carbon technologies and industry.

Whilst this must be applauded it’s hard not to feel concerned that the long term effectiveness of such development will be affected by the drying up of these funding sources.  As a comparison the EU baseline funding for the 2014-2020 was £10bn whereby the UK Government spend between 2010 and 2015 was only £6.2bn.

More importantly than that however is the need for the UK to plan more strategically so that future funding and development really creates positive long term change.

At present the bodies through which development planning can be facilitated are fragmented to say the least. This view is supported by a number of economic commentators. For example in a recent blog entitled ‘what future for UK regional development after Brexit?’ Professor John Bachtler agrees that the ‘context for regional policy is not favourable with a fragmented approach to regional and local development.  He argues that a once powerful domestic, UK-wide regional policy has been whittled away with divergent approaches to regional development and institutions since 2010, superseded by local and urban initiatives with variable resources, coherence, co-ordination or permanence. These include the devolution deals, the proposed Northern Powerhouse, the Midlands Engine, Local Enterprise Partnerships and Enterprise Zones.

He goes on to say that the asymmetric path towards devolution has left the UK without mechanisms for co-ordinating policy objectives and instruments for territorial imbalance.

The formation of the LEP’s is a prime example of this fragmented approach. This originated from the Tory Government’s desire to reduce central control and bring in a bidding system to local business areas. This, not surprisingly, has led to cherry picking with LEP’s’ representing already well developed economic areas at the expense of those more needy deprived districts.

The facts do tend to back these up. For example The Manchester Institute of Innovation and Research discovered that while the UK is home to the richest region in Europe 31 out of 40 UK regions have GDP below the EU28 average.

A more strategic approach is one that is favoured by a number of continental European countries. In addition the conditions surrounding much of the European development funding encourages a more strategic approach.  For example a considerable amount of funding was offered through the EU Cohesion Policy, which demanded collaboration between Local and Central Government and the EU.

If we are to tackle the challenging issues of the 21^st century, such as adopting an effective low carbon economy, creating fairer opportunities for all, and creating transport infrastructure fit for our times we need to develop a culture of co-ordination and joined up thinking.

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One comment that was reeled out during the rather depressing Brexit debate was that we had to move away from the heavy bureaucracy of the European Institutions. Leaving aside the false argument that this was an unelected bureaucracy – remember we had a European Parliament electing MEP’s by proportional representation who would pass legislation , which in many ways was more democratic than our old creaking domestic ‘first past the post system – we should be very careful what we wish for here.

Many people calling for the end of European bureaucratic organisations are the same people who seem hell bent on getting rid of any ‘quango’ or executive organisation.The problem with this movement is that it has coloured the language to make us believe that bureaucracy is an inherently bad thing.

I looked up the definition of ‘Bureaucracy’ in the Cambridge dictionary. It states that it is a ‘system for controlling a country, company, or organisation that is operated by a large number of officials employed to follow rules carefully’. This should provide significant food for thought. For example take a step back and consider how many areas of your practical life depend on bureaucracy. The answer? ; well getting paid correctly, having medical services available, having your refuse collected or having local schools at hand ; none of this would be possible without the above.

Whilst there is room for improvement in the way that some of these areas are run it’s not bureaucracy in itself that’s the problem, rather I would argue it’s the reasons for it and the way it’s executed that will determine whether it’s good or bad bureaucracy. I would also argue that size is not necessarily an issue. For example to run an effective tax and benefits system we need plenty of people to ensure that the detail is in place to make the system effective and fair.

More significantly effective bureaucracy is also essential in tackling the major challenges ahead, not least of which is moving into a new low carbon world. Responsible environmental regulations can only be successful if we have a good bureaucracy enforcing it. Whilst not perfect the European Union has been a lot more effective than our domestic government in imposing necessary low carbon legislation. In light of Brexit this is something we need to revive quickly.

So when someone says to you we want to get away from bureaucracy ask them what they mean by that. In other words be careful what you wish for !

