Goodbye to all that

Sad to say goodbye to this, but I'm not blogging here anymore. 

The good news is that I am doing a free substack newsletter called The Social Factor here.

Airline turnout

Wizz Air had its AGM this week. Once again very low turnout, due to disenfranchisement of non-EU shareholders in order to meet ownership & control requirements. This is of course an issue across the sector (and TUI had other issues this year), so I've put AGM turnout from 5 airlines operating in the UK into one chart. Ryanair still has its AGM to come but unless turnout there more than triples the average turnout across these 5 will fall again this year. 

    

Immortal engines

I liked this from David Runciman's book How Democracy Ends:

“Many of the things that we fret about when we imagine a future world of Als are the same worries that have been harboured about corporations for centuries.

“Corporations are man-made monsters. They have no conscience because they have no soul. They are able to live longer than people do. Some of them almost appear to be immortal. Corporations, like robots, can emerge unscathed from the wreckage of human affairs.

“During the first half of the twentieth century, German society underwent a near-death experience. The scale of the human destruction was mind-blowing. Yet some German corporations came through it all as if it had never happened. Some of the biggest German companies created in the nineteenth century are still among the biggest today - Allianz, Daimler, Deutsche Bank, Siemens. It is as though the madness of human beings is nothing to do with them.”

You can't take politics out of ESG

Over recent months I've seen various pieces about what ESG / RI 'really' is. One of the principal areas of quite profound disagreement is whether it is about values or value. Some contend that it is simply about good risk management in the pursuit of financial returns. Others say that this is a greatly diminished conception of why we all do what we do.

I'm not going to refight that battle. Rob Lake has articulated the position that is closest to my own. If the growth of ESG had been driven solely by risk management I think it would still be a very limited part of the investment industry.

What I want to take issue with is the idea that 'politics' is an intrusion in the ESG / RI world and it would be better to keep it focused a purer path, again in pursuit of financial returns over and above all else. I'm far from sure that many people who argue that ESG analysis is really just risk management believe it themselves, rather they think this is a tactically useful way to frame their arguments (either to engender support or to avoid challenge). In any case I think it is naive to think politics can be 'taken out of' ESG, even if it were ever obtainable or desirable. Rather I think we should expect to see more politicisation, not less.

The simple fact is that people, investors, have different views and objectives. This is uncontroversial enough when we think about market behaviour. That you want to buy the asset that I want to sell demonstrates that we put different values on the same thing, for lots of good reasons. In a free market it should not matter that I put a lower value on, or will not buy at any price, securities issued by a particular company. If ESG criteria form part of this process, so be it.

It's easy to think of examples that make this obvious. Clearly a mainstream hedge fund and the investment arm of a faith-based institution are very likely to have a very different orientation towards ESG issues. There might be a set of issues (or issuers) where they reach the same conclusions, but no-one really expects them to take the same approach overall. And at a general level asset owners and asset managers often take different stances, no doubt reflecting what they think is important to those to whom they are accountable.

These differences in view will be expressed in numerous places: 'core' investment decisions (stock selection, asset allocation); service provision choices (asset manager selection, but also advisers, research etc); stewardship activity; policy positions; involvement in/support for collaborative initiatives and so on. Taken together these decisions position investors in very different places on the ESG/RI map.  

This should not be a surprise. Unless we think that there is a single, correct way to view investee companies, or other assets, people and the institutions that they constitute are going to reach different conclusions, and they're going to argue about them.

Here it is useful to look at Big P politics - some politicians like to argue that they are non-ideological, and just focused on the best / most effective policy responses. This is commonly know as 'technocracy', though David Runciman makes the point that we should distinguish this from 'epistocracy' (which is what people often seem to be talking about when they say 'technocracy').

"Epistocracy means rule by the people who know best. Technocracy is rule by mechanics and engineers. A technocrat is someone who understands how the machinery works... What they know is how to operate a complex system they have been instrumental in building, so long as it behaves the way it is meant to. Technocrats are the people who understand what's best for the machine. But keeping the machine running may be the worst thing we can do. A technocrat won't help with that question."

