COP26 has had many critiques and my review, in this article, gives it just over half marks. The phrase ‘good COP, bad COP’ summarises it well and how to view it depends on framing and context.
One good note was that the marching orders for the investment industry have emerged at least at a high level. The industry is now more broadly committed to a significant role in the implementation of this great transition to a net-zero economy, starting with a halving of carbon in the decade ahead. So, the road from Glasgow now needs its roadmap and some key milestones.
In the 3D investment framework is a gamechanger article I argued that the investment firm of the future must have the 3D investing model, comprising return, risk and impact on its roadmap. Here I argue that something even more significant is lined up for the asset owner of the future in which shifts in convention, collaboration and culture are needed for the transformational changes ahead.
Convention
The investment models – ie the structures, processes and content – used in our industry have evolved over time into a range of best practices. That paradigm is being shifted by large-scale changes to asset owners’ circumstances, particularly relating to sustainability, the prevailing investment macro and governance.
While sustainability and ESG forces have now largely been integrated, there is further to travel into 3D investing and impact. And central to this new model is universal ownership theory[1] and the rise of systemic risk.
We also have a new investment macro. The succinct version of this is the rise of private market investing and the fall of 60-40 as the main responses to lower-for-longer interest rates and returns. This is calling for as much unlearning as new thinking as one shouldn’t use an old map to explore a new world.
The last shift is organisational in nature. Most asset owners have kept to a basic benchmark-oriented model in which their boards have ownership of investment policy via a policy portfolio and implement using outside investment managers. But with more complex goals coming from these paradigm changes (like net zero), the shift to an outcome-oriented model is increasingly attractive alongside making increases to internal capability to manage in a more streamlined, sophisticated and – most of all – holistic way. The test of this approach is at the total portfolio level – where every investment contributes to the joint goals of maximising risk-adjusted returns and alignment to net-zero commitments[2].
These shifts are leading asset owners to contemplate future actions that are substantially dissimilar from today’s actions. Managing real-world impact is the biggest example. That calls for new versions of collaboration and culture.
Collaboration
For this transition, we need a big shift in priorities in the fields of active ownership, engagement with asset managers and in engagement with sustainability NGOs like PRI. This will require asset owners to build new capabilities in leadership and teamwork.
Systems leadership is quite a good marker for the new type of leadership we need to enable the collective action so critical for success. This is collaborative leadership that finds joint solutions to common problems framed by a joined-up understanding of the interconnected, but messy, systems of which we are a part. It is built on respect for the multiple strands to the challenges and the multiple people that have a stake in the problems, and on a realism that the there are multiple facets to any problem requiring thought though and holistic solutions. A systems leader works with the belief that their, and their organisation’s, success depend on co-creating wellbeing within a very large system.
Part of this requires more attention to be given to effective teamwork which is, in effect, the principal way value is created in investment organisations. But the focus on making teams work well is largely absent even though the ways to do so are quite self-evident. That is not to say it is easy. Working with the enablers of cognitive diversity, collective intelligence and organisational culture to enhance team dynamics and engagement requires confident leaders with a high emotional intelligence and systems leaders that walk the talk by empowering deeper collaboration and sustainable cultures.
Culture
In the aforementioned 3D gamechanger article I suggest that culture is symbiotic with sustainability, whereby positive culture supports sustainable investing and vice versa. And that organisational culture has been deepened and enriched in many places by the wider purpose and goals mantra that has emanated from the sustainable-investing model.
The pandemic has reinforced these links with many financial institutions responding to the difficulties experienced by the workforce by taking more humanistic pathways. This has been a differentiator for some, but it obviously does not register for all, with many organisations still seeing sustainability through a business-first lens and not the people-first lens, which I think it requires.
A rapidly changing society is a new factor entering an equation where climate change casts such a long shadow. There is a resultant societal zeitgeist which increasingly reflects the resentments of harms caused and a less-than-just transition. The systemic risk of these social changes is significant. And a conceivable scenario is a world in which investment organisations’ social license to operate is downgraded or even taken away. The key is for asset owners to recognise the rise of systemic risk and build critical strategies to address it.
