Becoming a consequential investor
"The best way to measure your investing success is not by whether you are beating the market but by whether you have put in place a financial plan and behavioural discipline that are likely to get to where you want to go." - Benjamin Graham
Munib Madni, Founding Panvestor & CEO, Panarchy Partners
05 April 2022
“The best way to measure your investing success is not by whether you are beating the market but by whether you have put in place a financial plan and behavioural discipline that are likely to get to where you want to go.” – Benjamin Graham
One need not be a disciple of value investing or its father, Benjamin Graham, to appreciate the message here. Knowing where you want to go and how to get there defines us as investors. What is our goal and where do we want to go?
Over the December break, I took time out to revisit the writings and experiences of investing legends like Benjamin Graham, John Maynard Keynes, Irving Kahn, Warren Buffett, Bill Ruane, Peter Lynch, and co. While their investing strategies differed, their investing traits were similar, but most of all they knew where they were going with it.
These investing legends have been categorised as being Intelligent, Focused, Contrarian, Value, GARP and Philosophical Investors, to name a few. Each one of them built their skills upon the best attributes of their predecessors but always evolved their approach to decision-making, to help them get to where they wanted to go. In doing so they earned themselves the above descriptions. Now, in the same vein, we, like a few others, are evolving investing once again and know where we want to go. We aim to become Consequential Investors.
The evolution of investing
Capital allocators, young and old, have used intelligence and enterprise with a primary goal of achieving financial security. Now, they also seek impact beyond the obvious financial returns. They require consequences of their investments to be accounted for. The words of Charles de Brouckere, the 19th-century mayor of Brussels, are coming true: “The value of wealth depends on the use to which it is put.”
Consequential is the adjective that would best describe our contribution and evolution to the already existing investing approaches. I doubt we are the first, nor will we be the last to do so. We need to not only deploy our best efforts towards business intelligence, management focus, financial returns and valuation analysis, but crucially we must also carefully consider the consequences of our investments on and for ALL stakeholders. At Panarchy Partners, we call this Panvesting.
As consequential investors, we are treading new ground in many ways. Being concerned with all stakeholders, we must expand our research capabilities and frameworks to analyse companies for environmental, human and social capital as well. An MBA, finance degree or CFA no longer is the must-have training — an MSc in Environmental Science definitely is. Once the capabilities are in place, we need to deliver innovative yet practical research frameworks. As an example, in 2021 we finalised our Portfolio Environmental Mapping framework, thus allowing us to monitor the environmental consequences of each company as well as the overall portfolio.
When evolving, it is natural and essential to explore beyond one’s known frontiers. No surprise that we regularly find ourselves either all alone looking for answers or questioning the wise and well-thought-out instructions of legendary investors and celebrated portfolio theorists. Daunting as this is, as consequential investors it is our responsibility to extend their work, especially to cover human, social and environmental capital. As an example, we have augmented the traditional Capital Allocation Line with Capital Impact Line for capital allocators, who aspire to become consequential investors.
Such evolution, why now?
Our predecessors evolved their investment decision-making to adapt to the times. Since investing began, a shareholder, as an owner of a company, focused only on risks and financial returns. Now shareholders are accepting themselves as one of the many stakeholders of a company that need to be respected and compensated. This is because many of the stakeholders have a global digital voice, which was not heard before. Now it is. They now vote en masse as stakeholders. Last I checked, every listed company has more stakeholders than shareholders. As a consequential investor, it is therefore paramount that the board and management of our companies have canvassed all stakeholders’ concerns and opportunities.
Is this a fad?
Many investors, with track records that I can only dream of, see this move to a stakeholder model as transitory and/or nonsense. These same long-term investors consider themselves owners of companies with the right to mandate management to first and foremost take care of shareholders’ interests, aka shareholder primacy. But like it or not, many companies’ management themselves are now proposing KPIs that introduce other stakeholders into their mandate. As consequential investors and owners, we cannot ignore the business sense and financial impact of such new mandates. We need to understand and approve the financial implications of such management incentives.
This dramatic shift in the owner-agent relationship between investor and board/management is underestimated by many. Globally and by stealth, regulations, standards and protocols are driving this shift towards a stakeholder model of doing business. A consequential investor must not only be on the lookout for non-recurring costs/opportunities associated with human, social and environmental capital but also ensure that the management does not engage in sustainability shenanigans. For this, one needs the forensic accounting skills to identify deceptive behaviour in company sustainability reports and disclosures. This is a skill set that must become second nature to us consequential investors.
What is the concept behind a consequential investor’s decision-making?
