TOMORROW 2020 - Podcast Series

This compilation of podcasts is from interviews and recordings with contributors to TOMORROW 2020 – an annual thought leadership publication on all things related to responsible investing and green growth. To navigate to the topic or episode of your choice, go to CHAPTER MARKERS and click on the time indicator in the left-hand column.

To view the publication, click here.
TOMORROW 2020

Thanks for listening! Follow us on Linkedin.

Transcript

Welcome to the sixth edition of Tomorrow, the Old Mutual Investment Group annual thought leadership publication on all things related to responsible investing and green growth. We've selected contributors from across the financial ecosystem, including asset owners, consultants, asset managers, economist advocacy groups, and government representatives. 

The themes explored in this year's publication span issues such as:

·         long-term systemic risk, 

·         resilience, 

·         inclusive growth, 

·         green financing innovation, 

·         impact measurement, 

·         and stewardship. 

We know that no single actor can solve long-term system risks on their own. And so, have created this thought leadership platform for industry discussion and knowledge sharing. Welcome to the conversation, your participation is critical to our shared success. 

Episode 1

Jon Duncan  00:44

It's a real pleasure to welcome Khaya Gobodo, Managing Director of Old Mutual Investments. Khaya's contribution to this year's edition explores ideas of the asset manager of the future. Khaya, welcome, and thanks for joining us.

Khaya Gobodo  00:56

Excellent, Jon, what a pleasure to be here.

Jon Duncan  00:58

What, in your opinion, do you think are the top attributes of the asset manager of the future?

Khaya Gobodo  01:02

It's one of those questions that are so timely to explore, Jon, because there's things about the industry that are fundamental in nature, with the longevity to survive multiple cycles. For example, you need solutions that are relevant to the need that clients face, irrespective of time You need those solutions to be delivered in a way that puts those clients at the very centre. You need those solutions to be delivered in a way that they meet the client expectation, with respect to the return expectations and the ability to meet the objectives of settling themselves. You need those solutions to be delivered by exceptional people, both with respect to, you know, the actual return outcomes, but also the way we deliver them and engage with our clients. 

But then comes the recognition that we're stepping into a new world. And that's about recognizing that clients no longer just want to focus on the return outcomes. They want to know that the capital that they've given you to be responsible for, has a positive and meaningful impact on the society that they live in, and generally the world that they're growing up in, and indeed that their kids will grow up. And so, this idea of responsible investment becomes central, no longer this ancillary idea that you put on top of what you do. It has to be the very heart and soul of what you do. 

So, you then begin to explore those organisations, and how they've integrated responsible investment into everything that we do, both with respect to how we design our solutions, and indeed, with respect to how we measure and become better at the marginal contribution of that capital to improve in the world.

Jon Duncan  02:39

Thanks, Khaya, one of the persistent themes in the Tomorrow publications, is this idea that the asset management industry has a role to play in shaping the future. And so, in your opinion, what is the unique contribution that asset managers can make in building a better future? 

Khaya Gobodo  02:56

It's not a navel gazing question, it's at the very heart of the reality we're staring down, it comes down to capital markets 101, capital markets are there to be the central repository of those who are long capital and those who need capital, which means you've got to provide the IP as the custodian of capital in driving how capital is allocated. 

Responsibility number one is to recognise we have this role as the consolidator of capital. An individual investor, right, as much as it's their money, has a very small ability to make that money work in a way that generates a positive outcome in the world. They can allocate that capital to fund managers that are that way inclined, which means our role then is to be at the cutting edge of that. 

The first one is to make sure that we're part of the conversation and we elevate in the conversation around the work that capital can do. And if you think about it, the number of categories, one of those categories is the very, you know, very practical way that you can allocate capital, to making the economy greener and substantially better for the society, right? I mean, if you think of ESG as a conceptual framework, the "S" and the "G" are so critical. So, in other words, how the capital is allocated and the way that it influences society, and how it influences and impacts on the environment. And this is about creating actual product that is very focused and dedicated on substantially improving the green nature of the influence we have, but also driving society, you know, down the right path. 

The other one is, let's call it as custodians, it's our responsibility to vote and engage. We have the mandate from our clients to engage with corporations, to engage with management teams, around their own practices. So, as an individual investor, you can't call the Chief Executive of Sasol and say, "How are you thinking about your carbon emissions and the impact that they have on society?" but as a collective industry, we certainly can do that. And even as an individual organisation, given the sheer size of assets we're responsible for, we can definitely make a difference, you know, on that front. 

So, the point I'm making, Jon, it's the conversation and the discourse and being at the centre of that, it's the engagement and driving, you know, the direction of travel, and then in a very practical way, producing and creating product, where the underlying investment decision is focused on that outcome that makes the world greener, more inclusive, and substantially better.

Jon Duncan  05:31

Ja, I couldn't agree more. I mean, one of the things that is certainly evident in this field of sustainable investing is this idea of innovation. And one of the things that's become abundantly clear, is that it's entirely possible to deliver an appropriate risk adjusted return, while at the same time delivering a meaningful contribution to shifting the conversation around societal and environmental ills. And increasingly, I think that is becoming the norm, shifting from this world of risk and return, to risk, return and impact. 

So, let me bring you to another important point around this conversation of responsible investing. And we mention it as a part of our intro to each one of these podcasts, is this idea that no one individual or company or asset management firm is going to solve sustainability on its own. We need to collaborate; we need to work across the industry. 

So, my question to you is, you know, what are the kinds of future fit industry partnerships that you see are critical for the asset manager of the future?

Khaya Gobodo  06:31

You know, we live in an industry that's amongst the most competitive in the world. And yet, there is this special juncture where we don't think about life as contested space, all right. In the balance of everything we do in asset management, it's about competition for marginal returns, you want to be at the top of the league tables, competition for modular flows, you want to capture clients attention and interest, enough for that client to trust you with their capital. So, all of that is intensely contested space. But in this area of impact, and changing the world together, we actually live in a big space that's uncontested. 

