Planting seeds for the future

There is a recognition that we need businesses and investors to play their part in tackling some of the challenges we face. But all investors are just interested in a quick buck right? Wrong.

Increasingly there is a recognition that we need businesses and their investors to play their part in tackling some of the challenges we face, such as climate change. But all investors are just interested in a quick buck right? Wrong.

Ben Yeoh is senior portfolio manager at Royal Bank of Canada Global Asset Management, managing global equities as an investment manager. He is a leading proponent of ESG – or ‘sustainable investing’. We spoke to Ben to find out more.

Watch: Ben Yeoh gives his three reflections on the future of water


Ofwat: Hi Ben. Thanks for joining us. What is ESG – and are investors interests changing?

Ben: So ESG stands for environmental social and governance factors. Investors are interested in the so-called extra financial factors which are some of the material factors which drive businesses and organisations over the long term.

I think there’s always been an understanding amongst investors that these extra financial factors are important. But I think there is being extra scrutiny over these over the last few years. Furthermore I think investors in companies are somewhat reflecting society and stakeholders – and where we can see elements in society and stakeholders paying more attention to these kind of elements and scrutiny, that’s also going along the chain. Such that investors and companies themselves are also paying more attention to these details.

Ofwat: The three shared vision themes are excellence, value and stewardship. Do they resonate with you and the investor community more generally?

Ben: In thinking about the vision – excellence, value, stewardship – excellence almost goes without saying that we’re looking for things to be excellent. And value, I think in any organisation you’re looking to serve your stakeholders and customers and give you value. Whether that’s value in terms of value for money or value in terms of services. So they seem somewhat obvious to our industry.

The one I’d like to pick up on is stewardship. Because actually there’s been a lot of debate amongst investors and owners of assets as to what it means to be stewards for the long term. And essentially almost all investment managers and even large organisations, so-called asset owners, are stewards of other people’s money and other people’s capital.

I’m investing on behalf of the man on the street, of your pension fund or an organisation’s pension fund. And we’re reflecting the long term aspirations of that group. Now they want to obviously meet financial ends and means for retirement. That’s an obviously really big part of what we want to do. But a lot of them also want their assets stewarded for the long term. And for them, for some of them, that is: we want that money invested in a way that also encompasses notions of stewardship of companies, of companies, organizations and systems, being better in 5, 10, 20, 30 year time frames which aligns actually with a lot of people’s pension liabilities and where they would think.

So I think stewardship is going to be an increasingly important part of the investment management industry. There is maybe some debate that perhaps in previous years or decades investment managers perhaps didn’t pay enough attention to stewardship for the long term. And again that is coming under scrutiny, that actually stewardship is going to be a really important element. Because who doesn’t want to live in a better world, have things better for them in five, 10 or 20 years down the line?

Ofwat: So one of the new ideas about public value is generating a lot of interest. What does this mean to you as an investor?

Ben: Well, in terms of public value I think there again is this debate around how organisations produce wealth. And when I say wealth and value I mean kind of all types of wealth and value of which financial element is one kind. But it’s perhaps not the only kind. And in part of this debate we kind of think that well maybe profit or cashflow over the long term is almost a side effect or one benefit of doing other things really well. This is where you have notions of purpose or notions of stewardship, these type of things. That is something as an investment manager, I’m very much interested in. So when organisations, or systems, or parts of what we are doing that are providing strong amounts of public value – and that intersects with all of these other stakeholders – it’s very likely that if you’re doing those type of things you’re also providing other types of maybe private value or other stakeholder value. So I think it is very important to: (a) keep the system very healthy but (b) to sort of acknowledge that if you’re doing very great things amongst your various stakeholders, you’re probably producing value across that whole stakeholder chain.

Ofwat: Do companies need to focus on more than just a return for shareholders?

Ben: So when we talk about a return for shareholders, I guess people typically think about stock or share price. And maybe they think about stock or share price over the next few months or maybe a year or two. How we like to think about it, and how I think a lot of investment managers who are interested in stewardship for the long term are thinking about it, is what happens to the stock price or share price over the long term or more importantly what happens to the value creation within that company over the long term.

And a lot of people kind of think ‘Can we disentangle stock price and wealth creation in terms of purely financial terms vs. all of these other kind of stakeholders or notions of wealth?’. This is your environmental capital, how you treat your environment. It’s how you treat your employees. It’s how you treat your customers. Your relationship with your regulators. Where you are in the community. All of those other stakeholders have value as well.

And I think where we are is that we see that for the vast majority that if you’re adding value to those other stakeholders, the so-called extra financial assets or environmental social governance factors or things like that, you’re actually adding long term value also to where the share price would be. So I actually think that maybe there isn’t such a large disconnect from actually serving the stakeholder and wider society. I guess the phrase is you can profit by doing good as well.

You can see this maybe if you think about one or two of those stakeholders, like your employee base or your customer base. If you ding your customer too much – you know, cut customer service or you cut employee benefits or staff and salaries – cash flow or profit in the near-term, as judged by money coming in the door that next month, kind of goes up. Cut everyone’s salaries 20 percent while your numbers went up 20 percent.

But we all know, everyone from businesses to the person in the street, you’ve destroyed longer term value. Because all your best people will leave you over the coming months. You can’t up and leave that week right? Life doesn’t work like that and you’ll find it very, very hard to ever recruit those people again. Your reputation will be damaged. You would have damaged not only your people asset but your long term share price as well. So I think a lot of these are intertwined and I think if you serve a lot of these other stakeholder groups very well, you will also be serving your shareholder group well.

Ofwat: What are the biggest challenges for the water sector – and what is your response to those challenges?

Ben: I have a couple of thoughts on the challenges of the water sector.

Part of it is this tension that we see in all human walks of life: between the short term and the long term. A lot of the systems around water is based on having long term water security, clean water, elements of that. But that plays out slowly over decades and it tends to be in a time frame which humanity in general isn’t that well suited to thinking about. And we have a lot of short term pressures in terms of money and costs and an ideas about that. And it requires a lot of long term investing to get excellence, to get good stewardship….but it plays out over decades. And I think that’s what a key challenge is for people or all stakeholders to understand that if we want to long term outcome. It might take some of that investment now and actually that investment might be higher than it’s ever needed to be done before. Because our challenges are more complex and are more pressing than has ever needed to be done before.

I think another challenge on the stewardship. And this is what economists would call kind of externalities or pricing things that everyone shares. There’s a kind of phrase for it: the tragedy of the commons. And it’s how you get things like overfishing. But the idea here is that everyone shares in water. But you kind of kind of don’t see the value that you get from it necessarily when you pay your water bills and things like that. And that is a difficult element for humans or all organisations to understand because we have something which is shared and we need to do a shared investment for. But you don’t necessarily see direct benefits. And I think that is a problem for something systemic wide like water and like for other aspects that we’ve seen in society today.

Ofwat: Finally, what does the sector need to deliver for all stakeholders?

Ben: So in thinking about what the sector needs to deliver for all stakeholders, I do think it needs a long term vision and I think it needs commitment from those influential stakeholders that they will commit resources. Some of it will be in money but some of it is in time and people in order to make that long term vision come true. And I think people need to concentrate on the fact that this will play out over decades. And I have a little saying, I think I picked it up from Warren Buffett, saying that we sit under trees today because someone planted a seed many generations ago. And I think with elements like water that’s what we have to understand is that we’re handing it on generationally. And that will take some investment from us today and our children and our children’s children will see it come to fruition.

Ofwat: Thank you Ben.

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