In politics the obvious question is, well, who knows best? Political challenges have no singular answer and 'solutions' that are chosen will displease some and are always open to renegotiation. Chantal Mouffe has nailed this:

"Every order is the temporary and precarious articulation of contingent practices. The frontier between the social and the political is essentially unstable and requires constant displacements and renegotiations between social agents. Things could always be otherwise and therefore every order is predicated on the exclusion of other possibilities.... What is at a given moment considered as the 'natural' order - jointly with the 'common sense' which accompanies it - is the result of sedimented practices; it is never the manifestation of a deeper objectivity exterior to the practices that bring it into being... [S]ociety is always politically instituted and... the terrain in which hegemonic interventions take place is always the outcome of previous hegemonic practices and that it is never a neutral one." 

This matters a lot more these days in the private sector, where the ESG / RI sector has it focus, because of the relationship between politics and the economy. As the state in many countries has retreated from a direct ownership role in the economy, more services are delivered by companies. The provision of these services has always been a subject of intense political discussion and disagreement. This might be over any number of issues including the nature of the service itself, who gets to access it and at what price, what impact it has on the user, the terms and conditions of the those working to provide it, and so on and so on.  

If such services are provided by the state, either at central or local level, inevitably such discussions occur more regularly in the more explicitly Big P political arena. If they are provided through the private sector, the discussion moves there. Unless we consider that people stop caring about issues relating to service provision and/or that they cease to have differing views once it shifts from public to private, then we should expect *more* of this discussion in the private sector in future, not less. 

As the state retreats from making decisions, as opposed to creating policy and regulatory frameworks more of these political questions will end up in the private sector. Employees may want a clearer commitment to certain values. If businesses do not want to make such decisions the state might face pressure to step in, or at least set some ground rules. But a whole plate of 'hot potatoes' have been tossed to the private sector for now. And as investors have been offered a greater say in the private sector - at the level of both the economy and the company - inevitably they too are drawn into political questions.

Issues around diversity, equity and inclusion (DEI) are a useful case the consider. Clearly Big P Politics has an influence on how companies approach these issues and to some extent public policy mandates certain disclosures and outcomes. But for most businesses the views of their own employees, primarily, and external stakeholders including investors and customers, secondly, matter greatly too.

The fact that we talk about DEI at all reflects the reality that the status quo has resulted in underrepresentation and discrimination on the basis of gender, ethnicity and sexuality. Public policy on these issues is important, but this does not provide the answers for companies, it is something they have to grapple with themselves. Unless you believe that we live in a unique historical moment where companies have now reached positions that have 'solved' these challenges you should expect this to be an ongoing political discussion. 

In addition, while it is now widely accepted that diversity is both desirable on its own terms and good for business, it really was very recently that views and practice were substantially different. 

Many seem to believe that 'business case' arguments for change are some kind of secret sauce that helped bring this about. But, to state the obvious, there is a 'business case' for the status quo at any point - the fact that businesses operate with their current policies and practices is because they believe that is what is best for them, at least for now. Until relatively recently the 'business case' for the status quo encompassed views such as "there simply aren't enough female candidates" and "we're appointing on merit, we just want the best people". It actually took various groups and individuals challenging these ideas - combined with some Big P Politics - to break up that settled consensus.  

And what happens if the business case for change is unclear? In common with many others, I believe that increasing board diversity delivers benefits to companies. I think it's highly contestable that in the recent past that boards that were comprised mainly or solely of white men had always chosen the best possible candidates. 

But let's suppose that increased board diversity made no difference. Companies could settle into an equilibrium with either largely white, male boards reproducing themselves through appointments in their own image, or of diverse boards that reflect the societies in which they operate. Which would we choose? If we think ESG is solely about financial risk management then arguably investors should stick with the status quo, no matter how just the alternative might seem. Yet actually this is one area where investor pressure has been very sharp-edged - see for example votes against chairs of PLCs that don't meet board diversity expectations.