So, I'm going to use a very specific, granular example to kind of paint the picture. If you look at the infrastructure space, right, particularly as it relates to renewable energy, you have the opportunity to drive an entire agenda. So, number one, we all agree that renewable energy as the direction of travel has the ability to substantively impact the quantum and quality of the electricity regenerates in a way that substantively greens, and at the same time, is good for the economy and it's good for return outcomes. But negotiating with all the value chain owners is the only way to get the outcome. So, you gotta align the government, you've got to align the pension funds that provide the capital, you gotta align the developers that develop the schemes, you've got to align the fund management industry that allocates the capital. And it's the only place where you can see all those partners, even when they live in a competitive space. In this uncontested space, they align together in order to create a framework that's better for everyone. 

Now, that's a great example that I think we can extend to so many areas and fund management as a realistic impact. And there's demonstrable evidence, you know, that's been at play for more than a decade. But in fact, it can be done. So, to me, it's not a cookie cutter. You know, if you live in a listed equity space, the model will be slightly different. But there are uncontested spaces where we can all agree that as industry partners, whether you're the client, whether you're the state, whether you're the regulator, whether you're competitors, you can collaborate in order to make the system better.

Jon Duncan  08:48

And that's particularly true in my day job. I mean, one of the areas we spent a lot of time trying to co-opt our competitors, is in the area of proxy voting and engagement, we often will reach out to our competitive peers to work on broad ecosystem issues, that we know that if we collectively fix them, it's better for us both. And so, this idea of co-optition in that space, is definitely a feature of the future asset management world. So, Khaya, thanks so much for sharing your thoughts. 

Maybe just to sort of end on a personal note, I mean, what do you personally looking forward to in the year ahead?

Khaya Gobodo  09:23

You know, we live in a world where it's so easy to think of 2021 as an extension of 2020, right. 2020 is probably amongst the most challenging years that many of us will have faced both as professionals, executives, leaders, fathers, parents, you know, brothers, sisters, but we've got to accept this notion that we're going to get through this, which means we've got to be able to lift our gaze from the very present to the kinds of things we can do to substantively make life better. 

So, for me, it's about continuing the journey that we've started, you know, acknowledging that we're the deployers of capital right at the forefront of deploying capital in a way that recognises that the future matters. And so, for me, if I look at across our business, whether it's in listed equities, fixed income, credits, infrastructure equity; being at the heart of innovating new solutions that clients can deploy capital to with confidence in the knowledge that we don't just worry about COVID and today, we're worried about how we'll put that capital to work in a way that makes a difference in three, five decades.

Jon Duncan  10:33

Brilliant. Well, thanks so much, Khaya. It's been a real pleasure chatting with you. 

Khaya Gobodo  10:37

Awesome, thank you, Jon. It was a great conversation.

Episode 2

Dean Alborough  12:30

It is my privilege to have Scott Nadler on the podcast with me as part of the Tomorrow 2020 publication. My name is Dean Alborough. I head up the Environmental, Social, Governance practice at Old Mutual Alternative Investments. 

And Scott is the principal and founder of Nadler Strategy, advising corporations, business to business service firms, private equity nonprofits, and startups. He's also the founder and director of the Business Adaptation Project in the United States and South Africa, and helps businesses work together to adapt to physical climate changes. He has kindly written an article as part of the Tomorrow publication called "Avoiding the Resilience Trap: Bringing Resilience into Strategy". Welcome, Scott. 

Scott Nadler  13:18

Hello, Dean, good to talk to you. 

Dean Alborough  13:19

So, diving into your article as an experienced strategist, what is the key purpose of your article?

Scott Nadler  13:26

I'm trying to help organisations think beyond resiliency. Resiliency is wonderful. It's a great capability for us as individuals, it's a great capability for organisations, it's necessary, but it's not sufficient. An organisation, to survive and to thrive, needs to go beyond responding, being resilient, and really take a good look at what's changing and adapt to the changing circumstances.

Dean Alborough  13:53

And as you state in the article that while you recognise that resilience is required, is a valuable asset to an organisation, you state that it's a trap. And can you please explain a little bit more detail in the view of how this can become a trap for business?

Scott Nadler  14:09

Sure, let me give you one historical example, and then we can focus on some very specific business challenges. During the last year, as you have probably noticed, there's been a little bit of a disruption around the world with the pandemic. And there's been a resurgence of popularity, the old war time, World War II, British slogan of "Keep calm and carry on". That's a great example of urging people to be resilient. And that was important to during the Blitz and during the rest of World War II. But if all Great Britain had done in 1939 to 1945 was be resilient, if they hadn't adapted their economy to support a do or die wartime effort, all the resilience in the world wouldn't have been enough. 

So, what you see is organisations run the risk of falling into the trap of saying well, let's be very good at keeping calm and carrying on, but not doing the adaptation. That comes about in two particular ways that I've seen. One is what I call resilience blindness. The focus on resilience can be so intense and so all consuming, that an organisation can literally be blind to the changes around it which require adaptation. 

I lived through that earlier in my life, I worked with a US freight railway. And I found that that company and that industry in the United States has an extraordinarily rich tradition around resiliency. There's 150 years of culture that says, we can carry on, the show must go on. It doesn't matter if we have snow, if we have bridges collapsing, if we have derailments, the show must go on. And it's a tremendously wonderful culture that can do a lot of great things. What I discovered when I took on the environmental responsibility for that company, though, was that sometimes the show must not go on. That culture had evolved beginning in the 1850s. 

By the time I took on this role, expectations had changed, conditions had changed. The culture and the regulatory regime were no longer content to have the show go on by virtue of a railroad pushing contaminants off the track and into the river and into their water supply. Conditions had changed, we had learned a lot about chemistry, we had learned a lot about biology, we had learned a lot about the need to keep water pure. The railroad hadn't adapted, the railroad got better and better at ways to use new equipment, the new technology, to shove things away to get them off the track to get the track back in shape and enable the show to go on. Their focus on that resiliency had blinded them to the changes in the underlying conditions. 

