(This is post 1 of 7 on the 2016 Thinking Ahead Institute global roundtable, held in London on 2 and 3 November. The theme of the event was “Fuller measurement, broader integration, better decisions”)
At the beginning of this session, Roger Urwin presented two case studies on the development of investment beliefs at CalPERS and Willis Towers Watson. Roger was closely involved in both processes. While different stakeholders were involved due to each organisation’s individual circumstances, both processes started with stages of socialising and beliefs settlement followed by implementation and review. Strawman beliefs played a key role in both cases by saving time and assisting socialisation, although attendees pointed out that it might result in anchoring to a relatively narrow set of beliefs. Both organisations, as Roger experienced, encountered difficulties in settling beliefs in the area of sustainability, due to its long-term nature coupled with inter-connectedness, reflexivity and values-beliefs conflation.
Roger has strongly advocated that beliefs are critical to integrating sustainability into investing. His suggested approach to sustainability, presented to Institute members a few times before, starts with developing investment beliefs, that along with benchmarking in turn derive policies and a roadmap. Under that backdrop, an Institute project team was formed in August 2016, comprising Daniel Ingram from BTPS, Deborah Gilshan from Railpen, Matt Christensen from AXA and Will Oulton from First State Investments, with the Thinking Ahead Group providing the executive support. The project team’s objectives were to (1) clarify concepts / terms in the space of sustainability, (2) agree on a list of sustainability-related questions that can act as the foundation tool to derive an effective set of investment beliefs, (3) analyse the beliefs of TAI members by reference to their responses to these questions and (4) benchmark organisational beliefs on sustainability. Objectives (1), (2) and (3) have been successfully achieved, reported Roger, and the next step is to invite more member organisations to complete the survey for benchmarking purposes.
Will Oulton (Global Head of Responsible Investment, First State Investments) was invited to share his experience of involvement as chair of the project team. First State Investments have been involved with a number of thought leadership groups and think tanks over the years to look into the area of sustainability. It stuck Will that there has always been a lot of good thinking in the area but most of the initiatives were short on practical applications to investment and business. For example they are often asked by their clients how much sustainability contributes to long-term performance. Given the scarce and unreliable empirical data that exists in this area, a belief approach is central in attempting to answer the question. They believe that a foundational questionnaire, a major output from this project, can be used as the basis to create their own investment beliefs. In addition, leadership buy-in to sustainability can be tested and in turn strengthened by engaging with them using this questionnaire. Will’s expectation is that this form of analysis can act as an anchor point to sustainable investing policies, guidance to decisions including which clients to work with and engagement with investee companies. In total, nine people, including two members of the leadership team, from First State Investments responded to the questionnaire-based survey and reactions to the process were very positive. It was short enough (only 36 questions) to be done in a short space of time and in general people enjoyed doing it. The results were very in line with Will’s expectations. He is confident that it doesn’t need any major re-engineering to be fit-for-purpose for the next stage, which is to put the leadership team through the same process and begin building their own set of beliefs using the strawmen created. Eventually they are aiming to make their investment beliefs public.
At the end of the session, Roger briefly introduced some of the new techniques we experimented with, in terms of analysing the responses to the questionnaire. In addition to producing the standard aggregate conviction analysis, we managed to infer respondents’ aggregate positions in four aspects of sustainability (we called them vectors), namely materiality of ESG factors, mispricing of ESG factors, financial motives with sustainability co-benefits and additional motives beyond pure financial. Two relevant measures of dispersion were also calculated: (1) beliefs consistency: the extent to which an individual’s responses are consistent (eg if an individual has a strong belief in the materiality of ESG in one question, does s/he have an equally strong belief in the same vector on another question?); (2) uniformity of beliefs: the extent to which there is agreement of responses over all individuals, for all questions. It is our conjecture that there exists a “sweet spot” level of uniformity within the same organisation. A polarising belief structure can arise from too little uniformity while too much uniformity results in groupthink and lack of diverse perspectives. The “ideal” level lies where there is sufficient level of order in the system that supports a healthy level of diversity on individual positions.