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The long-term matters, and sustainable investment holds the key to prosperity

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Alex Blackburne spoke with Dr Raj Thamotheram, widely recognised as one of the leading thinkers in the sustainable investment space. They discuss the notion of “investing as if the long-term matters”, as well as the term ‘preventable surprises’ and how it all began with a degree in neuropharmacology.

Speaking with Raj Thamotheram, it’s difficult not to get inspired about sustainable investment. The 52-year-old boasts an impressive CV, having worked for some of the largest pension fund management firms in the country, as well as spending significant time in his early career in the international development and campaigning sectors.

Now though, he splits his time between consultancy, supporting reform initiatives, public speaking and writing. And underpinning everything he does is a firm belief that investment is integral to fighting the majority of the world’s environmental, social and economic battles.

But how does a degree in neuropharmacology and another in medicine lead someone to become a thought leader in investing sustainably? By a stroke of luck, it seems.

That’s not to say that he doesn’t deserve to be where he is; far from it. But the nature by which he arrives at the current point in his career stems back to one chance meeting with the head of a large pension fund.

Having spent seven years in the late ‘80s and early ‘90s as the director of Saferworld, an independent non-governmental organisation that “works to prevent and reduce violent conflict and promote cooperative approaches to security”, he decided to focus his efforts more on development and conflict in Africa rather than just in Europe, and so took on a role as international head of advocacy at the charity ActionAid.

This was in 1995, just a few years after the Cold War had ended.

Citing one example of large donor intervention, Thamotheram says, “We had a very big project in Ethiopia which took years to develop, and a large corporation came in with a donation, electrified the water supply and as a result, changed the social dynamics, disempowered the women, and basically destroyed decades of development work with one major donation which it didn’t need to sustain once it got approval to be in the country.”

He left ActionAid in 1998 to work as a corporate responsibility consultant, and it was whilst doing this job that he had his first foray into the investment industry.

I sent a letter to a large pension fund which a newspaper had reported was going ethical”, explains Thamotheram.

I thought probably they didn’t know what they were doing, and that I could help them with a stakeholder strategy project.

A reasonable thing for a corporate responsibility consultant to do; but it was an incorrectly set-up conversation with the chief investment officer that changed his career path significantly.

By mistake, I got filed in a recruitment folder and got called for an interview”, he recalls.

The man who was then to become my boss started the conversation by asking whether I would like the job. I said, ‘What job?’ He said, ‘The job you’ve applied for.’ I said I hadn’t applied for a job, so he looked at the file, closed it and said, ‘Let’s pretend you had applied for the job. Why would you like it?

Syphoning off 5% of your assets and putting it in some cleantech or sustainability niche fund is neither here nor there. What I’m talking about is the 95%. A little change here is what will bring the biggest positive societal impact. And it can be done without losing money

And so I ended up working for Universities Superannuation Scheme (USS) for seven years as head of responsible investment.

I had a great time there, learnt a lot and am proud to have been able to help the organisation become one of the leading pension funds involved in responsible investment. I was then headhunted to do the same thing at AXA Investment Managers and I was there for five years.

When I look back on my career, it all makes sense, but it didn’t make any sense whilst I was doing it.”

Whilst at AXA, Thamotheram helped launch and then became president of the Network for Sustainable Financial Markets, “an international, non-partisan network of finance sector professionals, academics and others who have an active interest in long-term investing”.

‘Investing as if the long-term matters’

When sitting at the back of the room during what he describes as a “very boring” investment conference one day, Thamotheram and a “very bright investment actuary” called Sally Bridgeland,  who he had met for the first time that day, decided to “stop whingeing” and leave to “do something creative”. The brainstorm over drinks that ensued paved the way for the “investing as if the long-term matters” competition run in partnership between USS,  Hewitt and FTfm and a notion that he champions so passionately today.

We thought about how the investment industry operates on competition and so it was obvious – we had no money to invest in this new way so we decided to create a hypothetical competition”, he explains.

Both of us had read Schumacher’s Economics As If People Mattered, and so we did a pun on that and created a competition called ‘Managing pension funds as if the long-term matters’.

We had a quite major success actually, especially when you think it was long before most people felt there was a problem with short-termism.  At that time, serious players in the industry were openly saying the long-term is just a series of short-term steps.

Now, everyone is talking about the issues and few would dare say it in public even if they still think it. It was quite a thought leadership project at its time and it got a lot of publicity. But it didn’t influence investment behaviour.”