And by the time we adapted and began to develop the ability to judge when the show should go on or not, we had hundreds of millions of dollars of accrued liabilities from when we thought we were doing the right thing by being resilient. But we hadn't adapted to the changing conditions. That's what I call resilience blindness. The other problem is just resilience fatigue. If you have 100 year flood, a company can have just... if wonderful things to take care of their business, their people, the community. When you have three or four so called 100 year floods in a two year period, you just can't keep responding. You can't keep being resilient, you just get... your resources are stretched, your people are stretched.

Dean Alborough  17:42

Okay, very interesting. Scott, the seductive part of this resilience concept is that one can build up defensive strategies in your business, and it gives you a sense of security going into the future. And as you say, the risk of that is that you fall into this trap of resilience blindness, and also fatigue down the line. 

And having said that, I think moving into this adaptive capability, one thing that strikes me is the need for innovation, and to see the world slightly differently, which arguably, is a more difficult space to move into for a business. When you're looking at a business, what should that business be doing to be able to be innovative, to move from simply a defensive resilience type strategy into an adaptive, innovative creative type strategy?

Scott Nadler  18:36

Great question, Dean. And I think you characterize it correctly by saying resilience has an element of defensiveness to it. In particular, resilience, essentially, is about getting through an event and getting back to the way things were. Adaptation requires the recognition that you can't go back, you have to move ahead, that business as usual isn't coming back. 

And so, the first characteristic that I look for is an attitude. It's the openness to things truly changing. That's threatening, people do become defensive, you chose the word very appropriately. Because if you're open to the notion that the underlying conditions can change, that's scary. It means you're looking at something you don't know, it also means, to be honest, that what you may have had 20/30/40 years’ experience dealing with, may no longer be the same situation and so it devalues your experience. And unfortunately, a lot of people, including business leaders, I think believe that that may devalue them. 

So, the first thing I look for is an organisation open to the reality that the change may be out there, because if they're not open to that possibility, nothing else matters. Second, if they're open to that possibility, how good at they are listening for the signals about what's changing? Often those signals are loud and blaring until it's too late. How do you listen for those weak signals and amplify them without distorting them? 

Thirdly, then we get into its ability to look at and develop alternative scenarios. I went through this during the Great Recession, I dealt with a number of companies, including my own, who said, we don't know what will happen afterward. So, we can't plan for it. So, we'll keep doing what we're doing until we really know. If you walk through that logic game, what that says is, there are multiple scenarios, and we're not sure which scenario will actually take place, the only thing you really know is, things won't be the same. So, the business as it was before, is the least likely scenario to ever happen. Yet, you'd be amazed at how many companies say, because we're not sure which new scenario will happen, we'll stick with what used to be, which means we will go with the one scenario which is least likely to occur. 

So, you've got the openness to change, you've got the ability to hear the signals about change, then you have the ability to think through and evaluate alternative scenarios for which you need to prepare. If you don't have those three, then you're pretty much driving down the motorway with duct tape over your windshield only looking in the rearview mirror. I find that's a pretty scary way to drive!

Dean Alborough  21:19

Very interesting, and I'd just be interested in getting your viewpoints in what response leadership in businesses should be having to these concepts and their response to view of simply not being resilient, but also moving into an adaptive capability within their business.

Scott Nadler  21:36

The most important thing leadership can do is to make it safe, initially, and secondarily, to make it mandatory to think about the possibility of change. The most powerful two words in a leadership vocabulary are the words "what if".  Leadership doesn't have to have all the answers, in fact leadership thinks it has all the answers, that's a very scary situation. 

What leadership needs, above all, is the ability to ask the right questions early enough. 

·         What if sea level rises? 

·         What if international travel doesn't come back? 

·         What if there are new pandemics? 

Asking the "what if" question is the single most important thing leaders can do. And if you know that every time you go in with a big project, leadership is going to ask you those "what if" questions, the first thing is people say what's that all about? Then they start to make sure that they have the answers on their notes when they walk in. When you really have value, is when they start to actually incorporate the "what if" thinking as they develop proposals. 

Dean Alborough  22:46

From an investor's perspective, which is a slightly different angle to an operational business, what should investors be looking for and considering when looking at businesses in terms of what are the skill sets and capabilities of a business, in terms of resilience and adaptive capacity? 

Scott Nadler  23:04

An investor's job is to try and get a sense as to how well the leader is doing their job. There are a couple of ways of doing it. One is, unfortunately, easier now than it was a year ago. Because we have just been through the first year now of this awful pandemic. Unfortunately, we've just had a wonderful stress test. And you can look at any organisation and ask how they experienced this, listen to their answers, listen to their language. That will give you an incredible insight into whether they have a developed adaptive capability, or just relying on resilience. Sure, every organisation will tell you their heroic stories of resilience and what their people did to adjust to this, to suddenly finding on two days’ notice that they were not going back to their offices. There are wonderful stories of resilience, and they're genuine, they should be appreciated, they should be valued. 

But if you ask leadership of a company how they have dealt with the last year, and where they see it going from here, if all they talk about is resilience, that should be a bright red signal flashing on and off in front of the investor, because that means they haven't become adaptive. If, on the other hand, they begin to talk about what they've learned from this that will help them going forward, how their business model has to change during this, if they talk openly about uncertainty about some of those changes. Those are all positive signs that say they're developing adaptive capability. If they in fact begin to tell you about two or three alternative scenarios that they're preparing for, that's gold. That's a company that's truly learned how to be adaptive. 

Dean Alborough  24:44

Ja, thanks, Scott. I think that's incredibly insightful but thank you for your time and your incredible insights to this. 

Scott Nadler  24:49

My pleasure, thank you, Dean. 

Episode 3

Jon Duncan  25:50

Jon Duncan  26:32

It's my great pleasure to welcome Janina Slawski, Head of Investment Consulting at Alexander Forbes. Janina's contribution to this year's publication is on the finance industry's role in regenerating our economy. One of the big persistent themes in this year's book is kind of cross-industry collaboration. 

So, Janina, speak to us about the importance of cross-stakeholder alignment on green growth themes.

