Investing in 2021: engage or disengage?
06 January 2021
Investing has always been a divisive activity with the recurrent argument of active versus passive. Now a new division has reared its head; to dump and run or to hold and be involved. Looking at the issue here, PLSA Chair Richard Butcher asks should we engage or disengage.
Investing has always been a divisive activity. At even the highest level there are those who think it a grubby activity undertaken by the grubbiest of capitalists – the persistently popular image of the champagne swilling, loads-of-money, yuppie shouting into his brick like mobile phone in front of a screen of flashing red and green – who conveniently forget or maybe genuinely don’t realise they are, or their money is, part of the system by simple merit of their having some of the stuff.
Lower down the chain you have the perennial argument of active versus passive. On the one hand, don’t try and beat the market, you can’t, so why pay to attempt to and on the other, only a fool would be ready to ride the downs as well as the ups when you can take a defensive position to protect yourself.
And now a new division is coming into view. To be fair it’s been here a long time but it’s suddenly getting some attention: to dump and run or to hold and engage.
Here’s the story.
Over the course of the last few years there has been a gradual, but overdue, epiphany amongst asset owners, managers, regulators and legislators – albeit helped along by a wise Law Commission: the pensions industry manages a lot of money. It is consistent with our fiduciary duty to use it to make the world a better place. Put more bluntly, we can get better returns and fix the world (or parts of it anyway).
Of course industry is inevitably behind the curve compared to public opinion. Greta Thunberg, Extinction Rebellion, and many others have been making this point for quite some time now. Indeed the PLSA itself has also published its own A Changing Climate: How Pension Funds Can Invest for the Future report that identified solutions to the barriers that prevent pension funds from fully embracing climate-aware investment.
But there is a difference between the rightly emotive popular response to climate change and the hard, analytical, risk focused professional one.
The first argues that we should disinvest from the carbon intensive and other assets that are doing so much harm. The argument goes on to suggest that if we all, unilaterally, took this course of action the firms in question would have no capital to operate with and so would be forced to shut up shop. They would, simply, die as would their filthy product.
The second argues that as asset owners we have powers – special powers – to change firms’ behaviours. We have leverage to force them to change the way they operate – in the case of equity, voting rights and, in the case of debt, simply the power of the deal; what do I get in return for the cash? The argument goes on to suggest that if we use this leverage, we can force these firms to be less harmful over time.
So, where should we sit?
I suspect you might have noticed some of my loaded language in this blog. It’s quite hard to completely ignore your biases but at least I recognise them. I sit firmly all over the place on the wider investment debates – I am a capitalist, but a social one. I could go either way on active verses passive – with a small passive bias. But on the question of dump verses hold I am firmly in the hold camp.
Because of the evidence. I have seen the oil companies become the biggest investors in renewable energy sources. I have seen weapons manufacturers agree to stop producing cluster bombs. I’ve even seen China (not a firm, of course, but the principle of the power of capital does extend to nation states) building more renewable power stations than the rest of the world combined – albeit while still building lots of coal-powered ones; but it’s a start. I have seen no evidence of a major company shutting-up shop due to being starved of investor capital.
There is one industry I can think of that is immune to the power of capital – or more rightly that has a product that can’t be made more benign and positive: the tobacco industry. And here’s the rub. As an industry we hold very little tobacco money now. We sold out because we could see the long-term writing on the wall. But others, less concerned maybe than us, disagreed. The equity was bought. The debt was extended. The tobacco firms, out of our hands and beyond our influence, grow and sell more and more of their knowingly nasty product.
So the evidence supports my position and it’s rooted in a lesson learnt in the 1980’s heyday of the yuppie: no one can beat the market.