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A criticism often aimed at responsible or ethical investing is what’s the point of me doing my little bit when the majority of the corporate world continues to destroy and plunder.

 Whilst this may sound a little extreme there is a concern that the relatively small amount of ring-fenced responsible investing is having little impact.

This view however ignores an important factor, and that is that fund managers in this area are having an ever growing influence on the corporate world via engagement. There is now a growing realisation that Investment managers acting by proxy, on behalf of us, the stakeholders can initiate real positive change. The new enlightened fund manager realises that he has an active representational role to play as well as the more arms-length financial function. And results can be significant.

Most of us will remember the terrible Rana Plazza fire that killed over a 1000 workers in a clothing factory in Bangladesh in 2013. As a result the ‘Accord on Fire and Building Safety’ and ‘Alliance for Bangladesh Worker Safety’ were instigated by NGO’s and workers unions. The investment community however were very influential in getting a number of corporates to sign up to these agreements, corporates such as M&S, Primark, and H&M. Investment houses such as Alliance Trust and Morgan Stanley have also hosted investor trips to factory sites to understand some of these issues first hand.

As a direct result of the Accord 1600 factories in Bangladesh have been visited with over 1400 owners to produce corrective action plans. More specifically investment managers, such as Alliance Trust are working closely with clothing companies to encourage responsible supply and buying practices. According to Neil Brown, Alliance Trust Investment Manager, one such company is Spanish multinational clothing company Inditex, who own brands such as Zara and Berksha. Alliance invest in them partly because they are taking a marketing lead in management of social and environmental issues. This approach has contributed to financial rewards. Neil comments that since buying Inditex in 2012 shares have risen by 151.6% compared to 38% from the MSCI Europe Index. (Source Alliance trust SRI hub April 2016).

 Many fund managers are extremely pro-active in engagement with individual companies. For example Eden Tree, previously Ecclesiastical, meets over 300 companies a year regarding sustainability and ethical issues, adding a more direct approach to the engagement process. These would include contacting Hugo Boss on sustainable cotton sourcing, Sky on board diversity and SCA on animal testing. (Source Eden Tree SRI Activity Summary Jan-March 2016)

 Whist pressure works on an individual level greater change often comes about from collaborative organisations such as the PRI. The Principles of Responsible Investment (PRI) was initiated by the then UN General Secretary, Kofi Annan, in 2006. He invited a group of the world’s largest institutional investors to develop and promote the principles of responsible investment. Since those early days the numbers of signatories have risen from 100 to 1500, and because of their clout they now carry considerable weight and influence within the world economy. One recent example would be group from the PRI calling on the Indonesian President to act on deforestation caused, in the main, by palm oil cultivation. In response President Jokowi has established the Peatlands Restoration Agency and committed to ambitious forest and peat conservation programmes.

 Many in the Industry also see engagement as the way to deal with the so-called Oil Incumbents. Whilst there has been a campaign in certain quarters to encourage divestment from the fossil fuel giants many believe this is ineffective because other institutions will buy those stocks off those that sell. Organisations such as Robeco are favouring an engagement approach. For example they are supporting the ‘Aiming for A’ campaign where they are persuading the likes of Shell and BP to disclose their climate strategy and the resilience of their operating portfolios to carbon limits. This is in light of the unprecedented problem now posed by stranded assets. (www.robeco.com/en/professionals /insights)

 My view is perhaps that a combination of both approaches will eventually force the change that is needed to create a more sustainable planet. What is beyond doubt however is that engagement must continue , and this engagement must also include us the ultimate stakeholders. Many providers are now encouraging dialogue with advisers and investors. For example many companies, such as Aviva, now have twitter accounts. Others like Alliance Trust , mentioned earlier run blog sites that you can comment on.

 The point is these providers will ultimately demand what we the public ask for. If we demand that investment should respect our environment and society they will oblige.