With now nearly 15 years of experience in the investment industry, it’s fair to assume that Thamotheram has witnessed a few major changes in his time. Not least, the fact that ethical investment at a private level in the UK has grown to a size of around £11 billion, with over 80 funds available to individuals.

On top of this, as of December 2009, UKSIF estimated that there were around £938 billion worth of socially responsible assets under management in the UK – a 19% increase compared with the end of 2007, and a figure that has undoubtedly increased since.

Thamotheram describes the biggest changes he’s witnessed during his time in the investment industry.

Whatever we choose to call it, what we’re talking about today is no longer seen as completely off the other end of the planet”, he says.

There are more and more people in the roles. When I started, there were about 15 of us in the first three years.

Now, it’s a huge sector and the UNPRI quotes assets under management of more than $30 trillion. That’s something like one in ten investment dollars. That’s the positive side.

The negative side is that there’s a really big disconnect between the scale of the investment challenge and our understanding of this challenge  and what people are actually doing, and despite having evidence of this disconnect, it isn’t being closed in many important areas.

Am I saying things are getting worse? No, I’m just saying things aren’t getting better at the scale at which the awareness has increased or should have increased.”

‘Preventable surprises’

Thamotheram is known for being unusually frank about the sustainable investment sector’s progress. He cites the executive pay saga as one example, saying that whilst there are lots of people “doing good work”, 73% of Barclays shareholders voted in a way to allow the pay packages to go through.

He also uses a case study of oil giant BP, which in 2010 hit the headlines after more than 20m gallons of oil (equivalent to 4.9m barrels) spilled into the Gulf of Mexico following an explosion at its Deepwater Horizon rig. Shares in the company swiftly plummeted, and chief executive Tony Hayward resigned from his position as a result. But the chair of the company’s safety committee, Sir William Castell, remained in his job for two years afterwards, only retiring in April this year.

Thamotheram describes the explosion at BP's Deepwater Horizon rig in 2010 as a 'preventable surprise'. Photo: ideum via Flickr

Thamotheram explains how this disaster, as well as a number of other incidents during his time in the profession, led him to come up with the project, Preventable Surprises.

Having lived professionally through the experience of Enron, WorldCom, RBS, HBOS and then seeing BP happen as well, what struck me was that even the environmental, social and corporate governance (ESG) and socially responsible investment (SRI) communities largely found it hard to engage with what was our role as investors in that process”, Thamotheram says.

What haven’t we learnt that helped allow this to happen?

And I came up with the phrase ‘preventable surprises’, adapting it from an academic’s work in which they talked about predictable surprises. I wanted to say that they were predictable, but they were also preventable.

In the same way that in medicine, you can have a preventative health approach, it doesn’t mean that you stop every case of typhoid or tuberculosis, but you can focus on prevention rather than accident and emergency trying to clean things up after they happen.”

And this approach, he says, is fundamental to the future of investment, with private investors each holding a golden ticket for wholesale change.

I think that’s where we as investors need to go. We need to be focusing on creating systems that, for example, incentivise oil and gas companies to think about health and safety much more seriously than clearly they do at the moment.

We need to be incentivising banks to really worry about risk purposes.

Instead what we have today is investors acting as the primary enablers – often unintentionally and sometimes even unconsciously – of dysfunctional corporate behaviour.

These are unacceptable levels of failure of fiduciary duty I think, and investors could be a much bigger part of the solution.”

The nature of Preventable Surprises is simple. Major catastrophic crises, like the BP Deepwater Horizon oil spill, can be avoided or at least mitigated by more skilful decisions made by institutional investors.

But there are a number of barriers stopping the community from making the necessary changes; most notably perhaps, the system impact of a warming world.

Handing over a world which is fit for people to live in, I would guess, is what people are trying to do when they’re investing”, Thamotheram describes.

High net-worth individuals have enough money for themselves. They’re basically creating an environment, or a future for their charity, relatives and children.

Unless we change dramatically over the next five years or so, the International Energy Agency says we will be locked into six degrees of warming. And the system impact of this kind of temperature change is devastating – it’s on a scale that we haven’t even got our heads round.

And investors are really the key. Many surveys have shown that companies are more responsive to investors than they are to regulators.

The primary influence on a corporate decision maker is the investment community, particularly the sell-side and credit rating analysts and large investors in that company. And obviously that’s even more so for private equity.”

