All videos in the series
Introduction to the Game Changers video series
Hear from Dr Henning Stein, alumnus and Fellow of Cambridge Judge Business School and Global Head of Thought Leadership at Invesco.
Notice: This videos is for Cambridge Business School only. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Innovation and disruption are increasingly transforming economic and financial activity at global, at national, and at firm levels and household levels. So, the macro, the geo and the national political implications are as significant as those of past industrial revolutions, which obviously themselves remoulded the world. And in this video series, we bring together thought leaders from around the globe to really shed new light on how everything is accelerating, how change is radically reshaping our planet, our lives and our investment decisions. So welcome to Invesco Game Changers.
Game Changers: How do we define the impact of ESG investing?
Hear from Barbara Rupf-Bee (Head of EMEA, Allianz Global Investors) and Cathrine de Coninck-Lopez (Head of ESG, Invesco).
Exploring the “quiet revolution” of ESG investing -which is getting louder every day.
Notice: This videos is for Cambridge Business School only. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Hey, I’m joined by Barbara Rupf Bee and Catherine de Coninck-Lopez. Both are dedicated environmentalists and both work in finance. Barbara is the Head of EMEA for Allianz Global Investors, and Catherine is Invesco’s Global Head of ESG – Environmental, Social and Governance. Catherine, turning to you first. Hi, how did you become interested in environmental issues?
When I was in high school, my biology teacher took us to a planetarium to watch a movie about the future. It was all about the catastrophic effects of climate change and I just thought, this is too real, this sounds like this could actually happen. And so, I dedicated my university to environmental sciences, learning more about the real risks and opportunities that we have ahead of us.
It’s a huge issue for the world, and we saw that recently becoming more and more pressing through COVID, for example. And Barbara, what about you?
I had the pleasure of growing up by the sea and I have a large amount of siblings and we spent a lot of time on the beach. And obviously the beach was important, but seeing it become more and more congested with plastic and all sorts of things, even in the 1980s when we grew up there, made us very concerned for the marine life. And I had wanted to get into marine biology, but quite frankly, if any of you know, to get a spot at the University of Monterey is almost like winning the lottery. So, I didn’t manage to, and went into finance. But we can still change things this way, right?
Absolutely. And Catherine, firstly, have you seen any shift in the investment world and the attitude towards environmental issues during your career? Is this the Quiet Revolution that’s getting louder? So, this term I think comes from Cambridge University and they came up with a study on the Quiet Revolution. Would you see that in the investment world?
So, I joined the industry in 2008 in ESG, and the principles for responsible investment were only coined in 2006. Two years after that, and I would say yes, at that time it probably was the Quiet Revolution, and it still seemed to be quite a niche area of the industry. But year on year, the interest has grown, so the wider industrial, personal, community and social interests, and the real physical impacts have just become so much more apparent. I think the urgency has increased and this more recent wave has been very marked. And I think it is no longer the Quiet Revolution.
Can you see regional differences in your work on ESG?
Absolutely, there are clear regional differences. We do think these are global problems, global opportunities, particularly issues like climate change, water pollution, etc. However, definitely in terms of interests and asset flows, for example, if you just think about sustainability funds, there is a marked difference between Europe, Asia and the US. Europe really leading the way.
Right. And Barbara, have you seen a shift in the investment world’s attitude, in your slightly longer career?
Yeah. Well, the burden of age in some cases as well, right? Seriously, my first real interaction with sustainable investment was in 2002. If you recall Henning, there was a smallish asset manager at the time in Geneva called Peak Day and it came up with a water fund. And there was an enormous interest and we had the industry moving into what were then called alternative or sustainability investments. Unfortunately, it didn’t last very long because it didn’t perform particularly well in many cases. Peak Day’s water fund survived, but many other investments with their roots there are no longer in existence. An early mover in the field was a competitor, RobecoSAM, known as SAM at the time. They had a greater rate of sustainable investments even back` in the early stages of ’03, ’04. I was then at HSBC, and we actually had the first CO2 certificates to launch from the investment banking arena for our clients. It was unfortunately a short-lived moment. I only feel the topic really became interesting to clients again, maybe four or five years ago. People started to shift because the whole thing is, “I don’t want to give up, I want to do good, but I don’t want to give up on performance.” And that’s still key today. I believe COVID-19 certainly had its mark here, as well as climate change, in some of the movements that we have seen all around the globe. This has shifted and it’s almost from a performance sense. If you’re not in the trade, you’re locked out of the trade.
If you look at the venture capital business at the same time you had a lot of players, and a lot of them went bust because subsidies went down. Now you see that coming back slowly, but not by far enough. Catherine, do you also see the need for education because depending on the type of client you probably see different levels of knowledge around sustainability, right?
Absolutely, the need for education is particularly high in the retail space. Individual investors knowing that it is actually an option to express their interests, values, beliefs while investing – I would say this sort of knowledge is still quite limited. Even with sophisticated investors we’re seeing a lot of interest in some of the newer issues coming to the fore, such as the TCFD climate scenarios and thought leadership on inequality. And so, we’re doing a lot at that end of the spectrum as well.
Right. And do you see it as just a task for the investment world or is this almost like it needs to start in schools? I mean, to educate kids about this stuff.
Well, absolutely. We do have a partnership in the UK with an organisation called RedSTART where we send volunteers. Starting with education in schools is increasingly recognised by governments. But I would say we still have a long way to go.
Right. And Barbara, who do you think would benefit most from education about environmental issues and ESG mentors?
Well, having worked most of the last 20 years with investors in EMEA, I actually think it’s quite far down the line. We’ve just hosted three ‘sustainability days’ that clients attend, which we also use to educate our own workforce around the globe. I think it’s a regional topic. I see from my colleagues in the Americas or Asia that their clients are at a very different stage. I have one observation which I’d like to share when it comes to ‘regional investors’. When we changed to MiFID regulation in Europe, it was quite onerous – it’s document-heavy and you have to go through lots of hoops to invest. Many clients who previously invested in several solutions might have gone the mandate way. When that happened, over two-and-a-half years ago, 80% of clients opted for an SRI version over a conventional version. I think, looking at some of the key wealth managers on the global scale, their usage of ESG is outpacing conventional investments quite rapidly now this year, but interesting to have seen the mandate version a couple of years ago. So, I believe it’s more of a regional topic. I’m quite happy with how EMEA has evolved, perhaps continental Europe being slightly ahead of the UK, certainly versus the other region. It’s also because subsidies for solar panels, subsidies for waste management and so forth, are on everybody’s minds, and even in the schools. Hence it’s less of an issue and more about the evolution of knowledge, and what more you can do. Especially in everybody’s interest right now is impact. So, what impact does my investment have on the environment, on climate change? Quite interestingly, we went and talked to kids – we had a day at school a couple of months ago when you still could – and we developed our own version of the carbon calculator. It gave them the sense of how to calculate and reduce their own carbon footprints. It was a fantastic experience to have with these children, and something we hope to carry out in other regions as well. I think we’ve come a long way. It’s more about implementation and to be able to report on the good done in a coherent fashion, so people see how they’re making an impact. You cannot just be about labels. There will have to be proof points that get clients, and hopefully also future investors, to the point that they believe in what they do. Right now, it’s a bit on a hope and a prayer, if I’m being honest, and I think we still have to work on the proof points.
Yeah. They’re almost, I guess, two sides of the story, right. One is to focus on companies and make them more ESG compliant, and the other is the big investment opportunity that’s out there. As an asset management industry, we have to look at subsidies, for example green hydrogen, which is heavily subsidised in the EU. So, Catherine, what do you think are the biggest threats to that revolution, if you will?
Just picking up on Barbara’s points around MiFID now and in the future, we will see retail advisors asking about ESG preferences. I saw some statistics, which were fairly frightening, that only 50% of financial advisors have received any kind of training on ESG. Making sure that people are educated in the advice they’re giving is a fairly big challenge that does need to be addressed. So, education is a big challenge. I think Barbara is absolutely right on also being able to articulate the impact and the outcomes. So, for example, the UK Stewardship Code has set a new bar in terms of engagement with companies and reporting against those engagements. There’s actually now a requirement tool to explain what the outcome of that engagement was. There’s a lot more for everyone to do, including the companies, to report back on what’s actually been directly changing. I would say there are lots of challenges ahead of us, but like Barbara I’m very optimistic. I’m only seeing very positive movements. I do get asked, “Has COVID meant there’s less of a focus on ESG?” And I would say it’s really quite the opposite. It’s only reinforced the need and the rise of ESG, in my opinion.
Right. Taking CO2 as an example, can you measure the collective impact of the asset management industry on this subject, or is that too complex to calculate?
Well, I think there have been attempts. But if you just think about the conversation around climate reporting right now, there are new initiatives, particularly in the financial industry. There are operational emissions scope one and two, and then there are scope three emissions, which are really the emissions of your portfolios or, in the case of banking, of your lending book. Counting mechanisms for that are really not very well understood, and so there’s now actually a new standard being devised around that. But again, it’s very early days in terms of actually setting the standards for how you should be accounting for that and aggregating meaningful comparative figures. So, I would say, yes, we should be able to, it’s something within the realm of possibility. But there are definitely data challenges and comparability challenges within that.
Right, and Barbara, despite your optimism that I share, you also see threats on the horizon?
I do. We make it too complicated for clients to sometimes access data and information that we lose. For myself, a lot about the COVID-19 momentum is that people actually had a lot of time on their hands in the home office, so they were investing much more actively than before. And also in that sense, people were educating themselves, asking what does something of this impact mean, and could climate change be on par with that? So, we’ve had very interesting discussions with clients during that time, who ‘woke up’ a little. The more institutional side also changed a bit. For example, in the Netherlands and Nordics, pension systems are only allowed to invest sustainably through an SRI approach. Very enlightening. Everywhere else, it’s a bit, you know, you go as you play. So, there’s no definition yet on what the terms are. The threats I see are we need to come to terms with how we define ESG, how we’re defining SRI in certain categories, and what is the impact? How do we measure it? All these things are kind of buzzwords these days, but they’re not intellectually recognised.
Right. And Catherine, do you think that our industry, the investment industry, is recognising this and has the will and the drive to address that going forward.
Oh look, absolutely at the forever question of nomenclature and the ESG world. I doubt it’ll ever go away, but what I would say is both in the US and the ICI in the UK, that investment association, in Europe, obviously with the new taxonomy, there have been some real attempts at defining terms in a much clearer way. And so, I do think this is an issue the industry is still grappling with, because even within those various frameworks, there are differences. But I do think it’s something the industry is trying to tackle. And I would say, in terms of how we define it, if you think about the spectrum of these various frameworks, I would say they broadly fall into the similar category for sure. But broadly they fall into kind of ESG integration, which is your core financial focus. It’s systematic, but it’s very broad. Then there are exclusions where you’re essentially trying to avoid doing harm. Then there are sustainability-focused solutions, which are more about positive outcomes, maybe more thematic funds. And then there’s impact, which is defined by the GIINs – the global impact investment network – which is around intentional targeted impact. So, I do think those four broad buckets are broadly recognised, they may have slightly different names in the different regions, but broadly it tends to fall into those four buckets.
My impression is almost like our industry is spearheading this. If you look at the outside world, people in the street, we’re still eating lots of meat, right? You have the fast food industry that’s not really changing very rapidly. But with our industry, almost everyone bought into that awareness and the willingness to change. Although I do see positive signs even outside of asset management. Here in Switzerland, veganism is on the rise, you see these restaurants coming up and I think it’s a generational question as well. Barbara, you’re also from Switzerland…
It’s interesting, even in my little part of London, on one particular high street, I see more vegan restaurants than I see anywhere else. So, this is a general movement. You see the same in the Nordics, I’d say. Less so in Germany, the Netherlands and definitely not in Italy yet. I guess vegan pasta is still a difficult thing to achieve if it’s done in the same way, so I’m not sure. But when it comes to sustainability acceptance, I do think it’s here to stay and it has a lot to do with the generational shift that we see. So, millennials, if they are considering investments, tend to be more on the green side than on the conventional side, most definitely. So, the conversations that we’re having with groups of people of that age group are very much focused on making a difference.
Right. Much more progressive than let’s say five years ago. And we saw that at the highest level of the world economic forum, where we had the young speakers and the world was listening. And in terms of the Revolution, do you think we might be too quiet about what we’re doing in our industry, that we should speak up a little bit and explain more about these advantages and changes? Maybe Catherine first…
I do think we need to be more transparent, absolutely. And I would say, certainly in our world, we have been on a journey and we are increasing our transparency. We’ve been putting out probably the most transparent Global Stewardship Report yet. Our climate change report as well, more and more focused on providing insights on various topics. So, absolutely I think it starts with us and being transparent about what we do. Greater reporting metrics for our clients, things like that.
Barbara, maybe a last few words? Yeah, to a certain degree. I think it’s not just the asset managers, I see us being on par with the investment banks and the wealth managers to be very honest. Actually, the wealth managers probably make the biggest difference because they take our products and turn them into solutions for clients who, then again, make the impact by investing. I see a shift also in investment banking product, quite frankly. And also how it’s priced, which for me is another aim at sustainability. It’s not just about what impact you make with the product, that you price it sensibly and sustainably, but the other ways of ensuring that it finds its way into portfolios. So yes, we’re making a difference. Could it be faster? Yes. I do think we need more of a lobby, certainly in parts of the world where I’m still, how should I say, a little bit down on the factor of how we’re currently moving. Let me put it that way. So, we should be lobbying much more as an industry, especially with those governments where this is not yet a key topic or not anymore, in many cases. And there is the danger of COVID-19 again. When it comes to changes in a governmental space, if you have to spend as much money as all the governments had to around the globe just to keep people safe, in order to help sustain us all, there was less money for subsidising certain movements, less money for lobbying. And that’s the worry in the back of my mind, and that’s where we could do more. And I don’t think we do enough actually, no.
Totally agree. And I think on the political level, it’s almost something we can push as well in our function, sitting around these tables to move policymakers to do more. And I feel that it’s just the beginning and there are so many more things that can be done – from us, from policymakers, and from consumers and investors. So, thank you very much both of you. It has been really insightful and I hope to see you in person soon.
I hope so Henning. Take care of yourselves and the same to you Catherine. Lovely meeting you.
Game Changers: A life of innovation and disruption
Hear from Dame Stephanie Shirley (pioneering female software entrepreneur and philanthropist).
Dame Stephanie Shirley blazed an entrepreneurial path through the dawn of the UK software market at a time when women were rarely found in positions of positions of power, particularly in technology companies.
Through the charitable foundation that she founded over a decade ago, Autistica, Dame Stephanie is now applying to the world of philanthropy the lessons that she learned as an industry pioneer building, operating and ultimately divesting a successful business.
I’m delighted to welcome as my guest today, Dame Stephanie Shirley, a genuine pioneer, who has broken the mold, both in business and in philanthropy. Dame Stephanie famously made a fortune and then gave it away again. Her achievements have earned worldwide acclaim, including being awarded the rare Order of the Companions of Honour in the U.K. and election to the National Women’s Hall of Fame in the U.S. She’s joining us to share her amazing story, to reflect on the power of, really, innovation and disruption, and to discuss her own lifelong ability to defy and redefine convention. Welcome to Invesco Game Changers.
Dame Stephanie Shirley:
Thank you for inviting me.
Dame Stephanie, many thanks for joining us. Before we start, I have to tell you that your autobiography really moved me to tears. Like you, I’m German, Jewish, a child of the Ruhrgebeit. In fact, I come from Essen, come from Dortmund-
Dame Stephanie Shirley:
You come from Dortmund? I come from Dortmund.
Yes, I come from Essen, next to Dortmund.
Dame Stephanie Shirley:
Oh, right, yes.
Yes, so your story, really, you changed how I look at life, so thank you for sharing it. You often said you resolved at an early age to make yours a life that was worth saving. Can you tell us about your formative years?
Dame Stephanie Shirley:
Well, you mentioned Essen. I mean, my life started in Dortmund, also in Western Germany. In 1933, shortly after my birth, my father got fired from his job, and the bad times began, and we started to move around Europe trying to find a safe place. All our family did eventually get out, but as far as I was concerned, it was a pretty traumatic start. We settled in Vienna for a bit, and then my parents did a very brave thing, I think. They organized for me to come to England on a Kindertransport. When I got to England, we arrived, a train load of a thousand children with just two adults. You can imagine how traumatic it was.