Janina Slawski  26:54

Green growth in South Africa right now is just such of critical importance. If we don't get it right, we are literally not going to save South Africa. And it means everyone needs to pull together. So, whether it's business, labour, government, political parties, we have to pull together to make it successful. And it's extremely encouraging that we have seen such positive, they're working together across all those areas.

Jon Duncan  27:18

Janina, I wanted to maybe just sort of take you back a little bit around the different stakeholders across the industry. So, obviously, as an asset consultant, you guys had an important nexus in the industry.  It'd be interesting to hear, you know, what are your clients saying to you about alignment and infrastructure and green growth? What are some of the conversations you're hearing?

Janina Slawski  27:37

Very, very positive, I mean, every one of our clients would love to invest into these types of investments, provided they know that they're going to be well managed, and that they'll give good risk-adjusted returns, but also very critically, that they're liquid. So, all of this conversation about investing into 20 year projects, etc. very, very few of my clients can allocate anything of that nature to such a long dated illiquid investment. So, liquidity, very key. 

Jon Duncan  28:04

And so, speak to us a little bit about that liquidity gap. What are some of the innovations that you see coming forward that might help here?

Janina Slawski  28:11

I think the major comment we want to make is that a lot of focus has been on pension funds as a sort of the assets for infrastructure. But the size of the build is massively bigger than the percentage of assets the pension funds can allocate. So, you need to be pulling in all investors, private sector plus foundations, international investors, everyone. And a key part of the innovation is trying to find ways to leverage whatever assets can come in, to create some liquidity so that a wider base of investors can actually invest.

Jon Duncan  28:46

And so, when we speak about the infrastructure plan for South Africa, from where you're sitting, what progress are you seeing at the government level?

Janina Slawski  28:55

Amazing progress in the last two years. So, the plans not actually changed that much, but the execution of it is starting to come in line. So, a great deal of effort has gone into the SIDSSA initiative, Infrastructure South Africa, they actually get projects ready to be invested into. And the way they've done it is actually bringing in the private sector, the banks, the experts on knowing how to actually implement these types of projects. So that what we're starting to see in the pipeline are actual investment opportunities, as opposed to previously where they were potentially nowhere close for investment.

Jon Duncan  29:32

Just in terms of infrastructure investments themselves. We think about liquidity and the different sort of ways one can participate in these investments, either through debt or equity. Where do your clients sit, on the debt or equity side?

Janina Slawski  29:46

As I said, most of them would love to invest, but really struggle because of the illiquid nature. So obviously, we've had quite a lot of innovation over the years of investing, particularly into bond funds where there's some level of liquidity, for example, through listed partners, government bonds, municipalities, etc., and then some level of the liquidity. But obviously a lot of it would be short-dated debt. So, even though it's illiquid, it's still going to pay out coupons and have a short maturity less than five years. The infrastructure we're talking about is much more long-dated, 20 years essentially. So, that's the financial innovation we need right now, it has to be different to get liquidity.

Jon Duncan  30:28

I'm curious to hear your thoughts about what's going on in the renewable energy space around a lot of the private equity players exiting and potentially looking to some of these REIT structures as listing vehicles. Is that potentially a way to create liquidity as well?

Janina Slawski  30:42

Yes, definitely. Obviously, we've got interest coming through the JSE in terms of green bonds, project bonds, anything that can end up in a category where there's liquidity. But obviously, liquidity tends to be relative, because some of them don't trade hands often. But still, the fact that you're getting an independent price and the oversight of the listing is incredibly exciting, I think it will definitely extend the ability of investors to put money in. 

This is a subject I'm extremely passionate about, and everyone needs to be passionate about. If you look at everything that's gone wrong in South Africa for a while, but specifically this year with COVID-19, it's just shown how diverse we are as a society, between those who have and those who have not. And the only way you bring those two together, is to actually create jobs, creates finances through taxes, etc., to actually build up people who don't have at the moment. And the infrastructure build is exactly what can deliver that, nothing else we've seen has the ability to turn South Africa around the corner.

Jon Duncan  31:43

And there's a bunch of that infrastructure, which, depending on how it's orientated, it has also the ability to solve some of our longer-term climate systemic risk as well. And so, the infrastructure choices in terms of old economy versus potential new economy, those are some interesting ones that are gonna have to be made over the next three and five years.

Janina Slawski  32:04

And one of the points I wanted to make in the article was about attracting international finance, we don't have enough assets in South Africa to pay for all of this infrastructure. But there are obviously international investors who want to make an impact. So, they are looking for investments like these. But obviously, you also have companies that are trying to do carbon offsets. 

So, if we can make this infrastructure build as attractive as we can, we potentially attract investors who want to help us convert to green energy, because it's good for us, but it's also good for them. That's incredibly exciting. But obviously, we're in a queue with many other countries right now, we have to be more attractive as an investment destination, if we're going to attract that type of finance.

Jon Duncan  32:48

One last maybe just personal anecdote if you wanted to add on to the end, what are you personally looking forward to in 2021?

Janina Slawski  32:56

Well, I have to carry on with the subject I'm passionate about: execution, execution, execution in terms of infrastructure. I just... my heart goes out every time I see poor people starving and not getting housed in the midst of COVID. We can make a difference as investors; we can actually make a difference to their lives. So, I'm hoping to see that 2021 brings not just green shoots, but massive shrubs starting to grow. We've really got to make a difference.

Jon Duncan  33:24

Oh, that's fantastic. Thank you so much, really appreciate it, Janina.

Episode 4

Jon Duncan  35:19

Brenton Lalu from the PIC, welcome, I really appreciate you contributing to our publication this year. Topics in this year's publication cover a really broad spectrum and your one around future-fitting portfolios towards a green economy and long-term system resilience really caught my attention. So, thank you.

Brenton Lalu  35:37

Thank you, Jon. And thank you, Old Mutual, for the opportunity, it's much appreciated.

Jon Duncan  35:42

I want to get into what you spoke about. And one of the key ideas is this issue of motivation. It'd be really interesting to hear you speak a little bit about, you know, why you decided to write the topic and your ideas around motivation being an important driver of how people allocate capital to the green economy.