It’s because investors are by far the most powerful people and it’s because the mainstream investment community doesn’t get ‘it’, that we have such a big problem today. 

“It explains why CEOs don’t prioritise sustainability actions even if they get it intellectually and can talk the talk. And it explains why CFOs routinely trade off productive investment activity in their own companies simply to deliver on the quarterly number – this is proven.”

Thamotheram draws on a recent survey of Global Compact leaders which asked what the biggest block to them doing sustainability was. An overwhelming majority – 75% plus – said it was investors. Therefore, a change in investor attitude is essential if there are going to be notable changes within the current global financial structure.

We know the clients who move the fastest on innovations in the investment system are high net-worth individuals. And a few people acting has a disproportionate impact

He adds two reasons why he believes this system is an unsustainable one.

The first reason is that major benefits go to investment professionals – the intermediaries – and not to the real asset owners”, he states.

The smaller you are as an asset owner, the more likely you are to be the dog that’s been wagged by the fund management tail.

If you’re a normal pension fund member paying excessive costs with little real alignment between performance that matters and fees, you’re being hammered.  It may look like all the boats are rising but when the bust comes – as it always does with bubbles – it turns out that all the boats haven’t risen and you actually see who’s naked. 

“A lot of middle class and especially lower-income people are naked as a result of having been exposed to this industry. And this isn’t a nice society for anyone to live in, even high net-worth individuals.

The second area is that the industry doesn’t take into account externalities. It will make a huge killing on the basis of externalising costs with profits and investment returns made on the basis of externalising costs to wider society and future generations.

So all in all, what we’re doing is cheating on our future generations. What’s the purpose of that? Why work so hard and so creatively to save up money to hand over to your children having destroyed the planet and society we also hand over to them?

Climate change and sustainable investment

Here lies a contentious issue, though. The argument about responsible investment is inextricably linked – especially in the minds of sceptics – with the heated debate about climate change and its causes. It’s a sad reflection on society when scepticism makes for better headlines than actual science.

And with the very well-funded climate change deniers seeming to be in the ascendency in public opinion, Thamotheram agrees this particular barrier is becoming increasingly difficult to tackle.

The problem with climate change today is that it’s become an activity that has been sort of sub-contracted to the specialists – the climate change scientists and advocates on one side, and the deniers, sceptics and vested brown energy corporate interests on the other”, he declares.

The debate has been taken over, but to my mind that’s largely the responsibility of the very large group of people who are in the middle, sitting on the fence and staying silent.

This includes mainstream institutional investors. There are many, many things that these investors could do if they took a rational perspective. But the really sad thing is many decision makers seem to think they can double-check every scientific fact about climate change.

This is plain silly. The level of scientific confidence about climate change is much, much higher than many other things that investors just take for granted today.

The level of scientific consensus about climate change is far higher than many other things that investors just take for granted today, says Thamotheram. Photo: Andrew via Flickr

The bottom line is the national academies of Russia, America and so on are saying that it’s happening and humans are a major cause. Even climate change sceptics that have looked at it in order to prove it’s not happening have said they now largely agree with the IPCC conclusions.”

Overshadowing the debate about climate change though is the need to reduce our pollution and waste, as those two combined are arguably the biggest problems we face. And it would take, says Thamotheram, a rather ill-informed investment professional to argue that resource scarcity is not a major threat to societal well-being and investment returns.

This is why there really shouldn’t be a debate around investing sustainably and responsibly.

Thamotheram’s passion for “sensible” investment is contagious. Speaking with reference to Blue & Green Tomorrow’s readership, he issues a rallying call to action to encourage and inspire individuals who have significant wealth to take a leadership position on sustainable investment.

Look, we know the clients who move the fastest on innovations in the investment system are high net-worth individuals”, he proclaims.

It’s their money, they can make the decisions and they can choose what signal they send to their fund managersThere is no need for the backside-covering fiduciary duty debate that characterises institutional investors who are trapped in a system where deviating from the herd carries real risk.

And a few people acting has a disproportionate impact. We know from the theory and practice of ‘tipping points’ that system change can happen with about 10% of the community taking action. So that’s one of the opportunities created by the concentration of wealth today –   a small number of high net-worth individuals acting collaboratively and seriously could have a big impact.