It was the beginning of an enormous change for me, new language, new country, new nationality, because Hitler had taken nationality away from Jewish families, and in particular, new parents. I was very lucky. I was fostered by a loving couple in the Midlands of England with a rather reassuring name, very English, Smith, guy and Ruby Smith, bless them. They gave me a home and took me into their heart, really. I was with my older sister who was nine, and she had the dubious task of also looking after me at five years old. I’ve got something wrong with my foot, so I was pretty fractious. I think she did well to get me to England.
But that I challenged in some detail, because that trauma has really driven my life, my business life, my family life, the person that I wanted to be, because I had survivor guilt. Why was I saved when so many died, including a million children at that time? How can I make the life that was saved, worth saving? I did, at a rather unhealthy early age, decide to try and live a life that was a good life. I don’t complain at all, but it was a life of value.
Yeah. Later then in your life, you also encountered glass ceilings, I believe, in your education and then early in your career. How did that influence your thinking?
Dame Stephanie Shirley:
Well, I had trouble learning science. I mean, I’m basically a scientist, and the only science considered respectable for girls of my generation was the study of plants, and I wanted to be a mathematician. I really had to fight and change schools twice in order to get that tuition. Then suddenly, I realized that mathematics had led me into the very early computer industry. I started off as sort of junior mathematical clerk in a research station, working on graphs, doing little bits of coding, working on the big lottery machine for Britain called ERNIE. It was there, of course, that I met my husband. I fell in love with my husband, but I also fell in love with computing, and that really became the driving force.
The more I was ambitious, the more implacably I was patronized by the male colleagues, because the research station had many, many handsome, young, intelligent men, but it did not have very many women at all. People would say, overtly, “I will never appoint a woman to a graduate position,” or they would stand down from my interview appointments because they sort of said, “I would never appoint a woman, no matter how good she is.” I don’t think they even said that, “They would never appoint a woman.” I began to feel that I’d come across that glass ceiling, we’ve learned to call it.
Frankly, Henning, I was tired of being patronized as a Jew. I was tired of being patronized as a woman. Eventually, I decided to break away and do my own thing, so I became an entrepreneur. The first time somebody called me an entrepreneur, I didn’t know what the term meant, but that’s clearly what I am. I’m a serial entrepreneur. I like to start things. I like to do new things. I like to make new things happen, and sometimes in very new ways. Some of that comes from the fact that I didn’t have a very good education, I think.
Maybe let’s talk about that aspect. When you set up your company, that was very family-friendly for women. You employed women in a very family-friendly way. I should remind people that this all happened more than, I think, half a century ago. What you did then, I think, was really more progressive than what we see today in some businesses. As a member myself of a minority, I really see that as a milestone in that quest for workplace equality. You think of this as being innovative, disruptive, maybe a little bit defiant, or maybe a little of each?
Dame Stephanie Shirley:
It was a crusade, a crusade for women to actually provide the sort of work environment in which we could do science, all the arts, but in a way that fitted into women’s lifestyles and women’s patterns. By that, I mean, flexibility. My company targeted work patterns that were flexible to the extreme, part-time, full-time, summer-working, consultancy, winter-working, min-max contracts, zero-hour contracts, which are very unpopular in this country now. I started them all, including job shares. We paid people from a cafeteria of benefits so that they could choose how they were paid, whether it was by salary, or by a larger company car, or more holidays, early retirement, whatever they wanted. Flexibility was really what allowed women to have that work-life balance that fitted in with our child-rearing patterns of living.
I started off in a little cottage working on my dining room table. I was almost inundated with requests. Can I come and work with you? Of course, we had not the work for them to do. I started off thinking that would allow me, also, to work from home, with my plans for a family. But in fact, I very soon found myself really having to do the marketing, having to do the recruitment, having to do the cash flow, which was really the critical thing as any company tries to start scaling up a bit. It was very amateur to begin with. We just learned on the job, really. If something worked, we’d do more of it. If it didn’t work, we’d try something else.
We had very much a family feeling, not just because the staff, and of the first 300 staff, 297 were women. It was very female-oriented. Not only that we all had our own families, but we worked like a family company. It was quite acceptable for me to help somebody in the morning, and in the afternoon ask for their help on something. Between us, we could actually get the work done. We built up a very solid reputation for developing tailor-made software. This was at a time when software was given away free with the hardware. “Nobody can sell software,” they said.
You tricked them. You basically called yourself, Steve, right, when you do contracts, basically, instead of Stephanie, I remember reading in the book?
Dame Stephanie Shirley:
I was writing sales promotion letters by the dozen, really. This was before the days of word processing. They were beautifully typed on a portable typewriter. My secretary came in Tuesday afternoons always, and she churned out these standard letters to people who were advertising for programming. I would contact them and sort of say, “I’m not applying for that job, but I can get programming done for you.”
Dame Stephanie Shirley:
Nobody bothered to reply at all, Henning. Then my dear husband, actually, suggested that I start signing letters, not that double feminine of Stephanie Shirley, but rather, Steve Shirley, which is a family nickname. Surprise, surprise, we began to get some responses to my letters. I began to get some interviews, and I had a good story to tell as I began to get some work.
Yeah. I think you also empowered your employees, motivating them by putting the company in their hands, so creating a sort of unlisted partnership, incorporated model in the U.K., you called that. What made you take that course?
Dame Stephanie Shirley:
I think somebody like me is always interested in making the world a fairer place. In the early days of the company, although we paid our staff reliably, we didn’t pay them particularly well, and we asked a great deal of them. In particular, we paid them slowly in order to deal with the cash flow, so that most staff were only paid when the work that they had been involved in was paid for by our customer. If the customer hadn’t paid for three months, then we would pay anyway, but enormously slow rate of payment. So, it seemed right and proper that they should share in any potential wealth creation, as well. I was inspired by another share-owning organization in the retail area in the U.K. I wanted, actually, that family feeling to turn into a sort of collegiate working together.
It took me 11 years, I think it was, to make it happen. Not easy, because you’re trying to give away a company of some value, but not much, without having any other wealth to pay the taxation that was involved in that transaction. It was pretty slow, but I’m enormously proud of it. It made a lot of difference. For reasons I can talk about, I suppose, I didn’t get the 100% staff ownership that I wanted, but I did get it up to 62% staff control at one time, and 25% staff ownership. That went up to 30% the year after I left, actually. It’s a wonderful way to grow a company.
What I found particularly fascinating when I read your book, your first book, autobiography, at the end where you really take the same sort of innovative thinking and outlook to philanthropy. Charity plays a big part in my life, too, but I never really met anyone who deliberately set out fall off the Sunday Times Rich List through philanthropy… that’s pretty amazing… also, in terms of your worldview. What decision-making processes do you go through when you contribute to a cause?
Dame Stephanie Shirley:
Well, I tried to use my business skill and have head and heart working together. After a few years, two, three years, I really sat down and worked out a mission statement, which is the sort of thing that we did in business, but it hadn’t occurred to me to do in philanthropy. That was quite simple, to concentrate on the things that I know and care about. There’re really only two, information technology, my professional discipline, and autism, which is my late son’s condition. I concentrate on those two. I only do strategic projects. I only support strategic projects, because I always felt that I had worked very hard for that money, and I really wanted it to work. I was not going to fritter that away, either.
I look for projects that make a real difference in the sea of need. I mean, there’s so much there. If it’s just helping these five or these 50, or even these 500, that wasn’t what I wanted to do. I wanted to make a sectional, structural change to how people looked at autism, at new computer systems. What happened, Henning, was that after a few years, I realized that other people were starting to support computer systems, computers in schools, computers in darkest Africa, but nobody was really supporting autism. In about 2002, I think, we decided… and I had a trustee board… we decided to focus entirely on autism. I’ve been the major charitable funder for autism in the U.K. for some time. That allows me to see things that need doing and set up projects, or even set up a charity to solve that problem. I always take a charity. I start it myself. It starts on my desk. It gradually grows. I stay with it until it’s sustainable, and then I back away, because I want to do the next thing.
Contributing money is only one element, as you say in your book. It’s bringing your strategic thinking into that relationship and really try to move that forward. The question here, really, does your appetite for innovation really drive that aspect that you’re doing philanthropy?
Dame Stephanie Shirley:
I have a very low boredom threshold, and I like to do new things. I feel that in the charitable world, there are a lot of small charities, worthy that they are, doing much as happened somewhere else, a little bit better, a little bit cheaper, but they’re not really making a difference.
Do you think you will ever grow tired of innovating and disrupting? Probably not.
Dame Stephanie Shirley:
No, I think that’s part of my character now, Henning-
Dame Stephanie Shirley:
… what I do. I want to make a difference in the world. I want to, again, come back to… Still, I’m 87 years old. It’s over 80 years since I arrived as a five-year-old refugee, and I still have that driving force to make each day worthwhile. I’m not going to fritter it away. I’m going to do something that makes a difference to people.
That’s fascinating. We have heard how Dame Stephanie has devoted her post-business life to philanthropy. We also heard about issues, especially close to our heart, which is autism. All the proceeds from sales of Dame Stephanie’s new book entitled, So To Speak, will go to Autistica, the charity she founded 16 years ago. You can find out more about Dame Stephanie’s work in this field and how to order a copy of the book, actually, by visiting the webpage that’s now on the screen, that’s steveshirley.com. So To Speak is a collection of some of your favorite speeches, Dame Stephanie, from the past 40 years.
Dame Stephanie Shirley:
40 years, yes.
I already ordered my copy, so can’t wait to read it.
Dame Stephanie Shirley:
I hope it inspires you.
Yeah, I’m sure. I would, really, sincerely recommend these books for anyone looking for a truly inspirational read. Dame Stephanie, thank you so much.
Dame Stephanie Shirley:
It’s been a real pleasure.
Game Changers: From Keynes to currency factors
Hear from David Chambers (Invesco Professor in Finance, Cambridge Judge Business School) and Jay Raol (Head of Fixed Income Factors, Invesco).
A recent paper by Prof. David Chambers of the Cambridge Judge Business School titled “Currency Regimes and the Carry Trade analyzes data from spot and forward currency markets back to 1919, demonstrating the robustness of the carry factor and its outperformance in floating rate currency regimes.
Jordan Maynard Keynes was one of the most important game-changers in the history of economics and finance. It’s now nearly a century since his findings really revolutionized economics. Today, we are meeting another Cambridge academic whose work is changing how we think. And in addition, we have a practitioner who can explain to us how to implement these findings.
So factors are changing how we view asset management. They represent an investment approach that targets quantifiable characteristics that really help to explain patterns of risk and return. So, today we are discussing their role really in the context of currencies. And I’m joined by David Chambers. He’s the Academic Director of the Centre for Endowment Asset Management at the Judge Business School. And David is really responsible for especially innovative research in his field.
But also with us is Jay Raol. He’s a director of Quantitative Research at Invesco Fixed Income. Jay will help us really place some of today’s insights into a more tangible risk and asset allocation framework for investors. David, you are the first researcher together with your co-authors of this paper—I have it here, Currency Trades—to really examine the long-run evidence on the existing of factors in currency markets. And could you explain why this long-run evidence is important in this context and what are the main conclusions in terms of really simple terms for practitioners like us?
Thank you, Henning. So, the main purpose of this paper is to examine one of the most important issues when you’re thinking about factor investing, irrespective of whether it’s in currencies or equities, or fixed income. And when you’re thinking about what factor exposures and investing you want to take on, it’s really important to understand how robust those factors are in terms of the risk premia or the returns that they generate.
Now, much of the research that has been done both by academics and practitioners to try and identify the factors that are out there is based on data that starts from around 1980. So, it’s a reasonable length of time, but it still only amounts to barely four decades. And it’s also a period of time that is dominated largely by one macroeconomic narrative, which we’ve come to know as the great convergence. And that represented the period from the early ’80s through to the global financial crisis where saw a steady decline in interest rates.
And that proved to be a relatively benign environment for a lot of investors. So, what we’re doing in this paper is to say, to really understand how robust a factor is in terms of the risk premia returns that they can generate, we need a lot more data. Now, we could wait from where we are today for the markets to reveal more data for us going forward, but you’re going to have to wait a long time. So, the other thing that we can do is go back in time and find as much high-quality data as we can and conduct what academics would call an out-of-sample test. So, in other words, we take the same risk factors or factors that have been established in a recent research on recent data sets and look at how they behave in this out-of-sample period. And over this much longer span of time.
And in doing that, we’re adding more data, but we’re also looking at how these factors behave in different economic conditions. And in particular, if you think back to the ’20s and the ’30s that was a very different set of macroeconomic conditions to what we have witnessed during the so-called great convergence.
Now in this paper, we particularly, look at the carry factor in currency markets and that’s because probably of all the factors that are out there, carry is the one that’s the most popular and the most well-known and at least in the last four decades, has fairly, consistently delivered positive returns. And what we find in the paper is when we look out-of-sample that, indeed, the carry factor still delivers positive returns, particularly in the period of the ’20s and the ’30s when we had a regime that was largely dominated by floating exchange rates. And so that result can give us some degree of confidence that carry is a robust factor. It doesn’t mean it’s going to perform well in all time periods and in all market conditions. And so these returns or risk premia will time-vary. And so a fluctuate-
And if I read this correctly, you’re also talking about the switch. You examine what happens if you switch from a fixed to a floating currency regime and you used the 2015 Swiss Franc/Euro example to really show how breakdown of that currency pax is associated with significant carry trade losses. And what does this mean for investors in practical terms if they find themselves in, let’s say, a global flight to safety, which we saw that in 2015?
That’s correct. The episode that you’re referring to in January 2015, the Swiss National Bank announced that they were going to drop the peg or the cap that they add for their currency against the Euro. And in the month following that announcement, the carry trade lost 5%. So, it experienced a very sharp loss. And that was because the long portfolio of the carry trade, the currencies, the high-interest rate currencies you’re investing in a depreciated, but more importantly, in this case, the short portfolio of the carry trade or the currencies that you’re using to fund your positions appreciated.
And what we were interested in doing was looking at how common this outcome was. So, one of the other great advantages of using this long span of 100 years of data that we now have on currency markets and returns is that there were a lot of regime changes of this nature.
So, there were a lot of instances of currency switching from fixed to floating and vice versa, but we’re particularly interested in this fixed-to-floating event. And we have over 200 of these kind of events. And we were able to establish that on average, the carry strategy experienced losses in the month following these events, these so-called peg collapses or fixed-to-floating events. And so the message for the investor is that this is an additional type of risk that you’re taking on when you’re entering into the carry strategy in currency markets. Well, certainly, they would not previously have been aware of because this has not been unearthed by academics previously.
Right. And let’s briefly return to Keynes. So, you mentioned that earlier, he obviously was a giant in the annals, you could say, of economics and finance. And usually, an extremely successful investor, but not so great with currency trading. Why was that?
It’s interesting you raise John Maynard Keynes because the book that you have in your hand, he wrote coming up for 100 years ago today. He wrote it in New York in the autumn. This is The Economic Consequences of the Peace. This is probably the most entertaining of the books that he wrote because there isn’t a lot of economic theorizing in there, but it’s important in the context of what we’re talking about today. Because the royalties he earned from that book, which sold very well, funded his currency speculation initially.
He began speculating in currencies in September 1919. Right at the end of World War I. And it was that. It was researching into his currency trading that put us on to the fact that there was actually a forward market that had started up in London. And this is the very first time. From that point on, we observe forward rates being consistently quoted on a daily basis.
And we went out and collected that data alongside spot rates. And it’s that dataset that has enabled us to do the research that we’ve done today.
Now, the other interesting point that you raised is that he wasn’t terribly successful speculating in currencies. He did actually make money overall. So, he made profit. But in the two episodes that he was managing his own money in the currency markets, he experienced two really substantial losses. One was in 1920 where, in fact, he was close to being personally bankrupt. And the other was again in the 1930s.
His approach to investing in currencies had nothing to do with factors. So, he pursued what today we would call a discretionary-fundamentalist-based approach, where he was looking at the macroeconomic and industrial data, and what was happening at the various central banks in trying then to decide what his fundamental take was on a currency. Whether to go long or short. And as I say, there’s no evidence that he had exposure to factors, certainly, not explicitly. And even implicitly, when you model the returns on his portfolio, we can observe factor exposures. Would his performance have benefited from implementing a more of a carry strategy? Well, in the ’20s and ’30s, yes, it probably would.
