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.”
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 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 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 managers. There 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.