And when I say ‘seriously’, I don’t mean syphoning off 5% of their assets and putting it in some cleantech or sustainability niche fund. That’s neither here nor there. It may make the investor feel good. It may even deliver good returns. But that niche makes sense only because the mainstream is unchanged. What I’m talking about is the 95% of their assets that’s part of the problem. A little change here is what will bring the biggest positive societal impact. And it can be done without losing money.

Today, no-one would eat well 5% of the time and then pig out for the rest of the week at fast food restaurants on food that was stocked full of antibiotics, steroids and pesticides and where the workers were treated badly. No-one would think that’s healthy, especially if they were fortunate enough to be a reader of this magazine. But that is what many of us do in relation to our investment behaviour.

We don’t clock that we are what we invest in. That’s all we have to do. And a few people starting to do it will create a different environment.”

American anthropologist Margaret Mead once said, “Never underestimate the power of a small, dedicated group of people to change the world; indeed, that is the only thing that ever has“. And it’s this notion that the sustainable investment industry must cling to, as it continues to innovate, excite and push the boundaries with the sole intention of creating a cleaner, greener, fairer, more responsible, more prosperous and more sustainable future for generations to come.

Further reading:

The dynamic future of sustainable investment

The Guide to Sustainable Investment

Inspiring innovation in sustainable finance: FT/IFC Conference

Reforming the banking system for good

Economy

How Going Green Can Save A Company Money

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going green can save company money
Shutterstock Licensed Photot - By GOLFX

What is going green?

Going green means to live life in a way that is environmentally friendly for an entire population. It is the conservation of energy, water, and air. Going green means using products and resources that will not contaminate or pollute the air. It means being educated and well informed about the surroundings, and how to best protect them. It means recycling products that may not be biodegradable. Companies, as well as people, that adhere to going green can help to ensure a safer life for humanity.

The first step in going green

There are actually no step by step instructions for going green. The only requirement needed is making the decision to become environmentally conscious. It takes a caring attitude, and a willingness to make the change. It has been found that companies have improved their profit margins by going green. They have saved money on many of the frivolous things they they thought were a necessity. Besides saving money, companies are operating more efficiently than before going green. Companies have become aware of their ecological responsibility by pursuing the knowledge needed to make decisions that would change lifestyles and help sustain the earth’s natural resources for present and future generations.

Making needed changes within the company

After making the decision to go green, there are several things that can be changed in the workplace. A good place to start would be conserving energy used by electrical appliances. First, turning off the computer will save over the long run. Just letting it sleep still uses energy overnight. Turn off all other appliances like coffee maker, or anything that plugs in. Pull the socket from the outlet to stop unnecessary energy loss. Appliances continue to use electricity although they are switched off, and not unplugged. Get in the habit of turning off the lights whenever you leave a room. Change to fluorescent light bulbs, and lighting throughout the building. Have any leaks sealed on the premises to avoid the escape of heat or air.

Reducing the common paper waste

paper waste

Shutterstock Licensed Photo – By Yury Zap

Modern technologies and state of the art equipment, and tools have almost eliminated the use of paper in the office. Instead of sending out newsletters, brochures, written memos and reminders, you can now do all of these and more by technology while saving on the use of paper. Send out digital documents and emails to communicate with staff and other employees. By using this virtual bookkeeping technique, you will save a bundle on paper. When it is necessary to use paper for printing purposes or other services, choose the already recycled paper. It is smartly labeled and easy to find in any office supply store. It is called the Post Consumer Waste paper, or PCW paper. This will show that your company is dedicated to the preservation of natural resources. By using PCW paper, everyone helps to save the trees which provides and emits many important nutrients into the atmosphere.

Make money by spreading the word

Companies realize that consumers like to buy, or invest in whatever the latest trend may be. They also cater to companies that are doing great things for the quality of life of all people. People want to know that the companies that they cater to are doing their part for the environment and ecology. By going green, you can tell consumers of your experiences with helping them and communities be eco-friendly. This is a sound public relations technique to bring revenue to your brand. Boost the impact that your company makes on the environment. Go green, save and make money while essentially preserving what is normally taken for granted. The benefits of having a green company are enormous for consumers as well as the companies that engage in the process.