Jay looking at this from a broader asset-allocation perspective, how do you see factors such as carry really aiding asset allocation?
Well, let’s take a look at sound guiding principles for any asset allocation. First and foremost, risk control through diversification. Second, tilting the portfolio to premiums. Third, being very cost-efficient and fourth, transparent.
I think the benefit of factor investing is that it hits all of those criteria. Factors tend to have low correlations to themselves and to bonds and stocks. And therefore, they can provide diversification to a portfolio. As David said, factors like carry are rewarded in the long run. So, holding these kinds of portfolios are means to harvest returns. Because of their nature, they are very transparent. It’s very clear the investment process behind factor investing. And finally, because of all those, they tend to be available at a very, very low cost.
And what motivated you to really start looking into carry factors specifically, and why is this really relevant to investors, you think?
Well, for us, the carry factor, as David said, is extremely popular, especially in fixed income. And a lot of the facts around carry are generally based off a shorter period of history than even he mentioned earlier. Carry underperformed quite dramatically in 2008 and had a severe drawdown. And since then, has struggled to produce compelling returns. And so, one of the things that we wanted to look at is the long history to understand whether there was returns there and is the risk profile that we saw in 2008, indicative of how carry’s performed in past market crashes.
So, David Mentioned earlier, the Keynes strategy didn’t have anything to do with factors. But you, obviously, said something I found quite intriguing is everyone’s a factor investor, whether they realize it or not. And this raises sort of, I think, important questions for investors, such as which factors they should really have exposure to and how should they pay for them and applying this idea to what we’ve discussed today. So, how much currency exposure do you think should a reasonable factor asset allocation have and how much should investors be prepared to actually pay for it?
Well, I think one thing that David’s work should highlight is that factors exist in all asset classes. While people may be used to hearing about them in in equities, really, they can be found in all asset classes and many managers already implicitly or explicitly tilt toward factors. So, first and foremost, as you pointed out, investors should be looking at their portfolios, understanding what their factor exposures are. And as we said earlier, factors should not be expensive. And so in so much as investors have exposure to these factors, they should not be overpaying for them. That’s first.
Second, in particular, currencies can be quite attractive for investors because first, the research shows that the carry factor, for example, has low correlations to stocks and bonds, and therefore they can provide a source of diversification, risk control, and return in the portfolio. Second, they’re extremely liquid, probably one of the most liquid ways to get access to factors relative to equity factors or credit factors. And that can be very useful tool for asset allocators who want to be able to keep a part of the portfolio in a very liquid format, but also to harvest returns.
I think the one thing that David’s research points out though is that monetary policy regimes can have an impact on these currency factors and, therefore, we advise that clients shouldn’t use too much of them in their portfolio, but enough to provide a little bit of diversification.
So, if everyone’s a factor investor, you said, whether they know it or not, do you think Keynes somehow appreciated the concept, even though he focused on fundamentals? Probably for you, David, the question.
I think there’s not much evidence of that in what he did with his currency investing. But there is evidence of that in what he did when he invested in equities. So, the detailed research we’ve done on his equity portfolios clearly shows that he had exposures to two important factors in equity markets, which are size and value. And so we can clearly see that he loaded on those factors. He had positive exposures to both those factors. Now in the 1920s, neither Keynes nor anyone else talked about factors, neither did they talk about size and value, but he clearly understood what he was doing in biasing his portfolios towards small companies and in biasing them towards companies that were cheaper than the average stock listed on the market. So, in equities, in short, he did expose the portfolio to the factors.
Thank you, David, thank you, Jay, for sharing your insights. And thank you for watching, and please look out for other videos on our Game Changes series.
Game Changers: Lord Browne: ESG past, present and future
Hear from Lord John Browne about ESG Past, Present and Future.
Environmental, social and governance consideration, collectively known as ESG, are now high on the agendas of companies, investors, policymakers, but also citizens around the world. This wasn’t always the case. If we wind back around a quarter of a century, for example, it was really considered extraordinary for senior business executives to discuss these matters, not least on a public stage. And it was almost as if to do so was to break ranks.
That’s precisely what my guest did and his actions are still making a difference today. It’s my great privilege to welcome Lord Browne, former CEO of BP and now chairman of climate growth equity venture BeyondNetZero. Welcome Lord Browne.
Thank you very much.
Maybe let’s start by going back to 1997 and the famous speech that you delivered at Stanford University. That was when, as CEO of a major oil company, you stepped up to the stage and endorsed the science of climate change. You famously said the world was no longer defined by ideology and it was time for a fresh perspective on the nature of society and responsibility. What led you to this landmark speech?
It was the weight of evidence that was being built up that humans caused greenhouse gases. Anthropogenic greenhouse gases were changing the nature of the climate. And that evidence was getting stronger and stronger. It wasn’t just models, it was observations from ice cores, it was many, many things. And in 1995 when I became CEO of BP, I made a big tour of people who had opinions in this area. And we concluded as the leadership of BP that the time was to do something. And we decided to set out a plan to reduce greenhouse gases inside BP to begin to set an example that change was possible in a company that was the cause of much of greenhouse gas emissions. We could become part of the solution to reducing them.
It’s been said your speech was really crucial right? In upsetting the balance of power, if you will, in the battle for hearts, for minds over climate change. Was that actually your intention when you went into that speech or did you feel actually you succeeded with that emotional part by bringing in the hearts and the minds of people.
So the beginning of the speech, I did point out that the time for pure ideology was over. I wish that were the case still today. And it was in my mind the point that much of the oil and gas industry and other heavy carbon emitters believed that to say anything about climate change was to create an existential threat to their business.
And I didn’t think so. I think it was facing reality. And we said we have to do something about this. And we wanted to be importantly part of the debate on the solution rather than simply the object of someone else’s solution. So we wanted to be around the table to solve the problem.
And many of the lobby groups including the American Petroleum Institute didn’t agree with that. And when I made the speech they said that rather famously that I’d left the church, whatever that had meant. I may say I wasn’t quite sure what church I was leaving at that point. But it was a demonstration of, I think, ideology, which is you just don’t agree to things that could be a threat, rather than trying to solve them.
Right. And if we fast forward to the present day, you are now chairman of BeyondNetZero, which aims to support high growth businesses that have the potential then to combat climate change at scale. From what you see today has the transformation shift so far met your expectations or maybe even exceeded them and what are your feelings about the pace of change now?
Over the last 25 years, if we take a 25-year period, dramatic change has taken place. I think many, many corporate executives, many boards believe that something must be done to improve our handling of the environment, of society and making sure our governance is in good order.
The focus now is on the environment: what to do about it? Can you actually reduce the chances of us succeeding a one-and-a-half degree temperature rise in the world? Can you reduce those chances down to zero. Can we actually get to net zero by 2050?
So everyone is saying we must try, there’s a lot of signaling of which I may call virtue. People saying I want to be on the side of good here. There are however very few plans of how to get there. So people are beginning to think about targets, setting targets and having action plans to get there. But that’s in the minority. The majority are at least saying the right thing; we now have to get them all to do the right thing.
And history really shows humanity has a knack for innovating itself out of trouble. So, what are likely to be the keys to our escape route this time and how ambitious might we dare to be actually given the threats we face? And is simply aiming then what these targets do for net zero or do we need to go beyond that actually?
So I think we’ve obviously got to get beyond that. And I think the important thing is not to just have targets which are 30 years out; that’s a long time, a long, long time. We need targets which are five years and 10 years and 20 years and 30 years. And those five- and 10-year targets can be established nowadays by the very convenient work of the science-based target industry (SBTs), which set you on a path for net zero over time.
So people need to adopt these and they need to get on to get that pathway sorted for business after business after business. Try and exceed it. Because we know that some people will fall short so therefore some people have to do more, and that is very important. We have to go if you will, beyond net zero, which is exactly what the name of my venture is: Beyond Net Zero. It means that we can go beyond the science-based targets and beyond the targets that we can achieve ourselves in each company we invest in. But what are the targets that they can achieve by doing things with other companies?
So if we make a battery, for example, and install it in a company and they don’t use, let’s say, gasoline, that’s an advantage that you share with that company. And it’s about going beyond net zero. So that’s very important indeed. And there are plenty of ways that we can get there. When I say 30-year targets, one of the big debates has been: would you do something that only lasted 20 years? The answer is absolutely. Because if it’s the first 20 years, it’s better than the second 20 years.
And eliminating methane as a greenhouse gas, letting that go to the atmosphere, (methane is, as you know, natural gas), letting that escape is a very dangerous greenhouse gas. In fact it’s about 85 to a hundred times more powerful than carbon dioxide. So keeping that bottled up, avoiding leakage, is a very powerful thing to do. And a very interesting piece of low hanging fruit that can be picked right now. Right now.
Right. And when I listened to you it seems like you have a lot of confidence in the power of markets to solve that, right? And then the question comes : are businesses and investors actually become almost like a substitute for policymaker action in tackling this problem or do you think it’s really both coming together in terms of public/private sector cooperation?
Well first of all, the public sector cannot solve this problem without the private sector. Private sector is the sector that is capable of delivery. And that’s the important thing. Delivering things is what business does. And so the framework has to be established by politics, and by policy makers.
So here’s the target: we need to get to net zero by 2050. Here are some things that will help share the risk between the public and private sector. These such things as investment tax credits, production tax credits, 45Q in the US, tax credits in Europe. Even carbon taxes are a form of incentive policy instrument which makes things possible that couldn’t otherwise be done unless you gave people credit for reducing externalities. And it’s pricing the externalities that really makes a difference there. It’s also reducing the risk that the private sector probably can’t take by itself. The public sector can share.
So all these things are policy instruments. You don’t need too many of them but you need some very powerful ones that will make a difference for the future. It’s why for example I think when we started this all those years ago in BP 25 years ago, we said one of the most important things we had to do was to price carbon–to put a price on carbon. Because when we did a project, we knew what we were doing. We knew if we reduce carbon dioxide emissions, we knew what we were doing, what the value was. And that’s meaningful. Whether it’s through pricing or taxes, these are policy instruments which are critical.
Right. And public and private leadership requires ESG leadership as you said right?
So, can you talk a bit about what you mean by ESG leadership.
So I think the first thing that the public private partnership needs is good data and alignment of objective. I think everyone has to be absolutely convinced that we’ve got to get down to net zero by 2050. More importantly we’ve got to halve our carbon dioxide emissions in the next 10 years, that makes it real.
And the consequence of not doing that is probably evident all around us. About temperature rises, about wildfires, about extra hurricanes, about sea level. You name it, about desertification. A lot of things that people can now begin to see. So if we don’t get that right we will do very bad things to the surface of the earth and therefore to humanity.
And environmental considerations still tend to dominate the conversation about ESG…which is good, though, because it’s one of our biggest challenges right?
I agree. So I think ESG came… there was a whole drive originally about corporate social responsibility. And before then the word stakeholder had been invented. I think a good word I may say. And it was a counterbalance to the school of Chicago University’s business school, Milton Friedman and people like that, which said the only purpose of a CEO is to drive a company to generate more profits short-term.
Actually that’s not true. It is true that CEO’s have to generate profits, but on a continuous basis for the long term, and that means creating a sustainable company. So corporate social responsibility came in and people began to think: how can we make that possible? How can we align stakeholders to make a company that could sustain in the future?
That then morphs into factors to do with environment, social behavior and governance. Governance was a bit easier, the first thing to sort out, which was rules and regulations on how you run a company, what you reported on, how you fix executive pay, still a big issue. But it’s all there. And how you have rules inside the company that allowed you to operate.
It’s still in debate. It’s very much about equity, about diversity and inclusion and about how you treat people outside the company. So communities as well as your own team inside the company. And E started off, I think, as a push to almost do what Rachel Carson indicated in Silent Spring, which was to deal with the local environment you’re on. The land and the water. Make sure you don’t destroy the biodiversity. And then it became more and more extended from air and water, land, biodiversity and climate. And that’s where we are today.
And we have to balance all these things. You can’t do good things for the climate and do bad things for biodiversity. You just can’t-
It’s a very conservative course actually and most people don’t see that right?
It’s about conservation, as you mentioned.
And I think SBTs will do that because they speak into the sustainability goals of the UN and are meant to be in conformance with them. So I think that’s all very important. Now, what has become really interesting is the requirement to report on these matters in a way which is consistent and to measure your progress against these matters.
And more and more things can be measured remotely. So for example, methane emissions can now be detected by satellite. And if you report that you’re not putting any methane in the atmosphere, someone can come and check on you. This is no bad thing, it keeps everyone on the straight and narrow path. So there are plenty of things we can now do to validate what people are saying.
And there will be I believe more and more demands to report in these areas to improve… not reporting for the sake of reporting, but to report for the sake of improving year on year.
You mentioned aligning stakeholders and diversity and inclusion right? A few years ago you wrote a book entitled the Glass Closet, describing really your own experience as a member of the LGBT community in the corporate world. And that book was very important I think for me, and I know many other people who found it very inspiring. How is the standing of the LGBT community changing now in the age of ESG do you think?
Well again I think it’s a matter of the glass being half full. It’s not much more than half full, but it’s half full. People have now understood and have welcomed more and more diversity in corporate life. I noticed that not only the law has changed… laws are important because they set the backdrop. So for many countries there’s now the possibility of two people of the same sex getting married. There are rules and laws to outlaw bigotry and discrimination against gay people. So all of that is good progress.
Behavior is getting better too. I think most companies realize that to include people in one entity and to really demonstrate that you are including is a great act of leadership which creates the possibility of doing better because you have a team which is working together. And the thing about LGBT is that it’s very often not identifiable. You can’t identify that someone is gay. You have to allow them to participate in the whole team and at the right moment tell people, if they wish , that they’re gay or not gay. But not to threaten them and not to make them feel unsafe.
And it’s that approach of creating the safety of inclusion which is I think something that great companies, many companies are now doing better than the past. Having said that, there are still people who don’t want to identify what their sexuality is. They absolutely don’t because they believe that will get in the way of promotion, it will get in the way of doing business with others. And so there’s still that barrier there.
And with a barrier, one has to be very careful that the barrier doesn’t get bigger. So I always think that the most important thing to remember is that while the glass is half full, constant vigilance is needed. To keep reminding people that equity is part of a human right, inclusion is part of a human right, diversity is what is needed.
Right. And ultimately it leads to better performance and meritocracy right?
Rise in shareholder value.
It does. Data shows that a bigger approach to inclusion leads to higher returns.
Right. And taking into account everything we’ve just talked about, do you feel humanity has found this fresh perspective on the nature of society and responsibility you mentioned back in 1997?
Well I’m an optimist. You have to be an optimist to be in business. And I believe, I have a real belief that the best is yet to come. My mother, an Auschwitz survivor, always reminded me that without a thought for the future there is no hope. So the best is always yet to come. And it is the human being, it’s their ability to innovate, to learn from the past that I hope will drive us on balance to better things. We always have to be careful. Constant vigilance is needed on all these matters.
Lord Browne it’s been absolutely fascinating to hear from someone who was ahead of the ESG curve from really the outset and is still ahead of this today. So you mentioned the importance of ESG leadership and you very much embody that idea yourself. Thank you so much for joining us and thank you for watching Game Changers. We look forward to seeing you again soon.
Game Changers: Is the asset management industry dead?
Hear from David Chambers (Professor in Finance, Cambridge Judge Business School) and Marty Flanagan (CEO, Invesco).
A lively discussion about what lies ahead for—and what we can learn from the past of—the rapidly changing global asset management industry.
Notice: This videos is for Cambridge Business School only. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
It’s said that history doesn’t repeat but often rhymes. Does this apply to asset management? Well, this is a crucial question because we are entering what could be one of the most tumultuous decades the industry has ever faced. We have a persistent low return environment, pricing pressures, we see increasing costs, greater regulatory intervention and growing client migration. And despite these challenges, we are also witnessing unprecedented innovation. So, who are the likely winners and losers? We are going to explore what the future holds for the asset management industry. For that, I have here Marty Flanagan, President and CEO of Invesco, and Professor David Chambers from Cambridge Judge Business School. Welcome.