The different roads from Glasgow stretch out in front of us, with many finishing in dark places. But we can all make brighter choices about the role of our influential industry in a high-stakes transition, if we take seriously the great responsibility that comes with this power.
| What did we get from COP26? Doing what we can with what we’ve got This personal view is through an investment industry lens using a systems-wide perspective. |
Marks | |
| Overall COP26 assessment:
1½/3
|
§ Glasgow was never the place to solve the climate crisis but it has been a place to get better alignments in place – science, politics, civil life, rules and principles. And signal some marching orders. We have made progress
§ There has been improved holistic understanding and to some extent inclusion of nature-based solutions (carbon sinks, forestry, oceans intact) and of financial commitments and solutions § A version of the Stupidity Paradox* among nation-state administrations is holding back progress. In Glasgow communications were over-simplified, over-optimistic and under-authentic. The saying-doing gap (greenwashing) was everywhere (as Greta Thunberg pointed out) as was political correctness (except remember Tuvalu)
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½
1
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| World leaders coming together with appropriate seriousness & collaboration:
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§ The absence of systems leadership in Glasgow was omnipresent, we got myopic leadership. At no time have we needed systems leaders more because we face a host of systemic challenges beyond the reach of existing institutions and their hierarchical authority structures
§ This is the first COP where we did not debate the direction of travel, just the speed. But we are doing that with a lack of urgency § We have been given a road from Glasgow just as we had a road from Paris |
0
½
1 |
| Passing the baton – support for a wave of initiatives; battling new conventions
2/3 |
§ Glasgow signalled the considerable progress in the finance community with capital an increasing force in tackling the climate emergency
§ The rainbow aspect of the climate coalition was evident – activists, academics, NGOs, lobbyists, business and government all part of a wide stakeholder ecosystem addressing the planetary ecosystem § Climate challenges are producing peak complexity and a messiness with considerable challenges to convention which those with the baton are not yet in great shape to address
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1
1
0 |
| Collaboration – with influence through soft power and systems leadership:
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§ Relationships across the value chain and with peers are starting to be deepened and sharpened with industry collaboration groups (PRI, GFANZ, etc) much more significant
§ The market infrastructure in climate investing (regulation and standards, data and practices, etc) is really immature and is leading to a logjam of ten years of work needing to be squeezed into one or two. Glasgow confirmed a few areas of progress, notably financial market sustainability disclosures § Countless collaborative initiatives have started in the past decade but failed to foster systems leadership within and across organisations
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1
½
0 |
| Culture and change in investment private sector:
2/3
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§ This is a great commercial private finance opportunity that can galvanise much more energy and creativity but to exploit this investment organisations must step up a lot in their sustainability credentials and edge
§ Glasgow has helped signal to actors in the financial sector to come on board and has directed the focus on where capital should be moving and what standards are needed § The main factors supporting the winning business models are true commitments to net zero, change capabilities and strong culture which makes this tough for most organisations – only some will make it. As prevailing industry cultures remain overly self-interested, they may find it easier to avoid the challenges and occupy the boltholes** like free riding and greenwashing that are more about looking good than being authentic
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½
½ |
| Overall marks | COP26 has been moderately successful, particularly in terms of how it has mobilised thinking and action, but it will be seen as a missed opportunity | 8½ / 15 |
| *Stupidity paradox – source Alvesson and Spicer. Organisations encourage a degree of stupidity through a misplaced faith in classic leadership (not more progressive systems leadership versions), addiction to branding, thoughtless attachment to conventional rules, and overly upbeat cultures because it seems to work in the short-term. The application to nation state administrations is that they use the same over-simplifications, over-optimism and myopic orientation that are politically expedient and work short-term but are not good with long-term issues
**Boltholes – source TAI. Systems exhibit patterns like freeriding, tragedy of the commons, arms races, winner takes all and greenwashing. Understanding these is particularly important given a tendency of organisations and nation states to use them as ‘boltholes’ – ie places that are comfortable because they avoid long-term challenges with neat-looking short-term fixes that also reduce career risk |
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[1] Universal ownership combines the large-fund mindset of seeing themselves as long-term owners of a slice of everything – the world economy and market and its implied dependency on the market beta; with the large-fund strategy of leveraging collective action to build better beta to address systemic risk through active ownership, systemic engagement and allocations to more sustainable betas. ‘For universal owners, overall economic performance will influence the future value of their portfolios more than the performance of individual companies reor sectors’. (Urwin | Universal Owners | Rotman Journal of Pensions Management 2011)
[2] The total portfolio approach methodology (TPA) has been developed by a number of leading asset owners. See Total Portfolio Approach | TAI.
Roger Urwin is co-founder of the Thinking Ahead Institute