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]]> https://richardessex.co.uk/the-power-of-engagement/feed/ 0 https://richardessex.co.uk/profit-comes-from-purpose/ https://richardessex.co.uk/profit-comes-from-purpose/#comments Mon, 22 Jun 2015 21:20:59 +0000 http://richardessex.co.uk/?p=2716  

It’s very easy to think of responsible and ethical investing as some special science forever at the margins. But there is a growing recognition that this approach is becoming far more mainstream. Underpinning this view is the notion that real sustainable profit can only come from Companies who have a purpose to benefit society and the environment they live in. More and more experts from many fields are talking about this link between profit and purpose.

In my last blog I mentioned how Professor John Kay, government adviser, stresses the importance to the market of companies allocating capital towards long term sustainable needs for society. Providing a further dimension to this was a TED presentation made recently by Alex Edmans, Professor of Finance at London Business School. Alex Edmans Ted Talks

In his presentation he talks about how profit and purpose is not an either-or choice. Instead the profit will follow from a company’s purpose. This purpose can be external reflecting what it achieves for its customers and users but can also be internal based on how it operates.

Alex Edmans concentrates more on the internal purpose. In particular he has investigated how employee well-being affects Company returns. This has involved a 4 year study based on ‘Fortune’s top 100 companies to work for’. In the study he wanted to look at how future stock returns were impacted by employee well-being. Using recognised analysis he discounted other possible factors, such as general industry success and other growth factors. The results showed that the share returns of the 100 best companies consistently out –performed their peers by 2-3% per annum over the period between 1984 and 2009.

This naturally has positive repercussions for responsible investors. In this regards Alex also brings up a really interesting point. Much traditional analysis, such as price earnings ratios, is so easily accessible it’s often more difficult to gain real underlying value at the time when a stock is bought. Environmental and social data however, such as employee well-being, is more difficult to access. Much of this information is offered by specialist consultants, who work closely with SRI and Ethical fund managers, whilst not currently being recognised by many traditional fund managers.

Therefore there is real profit with purpose.

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So much of the mantra surrounding responsible investing lies in the idea that an investor is best served by taking a longer term view. The question is therefore; ‘can better value be delivered that way both for the investor and society.

Professor John Kay certainly thinks so.

Professor Kay CBE is an eminent British economist, who recently carried out a review for the Government on just this subject. I was lucky enough to hear him speak at a recent seminar hosted by the fund manager , ‘First State Investments’. During the seminar Professor Kay explained why over the last 20-30 years investors had been increasingly let down by the short-termism of markets and operators. He went on to state why there was need for change and why there is a need again to allocate capital for real needs in society, which in turn will offer real financial value.

Short Termism

He pointed out how stock markets had become so reliant on secondary trading and so little concerned with producing real value. The statistics are frightening. For example over the last few years world markets have effectively traded between $70 and $100 for every dollar of real underlying value.

What are Markets For ?

He then suggested there were 4 principle roles for financial markets.

• To operate a payment system
• To help manage risk
• To manage wealth through investors lifetimes
• Most significantly- To allocate capital

He emphasised this last area because it’s one which fund managers desperately need to re-learn. In particular he refers to the need for Search and Stewardship

Searching for those areas that really offer long term value for society and the investor.

Stewardship – to ensure that capital is looked after effectively to meet these needs

This is happening now !

There are real signs that this is not just theory but is working right now !   A good example of this would be WHEB one of the first retail fund managers to produce an ‘Impact Report’. This looks at the environmental and social impacts of the group of holdings it invest in. These holdings are spread across nine positive themes including Cleaner Energy, Sustainable Transport and Resource Efficiency. Impacts are then measured across the different themes as well as against the fund as a whole.

For example the overall carbon footprint of the fund was 92 tonnes of CO 2 per £1m invested compared with 282 tonnes per £1m for the market as a whole (based on the MSCI World Index). Interestingly financial results showed that the 5 year Historical Sales Growth for the group of companies in the fund had significantly out-performed the wider market.  In other words responsible fund managers are showing that investing in positive long term growth areas is reaping rewards for the pocket as well as society.