Marty, as President and CEO of one of the biggest asset managers in the world, how do you see the 2020s playing out in terms of disruption in the asset management industry?
I think it will be quite significant. And I think the important thing to note is it’s not going to start in 2020. It’s literally underway right now. And it really, in my mind, kicked off after the financial crisis, and has taken pace in the last three years.
The consensus seems to be that the winners are going to be more consolidation, we’re going to see more consolidation. Do you agree with that observation in general?
I do but let me also put it in context. I think if you read the headlines, you’d get the sense that the industry is going to go out of business. The reality is it’s a $90 trillion industry continuing to grow. But what is happening, because of innovation, regulation, technology and client demands is that the makeup of the asset management company is going to be quite different. The bigger are going to get bigger and the stronger will get stronger.
And then David, maybe you can elaborate on this from the past, maybe do a perspective on the past.
Well consolidation in the asset management industry is something that’s relatively new. If you’re taking a long-term view of this, consolidation was really something that affected banking and commercial banking starting in the 1930s. Before that in the US, commercial banking was extremely fragmented and very weak, and of course that led to panic after panic, leading to the Great Depression of the 1930s. So really, as a reaction to that, consolidation then started. We didn’t have a panic here for 50 years until continental Illinois. We ended up with a much more stable industry, with fewer stronger players. Of course, we had the problem at the end of the 2000s with the global financial crisis. But I do think, despite the fact that there was some misbehaviour across some of the large financial institutions, the fact that the industry had consolidated up did put it in a strong position and it was one of the reasons why we didn’t have a rerun of the depression of the 1930s. But that episode does point to the fact that these large financial institutions today do have to behave responsibly going forward.
So, how might an asset manager show and demonstrate more responsibility once it gets bigger, with that scale and more influence?
I think particularly in the context of asset management or asset managers, what we would like to see is them thinking about investing responsibility in the context of ESG and climate change specifically. And this is again something that’s relatively new, it’s a new challenge for the industry. But if we dip back into history again, there have been parallels. So, if we think back to the first half of the 20th century, the problem then was poor financial and poor accounting disclosure, and very weakly protected investors. And investors had to step up and try to get better protection, and to try and get firms to disclose more detail about their accounts. And that’s something they did successfully, starting in the mid 20th century. So, in the UK, for example, institutional investors were very successful in the 1960s in impressing for one share, one vote, and impressing to get fair and equal treatment through mergers. That gave them the tools to then start changing underperforming corporate management teams and extract more value. So, they’ve done this in the past in a different context. The challenge clearly going forward is to try and do that in the ESG context and in the context of climate change particularly.
That’s a great perspective, and you know from my view, for us, we’re absolutely dedicated to ESG investing and have really been embedding it throughout the organisation, and social responsibility and climate change. But I will say, you’re right David, it felt like a conversation for the last X number of years. I’d say clearly on the continent, in the UK, it’s an absolute necessity. You will be out of business as a money manager if you are not a thoughtful, successful ESG investor. We’re taking that around the world as an organisation right now, but there are a lot of challenges, definitional challenges and maybe some people do a little bit more of a marketing pitch than being serious about it. But I would say probably in the next few years it should be pretty well embedded I would imagine, and if you haven’t done that as a firm, you’re going to be totally disadvantaged from a client perspective.
Another major source of both opportunity and disruption is innovation. Can you maybe quickly comment on that and how that shapes our industry.
It’s at a pace that I’ve never seen before, and I’d say almost in my career, the last time you saw something like it was around 1999, 2000 during the adoption of the internet. I’d say most in the financial services industry were sort of arm’s length on it. That was not a very good idea – they ultimately turned to embrace it deeply. But right now, there is no part of our business that is not somewhere on the path of using AI, any type of digitising almost any process that we have within the organisation, and the good news is, who wins? Our clients are better off, we’ll do a better job managing money, we’ll drive down operating costs. Everybody wins. Client wins, shareholder wins, it’s more exciting for all of our colleagues.
Any idea what the requirements are to be a winner in that field?
Yes, and again back to where David was going, the pressures on money managers right now to adapt their business to client needs are real and material. The increased cost of regulation is something that is very different to a decade ago, but now it’s this cost into technology and innovating with the technology. So, it’s a real barrier to those firms that don’t have the financial wherewithal and also the intellectual leadership to recognise this development.
And maybe David any perspective from history on that aspect, innovation? Yes, there are a couple of things I’d say. One is that the finance sector has been very good at adopting technology in the past. If you think back to the second half of the 19th century when the telegraph first appeared and we had the introduction of the transatlantic cable linking the US with Europe, the stock market and players in the stock market were very quick to exploit the telegraph. That led to more efficient pricing and to capital flowing particularly from Europe into the US to finance the US railroads. Another excellent example is what happened in the 1960s on Wall Street when there was this big move towards computerisation, particularly in the back office because it was flooded with paper to settle trades, and that was becoming a big problem. So, Wall Street firms were very quick in investing in IT to solve that problem. The other thing I’d say is financial innovation has also been important in this industry. And just to mention a couple of prime examples: one is mutual funds. The industry was very smart in coming up with the idea, and this is going back to the 1870s, the idea of pooling investors’ money so that they’re able to diversify their wealth beyond just investing in a few bonds. And the other prime example going towards the end of the 20th century is of course ETFs. The industry was very good at exploiting the advances particularly in modern portfolio theory by the likes of Harry Markowitz and Bill Sharpe, and in constructing the first index funds in the 1970s and then a couple of decades later we got the first ETF.
David, I think you’re right about the innovations of the pooled products, mutual funds, a very long time ago, and the more recent innovation with ETFs. And I will say for us as a firm, we took the opportunity in 2006 to purchase an ETF business at $3 billion – today it’s at $400 billion. And the point is it’s a reflection of everything you’re talking about. The emergence of factor investing, a new vehicle that is being readily adopted by clients, whether that’s institutional or retail investors. So, these innovations do make a difference for investors over time.
And Marty mentioned AI, and I know you recently did a study on AI supremacy, distinguishing the leaders and the laggers in the field. Maybe you can quickly comment on that?
Yes, some colleagues in the Centre for Alternative Finance did a study on AI and its adoption, and the future challenges and opportunities. I think one of the standout findings of that survey, broadly across the finance sector including asset management, was that already you’re able to see the leaders and the laggards in terms of the amount of investment and effort that’s being put specifically into AI and machine learning.
I might add to that, you hit on a very important point. From our perspective we have been in China a long time, and about five years ago when I was there, I observed the use of mobile digital technologies and financial services that were so much more advanced than anything I had seen. And as you would probably realise, most Americans think it all happens here – by the way, it doesn’t. That’s one of the benefits of being a global firm and that really got us going on these digital platforms. It literally came from what we saw in China and what could happen in the world. And having the wherewithal to understand it I think is something that’s very important for organisations these days.
So, maybe a question for both of you, I’m starting with you David. In one sentence, where do you think the industry is going to be in 10 years?
Well, my hope is that the asset management industry really takes the lead and grasps both the opportunities and faces the challenges to invest responsibly, and to really think about how we tackle climate change in the absence of firms and governments not really grasping the nettle. And I think it’s incumbent on particularly large investors to take that lead and I think they’re up to the challenge.
Look, David’s right on point. I think looking back in 10 years, who’s going to be better off? Our clients are going to be better off. All the money managers with the wherewithal are moving to focus on outcomes for clients’ delivery with the use of technologies that David has referred to. This focus on ESG investing, responsible investing, they are all hallmarks that are emerging in those companies that are literally clearly starting to leave the pack. And when we look back in 10 years it’s all going to be very clear, but at the moment it is happening but some of it could be hidden under the pond.
Thank you very much both of you.
Thank you, thank you.
Game Changers: What can be done to address educational equity in the US?
Hear from Dr Raphael Bostic (President and CEO, Federal Reserve Bank of Atlanta) and Deborah Bial (Founder and President, Posse Foundation).
Exploring the wide-ranging effects of educational inequity on the US economy and innovative approaches to tackling this challenge.
So, joining me today are two very special guests. It’s my honour to welcome Raphael Bostic, President and CEO of the Federal Reserve Bank of Atlanta, and Debbie Biel, President and Founder of the Posse Foundation. We are here to talk about educational inequity, which is still a huge problem in an age where we claim to cherish diversity and inclusion. The question is, what can we do about it? So, welcome to Game Changers. Raphael, Debbie, thanks so much for joining us. Let’s first try to frame the problem of educational inequity, and then we can discuss possible solutions. I have the advantage of being quite familiar with the work you have done in this field, and I know it’s amazing. But many of our viewers might not be so conversant with this issue. So, maybe let’s start at the beginning and try to build a clear picture for them. Raphael, as the first black president of a US federal reserve bank, you famously wrote last year about what you termed the ‘moral and economic imperative’ to really end racism. And you said that by limiting economic and educational opportunities for a large number of Americans, you actually institutionalised racism and that constrains America’s economic potential. Could you elaborate a little on how educational inequity creates that sort of drag on the US-economy?
I’d be happy to talk about this Henning and it is really great to be here and have a conversation with you. Now, the way I think about this, each of us is born with skills and with talents and abilities. But it’s really the education that we get that allows us to hone those skills and those abilities to position us to be productive and to innovate and to really add and contribute to the broader economy. So, if you don’t have education that is really empowering and energising people so that they get the full realisation of that, then they’re not going to contribute as much to our production, to our innovation and to all the energy that drives economic growth. And I think if you look at the United States, and that’s the place I’m most familiar with, I think we can say pretty safely that a high-quality education doesn’t occur everywhere and that children as they’re growing up are not equally challenged and encouraged to grow. We just had a ‘Racism in the Economy’ webinar session on education, and this is a series that the federal reserve is doing. And Geoffrey Canada, who was one of the speakers, really made a strong case to say that we have not made enough progress in many communities in terms of making sure, that we get a quality education to kids so that they can do those things. So, what does this mean practically? The way I experienced it and see it, there are diamonds in the rough that are in communities that we don’t often see as being productive, and when we don’t have that quality education that challenges the kids, those diamonds just stay hidden. I’ve gone around the south-east and I’ve seen examples where people have taken a chance on kids that really weren’t performing so well in school, created some structure and gave them things to aspire towards. And the C-plus student became the A-plus student and they started to do things that were just not really imagined for them or for us. And that puts them on a different trajectory that allows them to produce and really contribute to our economy. And so, I think about this, and one of the reasons why I think this is really an important conversation is we have to think about what are the systems level things that are preventing our kids from getting those sorts of education so they can actually make that contribution. And I think about my childhood. So, I grew up, I was the first in my family to go to an Ivy League school. There were a lot of things I didn’t know. I didn’t know the rules of the game. I didn’t know the things that needed to be done. And it’s those systems pieces of information that we really have to take a step back and make sure that they’re working for all kids so that they can get the education they need, that then can translate into a more productive citizen. And then ultimately a more productive economy.
Right. And you also wrote in your article about the importance of an inclusive economy. We actually quoted much of what you said in that article in one of our white papers on responsible investing, and how you can use responsible investing to tackle inequality. Because although it usually refers to environmental issues, it also has a social aspect. Your words were extremely powerful. And I think it’s important that people really understand the significance of someone in your position delivering them. Should we regard equality of educational opportunity as a cornerstone of a more inclusive economy?
Well first, thank you for the very kind words. I’m really glad that the essay struck people and caused them to think hard about things. But I do think that educational equality has got to be foundational if we’re going to have an inclusive economy. An inclusive economy means to me that everyone has a fair shot to be great and to aspire and to contribute however, they feel they can, and that they find their way to their greatest value add to our society. And education is part of our system that helps us do that. It exposes us to areas, to fields and to ways of thought that can then broaden our sense of the ways that we can contribute. So, we’re going to have a fully inclusive economy. We’ve got to make sure that every person in the economy gets exposed to the things that education can bring to them, so they can find that pathway and be more productive. Ultimately, and this is a tagline we use at the Atlanta Fed, we’re looking to have an economy that works for everyone. And if that’s really going to do that to its maximum effect, we’ve got to have an effective and really powerful educational system that shapes the experience of every child.
Yes, it’s interesting because most people when they hear ‘Fed’, they think about interest rates, right? But you’re also very much looking at access to jobs. I looked at your website, you publish jobs that don’t require high degrees of education to enable this sort of access, which is fantastic.
So, we’re actually a little unusual in the sense that our central bank has a dual mandate. So, inflation and prices is one, but we also have maximum employment as the other. So, we have to think about how people are getting their jobs and are those jobs the types of jobs that are going to put them on a trajectory to be stable, have self-sustaining income and revenues, and then ultimately take us to maintain our standard of living and quality of life.
Great. I think that brings us to the amazing work of the Posse Foundation, which Debbie first established, I think, 30 years ago. Again, there will be people on the podcast, on the video, who haven’t heard of the foundation and the brilliant work you are doing Debbie. So please don’t hesitate to tell the story in full, because I think it’s a story everyone should really hear. Can you maybe tell us a little bit about the foundation, how it got started and what it aims to achieve?
Thank you. Thanks for having me here. It’s really nice to be here with you, Raphael too. And I so admire the way you think about justice and equity in a position that is influential. Our economy is so important and jobs – people want jobs! And I agree, education is so critically important to preparing people for the workforce. 30 years ago, I was working at a youth organisation called City Kids in New York City with these great kids, these really smart, talented kids who were going off to college, but a lot of them were then dropping out. Now this is back in the 80s when the word ‘posse’ was still kind of a cool word in youth culture, but we all know what it meant. There was a student who had dropped out of college who said: “I never would have dropped out if I had my posse with me.” And we thought: “Oh my God, what a great idea. Why not send a posse or a team, a cohort of kids together to college?” And that way, if you grew up in the Bronx and you ended up in, say, Middlebury, Vermont, you’d be a little less likely to turn around and go home. So, we started this programme with that concept in mind, sending a team of kids to college. And the first group of students went to Vanderbilt University in Nashville, Tennessee, and they knocked it out of the park. Like, just amazing kids. These were young people that typically would not have shown up on the radar screen of an elite institution like Vanderbilt. Their SAT scores weren’t that great, maybe they didn’t go to the highest ranked high schools, but they were really smart. And something that Raphael said that I think is so important is this idea of how we understand merit and how we understand responsibility, that we often look at what’s wrong with the kids and we think we need to fix them. But really, we’re not looking at ourselves. We’re not looking at what’s wrong with us or the systems that we’ve created that keep smart kids out, that keep deserving young people out. And so, we want to create programmes that help young people, but we also need to focus on how we can fix our systems and change our systems, whether it’s college admissions or how we hire in the workforce, we need to think about that. So, Posse started with this concept in mind. Send a team of talented, smart, incredible young people with great potential to these wonderful institutions of higher education that we have in our country. But find the young kids, the ‘diamonds in the rough’ as Raphael was saying, who aren’t showing up for whatever reason, because we too narrowly define merit or we too narrowly think about who deserves to be on our campuses. And since 1989, we’ve now sent over 10,000 students to over 60 elite colleges and universities in the United States. They’ve won an astounding $1.6 billion in scholarships from our partner schools. `They graduate at rates of 90% and they go on to become leaders in the workforce. And our ultimate goal is to create a leadership network for the United States. A leadership network for the workforce that reflects the country’s very diverse demographics. We’ve never seen anything like that before now. And I’ll just tell one quick story to illustrate this. In that first posse was a student named Shirley Collado. Dominican kid, she grew up in Brooklyn, her dad drove a yellow taxi. She didn’t have strong SAT scores and she would not have shown up on the radar screen at Vanderbilt. She goes in that first posse to Vanderbilt. She graduates with honours. She gets her doctorate in clinical psychology from Duke University. She becomes the Dean of the college at Middlebury. And a couple of years ago, Shirley became the President of Ithaca College. She is the first Dominican American to be president of a four-year“ college in the United States. `And I tell you that to illustrate the beginning-to-end point of what we think needs to happen in this country.
Yes, that’s amazing. So, you can say you’re a meritocracy, right, but if you don’t get access to that meritocracy you’re out, and I think you’re all about belonging and inclusion. There have been scholarships around for underprivileged youths for quite some time. But the problem always seems to be this overlooked sense of belonging and, as you say, underprivileged students don’t necessarily fail because they aren’t academically gifted. `They fail because they don’t fit in, and I think that’s what’s innovative about your foundation. Taking this angle of inclusion and belonging. And it extends, right?