“Margin of safety” was the central concept of investing for Benjamin Graham’s intelligent and value investor; returns based on “owner earnings” percolate through Buffett’s focused approach; “power of common knowledge” guided Peter Lynch’s growth at a reasonable price investor.
“Improving stakeholder value,” where the shareholder is also a stakeholder is the concept that runs through our investments.
Incorporating consequences or impact of a business operations on all relevant stakeholders is at the core of our decision-making. We believe that the intrinsic value of a firm that has historically been determined purely on cash flows, assets and liabilities should be adjusted for a firm’s progress on human, social and environmental capital. Some of this progress will come through in their profit and loss statements, others could become part of their balance sheet as intangibles. Many investors, including us, have started working on methods to show this enhancement to intrinsic value. We should expect accounting standards to incorporate stakeholder assets and liabilities in the coming years.
What are the returns expectations of a consequential investor?
When one is not aiming to beat the market or an index benchmark, and has a long-term approach to investing, predicting returns of one’s companies and portfolio in the short term is a fool’s errand. The best of the best investors mentioned above focused on a minimum return they expected from their companies over the longer term. Discipline and patience ensured they eventually delivered well above that hurdle.
At minimum we should expect “appropriate and equitable returns and progress,” on all forms of capital from our companies. For financial capital, returns should be greater than 7% p.a., while for human, social and environmental capital we expect progress from a baseline towards an equitable and sustainable position.
Here we should highlight that over the coming years, investors, especially consequential ones, will be sharing more globally standardised stakeholder-related return metrics. As an example, many Funds are promising Net Zero or Carbon Neutral portfolios. Other than being catchy slogans for us fund managers to post on our websites and LinkedIn, as consequential investors there will need to be accountability on the progress of these claims. For that reason, we intend to share more on stakeholder metrics in our impact report.
To end my rant for now, for intelligent investors, operations for profit relied not on optimism but on arithmetic. Similarly, as consequential investors, our operations for appropriate and equitable returns are not based on grand sustainability claims but on arithmetic and engagement-based stakeholder analysis. If Graham’s security analysis took investing from almost witchcraft to something closer to science, then we want genuine stakeholder analysis to take consequential investing from charitable allocation for the rich, to mainstream stakeholder wealth creation.
In Churchill’s words, “Now this is not the end. It is not even the beginning of the end. But it is perhaps, the end of the beginning.”
SSP Steering Committee
The SSP is supported by the Monetary Authority of Singapore (MAS) and Singapore Exchange (SGX).
About the SSP
Stewardship codes are developed to promote the responsible allocation, management and oversight of capital to create sustainable value for shareowners, beneficiaries and other stakeholders.
Stewardship codes aim to encourage investors to be effective stewards of assets entrusted in their care. The codes foster transparency, improve communication and enhance corporate governance for healthy markets.
Globally, stewardship codes have been introduced in over 20 countries, including Singapore.
The investment market has evolved since the SSP was first introduced in 2016. Investors have been called to prioritise stewardship outcomes and integrate ESG considerations into the investment process.
The Steering Committee considered these global market developments in revising the Principles. The main changes include:
- Requesting signatories, in line with their fiduciary duties, to integrate ESG criteria into their investment practices
- Encouraging signatories to adopt an outcomes-oriented approach when applying the SSP
- Recommending that signatories demonstrate how they apply stewardship in different asset classes
The SSP Steering Committee undertook research on stewardship codes in other jurisdictions and drew on best practices in drafting the Principles. An industry survey was conducted in March 2021 to garner feedback from the asset management industry on their perspectives of investment stewardship. This was followed by an open consultation to obtain stakeholders’ feedback on the draft of the updated SSP in November 2021. The enhanced SSP was officially launched in March 2022.
The SSP is not a set of prescriptive measures.
Using the Principles as an overarching framework, signatories can choose to apply the Principles or explain what they do to fulfil the aim of the Principles.
Signatories are strongly encouraged to submit evidence of their stewardship efforts annually to the Secretariat in a stewardship report supported by data and case studies.
Supporting the SSP
The SSP Steering Committee
The SSP is supported by the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX). The Principles should be read in conjunction with applicable local legislation and regulations. They are designed to complement stewardship codes that are in place in other jurisdictions and investors may wish to utilise the Principles alongside other local and international frameworks to achieve effective stewardship outcomes.
The Steering Committee was officially established on 2 November 2016. It comprises the following organisations:
• Stewardship Asia Centre
• Association of Chartered Certified Accountants
• Asia Pacific Real Assets Association
• CFA Society Singapore
• CPA Australia
• Investment Management Association of Singapore
• Institute of Singapore Chartered Accountants
• Securities Investors Association (Singapore)
• Singapore Institute of Directors
• Singapore Venture Capital & Private Equity Association