Brenton Lalu  35:58

I believe investors' motivation will determine and define the nature of focus on green investments that are made. I think, at the core, your motivation for allocating capital to green economy will shape and have influence on your long-term investment philosophy. It's the beginning and arguably the foundation. Green investing, yes, is a long-term game. And the more robust your motivation to do so, the stronger your investment philosophy is to incorporate it, the stronger your process will enable it. 

Also, I think we must be cognizant that there are different motivations for different clean investors, because this will shape the definition and understanding of what a green investment is. Motivations, though, aren't exactly mutually exclusive. So, there is a bit of overlap whether you're looking at financial considerations, reputational, social, etc. 

I think you may also have monetary requirements. So, fiduciary duties to do so. I know the Pension Fund Act relation 28 has broadened its objectives beyond the financial considerations that it looks at. It considers also long-term, sustainable performance within that. We're seeing also a lot more investors embracing green economy and ESG principles in general. I think largely this is due to some regulated push, societal demand, people are demanding it and it developed need. 

Jon Duncan  37:24

Let's talk a little bit about what a future-fit portfolio looks like to you. You know, from a multi-decade old green economy, you know, how does that look and feel to you across asset classes, jurisdictions, green economy frameworks?

Brenton Lalu  37:36

I think cultivating a future-fit portfolio that is well prepared to address either developmental, environmental, social challenges of this century look to be quite a formidable and challenging task. I think we live in a world that demands new and innovative approaches to facilitate sustainable and inclusive growth. On top of this, these also need to be aligned to the UN SDGs and Agenda 2063, in the Africa case, and different national objectives or national plans.

I think mobilizing such development will require not a singular approach but more of a multi-stakeholder approach, where investments that are identified deliver both financial and probably more important social returns at the moment, while enabling a strong resilience to contend with the mounting exogenous factors. Probably, I think, truly future-fitted portfolios need investors throughout the value chain need to be congruent of navigating diverse and volatile, so ever changing investment environments, through building resilience, protecting against the short-term shocks, and taking advantage and benefiting from sector trends. And on top of that, building diversification and incorporating ESG principles in their philosophy, in their process, while we're also delivering social and financial mandate.

Jon Duncan  39:04

The next question is really around the steps for a trustee. If you have to think about what would you do over the course of a year, you know, what's the steps to building a resilient portfolio?

Brenton Lalu  39:13

I think global volatility in the market, I think, intensifies the need for this type of structured approach to build a portfolio resilience. Obviously, again, it's not a one fit all approach, but I think building a long-term resilience requires a deep understanding of your risk and return factors. I think future fitting a portfolio towards a better resilience should not be reactive, we should rather be proactive, try develop an understanding of how assets may react to volatility, essentially, how to manage liquidity, which is a key constraint, especially in the African market. 

We also got to think about how assets will add to diversification while still focusing on your overall objectives, different asset classes, so, if you look at alternatives, they also deliver real economy resiliency benefits. So, what I mean by this is contributing to develop an economy, your operating can reduce the chances of the volatility in it, enabling this long-term system resilience. While I think estimating potential price and benefits are probably not clear cut through building a resilient portfolio, I think valuation models typically today, consider either market or financial metrics, and allows us to derive a true asset price. 

However, I think resilience requires a deep understanding of the complete ecosystem, which asset operates in. So, a deep understanding of systematics and the reaction to uncertainty, inclusive of the political drivers and the economic drivers, especially today. In today's climate, we need the ability to anticipate black swan events, and other unforeseen circumstances. Though, I think investors need to understand the nature of safe haven and common guarantee assets that probably have important characteristics to improve the resilience of portfolio. 

Similarly, I think investors make use of prediction mechanisms. So, what I mean by that is, we look a lot at investment taking out investment insurance, especially when you invest in a more risky environment. They take out hedging positions in this anticipation for a higher level of risk. I think each mechanism will most likely come with a premium. And that will impact your financial gains that you expect. But I think the benefits of these mechanisms may outweigh the costs involved over the long term. 

Jon Duncan  41:47

A really succinct system's view on the whole thing, people that are in the long-term risk management game need to understand this stuff.

Brenton Lalu  41:55

It's definitely harder done than said, but the overall understanding of resilience, I think, change is ever present, it's never going to go away. So, the complete understanding of what influences a particular asset, or what influences the environment around where that asset operates in, I think is more important now than ever before, arguably, especially what's happening around the pandemic.

I feel that we have economic political drivers, the general ecosystem drivers, but black swan events like the pandemic makes it a bit tougher for investors to be confident in evaluations, and what they actually put out there. So, I think it's more important now to realise those mechanisms than ever before.

Jon Duncan  42:43

Ja, I've been reading a bit of stuff on the efficient frontier, but the risk return matrix, but adding a third leg to it, it's having an impact leg. So, risk return impact more of a curved, efficient frontier, you know, as the metrics are on impact get clearer, I think, you know, triangulating the best point on that risk curve is going to become a lot more doable.

Brenton Lalu  43:06

Last chapters into the Africa impact report, in Argentina, a lot of the discussions was around this third dimension of impact, and how do you fit in to that efficient frontier. So, yeah, I think it's a really topical idea at the moment, also with that there's a massive measurement gap that's coming in now. I mean, with this paper, this article, as well, I think I've discussed a little bit about how to evaluate the impact through portfolio. 

A lot of discussion around the world in the impact space has been around standardizing, measuring, and attaining quantifiable results across different portfolios. And how do we actually future-fit portfolio to align, develop means a society congruent of the risk associated, while still striving to have a meaningful impact on the real economy, which is a real buoyant, topical question now.

Jon Duncan  43:59

So, what are you looking forward to in 2021?

Brenton Lalu  44:02

As with probably many others, I'm looking forward to seeing the back of 2020. I think it's been a really tough year for us all. Hopefully, we get some sense of normalcy in 2021, whatever that may look like. But I think also the market needs it as well. We need those investment flows back, it started to recover. But more is needed and arguably quicker. 

