Dr. Raj Thamotheram is Founder & Chair of Preventable Surprises, a ‘think-do’ tank focused on how investors can better manage systemic risks. He co-founded the Nuclear Freeze Campaign and Saferworld and worked in the development sector at ActionAid and the Ethical Trading Initiative. He worked for 12 years as the head of ESG investing. He is a well-recognised pioneer in the field of long-term and responsible/sustainable investing. He writes regularly (including a monthly column for IPE, "Long Term Matters") and lectures widely.

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The article is co-authored by Howard Covington, senior advisor of Preventable Surprises. He is the chair of the Alan Turing Institute in London, the UK’s national institute for data science. He is also the chair of the Isaac Newton Institute for Mathematical Sciences at Cambridge University, the UK’s national research institute for mathematical sciences. He is a fellow of the British Institute of Physics. Howard graduated from Cambridge University with a double first in natural sciences and a distinction in postgraduate mathematics. He had a career in financial services as a director of SG Warburg, European chief executive of US investment bank Wasserstein Perella, and co-founder and chief executive of London-listed New Star Asset Management. He is a trustee of the Science Museum in London and chairman of its Science Advisory Board. He is vice-chair of ClientEarth, Europe’s leading environmental law NGO.


The tale below is conjectural. It is impossible to know how today’s CIOs will look back on their actions in the 2010s. But, we still have time to avert the worst of runaway climate change. And finance is as close to the ‘cavalry’ as we have – better than unproven technology to sequester carbon or stop warming. 

For this to happen, however, investment leaders need to get personally engaged and put aside their PR about all the good stuff they are doing – divestment, green bonds, portfolio decarbonisation/integration and impact investing. 

These strategies have some positive features but not all strategies are created equal in terms of triggering the capital allocation that is needed and in time. Christiana Figures, executive secretary of the UN framework on climate change, says we have till 2020 to bend the curve of greenhouse gas emissions. Some strategies send political signals (eg divestment). Some align portfolios with moral values – best in class funds or divestment. Some deliver alpha (green funds) or smart beta (portfolio decarbonisation). 

But forceful stewardship will work best to trigger a rapid energy decarbonisation. Paradoxically, it is also the strategy that CEOs, ESG heads and even clients are least likely to support. Roger Urwin, global head of investment content at Willis Towers Watson, estimates that the total expenditure of leading asset management firms on stewardship and engagement is less than 1% of total costs. The allocation to forceful stewardship – as opposed to ‘tummy tickling’ engagement – taking the sector as a whole is near to 0%.


How has this state of affairs developed? Partly it is because of the absence of informed (ie, insider) critical commentary about the different strategies. But now the flood gates have been broken with a critique of climate bonds published by the 2°C Investing Initiative, provocatively entitled ‘Shooting for the moon in a hot air balloon’1

Uncomfortable as it may be, advocates of green bonds should consider this critique and adapt their strategy if they agree: climate mis-selling is intolerable. Similarly, independent academics should review the decarbonisation proposition – what is the real-world value of relative carbon footprints where the focus is on backward-looking, numerator-only data of questionable quality?  

As Ralph Thurm and Bill Baue from Reporting3.02 have explained, this numerator-only approach – the norm in the sustainability world – delivers only incremental improvement. Given the vested interests around decarbonisation, undertaking this critique will not be easy and many will ignore it, but mis-selling with good intentions is still mis-selling.

How to avoid this critical reflection becoming a fight between passionate advocates of different strategies, especially where financial interests are involved? Financial academics can play a big role. Researchers at Zurich University, Julian Kölbel and Florian Heeb, for example, are to publish a paper, ‘The Impact of Sustainable Investing’, which explores the different strategies and their theories of change. 

What they find is that impact investing, thematic funds and active ownership are the strategies that have best real-world impact. And that is what will count the most when we look back in 40 or 50 years’ time.


July 2058: a climate-change fable

Boy: I keep hearing about a global environmental crisis. What’s it all about?

Grandpa: Because we burnt fossil fuel, the world has become much warmer. We passed through 2°C back in 2050 and with 3°C now in sight, the weather has become wild, causing all sorts of disasters. Some countries are having big problems and it’s not nice for many millions.

Boy: When you were younger, did you know this would happen?

Grandpa: I suspected it might. And that’s why I did everything I could to stop it.

Boy: So what did you do?

Grandpa: I made sure I didn’t use my clients’ money to buy shares in oil companies.

Boy: I bet that showed those oil companies! The oil they extracted came down, right?

Grandpa: Not really, it went up by 1-2% a year. The amount of oil produced depended on the demand and that just kept on growing

Boy: Didn’t you make it more expensive for the companies to produce oil by not buying their shares?

Grandpa: Sadly, I could never find evidence this happened. I like to think it made some difference to a handful of companies by increasing their cost of capital. But, most oil was produced by nationally owned oil companies and I couldn’t do anything about that. And technology made it cheaper to produce oil from difficult fields. 

Boy: So you achieved nothing?

Grandpa: We were one of the biggest investors of our day and we worked hard. I think we did help ensure the oil execs ended up looking self-serving and irresponsible – almost as bad as gun manufacturers – and their share prices were lower than they would have been if I and my colleagues had done nothing. In fact, oil CEOs were paid 10% less each year because of the action we took. 

Boy: Ha! I bet that hit those oil execs in their pockets! Did they starve?

Grandpa: Well, instead of being paid $20m they were paid $18m. They probably ate ok.

Boy: But grandpa, couldn’t your company have done something real? You’ve often told me how many hundreds of billions of dollars you managed, bigger than the GDP of some countries, right?

Grandpa: We were always signing letters urging someone else to do something. And we went to one international event after another to talk about why we thought climate was important. 

Boy: I still don’t understand. Why didn’t you push governments to actually reduce oil consumption? Why didn’t you act directly, as owners of power and automobile companies, to get them to appoint climate-aware leaders and transform their companies? You told me these companies lost you a lot of money. Couldn’t you have prevented that?

Grandpa: We were in business to increase value for our shareholders. And we managed huge pension funds for car manufacturers, energy utilities and oil companies so we couldn’t do anything to harm their business or upset their executives. These people sat on the boards of other companies whose pension assets we managed, and they were also trustees of other funds. 

Boy: So what you are saying is you really didn’t do very much.

Grandpa: Not at all. We developed algorithms so that nearly half our share portfolios out-performed the market each year. That was a great achievement for our clients and society. It proved that integrating climate change and other ESG factors, as they were called then, was good for investment returns. We showed that it was possible to do well by doing good. Now hurry up down to the basement and try to sleep. 

Boy: Can I invite Johnny and Roger over, so they are also safe in our enviro-shelter?

Grandpa: You know there just isn’t enough room for them and their families. These are difficult times and we cannot be emotional.


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This article was originally published on IPE’s Long-Term Matters.

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