This is not just theory !

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There is a considerable amount of lobbying at the moment regarding dis-investment in fossil fuels.

One of the leading lights here is the ‘Guardian’ with their ‘Keep it in the Ground’ campaign. This aims to encourage the world’s two largest charitable foundations, Bill and Melinda Gates and Wellcome Trust to divest their all their endowment s from fossil fuels. The campaign has so far attracted over 145000 signatures.

Not surprisingly perhaps there has been quite a bit of resistance to this type of demand. Wellcome Trust so far have declined to change their stance, whilst a number of high profile political figures have questioned this strategy. Lord Smith, former Cabinet minister and chief of the UK Environment Agency has said “we will have to leave carbon in the ground, but leaving all fossil fuels in the ground is for the fairies”. He argues that, whilst there is a good case for leaving the dirtiest fuels where they are, continued investment in areas like Gas will help a more effective transition to a lower carbon economy.

This sentiment is pretty much adopted by spokesmen from all 3 leading political parties in the UK. However whilst this point of view may seem sensible many argue that a more radical approach is needed, as we are running out of time and we need to take faster action to reach the required low carbon target. In addition many campaigners believe the Fossil Fuel industry are deliberately using blocking tactics to provide their desired line of argument.

One of these is John Ashton, until 2012 UK’s top climate diplomat. He recently wrote to Shell’s CEO, Ben van Beurden. This was in response to a speech van Beurden made where he suggested that those calling for ‘fossil fuels out, renewables in’ were naïve and said provoking a sudden death of fossil fuels was not a plausible plan to tackle global warming. Ashton also challenges Shell’s unsupported claim that the economic and moral benefits of providing cheap energy to the world’s poor exceeds the risks to the same people from climate change.

Finally Ashton pleads “ stop frustrating ambition. Talk to us about how you will play your part in a (clean energy) transition. Tell us the inspirational story of that transition, backed by your knowledge and experience and don’t tell us through crocodile tears that this will all take a long time. Tell us what you will do to hasten it.’

So in order to avoid climate change disaster, through following such a conservative approach, many argue the time to act is now! The Divestment campaign was launched last year in the US and now has 800 institutions committed. Among these is the Rockefeller Brothers Fund (RBF), which ironically is governed by direct descendants of John D Rockefeller- founder of the oil empire that eventually became ExxonMobil. The fund has pulled out of coal and tar sands, is gradually withdrawing from Oil and Gas, and has committed to invest 10% in clean energy!

• For more information on the Guardian’s ‘Keep it in the Ground’ campaign read the link below

        Guardian ‘Keep it in the Ground’

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A couple of years ago Bees came very much into prominence. Why because for the first time

Their very existence was being challenged and their incredible value to our environment was highlighted more than ever: It is thought by researchers that bees are responsible for pollinating around 1/3 of the crop production.

Their existence was being challenged by Neonicotinoids, chemicals applied to seeds as a coating prior to planting. This insecticide is then absorbed and distributed within the plant with the intention of controlling pests below or above the ground.

As a result the European Commission took action. They decided to ban three of these Neonicotinoids.

This was against a tide of considerable commercial pressure. Much of the Agrochemical industry warned of huge economic devastation as a result. Some reports claimed that the EU would lose billions in Euros as well as up to 50,000 jobs being lost. Yet this doom and gloom does not seem to have been borne out by the figures.

According to the Commission’s own crop monitoring reports, annual spring-sown crops (crops that previously would have used these Neonicotinoids) produced yields that were higher than the 5 year average.

This seems to show that the farmers can grow these crops without these chemicals. It also shows that sensible environmental decisions can prevail over pure commercial interest.

The event attracted like-minded individuals from organisations with an interest in the Isle of Man’s fund industry, fund products and associated services.

Listen to a recording of a radio interview from IOM radio in which Richard talks about salient points of his speech.

Event gallery