Personally, I think the development agenda of South Africa and the rest of African continent is going to be front of mind throughout. There's a couple of studies, which show that there's additional stats that estimate about 15 million more people on the continent is put into poverty. I think more than ever, it's really needed that we have a succinct approach to investing with a shared approach or mandate.

Jon Duncan  44:50

Well, Brenton, thanks so much.

Brenton Lalu  44:52

Thank you, Jon. And Old Mutual for affording me this opportunity, much appreciated. Really great opportunity for me to share my ideas on this platform.

Episode 5

Dean Alborough  46:52

Hi, I'm Dean Alborough. I currently head up the Environmental and Social Governance Function at Old Mutual Alternative Investments, for which I'm responsible for ensuring the implementation of Old Mutual Alternative Investments' ESG practices, including impact investing activities throughout the investment lifecycle, and managing the environmental social governance systems and performance of these assets across the group. 

My article for the Tomorrow publication 2020 is titled "Protecting your Impact through Climate Resilience and Adaptation". This is particularly poignant at this time, where the investment universe, we're very interested in impact investing and generating positive impact, but at the same time, we are feeling global and macro trends of risk and having to manage our investments through these times. 

2019 saw the Inter-governmental panel on climate change, the IPCC, publish this special report on global warming of 1.5 degrees. And the report is based on around 6,000 peer-reviewed publications, most of these published in the last few years. It confirms that climate change is already affecting people, ecosystems, and livelihoods. According to the IPCC, limiting warming to 1.5 degrees is possible. But it would require an unprecedented transition in all aspects of society. And overall, the report shows that there are clear benefits to keeping warming to 1.5 degrees, rather than the previously thought safe limit of two degrees. 

And so really, this background context is telling us that we are already on a path of significant climate change. And what are the risks to our investments, especially if we are wanting to derive positive impacts out of those investments and meet our impact investing thesis? And what does this specifically mean for Africa as a continent? And how does Africa find its place in this area of risk? Parts of Africa are said to incur some of the most severe negative impacts from climate change, including reduced crop production, spread of disease, water resource scarcity, drought, heat waves, livestock fatality, and rising temperatures and extreme weather events such as flooding. From Africa's perspective, we are certainly at crisis point. With this climate change context in mind, most African countries also need to develop, and many populations already vulnerable. An estimated additional annual financing of up to $1.2 trillion is needed to meet the United Nations Sustainable Development Goals' targets by 2030. 

So, looking at the context of climate change risk, as well as trying to derive positive impact, how does one balance financing the development of emerging markets, as found in Africa, while addressing climate change risk? One way of doing this is to adopt a resilience and adaptation lens to the investment thesis of impact investing. Alternative investments like economic and social infrastructure, which include renewable energy, education, and affordable housing, have fast become recognised as a critical asset class to achieve a direct positive impact. Unlike the listed markets, especially passive investing vehicles, alternative investments allow direct access to and influence over the investment. This direct influence becomes critical when considering the need to ensure both a positive impact coming to fruition and its resilience to external forces such as climate change, and the recently experienced COVID-19 pandemic. 

To ensure that intended positive impacts come to pass, a business's resilience and adaptive capability are critical factors. Resilience is the ability to withstand the disruptive events. While adaptation is a capability of the business to be flexible and to change as the external forces come to bear on the business. This ability of adaptation resulting ultimately in resilience is key when looking at the investment thesis of the positive impact that you are wanting to have. The task force on climate related financial disclosures, or TCFD, is a useful framework for businesses to identify climate related risks and building governance processes to better understand and manage those risks. A strong TCFD implementation in a business will help protect intended positive impacts. Businesses need to identify the risks faced by the business and then build in adaptive capability with specific stresses so that the business can be resilient in the long term. 

One of the challenges encountered when working through and implementing the TCFD framework is that it becomes clear that robust data sets on climate risks are essential to assist decision makers. The TCFD framework encourages the use of scenarios to forecast potential climate related risks. This means that the geographically relevant climate stressor data sets need to be sourced to provide an acceptable level of certainty for decision makers when considering these scenarios and taking appropriate actions to improve adaptive capability and overall resilience. 

An example may be the forecast extreme heat of a certain location, the probability of which could swing between mild to severe extreme heat, building out these scenarios, and tracking where the location currently is on these forecasts, will help decision makers make a more informed decision on building in that adaptability of the business. 

Old Mutual Alternative Investments is currently piloting three open source datasets in order to evaluate their efficacy in providing robust climate risk data for scenario planning, when investing to generate positive impact gains, while also needing to future proof the investment against external forces. Using a resilience and adaptation lens can help protect the investment thesis. Alternative investments not only allow for a targeted positive impact but provide the lever of much greater direct influence at the company level to assess future climate risks, establish scenario planning, and improve adaptive capability and resilience, thereby protecting the investment's impact thesis.

Impact investing continues to grow to market share, as capital providers seek more and more positive outcomes from their investments. The current impact investing market is an estimated 715 billion US dollars. 59% of this is allocated to emerging markets, and 21% of it is allocated to sub-Saharan Africa. A key aspect when looking at these numbers is to consider the impact investing thesis behind this capital and will that thesis reach fruition.

And this article really talks about a way of using a resilience and adaptive lens against these theses to help protect the outcome that this capital is trying to create. And by being acutely aware of the climate risks that we face and the climate risks that impact investments face, one can better protect the investment thesis behind this capital and future capital to flow into emerging markets to generate positive impact. 

In conclusion, given the climate change that we are already experiencing and the risks we will face in the future, alternative investments provide an asset class which gives direct engagement to the portfolio company, enabling an investor to use an adaptive and resilience lens to help protect the investment thesis and is specifically the positive impact investment thesis. Thank you for listening.

Episode 6

Jon Duncan  56:44

It's a great pleasure to welcome Monique Mathys-Graaff onto this conversation. Monique, thanks so much for your contribution, really enjoyed it, look forward to sort of discussing with you now your piece entitled "Justice, Not Justification". 