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Energy

5 Easy Things You Can Do to Make Your Home More Sustainable

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sustainable homes
Shutterstock Licensed Photot - By Diyana Dimitrova

Increasing your home’s energy efficiency is one of the smartest moves you can make as a homeowner. It will lower your bills, increase the resale value of your property, and help minimize our planet’s fast-approaching climate crisis. While major home retrofits can seem daunting, there are plenty of quick and cost-effective ways to start reducing your carbon footprint today. Here are five easy projects to make your home more sustainable.

1. Weather stripping

If you’re looking to make your home more energy efficient, an energy audit is a highly recommended first step. This will reveal where your home is lacking in regards to sustainability suggests the best plan of attack.

Some form of weather stripping is nearly always advised because it is so easy and inexpensive yet can yield such transformative results. The audit will provide information about air leaks which you can couple with your own knowledge of your home’s ventilation needs to develop a strategic plan.

Make sure you choose the appropriate type of weather stripping for each location in your home. Areas that receive a lot of wear and tear, like popular doorways, are best served by slightly more expensive vinyl or metal options. Immobile cracks or infrequently opened windows can be treated with inexpensive foams or caulking. Depending on the age and quality of your home, the resulting energy savings can be as much as 20 percent.

2. Programmable thermostats

Programmable thermostats

Shutterstock Licensed Photo – By Olivier Le Moal

Programmable thermostats have tremendous potential to save money and minimize unnecessary energy usage. About 45 percent of a home’s energy is earmarked for heating and cooling needs with a large fraction of that wasted on unoccupied spaces. Programmable thermostats can automatically lower the heat overnight or shut off the air conditioning when you go to work.

Every degree Fahrenheit you lower the thermostat equates to 1 percent less energy use, which amounts to considerable savings over the course of a year. When used correctly, programmable thermostats reduce heating and cooling bills by 10 to 30 percent. Of course, the same result can be achieved by manually adjusting your thermostats to coincide with your activities, just make sure you remember to do it!

3. Low-flow water hardware

With the current focus on carbon emissions and climate change, we typically equate environmental stability to lower energy use, but fresh water shortage is an equal threat. Installing low-flow hardware for toilets and showers, particularly in drought prone areas, is an inexpensive and easy way to cut water consumption by 50 percent and save as much as $145 per year.

Older toilets use up to 6 gallons of water per flush, the equivalent of an astounding 20.1 gallons per person each day. This makes them the biggest consumer of indoor water. New low-flow toilets are standardized at 1.6 gallons per flush and can save more than 20,000 gallons a year in a 4-member household.

Similarly, low-flow shower heads can decrease water consumption by 40 percent or more while also lowering water heating bills and reducing CO2 emissions. Unlike early versions, new low-flow models are equipped with excellent pressure technology so your shower will be no less satisfying.

4. Energy efficient light bulbs

An average household dedicates about 5 percent of its energy use to lighting, but this value is dropping thanks to new lighting technology. Incandescent bulbs are quickly becoming a thing of the past. These inefficient light sources give off 90 percent of their energy as heat which is not only impractical from a lighting standpoint, but also raises energy bills even further during hot weather.

New LED and compact fluorescent options are far more efficient and longer lasting. Though the upfront costs are higher, the long term environmental and financial benefits are well worth it. Energy efficient light bulbs use as much as 80 percent less energy than traditional incandescent and last 3 to 25 times longer producing savings of about $6 per year per bulb.

5. Installing solar panels

Adding solar panels may not be the easiest, or least expensive, sustainability upgrade for your home, but it will certainly have the greatest impact on both your energy bills and your environmental footprint. Installing solar panels can run about $15,000 – $20,000 upfront, though a number of government incentives are bringing these numbers down. Alternatively, panels can also be leased for a much lower initial investment.

Once operational, a solar system saves about $600 per year over the course of its 25 to 30-year lifespan, and this figure will grow as energy prices rise. Solar installations require little to no maintenance and increase the value of your home.

From an environmental standpoint, the average five-kilowatt residential system can reduce household CO2 emissions by 15,000 pounds every year. Using your solar system to power an electric vehicle is the ultimate sustainable solution serving to reduce total CO2 emissions by as much as 70%!

These days, being environmentally responsible is the hallmark of a good global citizen and it need not require major sacrifices in regards to your lifestyle or your wallet. In fact, increasing your home’s sustainability is apt to make your residence more livable and save you money in the long run. The five projects listed here are just a few of the easy ways to reduce both your environmental footprint and your energy bills. So, give one or more of them a try; with a small budget and a little know-how, there is no reason you can’t start today.

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