Inclusion and belonging in our communities, inclusion and belonging in our schools, our colleges and our universities. How do we create societies after that, that are about collaboration and working together? This is not the meritocracy that we say we are in this country. We want to be a meritocracy, we have that beautiful goal in mind. But how can we change to make sure we do provide everybody opportunity and that we give people what they need to get to the same place. And that’s not the same – equity and equality are two different things. And you’re not lowering the barrier because you still keep that aspect of meritocracy, you just help people so they can access it. And I believe this process includes several stages, right? So, without going into too much detail, so we can get into the conversation, Posse starts with this very wonderful large-scale recruitment and assessment process called the dynamic assessment process with large group interviews of a hundred students at a time. We’re looking for their ability to work in teams and their leadership skills, their public speaking skills, all of their problem-solving skills – things that don’t show up when you just look at a test score or paper application. We have an eight-month pre-college training programme. We have a four-year college campus programme with faculty mentors and retreats. We have a beautiful career and alumni programme that works with the Federal Reserve or with Disney or with Goldman Sachs and Bank of America to help connect young people to leadership track positions out there in the workforce.
And Raphael, you worked extensively in both higher education and economics, so it’s quite an interesting background you have. What kind of difference can an initiative like the Posse Foundation make, and could that be used as a template for the whole economy?
I actually have such admiration for what Posse has done because they have really identified a true barrier. I was a professor at USC, The University of Southern California, for 16 years. And the dropout rates particularly for first-generation college students that came from minority backgrounds or lower income backgrounds was extremely high. And part of it was not belonging, but the other part is not having people to just unload on or unload with. College is stressful and if you’ve come from a community and you’re dropped into, say, Middlebury, out in a more rural place, there’s so much that’s different and so much that’s foreign and you’re just going to have stress. And you’ve got to have people to be able to talk to and just sort of say, “I don’t know what just went on here, but I’ve got to figure this out.” If you can have a conversation about that, then it’s easier to sort of work through those issues and find a way to persevere. And for many people who go to college, they’ve gone to maybe a private school or a finishing school or whatever. They’re already used to all this stuff, so the things that are different are really small. But when you’re a Posse scholar, the community you’re going to is usually really different and there are lots of things you have to respond to, so I actually think it’s really important. And then the other part that I think is interesting is that many universities are not sensitised to that reality. They don’t create spaces for students from those backgrounds to just have unstructured time to talk about the things they need to talk about and that is such a critical thing. So, to me, this is really important. And this issue around the interpersonal aspect of merit and achievement, that isn’t about the technical details of whatever it is, whether the math or the science, but it’s really about how do you keep your mind together and how you stay calm so that you can focus? Those are the things that are often not given enough weight. And we see this in a lot of areas. And I’ll just say one last thing on this. So, part of my background is in psychology, and I talk a lot about what happens to people when they’re under stress. And the one thing we know is that people make poor decisions when they’re under stress. That’s one of the reasons why it’s so important to try and reduce the amount of stress, so that people can actually achieve. And Posse is really a great way to do it. You’ve got 8 to 10 people who you go with and you get to lean on each other continually. And I know some of those cohorts, they continued to do that even beyond the college experience, it just becomes part and parcel of how people get along.
Right. I think the psychology is an interesting aspect. If you look at societies in the West, they’re very much focused on honour and power. Whereas that seems to be more in the mindfulness and dignity space. That is often not really looked at, but it’s so important because it actually increases the success rates of people in an economy.
That’s right. And I would actually emphasise more the whole notion of individualism, that we all just need to do things on our own, and we need to stand on our own and not look for help and not acknowledge that we’re struggling at times. And that’s a hard way to go and requires everything to go exactly right in order to get to the end point. And when you’ve come from a background where you’re not naturally funnelled to understand the rules of the game, the likelihood that everything is going to go exactly right is just smaller, is less. And so, the ability for kids from those backgrounds to get through these rigorous elite programmes is extremely difficult. And I’ll just say this, I think it’s not fair for us to ask the kids to figure this out on their own. This is something that – I like how Debbie said it. We need to figure it out so that kids can just live and not have to manage at the same time. And that’s something I think we all need to aspire towards.
So, we’ve heard that the Posse Foundation was established more than 30 years ago. May I ask both of you how far you think – from the 1990s until today – this cause of educational equality has come, and where you hope it will be in another let’s say three decades from now, and what it might actually need to get there? So, my take on this is yes, we have come a long way, but there’s still a lot further to go.
You can go Deb.
I think that’s right. I think we have come a long way and there’s a lot more to do. I’ve seen some very specific things change. In the 1980s, there was an understanding that we needed to pay very deliberate attention to how we create diverse communities on our campuses of higher education. And we elevated positions, from Programme Coordinator and Multicultural Affairs. We now created positions, Provost for Institutional Diversity, Dean of Multicultural Affairs. And we created an opportunity for this idea of DEI – diversity, equity and inclusion – to get more attention. But we had a lot to learn. We didn’t understand how segregated our communities were on campuses, how segregated we were by race and by class. And we’ve thought a lot more about that. There’s a great book that Isabel Wilkerson has written called Caste that I recommend. And it’s about how divided we are in this country. We don’t even think about the US having a caste system. Today, I think with how aware we are of the brutality against black people in this country, with the murder of George Floyd and so many others getting the attention they are, we are. Seeing something amazing. We are seeing a multi-racial approach to racial justice in this country. That’s something we haven’t seen before. That’s something we haven’t seen in the way that we’re seeing it now. This is tough. We have just gone through one of the hardest years in the history of this country. We’re dealing with a terrible pandemic and we’re dealing with how we can face racial injustice in this country. So, we have a very long way to go, but I have a lot of hope because we are talking about it and young people are at the front leading the way, on college campuses, making this conversation important. And they’re not giving up on it. I’m really proud to work with over 60 colleges and universities who care, and who want to make change. So that’s what I see.
That’s a template not only for race, you can also apply that to veterans and other areas where people work in posses, and they’re more successful by doing that.
We have a post-9/11 Posse programme for US veterans. We have a STEM programme. Raphael, do you think that too, or do you have a different take on it? You probably have a different take on it.
Well, it’s a mix. So, I share your optimism. I don’t think I could do this job and be out here pushing if I wasn’t optimistic that we could see progress and make change. There is a long way to go though, and I don’t think that we should just look past that. Look, it’s taken us a long time to get to this point, where the inequities are so large. It didn’t just happen overnight. And I think the progress is going to require sustained engagement and commitment to these things. But like Deb, I actually have to say I would never have imagined that we could have some of the conversations that we’ve had, that I’ve been a part of in the last six to eight months. And it’s with people from all sorts of backgrounds that have different kinds of resources available, and they are committed and understand that there is a role to play for each of them to help make a difference. Now, I just think about during the pandemic here in Atlanta, the Metro Atlanta Chamber effectively adopted a number of schools and made sure that there were sufficient computer resources. If a kid’s family doesn’t have a laptop, when you’re doing schooling remotely, that kid is basically not in school. That then will exacerbate inequities and make it very difficult for them to really continue their educational journey and maximise its value. So, we adopted collectively a commitment to invest in these schools and even devote staff to help the students and help the families figure out how to get online, and if they’re having issues or challenges, what to do. That sort of thing I think is going to become more and more common, and part of this, if there is a silver lining to the pandemic, it’s that it has really exacerbated all these inequities in ways that have made it difficult to ignore them. And so, people are much more aware I think, collectively, that these things exist. And I think it has the potential to really be a game changer in terms of the types of investments we see in schools and in young people. The other thing I’ll say is, we are trying very hard at the Federal Reserve to focus on the solution space and be in the action space. We can talk about the problems a lot but at some point you actually have to do something. We have really been pushing businesses to think about ways that they can take actions to effect some of these inequities. So, one of the things that I’m so proud of at our bank is one of my staffers decided she was going to start an internship programme for kids from a school in an underrepresented neighbourhood. And she just did it on her own. It wasn’t from direction from me or anyone else, but she saw a challenge. She saw something that could be a solution and she figured out how to make it happen. And it’s those sorts of things, if people get in the habit or the pattern of taking action when they see things, a lot of these things are actually not hard, they don’t require millions of dollars, but they can make a difference. And if we got a million people making relatively small differences, that winds up to be a big difference. And so, I’m optimistic. I’m really, in some ways, excited for what the potential is and that I’m seeing some progress toward it.
And by the way, we see similar movements in Europe and elsewhere in the world where central banks are starting to look at these things, not only race but also environmental issues, for example. It’s a big issue here in Europe where we say, okay, the central bank can play a part in that as well. Raphael, Debbie, many thanks again for joining us. It’s impossible to listen to you speak about these methods without feeling really inspired and feeling that you really help make a difference here. And with that in mind, the Posse Foundation is obviously an initiative that deserves maximum support, and you can learn more about it by visiting the website address that’s on the screen now. So please check it out. I would sincerely urge everyone to learn about this organisation and what it does. It’s essential to keep building on success and I’m sure our viewers can help make that happen, so possefoundation.org. Thanks for watching and we will see you again soon.
Thank you both.
Game Changers: Innovation in politics: is it time to disrupt democracy?
Hear from Jason Brennan, Georgetown Professor, expert on democratic theory and the author of “Against Democracy”.
Georgetown Professor and author Jason Brennan makes a provocative case for a new system of government based on “epistocracy” – the rule of the knowledgeable.
“In a way, I’m trying to make an investment in the future, where if democracies have these sorts of crises and people are looking for an alternative, maybe 30-50 years from now, this will be something that’s seeped into the consciousness and people will be open to it.”
So our guest today, Professor Jason Brennan, is arguably the world’s leading proponent of an idea known as epistocracy, rule by the knowledgeable. And in his book Against Democracy, Professor Brennan argues that the political system as we know it today, really incentivizes voters to be ignorant, to be irrational, tribal in a sense. And we are here to discuss what an alternative system might look like, and whether recent events have further underlined why change is actually needed. So welcome to Invesco Game Changers.
Jason, many thanks for joining us. Maybe before we start, I have to tell you that Against Democracy, it’s really one of my favorite books. And it captures perfectly my own feelings about everything that’s wrong with politics in the present day, right? And they say, you should never meet your heroes, but this is a real honor for me. So let’s deal with the fundamentals first. What do we mean by epistocracy?
Yeah. Well, thank you, by the way, for having me. And that’s a very flattering thing for you to say, I really appreciate it. So I’m also honored to be here. The word epistocracy was coined by the philosopher David Estlund back in about 1997. And it’s supposed to mean a political system more or less like the ones we see in OECD countries, a representative political system. But the difference is that in one way or another, by law political power is apportioned according to demonstrable, measurable competence, or knowledge, or goodwill, or good faith.
So as opposed to in a democracy, supposedly what makes something a democracy is that every person has fundamentally the same amount of basic fundamental political power. Now, no actual democracy is truly equal in this way, all of them exclude children, all of them have issues where richer people, better looking people, people with the right name, people with the right race are more likely to win power than others, so no democracy is actually truly equal. And in fact, in most democracies, the leaders know more than the average person. The prime minister knows more than the person at the pub.
But in an epistocracy, somehow by law, you shape the vote in order to enhance the power of knowledge. And there’s different forms of this, there’s many possible variations, some of which are more objectionable than others, some of which are more defensible than others. So the most basic form, which is not the form I actually advocate, would be you only get to vote if you could say pass a test, like a kind of voter knowledge competence exam, the way you might have to get a driver’s license. So by default, no one gets to vote. But you get to vote if you can pass or demonstrate competence. That’s probably not a defensible version.
The famous philosopher and economist, John Stuart Mill, and even the philosopher, John Rawls at times, advocated plural voting, where everyone gets one vote but some people get more. In Ireland you sort of have that, because members of certain colleges get extra votes with regard to placing seats in parliament in their upper house.
I didn’t know that. Oh, interesting.
Yeah. There’s about six seats in the upper house, which are decided by, I think is it University College Dublin, or one of the universities there. But the system I think is probably the best, which we’ll probably talk about it more at length later, is what’s called enlightened preference voting, which is a system in which everyone is allowed to vote. Everyone really votes in a sense as an equal, but when you vote, you do three things. You tell us what it is you want. Whatever the thing we’re voting on, you tell us your position on that. You tell us who you are, we collect your demographic information, your race, your income, your ethnicity, your religious affiliation, where you live, your employment status, your educational status. And finally, we give you a battery of say 40 basic questions about basic political knowledge.
When you get those three sets of data, what you’re able to do, and any statistician can do this, the government can do this, the data can be anonymized, made public, is estimate what the public would have wanted if it were demographically identical but fully informed. So I call this enlightened preference voting. It’s a way of estimating what the public would want if it were knowledgeable, even though it isn’t. And the nice thing about that is that in that way, we’re all still sort of equal. It’s not really that I get extra votes and you get fewer votes, but rather, we are extracting knowledge from the populous in a better way. So these are some of the possible variations. But the idea of epistocracy is in some way weight votes according to knowledge, and some versions are maybe more defensible than others.
Right. So when I read Against Democracy, that was after the 2016 presidential election. And for me, it captured really powerfully the problem at the heart of the political system. And I find it really amazing that more commentators haven’t taken this view. And how can people ignore that the political system is, I would say, completely broken in some cases, in some countries? Simple fact that a non-politician in America became president should have been a wake up call, positive or negative. And has this picture changed at all in four years’ time, do you think?
Well, one thing I can do is check and track the responses to the book. And granted, in democratic theory, which is a subfield of philosophy that studies democracy, or subfield of political science that studies democracy, there is a selection effect where the people who choose to specialize in that are also the people who love democracy the most. In the same way that for whatever reason, philosophy of religion is dominated by evangelical Christians. It doesn’t have to be, but it is.
Nevertheless, the book had generally fairly positive reviews, positive responses. Even when people didn’t necessarily like my solution, they did like the critique. It was translated into 10 languages. I just got the Ukrainian version yesterday. It was a best seller in Germany, the German version was. So I think people are open to it. There’s lots of media mentions of the idea. Every day there’s media mentions somewhere in the world, in some newspaper, of the idea.
I think people are open to it because of the problems you’re mentioning. I mean, Erdoğan in Turkey basically said to the Turkish people, “Should we remove some of the constitutional constraints on my power?” And they said, “Yes.” Brexit, it sounds mean to say this, but the truth is if Brexit voters had been better informed, they would not have voted for Brexit. It’s not just speculation. We have actually very good evidence of that because of polling data, about what leave voters believed, what remain voters believed, and what the truth was. And we know that leave voters were in general and on average, very far off from the truth on a lot of relevant political information, such as where investment is going, what sort of money is coming in and going out, what percent of the UK is made up of EU immigrants.
And we know… I’ve done the regression. You know that if you could just have waved a magic wand and make everyone fully informed, they would have vote to remain rather than to leave. The Five Star Movement in Turkey, all sorts of these issues. What’s happening right now in the US, where… I wrote a post today on my blog talking about this point, because back in 2016 and 2017, when I first started arguing this, I used Trump as an example. And I often vote Democrat, but I’m not a committed Democrat. I really don’t like either party. But I didn’t like Trump, and I knew there was something unusually weird about him. And I kind of pointed to him, and I had a lot of democratic theorists respond to me by saying, “No, you don’t understand. The reason people voted for Trump is because they were hurt by globalization, and they’re rationally trying to find someone who will protect them from the damage done by globalization.”
And back at the time, I said, “It’s not clear that’s true. We have quite a few economics studies saying that’s not the case. In fact, the average Trump voter’s fairly rich. The average Trump voter actually receives a higher subsidy, not a loss, but a subsidy to their income from globalization than I do. In fact, the people who are voting for Trump are usually not harmed by globalization, but benefited from it, so that doesn’t seem to be right.” But now, that kind of argument is even less tenable, because you have a massive percentage of Republicans who believe in the QAnon conspiracy theory, even the ones who don’t explicitly affirm it, because they don’t know what it’s called, believe many of the beliefs in that theory. A lot of them believe that the election was rigged or stolen, or there’s a massive belief in election fraud and a bunch of other utterly bizarre beliefs that really can’t be defended.