So, it'd be useful just to get a high level fly through from you in terms of the piece itself. And then it'd be nice to hear you expand on your ideas around why social justice is such an important dimension of the green economy transition.

Monique Mathys-Graaff  57:13

Thank you so much, Jon, it's been a delight to participate in your publication. Especially I think it's so timeous, the title "Tomorrow" overall, as we are all considering what our tomorrow's look like. Having recently myself transitioned into a new country, having left South Africa, it's been interesting to witness how the world's perspective on justice and justification has erupted, as uncertainty and turmoil has captured various sectors of our society, of economies, and certainly of the pension fund industry. 

What I was trying to capture in this article, understanding how we think about how we measure our impact on the planet can never be done in isolation of what that means on the people experiencing the benefit. And given the massive inequalities that we face today still, particularly in South Africa with the highest Gini coefficient in the world, is that we should just be really cautious about only focusing on one element without taking into account the offsets on the other side balancing the scales.

Jon Duncan  58:29

Ja, I mean, the issues of social justice are so central to green economic growth story, and it's an important reminder, your particular piece. One of the things that's been very consistent in this year's publication is this recognition that we are moving from a world of what was previously in the investment industry, just balancing risk and return. And now, it's much more of a three-legged part risk return and impact. And so, I'm keen to pick your brains and get a few thoughts from you around how do we go about managing this balancing act of risk return and impact?

Monique Mathys-Graaff  59:03

Yes, indeed, there's nothing like seeing a headline as South Africa experienced this year of, you know, quote, unquote, the GDP basically halving to apply the mind that we've got to do things differently and that it affects all of our back pockets at the end of the day. We need to elevate impact to the same authority, understanding decision making ability as risk return has, you know, overall decisions pertaining to money, whether you are government, whether you are a pension fund trustee, you're an asset manager, whether you are corporate, or whether you are an individual or consumer, that any financial decision we make about how we use our money, no longer can be done through a binary lens of what is it going to cost me and what do I get from it? But it only enhances our ability to preserve the long-term wealth as stewards of that capital when we take an impact lens. 

And what COVID has done in accelerating, is to force us to apply our minds today, in how do we bring and mainstream faster this alignment of bringing impact into an equal consideration alongside return and risk. And some specific data points to support that maybe, to answer that it's not just me postulating in my head, in my little corner of self-righteousness, is that there's been a few publications pointing to that the risk surveyed asset managers specifically, that shows this cry. And it's not just in the asset management industry. It's also into the broader capital markets, fear of central bank, I won't bore you with the stats and the numbers. But, you know, I do make mention of it in the report. 

But sovereign and pension funds are struggling to formally measure their non-financial impact. The fact that 63% of them recognise it's something that they need to do and they're wanting to do better, is substantial. And similarly, that there's recognition that they are keen, therefore, 65% to them to develop the necessary capabilities. And central banks are also admitting and recognizing in how they are allocating deploying their capital, that they need to be more thoughtful about how they are incorporating sustainability considerations, even in their mandates. Practically and specifically, how that translates into the asset management industry, is how we see the construct of that. 

I would suggest in how we internalize it in our day-to-day operations, because there are things we can do today to ensure that impact and therefore considerations of social injustice of the environment, of how we see the long-term wellbeing of society taken into account. And that is in our very decision making, a trust level at board level, at investment committee level, within asset management, where are we using internal capabilities? Where are we using external capabilities? And where are the decision points lying to be able to be more flexible of incorporating sustainability considerations all along the value chain of the governance?

Jon Duncan  1:02:19

Ja, I mean, you speak so clearly to this idea of lots of different actors across the ecosystem needing to align on a sort of shared set of beliefs around what is it we're trying to solve. And so, it'd be good to hear from you what kind of change or what kind of new roles should these various actors be taking on, as we think towards fixing the long-term social, environmental, and market resilience?

Monique Mathys-Graaff  1:02:45

To quote Jean Monnet, a personal political economist, "nothing is made possible without man, but nothing is made lasting without institutions". We need to look at the institutional governance agreements that exist to ensure that we are consistently stewarding our capital with a lens of long-term justice, and not just responding to the latest justification by the loudest voice on Twitter, or in the room, or that's at the table. Because let's be honest, there's not always the right person at the table at the right time with the loudest voice. 

I'm quite encouraged to see the movement at a global level, and where you have corporate disclosure level. So, how companies report in their annual reports, both their financial and their non-financial performance, the National Integrated Reporting Council has announced they will be working with SASB. And importantly, a step to say we need greater clarity, it's an institutional step forward, recognizing that this aggregation of not having the right voice around the table in a structured way, is detrimental to the end cause of long-term justice. 

The next step of those institutional arrangements is for the sustainability organisations and institutions to have clarity on what is the best framing of how that should happen to get them an appropriate seat around the table with the IFRS Foundation, you would also have seen that we now moving into the mainstream accounting fraternity, the international financial organisation. I don't want to get into their acronyms, it's not important, but it's the principle of what it represents, is making an open call to say should we be considering a sustainability board as well as what they have currently, which is around being an independent public interest voice that accountability has the appropriate stewardship and governance around it. And that call is gathering momentum, and the IRC and the SASB process is institutionally looking at engaging institutionally with the accounting fraternity. These are the right moves. 

Similarly, we've seen at a global level, a discussion with the likes of the World Economic Forum, engaging and participating in discussions at G7 level, to ensure that the agenda pertaining to how we think about regulation for sustainability long term doesn't only land in the institutional discussions around an accounting fraternity or a sustainability grouping of professionals. So, we can see increasingly that the regulation, the policy, is pointing to improved ESG policies, the need for greater measurement of that. That needs to be an institutional arrangement, because at the moment, the weight of that lies on individual asset managers, um, individual interactions between an asset manager, pension fund trustees, asset consultants bilaterally. And the challenge with that is none of them hold the lens, the perspective of what a long-term collective vision is. We've kind of left the responsibility of preserving the long-term wellbeing of society and the planet to individual sustainability professionals in organisations banging on the table. 

