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The biggest challenge facing the investment industry

It’s also the biggest challenge facing everybody else.
Answers around climate change are not going to come out of a spreadsheet. Image: Shutterstock

Asset managers have a lot to worry about at the moment: from managing money in an environment where low and negative interest rates are distorting asset prices, to disruptive technologies that are changing the ways in which markets and assets can be analysed, accessed and valued.

Read: Are you buying what asset managers are selling?

For many in the industry, however, the biggest question they will need to address over the next few years is not one that is as immediate as these. It is a longer term problem:

“I think the disruptor that is going to have the most influence on the investment industry is the question of climate change,” John Green, co-CEO of Investec Asset Management told the recent Morningstar Investment Conference in Cape Town.

“If you’ve been in London in the last few weeks, you would have been massively disrupted by the protests going on there,” he added. “That is just telling you that the collective society, and the world, is saying that we need to take this question much more seriously.”


Green is far from alone in this belief. The same sentiment was shared earlier this month by the president and chief executive of State Street Global Advisors, the world’s third largest asset manager. Speaking at the Fiduciary Investors Symposium at Harvard University, Cyrus Taraporevala, said that climate change is “the biggest challenge for our industry and human life”.

He argued that only those investors who are able to take seriously the value destruction potential of climate change will survive.

Another industry luminary, Dan Fuss, who has more than 60 years of investment experience and is vice-chairman of Boston-based firm Loomis Sayles, told the CFA Institute Fixed-Income Management conference last month that climate change is now the greatest challenge facing society and the markets.

“I’ve been doing this for a while,” said Fuss. “Many times during this period, I have looked at things and said: ‘boy, I’ve never seen anything like this before’. That was easy to do in the early years, because I hadn’t seen much.

“Now I’ve seen more, but I’ve still never seen anything like this before,” Fuss said.

These comments illustrate how a growing number of asset managers are realising the enormity of the challenge this presents to their businesses. That is because its potential impacts are largely unquantifiable, and are enormously long term.

“In the discounted cash flow model, which is arguably the cornerstone of active investment management, year 50 is almost irrelevant,” the president and chief investment officer at Morningstar Investment Management, Daniel Needham pointed out. “Years one to 10 make up the largest proportion of what you look at.”

The impacts of climate change on business models and industries, however, have to be considered way beyond this kind of time frame. For example, how do you assess an investment in a coal miner, when the use of fossil fuels will fall dramatically over the next few decades? Models that rely on historical data are inherently incapable of assessing these sorts of risks and opportunities.

“Consultants and clients are typically backward-looking,” Green noted. “But this is not a backward-looking problem you can solve. We love data and crunching spreadsheets to come up with answers, but this is not an answer that is going to come out of a spreadsheet.”

New approaches

Asset managers, as Green noted, therefore have to “think about this very differently”. As fiduciaries, they have a responsibility to be proactive because the risks in waiting to see how things play out are simply too great.

Read: Is this what will save active management?

“One of the ways to do that is through active ownership,” Xolisa Dhlamini, a lecturer in development finance at the University of Cape Town’s Graduate School of Business told the recent Changing Course conference hosted by Just Share.

“You are not just buying instruments and leaving them there – you are being more active in forcing the corporates that you are putting money into to behave better.”

Another important consideration is how asset managers have the ability to influence how new markets develop.

“We as investors have a genuine opportunity to deploy capital in a way to support climate solutions and embrace opportunities,” Taraporevala said.

Importantly, asset managers can also be proactive in how they deal with clients, particularly pension funds. Since they have the best view on the risks and opportunities climate change presents, asset managers should be encouraging their clients to invest accordingly.

“Things can change if asset owners flex their fiduciary muscles,” said Nicholas Firzli, director-general of the World Pensions Council. “Pension funds own trillions of dollars in assets. By flexing their muscle, the board members of pension funds can change the world.”

If asset managers are really to look after their clients’ interests, they cannot simply be mandate-takers. They have to be willing to set the agenda.

“As a global investment manager, I sit in front of clients and say that my home town, Cape Town, nearly ran out of water,” Green said. “That is what climate change is doing. So what are you doing about it as a pension fund?”



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If most asset managers underperform the market why would they be successful in setting the agenda and try and tell companies how to “perform” and run their business?

I guess that’s why ETF’s is now the prefered investment vehicle in the US.

No AM.

@Mmmmm….exactly !

These same asset managers that have been syphoning off[ and in a lot of instances as we all know, ripping off] clients are now the same ones all suddenly pushing the ‘climate change’ agenda

Begs one question: who is behind all this ??

The biggest challenge is not necessarily climate change. The scientists are making predictions based on computer models, but these may or may not be accurate. It is fiendishly difficult to model something as complex as climate, and there’s also confirmation bias involved. If your study grant depends on scaremongering, that’s exactly what you’re going to do.

The bigger challenge, which is a certainty, is the amount of taxes governments will extort using climate change as an exuse, even if the models turn out to be wrong.

I suppose the concern is, what if they are right. Couple decades worth of studies and it could all be wrong but not worth the risk of ignoring it.

Carbon tax would be the cost I’d guess, I don’t trust governments to do good with any form of tax unless it’s ring fenced and managed outside of the bigger budgetary process, which this is unlikely to be.

@Incitatus…….you are 100% on the button

Unfortunately, most people have been indoctrinated by MSM into believing that cow farts and exhausts will destroy the planet !