And so I think the democratic theorists who back in the day were inclined to defend the voters who voted for Trump and say, “Well, they had their reasons,” I think are now more likely to come over to my side and go, “Yeah, there’s something deeply bizarre about their behavior. It’s not that they’re rationally trying to promote their interest. It doesn’t really appear that Trump has been good for them, and it doesn’t appear that they care about that.”
And do you think your theory also applies to countries like Germany or Switzerland, where I’m based, where we have a lot of consensus building, all the parties are represented in the cabinet and it’s less of a partisan atmosphere, I would say, compared to the US, right? So does it come closer to your idea of epistocracy?
I think some countries do democracy better than others. Switzerland, in a way, does democracy very well. Though, in a way, they don’t do that much democracy. I mean, Switzerland’s secret is so much of politics is devolved to the local level where people have a stronger… Their votes matter more at the local level, they have a stronger incentive to be informed, it’s easier to be informed. If we’re talking about fixing Main Street, I can just see that Main Street is broken.
And then at the national level, they use a lot of referenda, where they have low participation rates in the referenda. And in fact, the people who participate tend to be the best educated and most informed. And also Switzerland, it’s an unusual country. Comparing Switzerland to the US is a mistake. It’s more like comparing Switzerland to say Fairfax County, Virginia, a highly educated upper class area. In Germany, I do think that empirically speaking, having more political parties is better than having fewer. And so this is a reason to maybe use proportional voting systems rather than first past the post, like they have in the UK or the United States. First past the post voting systems empirically predict that you’ll have two major parties, it’s unstable to have more than that for a variety of mathematical reasons we don’t need to get into. And that’s what you tend to find. Even when you have more than two parties in a first past the post system, usually one is just in the process of supplanting the other and it’s disappearing.
And Voltaire had a good analysis of what’s going on here when it came to religion, and it applies to parties as well. Voltaire says back in his letters on England, I think that was the document where he wrote this. He’s like, “If there’s only one religion in an entire geographic area, the people in charge of that religion want to dominate and crush everyone to prevent any opposition. When you have two religions, Catholicism versus Lutherism, they fight it out hardcore because you’re almost on the verge of winning, and you really demonize and hate the other side. And you have so many people on your side, you can afford to sort of ignore and demonize these people.”
But Voltaire points out when you have 30 religions, 30 versions of Christianity, you can’t form your own enclave. You just can’t escape it. You have to work with other people, you have to tolerate them, you have to understand them, you can’t see them as enemies. And so when you have 30 sects of Christianity, everyone kind of accepts each other and goes about their business, and it’s fine. There’s something like that when it comes to politics. When you have lots of very small parties, it’s required that you basically don’t demonize others and work with them. When you only have two parties, it’s really easy to think our side is wonderful and we care about justice, the other side is pure evil, they’re stupid and evil. We’re good and smart. They’re stupid and evil. You can’t pull that off in a proportional voting system when there’s so many parties,
Right. And Winston Churchill, I think once said that, “The best argument against democracy is a five minute conversation with the average voter.” So without insulting any voters, of course, you basically paint a picture of hooligans, hobbits, and vulcans in your book, right? That’s how you describe voters. And I’m particularly interested in the idea that hooligans, somehow 5% I think you say, manage to drive a much of our system, despite being relatively uninformed. And meanwhile, the smart, super hyper rational vulcans, academics, probably like you, they effectively drown out. So do you think most voters today would fail Churchill’s test?
I think they would, and especially if you do the five minute conversations broken up into one minute at a time over multiple years, then you’ll really see how bad it is. So to sort of summarize that for people who haven’t read the book, a hobbit is… If you’ve seen the Lord of the Rings films or read the novels, hobbits don’t really care about the outside world, even though we see some having an adventure to save the world, they’re supposed to be unusual. They just care about living their genteel British countryside lifestyle. The analogy to that is the typical non-voter in a Western democracy doesn’t really care that much about politics. The main reason they don’t vote is because they’re not interested in it. Because they’re not interested in it, they are very few political opinions, if any political opinions at all. They’re not very ideological. They barely ever participate, and they just sort of want to go about their day-to-day business. They’re also radically uninformed. And that’s roughly about 50% of Americans. in Switzerland, it might be maybe 35%, but it’s roughly about 50% in most countries.
Hooligans, if you’ve ever been to a football game in countries where people really care about football, like for example, I went to a football game in Brazil that exemplified this, they’re very much into their team. They love their team, they can remember lots of facts about their team, but they’re incredibly biased. So an example would be, in the United States, Tom Brady of the New England Patriots was accused of deflating footballs. Everyone from New England, including me, says, “No, of course he’s innocent. He’s just the greatest football player of all time.” And everyone else, who’s of course, jealous of his greatness, was like, “Of course he did it.” We’re getting the same information, but we’re processing that information in a way that flatters what we want to believe. And really, in the best evidence is that’s roughly the other 50% of voters in modern democracies.
Vulcans, these hyper rational, non-ideological, people who just believe things on the basis of the evidence, and they change their mind as soon as they get better evidence, and they believe things only as strongly as the evidence allows, they’re kind of an ideal type. I don’t think I’m one. I’m not saying that vulcans should rule, I don’t think there really are any. The point of them was to say many democratic theories or arguments for democracy take the form of people are hobbits, but if we get to participate, they’ll turn into vulcans and democracy will work. In fact, democracy, and every other system, is the rule of hobbits and hooligans. What do we do about their hooliganism? And what do we do to diminish that?
When you talk to the average voter or the typical voter in the United States, this is what you will find. They are radically uninformed. They know who the president is, they generally maybe know who the vice-president is, they don’t know which party controls Congress, either house, they don’t know who their representative is in either house of Congress, or they don’t know who their two senators are, they don’t know the name of their governor, they don’t know which party controls the state, they can’t name any social statistics within say five percentage points, they don’t know the unemployment rate, they don’t know income things, they don’t know about recent changes. They maybe remember about six months of economic performance, which if they do know who the incumbent is, they’ll blame it on that person, regardless of whether they’re responsible, which is sort of like saying, “I had a bad day at work, so I go home and kick the dog.” It only makes sense to blame them if they’re actually responsible for it. They don’t know much about other countries. They can’t find…
If we’re at war with a country, the majority of Americans can’t find that country on a map. And by the way, usually the Americans who can are against that war, et cetera, et cetera. Similar statistics apply to other countries in which we have statistics. We have better statistics about the US than others, but we generally find this is the same. But it’s even worse than that. It’s not just they’re radically uninformed, most voters don’t really have much in the way of political opinions. There’s a really good book on this that summarizes all the research over the past seven years called Neither Liberal Nor Conservative by Kinder and Kalmoe. And one of the things that they look at is surveys that were started by a guy named Converse, where you take a bunch of voters and you ask them their opinion on a particular topic. And then you ask them their same opinion on about that same topic a year later, and a year later, and a year later.
And he would calculate what is the correlation between these beliefs over time. And in Converse’s original study he found for most Americans it was 0.00. When you ask someone their opinion on the spot, they don’t like to say they don’t know, so they’ll make something up, but they really don’t have opinions, they’re just making something up. And even among the people who do appear to have opinions, it’s much more common for someone to do this. Like, “I am committed to being a Democrat because I derive social benefits from being seen as a Democrat. Other college professors like Democrats and they hate Republicans, so I better be a Democrat so they like me,” and that’s kind of what we’re doing. And then I find out what the Democrats believe, and I say I believe the same thing. I might even convince myself to do it.
As soon as the Democrats change, I will change too. And if you ask people, these are real studies, if you ask people, “Why did you change your mind?” They say, “I’ve always thought that.” For example, with Trump, when he became the presumptive nominee in 2016, before he was the presumptive nominee, the overwhelming majority of Republicans said they were in favor of free trade. Within about a month of him being the presumptive nominee, the overwhelming majority of them said they were protectionists. When people asked these Republicans in polls and surveys and scientific studies, “Why did you change your mind?” They said, “We didn’t. I’ve always thought that.”
If that seems weird, think about sports again. Tom Brady, when he is the quarterback of the New England Patriots, Paddy down at The Lansdowne Pub in Boston, says, “Tom is the greatest quarterback of all time. He’s the greatest football player of all time.” But Paddy, you know about him, that had Tom just decided to leave for money and go play for the Jets, Patty would have said, “I always thought he was always overrated. I’ve been saying that for years.” Paddy’s sincere, but he’s wrong about himself. And that’s kind of how we think about politics, and that’s how democracy works.
That’s interesting. You stress in your book, Against Democracy, that actually it’s more about enhancing democracy then dismantling it. So with that in mind, how might epistocracy work in practice?
Right. There’s a couple of forms that are more defensible than others, and let’s talk about one of them, the idea of enlightened preference voting. So the enlightened preference method that I have in mind, it’s not completely original, in the sense that it’s a research method that political scientists and economists use right now. So here’s a question, I’m of Irish descent and I’m high-income, and I’m highly educated. How did those factors affect my voting behavior? Well, if you wanted to know that, you couldn’t just look at things like how do say Irish people vote, because that’s one of many, many factors that influence my voting behavior. What you need to do is get lots of information about people’s demographics, among lots and lots of different people, plus you need to know what they know as well. What sort of information do they have?
Once you have all this data about lots of people you can then using basic statistics, isolate variables. Here’s how Irish identity affects voting behavior while isolating everything else, income. Eliminating the effect of everything else, income, employment status, education, knowledge, which are different, knowledge and education, not the same thing, et cetera. And so this is how we study this. And because of this, there’ve been a lot of studies on this by people like Bryan Caplan, and Larry Bartells, Martin Gilens, let’s see, Scott Althaus and many others. We can say things like it turns out that high-information voters tend to have systematically different policy preferences than low-information voters. This is not explained by income, it’s not even explained by education, it’s not explained by race, or ethnicity, or religion, it’s just an information effect.
So this is a research method that political scientists and economists have used for a long time. And using this, you can do things like calculate well, what would the public have wanted if it were fully informed? We give a public a poll, we know how informed they are, what would they have said on this poll if they were fully informed? What would they have said if they were completely uninformed? How does that match up to what they actually want? So what if we took this research method and used it to actually create law?
So again, the idea is on election day, you come in, everyone gets to vote. Your cat can vote. Your kids can vote, there’s no reason not to let them. Let everybody vote. When you vote, though, you do three things. You tell us who you are, we get all of your demographic information. And there’s important interesting questions about how you collect this. Does it get assigned by the government? We want to let people just say at the point of voting, because they might strategically lie? That’s a complication that needs to be figured out, but that’s part of it. So we get your demographic information. We give you a quiz of say 40 questions about basic political information. Who’s your Senator? Who’s your representative? Who’s your member of parliament? What party is your member of parliament part of? What’s the unemployment rate? What’s the price of a bus ticket across town? It could be all sorts of things.
Then we find out what it is you want. How did you vote? And then this information is anonymized, it’s made public. And you calculate, what would the public have supported if it had gotten a perfect score on that quiz, a demographically identical public had have gotten a perfect score on this quiz? And you do that instead.
Now, I think the biggest complication here, which people are right to pick at, is well, who decides what goes on the quiz? It’s one thing when you have economists and political scientists and others who are just trying to do research, and even then there’s a question of what they put in. And we often are using things like the American National Election Studies and that sort of stuff. But they’re doing it to try to figure out the truth, they’re not trying to influence power. Well, once you have a quiz, then people have a incentive to game that quiz, because you might want to change the questions in a way that benefits your party at the expense of others. So my suggestion, and this is all very provisional, I really favor experimenting with this on a small scale, studying it more. Then if it works, trying it. I don’t favor let’s do this right now. We don’t know enough to do it right now.
Your proposal would be to inform the public about a potential outcome, or would it be to override the results?
I mean, at the very least, I think we should use it for information purposes, because if we say to someone, “Look, we gave you a quiz. We gave the public a quiz on basic political knowledge. The average score in that quiz was equivalent to chance. It was a multiple choice question. We gave you four answers, you got a 25% on this quiz.” That’s a pretty good estimate about how the public tends to do, the same as chance. We don’t know if they’re ignorant or if they’re guessing. So you got 25% of them right, but had you got 100% of them right, you would have voted for that person rather than that person. I think that would be good. But I also think it is worth trying actually just using this as the way we decide policy, that would be even better, I think.
In part, because if this were the way we were deciding policy, it would change the behavior of parties and candidates. When candidates are running for office, when parties are putting forward candidates or putting forward platforms, they are responding to the voting environment. This is one reason why Republicans don’t campaign in New York and California for the presidency. Because even though there are more Trump voters in California than there are in Texas, but because California is so big and has so many Democratic voters, it will always go to the Democrat, except I guess for Reagan in ’84, so it doesn’t make sense to even talk to those people. You don’t even try to appeal to them. You appeal to people in swing states.
And granted, in other countries with different systems, you’re going to get different but similar kinds of effects. The way you campaign, the platforms you push are based upon the voting system that you have. If you had an enlightened preference voting system, then what would happen is you’d have better campaigning, better quality candidates, better quality platforms, because that’s what it would take to win in that system. So they would purposely strategically modify their behavior to be higher quality in order to be selected by it.
Again, I mean the main puzzle is who chooses what goes on the test. And this may sound puzzling, but what I think we should try is actually having democracy choose to write the test. You randomly select 500 people, 500 citizens at random, almost the way you do jury duty in the US, and I think in the UK as well. I think you have randomly selected juries when you have a jury, is that right? Okay. So you randomly select people for the system. You pay them. They come in, they spend a weekend or a week together. And you tell them, “You are tasked with identifying an operational definition of an informed citizen. You give us 40 questions that you think an informed person ought to know. They can be any kind of question you want, you pick it. You’re going to deliberate together and decide that, write down those questions. And this is what we’re going to use to judge what counts as an informed vote. This is the one thing we’re going to use to weigh votes in order to generate the outcome.”
And this may sound perplexing because I’ve just argued at great length that citizens are completely uninformed, but it’s actually not that puzzling when you look at it more. In fact, when you go and ask voters, “What do you think you ought to know to be informed?” They say more or less the same thing I say. They say, “You should know the unemployment rate. You should maybe know the price of some commodities. You should know about recent changes in the economy. You should know the crime rate. You should know some facts about the social sciences. You should know who your representatives are. You should know the constitution of your country and some facts about the way the government operates and who has what power.”
Voters in a sense, they know what they ought to know in the abstract, they just don’t know it. So the typical voter’s like, “Of course you should know what’s in the first amendment.” “Great. What’s in the first amendment?” Well, they don’t know. “Of course you should know who your congressperson is.” “Cool. Who’s your congressperson?” “I don’t know.” “What party are they a part of?” “I’m not sure.” So it’s kind of voters are almost in a position like a student who did badly in chemistry class. They’re aware that like this sort of stuff… “I’m taking an organic chemistry class, so I need to know what a ketone is and how it reacts with all aldehydes or something, but I don’t actually know what they do. I just know I’m supposed to know that.”
So I think democracies are competent to tell us what counts as information, even if they don’t have that information. And this would be a way of avoiding having political parties and others manipulate that test for their own benefit. At least preventing them from doing too much of that.
Right. So one problem, as you mentioned, the voters knowledgeable and unknowledgeable voters. I understand that. And my question, are there also other measures to sort of encourage the superior decision-making at the highest level, if you will? I mean, you mentioned the quiz as one tool, if you will, but do we have to radically rethink also the people who run for office? Do they even should have party affiliation, or should they be having a neutral technocratic sort of agenda?
I think there’ll be a lot to be said for not having parties. It’s something that hasn’t been studied at great length, so it’s largely speculative. What would happen if there weren’t parties? I’m worried though that there’s not really a way of avoiding that. That one way or another people are going to, even if there isn’t like a formal legal system, there’s going to be something where people affiliate themselves in a group, and people are going to use that as a proxy for deciding whom to vote for and why they vote for them. And then you’re going to have things like certain groups are associated with certain types of people, and then you’ll get that kind of fandom behavior. What you tend to see in the US when you… We have a lot of data on this. Is something like Boston Irish Catholics. I’m using them because that’s my group. The Boston Irish Catholics vote Democrat, regardless of whether they agree with the Democratic platform or know what the Democrat platform is, because there’s kind of a social benefit to it, in the same way that there’s a social benefit from being a Celtics, Red Sox and Patriots, or Bruins fan.