And if we're going to shift the system, we need to ensure that these institutional governance level agreements have firmer seating decision making power today, and that is in the hands of any institution, any mandate discussion, any trustee, to do more deliberately and specifically. And there are significant amount of guidelines of examples today, that allows you to make this decision, so that our tomorrow, where we know when we can see where the global institutional arrangements are heading, allows you to be ahead of the curve, allows us to ensure that we can give higher confidence that when instances like COVID, like massive social unrest due to social equality raises up. 

We have the capabilities in our boardrooms, in our trustee, in our mandates, in institutional agreements, to provide the flexibilities for the right decision making timeously to address those overarching concerns and bring the long-term justice.

Jon Duncan  1:07:10

It's interesting to see how this is playing out in South Africa, there's green economy taxonomy work that's underway through National Treasury, there's increasing amount of discussion in and across the asset management industry. Batseta's just released a really nice responsible investment and ownership guideline document that's available for trustees. And so, I think, that this moment does present us with a really important opportunity. 

Monique, thanks so much for those thoughts. Maybe just one concluding question, what do you personally looking forward to in 2021?

Monique Mathys-Graaff  1:07:43

Ja, that was probably the hardest question that you posed, Jon. And I think importantly, I'm looking forward to seeing everybody take a breather, regroup, and reassert what your core purpose is in this space and time. I think everybody's running on empty, our resources have been depleted. 

When we're feeling battle weary, we have a choice to step out of the battle completely, or we can rest, regroup, re-strategise for the battle that lies ahead. Be wiser in where we exert our time, which battles we pick, and make sure that we have the right support structures working together, where we see there is ground being gained, instead of trying to hold our own porch and fighting a fight that exhausts us. 

So, thank you, again, Jon, really been good to participate in the publication. Wish you well. 

Episode 7 

Jon Duncan  1:10:26

Hi, there, my name is Jon Duncan, I head up the responsible investment team at Old Mutual Investment Group. I've been in this role for the last decade. My contribution to this year's edition explores how impact metrics can be used in the South African listed equity market. 

One of the founding principles of responsible investment is the recognition of the interconnected nature of the social, biophysical and the market's ecosystem. As a field of practice, responsible investing recognises the importance of pursuing market returns in a manner that builds long-term ecosystem resilience. While logical and is construct, this message has historically been trumped by the short-term returns focus of the market and the theory of shareholder primacy. 

The COVID-19 pandemic has amplified the sensitivity of the financial system to exogenous markets system shocks, and this has focused attention on the relevance of unpriced externalities, like climate change, inequality, and healthcare. As we seek to build our economies back better after this economic and biophysical and social shock, is perhaps an opportune moment for us to think about the best way investors in the listed market can drive impact. 

My article explores the potential for the listed markets in South Africa to play a significant role in impact investing. We are in a world where the old paradigm of risk and return is no longer sufficient, and we are rapidly moving into a more context based space of investing which requires us to understand both risk return and impact. Given the scale of assets and the list of equity markets, it's important for us to start understanding the right way to dimension that kind of impact. The listed markets in South Africa primarily comprise companies who produce their revenue from goods and services that are arguably not 100% aligned with the green economy outcomes. As a consequence of this, a lot of impact metrics that are used in the listed markets are, in effect, measuring a decline in harmful outcomes relative to, for example, a benchmark. 

So, if, for example, we explore two potential benchmarks that could be used for the listed markets. In my piece, I referenced a broad based black economic empowerment transformation using the BEE impact metrics as reported by listed companies. We made use of this metric to compile a portfolio level net transformation score and compared that for a portfolio relative to the capped SWIX. And the delta, the change between the two, is our proxy measure of impact. Similarly, when one looks to another potential metric that could be used for impact purposes in the listed market. 

The example provided in our article is that of a carbon intensity metric. In this particular instance, we use a weighted average carbon intensity metric referenced against the capped SWIX. In this particular example, we showed the decline of the carbon intensity of a fund relative to the capped SWIX and that net decline is the deemed impact associated with the fund. For investors in the listed market, a critical decision regarding impact metrics, is deciding what type of impact they seek. Are investors looking for a reduction of a negative risk, or an enhancement of a positive contribution om outcome? A positive contribution could be, for example, the net new number of kilowatt hours produced from renewable energy, as an example, or a reduction of a negative risk could be the decline in the weighted average carbon intensity of a company or of a fund relative to the capped SWIX. Both instances, these metrics would require reporting against a specific target and/or benchmark, if there was going to be some measure of change. 

The climate example is perhaps interesting for South Africa. Globally, what we see is the EU has recently defined Paris-aligned climate targets for funds to be sold in the EU. For a fund to be considered aligned with a 1.5 degree outcome, the fund should have a 50% carbon intensity reduction versus the parent benchmark. It should exclude coal and all primary producers of fossil fuels and the net carbon intensity should decline on average 7% a year. So, while this benchmark's relevant for investors in the European market, it may not necessarily be relevant for South Africa, where issues of national policy, energy mix, and all the just transition ambitions would need to be considered. But notwithstanding that fact, it's perhaps an opportune moment for investors in the South African economy to think about what the carbon intensity decline should look like in order for our economic growth to be aligned with the 1.5 or 2 degree Paris climate targets. 

It is worthwhile thinking about... although listed equity impact metrics are not yet perfect, there's tremendous scope for their application in the domestic market. In particular, to help asset owners guide the way their capital decisions have an impact on both societal and environmental outcomes. Given what's at stake, it's not how it makes good business sense for asset owners, consultants, managers, regulators, and issuers to work collaboratively on solving for listed equity impact reporting standards. Industry alignment on impact outcomes has the potential to create a virtuous circle that connects the responsible investing practices of asset managers and asset owners with the aspirations of South African savers, and the long-term sustainability strategies of listed companies.

Old Mutual  1:16:04

Thank you for listening to Old Mutual Investment Group's series of podcasts, which form part of our Tomorrow publication. 

To read our latest Tomorrow publication, and to listen to our other podcasts, go to oldmutualinvest.com, and join with us as we collectively work towards addressing these long-term issues.