Worries about inequality are ‘Sunday afternoon’ thoughts for investors. They must start acting on them on Monday morning.

Raj Thamotheram reflects on a recent study showing investors are seen to be lagging on inequality.

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Who are the primary enablers of dysfunctional corporate and market behaviour today? 

Having experienced, as an investment insider, the (last) Global Financial Crisis and what I have termed a ‘petri dish’ equivalent – BP’s Macondo crisis – I concluded the answer was investors. Governments – at that time at least – were trying to be part of the solution. In contrast, investors refused to take any responsibility or even learn, and this included the main ESG groups. Hence, I co-started the Network for Sustainable Financial Markets and the follow-on project, Preventable Surprises.

As you might imagine, this framing didn’t make me very popular! Even my friends said, “what’s your proof?” So, to be reasonable, I downgraded the criticism. I spoke about investors being a primary enabler of dysfunctional corporate and market behaviour.

But two bits of data this month make me think I compromised prematurely! The first is an important survey which is part of a fascinating report by the Test of Corporate Purpose and KKS Advisers which Bob Eccles highlighted in his recent Forbes column.

Focusing on the ‘S’ of ESG and in particular, income #inequality, this GlobeScan survey assessed how well different institutions – academic & research institutions, charitable foundations, civil society, civil society, (large) companies, institutional investors and national governments – were perceived as having responded to the pandemic and to inequality.

The survey had a good sample size (>500) and was unusually international (>50 countries). About 40% were “influencers”, and the rest came from corporates, civil society and institutional investors (each group with roughly the same numbers). One-third held senior positions in their organisations and the gender balance was good.

So who comes at the bottom of the ranking? 

Institutional investors!

5% of respondents felt they did well and 66% considered they did poorly. And the numbers about the pandemic are not much better.

For any who are tempted to try to dismiss this survey as a self-selected group of malcontents, remember that all polls are, to some degree self-selecting. Also the sample size (>500) plus the fact that the respondents came from a range of sources and countries. GlobeScan has developed its global database over many years and on this occasion, TCP’s very impressive advisory board members and staff also networked it widely. So we can reasonably assume it represents the broader stakeholder set.

This is good evidence that many key people know that corporations and investors have to change very significantly

Note also that respondents are not anti-capitalist! Specifically, they rated big companies as doing better than governments. And the 71 respondents who were from investment firms were fairly critical when rating their own sector:

  • 39% rated institutional investors as poor performers in addressing the COVID-19 crisis (11% rated good performance)
  • 70% rated institutional investors as poor performers in addressing the inequality crisis (4% rated good performance)
  • 24% selected ‘Financial sector’ as performing best in responding to stakeholder needs in these challenging times

What I did find very encouraging was that 33% of investor respondents rated inequality as the top priority. I fully agree with Bob that “large institutional investors see both climate change and inequality as creating system-level risks which will inhibit their ability to earn the returns they need to meet the needs of their clients and ultimate beneficiaries”. My (big) caveat is this is a “Sunday afternoon” insight – it has very little relevance to what these people actually do on a “Monday morning”.

The obvious message, of course, was the huge support (9 out of 10 respondents) for stakeholder capitalism. Even if you dismiss this by saying this shouldn’t be a debate or that respondents were answering for themselves and not their organisations, this is good evidence that many key people know that corporations and investors have to change very significantly. Also relevant was the mid-80s percentages who expect stakeholder capitalism to become more important – and slightly larger percentages for companies and investors compared to the other groups. But I also remember the many years of polling by Mercers and others which showed that investors expected ESG to become more relevant, year after year. Given the reality of time frames on a “Monday morning”, I fear this is also a way of saying “we know we should be doing this but we won’t just yet”.

The report did have one surprising finding: using data from Truvalue Labs, KKS Advisors concluded that EU and US companies were similarly ranked. This contradicts what many senior practitioners know experientially. But as Sara Murphy (head of research for TCP) noted, this data is entirely independent of regulatory frameworks, i.e. it’s a barometer of how stakeholders perceive corporate performance. “It’s possible that European stakeholders have a higher bar than their American counterparts” she postulated.

Hopefully future research will shed light on this and perhaps the big professional bodies, notably CFA, ICGN and PRI, might come together and do a really big annual poll. Then we can really drill down by country and category. But in the absence of that perfect poll, let’s not ignore this very important survey. When it comes to COVID and income inequality – the two big (and very closely connected) social issues of our time – investors are assessed by those who know most to have done very badly. 

Perhaps now is a good time to turn down the self-congratulatory ESG back slapping and – as Bob says – ramp up the soul searching?

Raj Thamotheram is an independent advisor and co-founder of Preventable Surprises, a think-tank dedicated to systemic risks and investor stewardship. He has worked in ESG and responsible investment at AXA IM and the UK’s Universities Superannuation Scheme.