Southern evangelicals now tend to vote Republican, they used to vote Democrat. And again, there’s a kind of social benefit. I think you’re going to see that even if there aren’t formal political parties. So nevertheless, the thing is when you change the voting system, you change the number of political parties, the strength of the parties and the composition and also what the parties do and how they campaign. So some of the problems that arise as a result of party politics are themselves endogenous to the voting system. If you fix the voting system, you’ll reduce many of those problems.
Right. And do you actually need to elect a government, or can that be appointed and then run by KPIs? Basically, let’s say low-unemployment, high-growth, a functioning health system. I mean, these are not rocket science ideas, right? They are everywhere the same. Most thinking is there a way of you elect basically the government system around the government, but the government itself is basically almost like a company.
Yeah. I mean, in a way that’s kind of what you have in Singapore. People like to say that Singapore is not democratic. I think it’s significantly more democratic than people give it credit for. But Singapore, I’m not sure how much we can explore their model elsewhere, but they do have a system which heavily rewards technocratic expertise and actual competence. And the result is that the technocrats who’ve run the government, and I’m not saying everything they do is good, they have problems with civil liberties and so on, but they took a country that was really poor and made it into this fabulous, incredibly rich place in a very short period of time, with a wonderful standard of living.
I don’t know if you can really scale that up to a large country like the US, or the UK, or Germany. I think there might be puzzles about the optimal size of government, and the city state is a sort of unique type of government in a way, where because you have so many people congregated in a small area and they’re all living roughly the same lifestyle, it might be easier to be technocratic in administering that than others. The other puzzle that you have though, and this is why representative government is important, is bureaucracies have agendas of their own. And there’s a strong tendency for bureaucracies to go against the common good and to promote the good of the bureaucracy instead.
I mean, the economist William Niskanen, said that, “The best way to model bureaucracy is a budget maximizer.” In the same way that you model firms in a competitive market is trying to maximize their profit, you should model bureaucracies as fundamentally concerned to maximize their discretionary budget, rather than to promote the common good. And there’s a lot of evidence that that’s true, and that’s how they behave. So if you have… In a way, yeah, if you could just appoint well-motivated bureaucrats to run everything, that would be wonderful. But the problem is they’re real people. And once you create this agency, they’re going to have a strong incentive to use that agency for their own benefit.
You work in college, I work in a college, we see this in universities. Individual units within the university system largely are trying to promote their financial and their status interests at the expense of the university, and at the expense of the students. That happens in government too. So we have to have some sort of genuine oversight, even though there are certain cases where it’s important to eliminate political control. One reason why most country’s central bank is not controlled democratically is because I think the leaders know, the empirics are clear, that democratic control of central banks is disastrous. You need it to be in government.
So I agree the political system shouldn’t be seen as immune from innovation and disruption. And always surprises me, we see all the corporations always on the edge of new innovation, and rethinking their own processes, but you don’t see that so much in the political system. So epistocracy almost seems to be a huge step change, right? So how likely do you think that is coming into action, and will be introduced by someone or a party, maybe?
Yeah. Great question. And I’m glad you brought up corporations, because there’s a dynamic that applies to corporations, which very weakly or barely applies to governments, and this is why change is so slow. Corporations, it’s understood if you’ve ever read Ronald Coase, a corporation, a firm is in a way, the internal part of a firm is an immune to the market. It’s the elimination of market mechanisms and the creation of a hierarchy. What does that mean? Because a corporation could simply, instead of having a full-time accountant, whenever someone needs some accounting service, they could just hire someone in the market, but they don’t. They have internal employees, where there’s a command structure.
So you get all these bureaucratic problems, but nevertheless, corporations are still influenced by a market. They’re competing with others. They’re forced to be profitable, to avoid externalities, do these other sorts of things, or they will lose their business. In a contrast, governments are monopolies. the US government has a monopoly of control rights in the territory that we call the United States. The UK government has a monopoly of control rights in the territory that we call the UK. They don’t really compete very much. They do some competition, because there’s some ability for people to move between places, but usually it’s only very privileged people. There’s more ability for companies and financial capital to move. So there is some competition in the terms of foot voting, to try to make your place attractive for investment and for immigration and so on, but it’s not that much, they’re monopolies. They have all the problems of monopolies. And thus, they’re slow to change. They face much less competitive pressure. And so there’s much more internal rent seeking and capture.
What it really takes, I think, for massive institutional change, historically speaking, is crisis. You have a massive crisis. And when there is a crisis, people look around and say, “We’re having a problem. What do we do? This isn’t working. What do we pick instead?” And then they look for something that’s in the air, that seems better. So in a way, epistocracy, might we see it? I think I’m doing, by writing this book, a lot of what people were doing in the 1700s in Europe. You have philosophers and the equivalent to political scientists, the equivalent of economists, we don’t really have those terms back then, writing about why more or less democratic representative government, I mean, they just called it republicanism, would be superior to genuine absolute monarchies and dictatorial monarchies. Constitutional monarchy is still really kind of… it’s really a democracy, right?
So they’re defending that before you see it in place. And then as monarchies have these series of crises in the early 1800s, you see a tendency and then later, even to the 1900s, you see a tendency for them to look around, and these ideas, from economists and philosophers and others, have seeped into the public, have been spread to the public, who endorses them even though they don’t know the source of these ideas, they’ve just kind of inherited them. And then when these crises occur, they look to liberal constitutional republics, and liberal constitutional democracies as a solution to the problems of monarchy.
In a way, I’m trying to make an investment in the future, where if democracies have these sorts of crises and people are looking for an alternative, maybe 30-50 years from now, this will be something that’s seeped into the consciousness and people will be open to it. Is it working? I don’t know. The word epistocracy gets a lot of mentions now compared to in the past. And I do notice that politicians in the US are throwing the word hooligan around the way that I use it. So even in Congress the other day, one of the senators used hooligan. I’m like, “He said it. There you go. He doesn’t know who I am, but somehow he heard about that.” So maybe that’s what I’m up to, but I don’t think we’re going to see it in the next three years.
Right. Well, Jason, many thanks again. This is a conversation I wanted to have for a long time, ever since I read your book, so thank you for making this happen. And I hope our viewers have found it as fascinating as I have. And for anyone who hasn’t read it, I strongly recommend Against Democracy, even if you don’t agree with the message, I think it will make you think, and isn’t that a vital element of what democracy is ultimately about? So see you again soon.
Yes. Thanks so much.
Game Changers: The shape of things to come: Imagining 2030 and beyond
Hear from Professor Mauro Guillen (Dean, Judge Business School, University of Cambridge) and Stephanie Butcher (Chief Investment Officer and European Equity Fund Manager, Invesco).
What will the world look like by the end of the decade? No one can truly predict the future, but many of us try to develop an informed idea of what it could hold. And I’m delighted to welcome today, Professor Mauro Guillen, political economist, sociologist, management educator, and now director of Cambridge Judge Business School. Mauro’s idea of where we might find ourselves in a few years’ time is unusually comprehensive, as shown in his bestselling book, “2030: How Today’s Biggest Trend Will Collide and Reshape the Future of Everything.” Also joining us is Stephanie Butcher, Invesco’s Chief Investment Officer in the UK. Like every investor, Stephanie has a very keen interest in where the world may be heading.
Welcome to Game Changers. Mauro, Stephanie, thanks for taking the time to be with us today. I would say, I guess, the first issue we want to address is one that’s been part of so many discussions since early 2020. It’s COVID-19. And my question is: is this pandemic likely to be substantially changing the future or is this just likely to make the future maybe arrive more quickly. Mauro, maybe you want to go first.
Yes. Thank you so much for inviting me, Henning. And certainly, COVID-19 is the kind of crisis that began as a public health emergency, but then, of course, mutated into an economic crisis. And it is, of course, affecting the prices, but it will change the future. Although, I don’t think it’s going to derail the direction, the general direction of change. In other words, I think this pandemic essentially accelerates pre-existing trends. I think the most obvious example is the use of technology. So e-commerce platforms were already growing before the pandemic. The use of technology in education was already growing before the pandemic. Even the use of technology at work and for the purpose of working remotely was growing from a very low base. But the pandemic, of course, has accelerated that to the point that over the last 18 months, things have changed in terms of the use of technology in ways that, normally, would have taken maybe five years or six years for them to change.
That’s one example, but there are so many others. Let me just mention two more. Inequality. That’s another trend that was going on before the pandemic, but the pandemic has accelerated big time. And then another one, by the way, is population trends. So some of the pre-existing population trends have also been accelerated by COVID-19. So it’s a great accelerator. In other words, we can still talk about the future, but we have to remember that the future is now arriving much, much faster as a result of COVID-19.
Stephanie, you studied history during your time at Cambridge. Do you feel our recent events rank alongside, let’s say major disruptive episodes. We look at the Great Depression or world wars.
No, I mean, I think I wouldn’t put it in the same category. I don’t think we’re looking at a sort of revolution overnight, but I agree with Mauro. I think it has been a really swift acceleration of some key trends. And I think, from an economic point of view, it’s really forced people to rethink things like supply chains. That was something that people hadn’t really seen stressed. And then you’ve got the geopolitics on top of that, which was also putting some questions into how those work longer time. I think the inequality point that Mauro mentioned is really important. And I think politics and economics are going to be inextricably linked moving forward.
So I think policy discussions on how you solve to some of these problems. And if you think about we’ve been post-GFC, really a monetary only environment. And if anything, we had to start austerity on top, but now, fiscal policy is very much part of the debate. And like they think that goes away. So I agree with the acceleration of digital trends. I think the reappraisal of working practices and frankly, for individuals as well. A profound reappraisal of their work-life balance. And that will probably have implications for us as investors as we move forward.
Great points. And maybe let’s take a closer look at some of the key elements of this great acceleration starting with demographics. What trends are likely to be especially evident by 2030, Mauro?
Well, I think that the biggest one that we need to pay attention to is population aging. So we have been talking about population aging for at least 20 or 30 years, but in the next decade or so, we’re going to feel a big impact. And the pandemic has accelerated that trend by the way for the very simple reason that young couples have postponed having babies during this crisis. For example, in the United States during the year 2020, about 300,000 fewer babies than expected were born. And so population aging means several things. Some of them really good, like for example, well, we’re going to have people with more experience out there who potentially could continue to make contributions to the economy, but it’s also going to have some negative consequences in the sense that it may be difficult for defined benefit pension systems to essentially make good on the promises that were made to many workers.
If we move in the direction of essentially having more people in retirement for each person who is making contributions into the system, because they’re working. But as far as the eye can see, this is going to change consumer markets because by the year 2030, the largest segment in the market in terms of age will be people above the age of 60. I think it’s going to change financial markets as well, because an increasingly older population means that savings behavior shifts, that the demand for certain kinds of financial products also shifts. And therefore, it will have many important lasting consequences. The fact that we’re going to have, beginning with Japan, about 40%, nearly 40% of the population about the age of 60 after Japan will be China that reaches that proportion. And then Europe. A little bit later United States. And after that, Latin America and the rest of the world.
And, Mauro, you just mentioned pensions, right? Stephanie, if you look at other parts of the financial system and investment implications, thinking about, for example, consumers, right? You also see opportunities here. And what are the implications for this from an investment perspective do you think?
Yes. I agree with everything Mauro said in terms of the big picture. And I think, as investors, there are lots of implications. So as you said, moving towards different products. Wealth management is going to be important. And then I think as well as the policy shifts, we’re already beginning to see it. So decision-making that governments have to make, for instance, so social healthcare requirements versus education and housing, and how to sort of balance those over time. I think the other big implication is a shift from goods towards services. The older populations tend to consume services more than goods. And so that will be an interesting implication to think through.
I think there will be some elements though that will stay in place. And I think, the emphasis on ESG investing is going to be in common, whichever sort of balance you have. So I think that element of thinking through the holistic element of running businesses is going to be increasingly important. But I think, for me, the biggest, biggest trend is probably that sort of shift from goods towards services and the implications of that.
Right. And then that’s another shift, Mauro, demographic-wise, which you mentioned your book is the growth of the middle class and developing economies. Could you talk a little bit about that?
Yes. So we are on the verge of a very different situation in the world from the one that has prevailed for the last hundred years or so, which is that Europe and the United States will no longer have the largest middle class markets in the world. And the middle class, of course, is key in the economy, also the political system, because most of the consumption in the advanced economies comes from the middle class. And, unfortunately, both in Europe and the United States, the middle class has been stagnant for at least 15 to 20 years. Whereas in emerging markets, especially those in Asia, it has been growing by leaps and bounds for two reasons. First is that every year that passes, there are more people in those markets that are above the minimum threshold for being considered middle class. And then secondly, is that those people who are already middle class in those markets have been seeing their incomes increased over the last 15 or 20 years.
So in other words, by the year 2030, just China and India together will be bigger as middle-class consumer markets than the US and Europe. If on top of that, you add the rest of Asia, you add the middle east, you add Sub-Saharan Africa, then we’ll be in a situation in which upwards of 60% of the purchasing power of the middle class in the world will be located outside of Europe, United States, Japan, all of the traditional rich countries. So that’s a big change. That’s a big change for many reasons. And more importantly, I think is something to watch in the context also of climate change, because, well, the middle class has air conditioning at home. The middle class has a car as opposed to a bicycle. The middle class wants to go on vacation. So we’re seeing this tremendous growth of middle class, of its consumption in the world, at the same time, that we also witnessing tremendous pressure on our natural resource base and on climate change.
And Stephanie, these trends, I guess, they’re already influencing your investment decisions right now, right? It’s not only 2030.
Yes. I think China is, as a driver of global growth has been something we’ve been very conscious hope at Invesco for a long time and we’ve been deeply involved and investing in the region and have presence there. I think the interesting element is that the rebalancing, particularly with China, but over time, as you see that sort of development of middle class services and consumption outstripping manufacturing, and construction. Albeit different rules as well, and I think from a market context the results could be quite different for investors versus what the underlying fundamentals are saying… And I think we’re seeing some examples of that with industries that are very attractive in terms of their growth profiles. But in terms of how much an underlying shareholder sees of that versus the social equality points that China are emphasizing, that’s going to be interesting to look at.
I think, clearly, we’re going to see more new businesses coming through from these markets as well. And so we’re going to see homegrown versus international brands. So for a lot of the international players, they’ve had very, not easy—that isn’t the right word—but they’ve dominated some of these markets. I think as we’re seeing more domestic brands come through that puts more competition in. Again, the supply chain difficulties as well. So I think clearly the pie gets bigger. The question is who owns, what percentage of it is going to be the piece where investors will really make or lose their money. But as an overall trend, it’s going to be absolutely crucial. And I particularly, I think Mauro’s point about the carbon intensity of middle class growth shouldn’t be underestimated. That is going to be the biggest challenge, to some extent, what Europe does near term about its carbon intensity is far less relevant than China and in particularly, India as well. So I think that’s something that we’re all going to have to grapple with in terms of policy.
And, I guess, investment opportunities as well. Right? If you look at these carbon technologies, for example, right?
Yes—huge opportunities. And again, looking at the experience or for instance, European companies who’ve developed a lot of capabilities and technology. There’s a huge market to be. We’re seeing it. Major European companies involved in emerging markets and helping create solutions. But we need to see more about and that is going to be where a lot of capital needs to be allocated.
Right. And another theme in Mauro’s book that I personally very fascinating is the ever-increasing role of women as practitioners, as academics, innovators, entrepreneurs, and leaders, right? And, Mauro, how is this trajectory likely to unfold?
Well, one of the most consequential changes over the last 20 or 30 years has been the increasing access to education by women, in an increasing number of countries around the world. This has opened up new horizons for women. This is really fantastic. It has also, as you know, accelerated the decline in fertility because women with a career, they postpone having their first baby. And if they postpone it, then they’re more likely going to have fewer babies over their lifetimes. But it is a very, very good change, I think, because essentially, it has enabled, not just the economy to take advantage of half of the talent pool, but I think it has also enabled society to be a little bit more equitable and a little bit more true to its values, especially in Europe and the United States.
A lot of the progress still remains to be done in many parts of the world. And, of course, the recent crisis in Afghanistan is a stark reminder of the fact that not all women in the world enjoy, as we speak today, the same level of access to education and the same rights.