Mouffe's point about the contingency of political settlements also rings true. Whilst in recent years corporations have embraced DEI, we should not assume that this is a lasting win. It is striking that, of all the topics that were available, the anti-ESG movement in the US has targeted DEI initiatives. Looking wider, think of companies (and some investors) dialling back their Net Zero commitments. I think and hope that these are temporary setbacks, but there is no guarantee that this will be the case. The political battles firms face - both internally and externally - will continue.

Denying there are or will be political choices for both firms and their investors won't help. I think that an approach that is built around "ESG is just risk management" is going to be pathetically easy for a smart and determined opponent to outmanoeuvre. Any wobbly evidence, or over-claiming (not that there's anything like that in ESG-land...) is going to be targeted and used to argue that it's just a disguise for a political agenda. Given that the question "Is active management worth paying for?" has not been decisively settled in the 25+ years I've been writing/thinking about institutional investment, I would tentatively suggest that the argument about the financial benefits of considering ESG issues will not be concluded any time soon.

It's not just a weak approach in defence. Unfortunately, the desire to argue that the analysis and adoption of ESG issues is just about measuring and addressing risks, and results in correct or optimal objectives, also risks, like its Big P political analogue, a kind of intolerance. To assess an issue from a risk perspective creates an expectation that there can be a 'correct' answers in the same way that 'apolitical' politicians claim to advance policy based on 'what works'. Who could possibly argue with that? But, as Jan-Werner Muller argues, this type of argumentation shares something with supposed opponents.

"Technocracy holds that there is only one correct policy solution; populism claims that there is only one authentic will of the people... For neither technocrats nor populists is there any need for democratic debate. In a sense both are curiously apolitical. Hence it is plausible to assume that one might pave the way for the other, because each legitimises the belief that there is no real room for disagreement. After all, each holds that there is one correct policy solution and only one authentic popular will respectively."

Interestingly, Chantal Mouffe warned, years ahead of Brexit, Trump etc, that the attempt to appear apolitical/non-ideological, and/or to deny significant differences in views, risked opening up ground for the populist Right. This is from a 2007 interview:

"A vibrant democratic politics needs to offer people the possibility of making genuine choices. Democratic politics must be partisan. In order to get involved in politics, citizens have to feel that real alternatives are at stake. The current disaffection with democratic parties is very bad for democratic politics… I am really worried by the celebration of the politics of “consensus at the centre” that exists today. I feel very strongly that such a post-political zeitgeist is creating favourable terrain for the rise of right-wing populism.”

Ironically it is the populist Right that is buzzing around ESG right now, and using some of the RI world's own tactics against it. I have articulated before worries about what we see in the 'getting Blackrock to do things' mode of campaigning. Unfortunately, now opponents of ESG / RI have noticed that threatening the removal of assets can make financial intermediaries responsive, so they have copied the campaign technology (they have also filed anti-ESG shareholder resolutions, though these have bombed).

If an ESG oriented investor says to a manager "I won't invest with you hold Stock X / vote against Shareholder Resolution Type Y" and they expect this to hold across its client base (as in it can't hold Stock X or oppose Resolution Y for ANY client), is it any surprise that an anti-ESG investor tries to do the same? To state the obvious, I think the anti-ESG movement is nuts - why would you want to stop investment firms you hire from considering anything? But if we consider the campaign tactic to be legitimate, why should people we disagree with not use it? 

I wince a bit when I think people on the same side as me seem to be arguing that we should put some issues out of political reach. That's OK while the wind is blowing in your direction, but when it changes... (I felt the same way about the attempt to overturn the Brexit referendum result through legal action - an incredibly bad idea.) It is a version of the benign dictator mode of thinking which can find expression in political, corporate and investor fields of power.

In contrast, for reasons outlined above, I think politics in ESG is inevitable, will exist as long as there is power in the investor-company relationship, will inevitably involve ongoing going disagreement and currently we should expect it to expand in this area. As such we should think about how to handle this rather than try and deny politics exist in this field. I personally think a greater degree of democratisation - at both firm and investor level - is likely the best way to go, but with an understanding that this entails inclusion of views we disagree with. But that's for another post.