rethink sustainability

Investors can save our way of life (and their own)

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Robert Peston

ITV’s political editor

For too long most professional investors operated on the basis that it really did not matter if the businesses they backed damaged the environment, or our health or our living standards. So-called externalities were the business of government to sort out. Investors’ responsibility was simply to evaluate whether shares were good or bad value on the basis of whatever financial metric they preferred or was fashionable. But the rise of populism, and the associated life-or-death challenge to economic liberalism, means that the prudent investor can no longer sit on the sidelines and ignore the benign and toxic spinoffs from corporate conduct. Sustainable investing means harnessing the power of capital to foster a sustainable society.

Here is an embarrassing admission...

I did one of those degrees at a top university, PPE1 with its “e” for economics, which is supposed to equip a young person with the intellectual resources to become, say, prime minister. But it was 20 years before I had any proper understanding of what I view as the most important public-policy and economic concept, “externalities”, and why tackling them are the great challenge of our market-based democracies.

The most under-rated and perhaps least widely known of economic ideas, they are those goods and bads that flow from how products are made or services provided that are not captured in the price of those products and services and also have an impact way beyond the producers and customers of those products and services.


Why externalities really matter

The classic example of our age would be global warming, and the associated desertification or inundation of places distant from the C02-chugging transport, factories and power-generation of richer and industrialising countries.

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Another would be the obesity epidemic in rich nations, that perhaps puts intolerable strain on public health systems – a strain viewed by many as showing that the price of a chocolate bar or a fizzy drink does not capture the welfare burden for society of carb guzzling.

Hence the fashion for sugar taxes – although these are problematic and can be seen as reinforcing inequality, in that they are most punitive for poor people, as are the assorted green levies and carbon pricing initiatives that are supposed to nudge energy companies towards sustainable power production.


Ethics and successful investing are two sides of same coin

All of which begs a huge question for investors. Should they ignore externalities altogether and just invest on the basis of a discounted valuation of the visible cash-flow stream generated by a company? When I worked on the FT2 in the 1990s, this was not only the mainstream view, but most commentators went further and said that to do otherwise would undermine capitalism. It was a different world!

Alternatively, should they invest on the basis of a hunch or guess about how governments are in the future likely to correct market failure and introduce taxes or other pricing mechanisms to capture externalities? Or should they go further still and engage in fundamental research to evaluate the goods and bads for whole societies of specific commercial activities?

This is really a question about whether there is a tension between ethics and generating super-normal investment returns.

I would argue – on the basis of the most conspicuous externalities of this era – that there is a false dichotomy between profit and the kind of sustainable investing that puts a premium on activities that generate societal goods and a discount on those that spew the bads.

There is a false dichotomy between profit and the kind of sustainable investing that puts a premium on activities that generate societal goods and a discount on those that spew the bads.

When I smelled the coffee

If I had to pick a moment when I had that insight, although I did not conceptualise it quite like that at the time, it would be just after 10pm on 14 September 2008, the Sunday night before Lehman filed for Chapter 11 protection. I was live on the BBC’s television news telling 6m British people that one of the world’s great investment banks was about to be declared bust. All I could think was that we were all going to pay for this – which was both scary and seemed unfair.

Lehman was a proxy for a banking bubble that permanently enriched a generation of bankers and traders in the decade before the great Crash of 2008 and then permanently impoverished a generation of citizens on average and meant lower incomes in the decade that followed the Crash.

Lehman was a proxy for a banking bubble that permanently enriched a generation of bankers and traders in the decade before the great Crash of 2008 and then permanently impoverished a generation of citizens on average and meant lower incomes in the decade that followed the Crash.

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My presumption, a decade ago, was there would be riots in the streets and mass protests. And there was some of that. But the more important revolt of the people – demanding simple answers to complex questions – took place at the ballot box.


Why populism is the child of Lehman

There is a thread between the proliferation of innovations such as the synthetic CDO3 – that were not Greenspan’s proof of the perfection of markets but hid risk behind a veil and enriched a few bankers at painful subsequent cost to many taxpayers – and the votes to leave the EU and for Trump.

What matters is not whether Brexit and Trump will in practice improve the life chances of poorer people. It is that a demographic identified by Theresa May as those “just about managing” (and then, some would say, promptly ignored by her) rightly took the view that 30 years of liberalising financial markets, globalisation and a worldwide competition to cut taxes for businesses had enriched a tiny elite at the top and hundreds of millions in Asia, but had lumbered them with insecure, stagnating low-wage employment in call centres or with digital gigs.

The crushing of hope for a better life of the white working classes in rich nations is what you might – stretching a point – call the mother of all externalities, of the financial marketisation of the global economy that was built by an elite for an elite.

Feel sorry for hedge funds

The cruel exquisite paradox is that some hedge funds and short sellers4 precisely identified both the mispricing of risk and the associated bubble in housing markets that wreaked such damage to economies and living standards.

But when they profited from collapsing bond and bank-share prices, that were associated with poor people being evicted from homes they could not afford, their morally neutral short-selling was seen (wrongly) as the rich feasting on the misery of the indigent.

And all finance was brought into disrepute.


Sustainable investing is not a luxury

This is why investors are foolish if they think sustainable investing – even ethical investing – is still a luxury for those with more money than sense.

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This is why investors are foolish if they think sustainable investing – even ethical investing – is still a luxury for those with more money than sense.

The almost three decades from 1980 of the Thatcher-Reagan consensus that put too much faith in the pricing ability of markets, and addressed externalities usually when the damage had already been done, gave us rising sea levels, threats to biodiversity, life shortening obesity and urban air pollution, and the longest stagnation in the living standards of those on average and lower incomes since the early nineteenth century.

On the march, on the rise, are scoundrels with spurious answers to life-or-death questions.  So for the first time in my lifetime, it is naïve to take for granted our liberal democracy, rule of law and way of life.

If those who manage the money of millions of us don’t use their financial clout to challenge environmental and social depredation where they see it they may find their own ecosystem – the financial market economy – dismantled by a new generation of demagogues who put a very low premium on our precious liberties.

Biography

Robert Peston is ITV’s political editor, presenter of the politics show “Peston”, founder of the education charity, Speakers for Schools, and chairman of Hospice UK. He has written four books, “How Do We Fix This Mess”, “Who Runs Britain?”, “Brown’s Britain” and his latest one, “WTF?”, which explains the causes and consequences of the rejection of mainstream politicians and politics-as-usual in many rich countries – and how to fix broken Britain. For a decade until the end of 2015, he was at the BBC, as economics editor and business editor. Previously he was City editor at the Sunday Telegraph, political editor and financial editor at the FT, a columnist for the New Statesman and Sunday Times, and at the Independent in various roles. Peston has won more than 30 awards for his journalism, including Journalist of the Year from the Royal Television Society. His blog is itv.com/robertpeston, on Facebook he is facebook.com/pestonITV and he is @peston on Twitter.

Please note that Robert Peston’s views and opinions are his own and not necessarily a reflection of those of the Lombard Odier Group.
1 Philosophy, politics and economics (PPE)
2 Financial Times

3 Collateralized Debt Obligation
4 Short selling is the sale of a security that is not owned by the seller or that the seller has borrowed

 

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