Bollocks !…. and if one takes the effort to research properly, the real agenda becomes clear : the elite and governments will continue to rake in BILLIONS [ heading towards TRILLIONS ] while exploiting this fear mongering.

Great article Patrick, thanks. I think the ‘asset managers’, etc cited here are on the money (so to speak). Just a pity they didn’t wake up to this a decade or 3 back. Better late than never though. And the do manage enough funds to make a serious impact.

I’m still constantly amazed at how many climate deniers there are – it is one of the best (and saddest) examples of having people say “don’t confuse me with the facts, I’ve already made up my mind”.

The average person struggles to look more than 3 to 5 years ahead. Here we are talking about the downside disasters that our grandchildren, great children and beyond will be facing. No wonder so many have their head in the sand. The reality is that we, as people, will not put ourselves through much in the way of anything that inconveniences our lifestyle – it’s human nature. Hopefully though we can at least see some moderation in how we all operate.

@SPAP…..Mmm…..really ?

Firstly, recall the famous Time cover in 1975 saying scientists were stating the earth was ‘cooling down’ !


Then after that, they did an about turn after the new agenda was set, now proclaiming the earth was heating up !


FIVE decades later and nothing has changed – sea levels are EXACTLY the same

Weather just as volatile as it was since the dawn of man

But always the one constant factor lurking behind it to take advantage of all this of course : big business and government.

Spot on Realitybites. What is incredible is that the goals of the extinction rebellion aka useful idiots, Goldamn Sachs and the World Bank are in perfect synchronicity: a transfer of wealth upwards from the middle class and poor to the rich. These alarmists epitomise the essence of the whole scare: they can never present any evidence (this being the basis of science) but call people names (denier) on a public forum. Name calling is the purview of the puerile, abandoned by most with a modicum of maturity by the early teens.

“If asset managers are really to look after their clients’ interests, they cannot simply be mandate-takers. They have to be willing to set the agenda.” But if they are also uninformed, how do they do it? By taking five years off to do the research into the processes of climate change? Or will they simply listen to the loudest shouter? Or pay a consultant … the usual and easy but expensive option which can get charged to their clients; eventually.

The real challenge to funds in SA is that fewer and fewer people have disposable funds to invest.

Globally, the last industry I would want to invest in is insurance, where increasing catastrophic disasters could either wipe them out or reduce profits to zero.

Those who discount man-made climate change have not seriously looked at either the science or the economics. The two top science bodies in the English speaking world or crystal clear about the most thoroughly studied science

And top economists not funded by the fossil fuel industry are equally clear about the devastating economical results of belittling this issue

You also drinking from the MSM kool aid fountain unfortunately

The official narrative as espoused by government, ‘science’ and MSM should ALWAYS be questioned

How about this for starters ?…research:

Greenpeace Founder: ‘Climate Change Crisis’ Is a ‘Completely Made-Up Issue”

It is dangerous to downplay the probable effects of climate change. We are gambling with the lives of our grandchildren.

Dear Realitybites – Your thinking and verbiage, while not unique, does serve as the epitome of visceral thinking. Perfect!

@SPAP…yes, taking the contrarian view these days as exemplified by myself and a few other critical thinkers is not going to win any friends, and clearly bosom buddies we might not ever be

However, winning a popularity contest is not on my ‘to-do-list’ and most of us deplore sycophants anyway ….

I’ll leave it for the climate change evangelists and their doom and gloom media prophets of disaster simultaneously urging us to give up air travel/eating meat/modern lifestyle……but all the while they and their Hollywood celebrities push this agenda while flying around in their private jets and laughing all the way to the bank !!?? [ at the dumb downed masses tax expense of course!]

LoL, you got to hand it to the elite and governments – they been pulling the wool over the sheeple’s eyes for centuries now

Perfected and effective MK Ultra programming, as evidenced by the many captured here too

In closing, your Judas Kiss of accusing me of being ‘visceral’ is more akin to literary betrayal, as you are in effect guilty of a subliminal ad hominem attack then – for the record I indeed pointed out factual footnotes to you which are hard to deny …… if you actually spent some time looking past the complete absurdity of this CC agenda as perfectly epitomised by Greta Thunberg and her sponsored gang, you might be enlightened to know all is not as it seems

Then again, cognitive dissonance is tough to handle…so you might be better off staying in your comfort zone

After all, being red pilled is not for everyone

Black or white thinking with a very touchy ego, wow!

Tiny tip – some research on actually understanding what cognitive dissonance is and the mechanisms typically applied to suppress the resultant discomfort might help.

@SPAP wrote:

“Black or white thinking with a very touchy ego, wow”

Mmm, perhaps you prefer obfuscation as opposed to cold black and white logic ?
Well, please dont let the truth hurt your feelings

“Tiny tip – some research on actually understanding what cognitive dissonance is ……”

Hehehe… really digging yourself into a hole here
Ok, you do realise that ‘global warming’ is a mainstream narrative, constantly pushed into our faces by all the elite and big corporations
So, discovering this is a hoax might be unsettling, especially to those who have been hoodwinked into becoming proponents of this agenda and then only to become traumatized when they realise things are possibly not what they seem

But…but…how can it be ?……governments told us it was true !…….CNN told us it was true…!…..’science’ told us it was true..!……even Kim Kardashian told us it was true !!
Shock…horror !
And then the cognitive dissonance kicks in……
Good luck

End of comments.





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