But there’s another aspect here that I think is really important to take into consideration when it comes to financial markets, which is that as a result of these big changes, women are accumulating wealth at a faster rate than men. And I believe that we haven’t crossed over in the threshold but we’re very close to a situation in which more than half of the net worth in the world is owned by women. And, of course, this is driven in part by the fact that now we have greater numbers of women pursuing their career, making money, saving money, and in general, by the way, investing it on average, better than men. But more importantly also because women live longer. And so we’re seeing, overall in the world, this accumulation of wealth in the hands of people above the age of 50, 60, 70. And remember: at those ages, there are more women than men.
So this is going to also change the landscape to the extent that you believe that men and women on average make different decisions about how to manage their money.
I mean, it’s almost sounds like a no brainer, where this is natural process, right? Where if you look at, Stephanie, at the investor side, the companies we are invested in, do you see that as a natural process or is this a little bit more than that we need diversity inclusion as an active management practice to make that happen, or do you see that it’s already there?
So, I mean, I think I just want to pick up on a point of Mauro made of this pointing in terms of how women invest. Because I think there is a differential where I think they’ve historically attempted to be more conservative in terms of risk. They’re more means-to-end focused. Tend to be more in cash and bonds rather than equities. And there’s a good report that BCG did on all of this. And I think that’s something as an industry we really need to think about, because to Mauro’s point, this is where the strongest growth is coming and yet, how effectively the industry is reflecting that in terms of the product that it offers, I think is up for debate.
I think going back to the corporate element to it, I think, clearly, from a gender perspective, and, obviously, I’m massive supporter of all of that. But I think on a wider basis inclusion, gender is hugely important, not just in terms of the moral imperative, but really it’s just the weight of research makes it clear that diversity of thought in the widest context make businesses work better.
And there’s a risk that you focused in on any one group. But whether it’s gender, or ethnicity, or social background, or sexual identity, or neurodiversity, they all add together to that strength and breadth. And for us within Invesco, we know we have work streams focusing on all of those because we recognize that it’s really that grouping together of those different inputs, which will make the most difference. I think where we can make some impact as an industry in terms of kind of helping accelerate trends. I mean, obviously, there’s the things like board level representation. And, again, I think one has to be slightly careful that it isn’t just box-ticking. And I think, again, within boards are they non-exec or exec level. I’m not generally a fan of quotas per se, but I think there is definitely room to put pressure on businesses, frankly, to reflect more effectively the diversity of their own client base.
Because you see it from a performance perspective and that’s why you put that pressure on firms that you see more?
Yes. But I think it really goes beyond just the data. I think the cultural point is… and this is where engaging with businesses and management teams is…put simply: what does it actually feel like to be a woman, or black, or neurodiverse within these organizations? Because those are going to be the healthy ones.
Where it is a positive experience rather than box-ticking. So data gets you so far. But I think that engagement in that, really sensing a culture over businesses is going to be very important for success moving forward.
Right. And maybe it’s switching topic, one thing we really haven’t discussed in detail is technology in meeting the challenges of the near future. And I guess this will be a story of both opportunities and threats. So given the rise of things like AI and automation, should we look at this with excitement or more with trepidation or maybe both? Mauro, what do you think?
Well, I cannot think of any example of a new technology that hasn’t been highly beneficial to one group of people, but at the same time, represented a big challenge or even a threat to another group of people. So if you think about the various waves of technological innovation that have happened in the world, there’s always been people who have, unfortunately, lost their jobs. And other people who have seen their opportunities in the labor market expand as a result of that use of those new technologies. And I think this is certainly going to be the case with AI, with robotics, with digital platforms and so on and so forth. And I think what’s important here is to keep in mind two very important principles? So the first is that increasingly competition in the world is being driven by the ability of companies to incorporate new technology, or to leverage new technology. That, I think is a first principle that we need to keep in mind when thinking about the impact of technologies in the economy.
Companies that for whatever reason, find it easier to incorporate new technology or they are themselves pioneers in new areas of technology, they tend to do much better. And then the second, very important principle in this case, is of a political kind. I think we have made a mistake both in Europe and the United States over the last 20 or 30 years. It was to assume that those displaced by technology, those who don’t benefit from the technology or are even harmed by it, because they lose their jobs, we were assuming that they would be able to find another occupation, another job. We were essentially taking it for granted that the labor market would adjust.
And, unfortunately, that didn’t happen. I think the rise of populism, the rise of extreme political options, some of the political nonsense that we hear about in the media, fake news and so on and so forth, has been increasing so much, mainly because so many people have felt sidelined or forgotten in this process of technological change. So I hope that from a political point of view, we don’t make, in the near future, the same mistake that we’ve made in the last 10 years or 15 years, which is to essentially to just forget about those people and think that the market was, one way or another, going to take care of them. I think we need to be a little bit more proactive and anticipate some of the negative side effects of this wave of technological change that we’re going through.
Because there are opportunities, right, for the human factor, right? And things like care for elderly and things like teaching. Right? So that is a big opportunity. Stephanie, what challenges or opportunities does this present from an investment perspective do you see?
I think this re-scaling point is crucial. And I, again, mentioned politics a few times. I agree it’s going to be very important for people to accept, also society to accept, this rapid change. And you can’t put it back in the box. Technology’s here to stay and the digitalization that we’re seeing and the speed that it’s operating at is incredible and, in general, to the good. But we do need to sort of take society with us on that. So I think, there are definitely investment opportunities for businesses that can help with that re-scaling. Companies that are agile enough to sort of to move their work force around.
And, again, that goes back to culture. But also, generally, corporate businesses, there has been a tendency to say new entrants and anyone who’s been left for any period of time can’t adjust, and actually, we’re seeing good examples of businesses who’ve taken the opportunities that new technology is giving them and adapting really well and really becoming sort of new winners within the space.
So I think it’s, again, it’s going to be very granular. I think it’s going to be about really looking at the individual companies and then for society in general. I totally agree with the point that it goes back to this inequality element, this left-behind populism. And so I don’t think society will accept the gaps getting even wider than they are today. And I think is that’s being why there’s been some of these tensions. The good news, I think, is that some of the fiscal spending that’s going into society seems to recognize that. And I think emphasis on job creation and new technologies, education and so on, I think will be really important.
Mauro, Stephanie, thank you again for joining us. And as I said at the outset, no one can truly predict the future, but I think we can, at least, say with confidence that the pace that you laid out here of change has become extraordinary. And I think we can also say that we all have a part to play in really trying to ensure that this change, whatever form it takes, will ultimately be for the better. So thanks for watching Game Changers and see you again soon.
Game Changers: How do Asset Managers view Diversity, Equality and Inclusion
Hear from Tilly Franklin, CIO, University of Cambridge and Colin Meadows, Senior Managing Director and Head of Digital Ventures, Invesco.
How do asset managers view diversity, equity and inclusion? Do they embrace it as a source of competitive advantage? Do they recognize it as a means of maximizing performance? Do they see it as a business decision, or something else? Do they understand where diversity ends and inclusion begins?
I’m joined today by Tilly Franklin, CIO at the University of Cambridge and Colin Meadows, Senior Managing Director and Head of Digital Ventures at Invesco. We are going to consider these questions because the answers are vital, not only to our industry, but also to our stakeholders.
The basic business case for diversity equity inclusion is well known. There’s well known research showing the links between diversity, equity, inclusion, and corporate performance on the other side, that first emerged, actually, nearly 50 years ago. But, now the question is, does our industry really reflect that fact that it pays literally and figuratively to give everyone a voice. Colin, you want to go first?
Sure, so I think to your question, I think the industry is starting to recognize it. I don’t know that it’s been fully recognized. I think, as you’ve mentioned, there’ve been a number of studies over the years. I remember one from my old firm, McKinsey which suggested that a higher percentage of women in senior positions in publicly traded companies led to greater returns on equity.
There’ve been other similar studies like that. In our own experience at Invesco, we’ve been managing an emerging manager funded fund since the early eighties. I think in its most recent iteration, as we deployed over 800 million in capital to first and second time funds that are headed primarily by women and diverse minorities, and returns have been fantastic.
So, I think the business case is there to be made. I think the opportunity is just, still enormous. So, if you look at just the 70 trillion or so in AUM, in the industry, in the US, just over 1% of that is managed by women or ethnically diverse managers, and so the opportunity ahead of us is large, but I do think that the understanding of what it could mean is certainly there.
There seems to be real money behind it. It’s not only about values. Tilly, what are your thoughts?
Sure. Well, I agree. I think, this is certainly a topic that everybody’s talking about now. If I think back to over a decade ago when I first got into the business of being an asset allocator, nobody was talking diversity really very seriously. I mean, it just was the case that asset management was probably one of the least diverse industries out there, but on the few occasions, back in those days, when I raised it as an issue, people sort of looked at me as though I was talking about some outlandish subject.
Whereas now, I think only a short decade or a bit more later, everybody’s talking about it. That doesn’t mean that the industry has actually become significantly more diverse. I think there are seeds, as Colin has mentioned, but still, if you look at the UK, which is a market that I’m closest to, and gender diversity, which is an area that I’m closely involved in personally, only 10% of investment decision makers across the board are female at the moment.
So, we still have an immense task ahead of us to increase diversity, but I think the good news is everybody talks about it all the time. And, I think whilst in some cases, in some firms, they may be paying lip service to an issue of the day. There are definitely other firms and managers that I work closely with who are genuinely really trying to take action, and to redress this imbalance.
I think one of the issues that we find though, is that actually the applicant pool is still relatively unrepresentative. So only 20% of applications for entry level investment roles in the UK are from women. So, you can’t just sort of say, “oh, the firms need to hire more women.” You actually need to go one step further back and say let’s inform and empower women and other diverse communities to actually aspire to these roles, because until there are a greater number of applicants we’re not going to be able to fix the issue.
And, do you see that across the board, because you’re referring now to fund managers basically, right? But, Colin was more talking about the firms and the venture firms that are run by emerging managers. Colin, would you share that view, or do you see that there is really meaningful progress in the 1980s if you look back?
So, I think that the progress is beginning. I think from a gender diversity standpoint, which has been a fair bit of the focus, certainly at Invesco, and I’d say across the industry where we’re starting to see some progress. I think to Tilly’s point, one has to be, firms have to be very intentional and proactive about this. I think for a whole set of reasons, but I think left to their own devices they’re not going to have a large pipeline of applicants that are diverse. They have to create those.
I think that investment firms in particular are frankly, well-suited to do just that. It’s what, as I’ve long said, what we do in our day jobs is, we kind of look around corners and discover undiscovered gems, right? In the investment standpoint. I think we can do the same from a diverse candidate standpoint as well, but we have to just focus on it, and frankly insist on it as well.
I think tactically, there’s a number of things that that firms can do to make it happen, but it has to be intentional, and it has to be a focus.
And looking at Cambridge Tilly, how do diversity equity inclusion considerations shape your work, and shape the work of your team?
Sure. Well, I think there’s probably two ways to look at it. One is, how have we gone about building our own team, and then obviously, how do we think about these topics with regard to fund managers that we back. I mean, when I arrived at the firm about 18 months ago, I had to substantially rebuild the team, and we were very, very conscious about trying to introduce different aspects of diversity, gender, ethnicity, socioeconomic, cognitive diversity of all sorts.
So for example, one thing that we did was undertake psychometric testing, and we were specifically looking for people with different psychometric profiles. So, if people were too similar then that would count against me regarding that particular individual to the team. So, that’s one thing I think, as Colin said, that we were very conscious about doing, and we’ve also undertaken unconscious bias training as well, which was extremely helpful, and it’s shocking to me to uncover some of the biases that I personally had, because I tend to think of myself as being a reasonably unbiased individual.
But, all of us have unconscious biases, and I think until you actually test yourself and undergo training it’s very, very difficult to identify them, and you have to keep these things front and center all the time.
When we interview fund managers now, we do systematically track the composition of their teams. We ask them about what they’re doing to address any absences of diversity that there may be, which there very frequently are. And, we also try to provide support to our managers because a lot of times we invest with fund managers that might have small teams. They might not have a ton of resources, so for example, we can introduce them to organizations, both in the UK and elsewhere, who are aiming to introduce different types of candidates.
So here, for example, we have 100 Black Interns. It’s been running an internship program for black students. We have Gain which does a similar program for female and undergraduate students. So, there’s lots of resources that the fund managers can tap into that we can help them with.
And then, on an annual basis, we actually survey the entire manager roster so that we can actually produce statistics across the endowment about, what is the composition of the teams that we’re backing across, all the different axes of diversity, so those are some of the things that we’re doing right now.
Henning, I might add on to the comment that Tilly made as well. It does feel like, in terms of progress in the last year in particular, there’s certainly, at least in the US been a renewed interest among asset owners in really tackling the broader diversity and inclusion topic, both from a representation standpoint within their organizations, but also just from a capitalist standpoint, in terms of directing dollars to underrepresented communities.
And so, one of the things that Invesco has participated in is something called the Corporate Call to Action, which was really sponsored by the CIO and treasurer of the state of Connecticut. But, essentially he brought together all of the asset managers that serve the state, which is basically all the big ones, and there’s something like 21 trillion of combined AUM that’s represented as part of this coalition.
And the real focus is on both looking internally in terms of, what are we doing to be more diverse, to be more representative, to be more inclusive within our own firms. And then looking externally, making sure that from an asset allocation standpoint, that we’re addressing these issues as well. And, I think that’s not something that I’d frankly seen before in my career. It’s not something that I would have expected to ever occur, but it’s happening now, and I think that there’s real energy behind this topic, honestly, that’s in many ways unprecedented.
No, I totally agree, and I’ll add one anecdoate [inaudible 00:10:21] and just this morning I got an email from an asset manager that we work with who had an all male team, who’s just told me that they’ve been really focusing on trying to increase gender diversity. And they’re just in the process of a late-stage interview with a female investment analyst. There’s no magic bullet. I think it’s just on the ground, a bit piece by piece, person by person. You have to make these changes.
And do you think, I often hear about diversity of thought, and we talk a lot about this at Invesco, right. Do you think that’s linked to all of these other diversity forms, gender diversity, ethnic diversity, or do you think there’s something separate like, diversity of experience, for example, is different from gender diversity say maybe, Colin.
So look, I do think diversity of thought as a catch-all for the importance of diversity, I think is helpful. I don’t think it can be… I think sometimes it’s often used as an excuse for why there isn’t more diversity from various groups, but I think if taken authentically, I think it can actually be helpful, because that’s the ultimate goal, right?
So the point of both gender and ethnic diversity and ensuring that you have representation in the rooms of decision-makers when decisions are being made, the reason that anyone does that is, they bring different experiences, right? Which presumably helps to create better answers, right?
And so, I do think that again, if taken authentically, right? That is a very noble thing to do, and it’s why we would encourage that. I think again, firms have to be, and organization have to be quite conscious of ensuring that it actually happens. And not just that the folks in the room are diverse, but that they are being heard, that they’re being encouraged to speak up, that their thoughts are being valued and reinforced, and that the folks who are managing, are ensuring that that happens. And I think when you do that, then that diversity of thought engine is actually really working as it’s intended to in theory.
Right. Tilly, what’s your experience with diversity of thought?
Yes, well there’s a wonderful book that you guys probably have read. It’s one of my favorite books called Rebel Ideas by Matthew Sayed, which draws some of the parallels, and also some of the distinctions between the more classic axis of diversity that we’ve talked about, and diversity of thought itself. And obviously the two are very closely linked, but also are distinct in their different ways.
I think in terms of the linkages, one of the reasons, or should we say excuses that I often hear for lack of diversity in teams in the industry is people say, “well, we want to hire candidates with a background in STEM, or science and maths, or engineering.” Or, ” we only hire people who have done two years investment banking.”
And then if, for example, women are less represented in the STEM subjects, or they may be less represented in investment banking analyst classes then people say, “well, therefore we can’t hire them because there aren’t enough of them.”
But, you have to ask yourself, well, why do we need to have graduates with a STEM background? Why do people have to have necessarily two years of investment banking experience? Why couldn’t you hire a languages graduate or a geography graduate? I mean, I studied English literature, for example. I’m just one person, but it hasn’t prevented me from working in a very quantitative field.
So, I think people just need to be a bit more creative and try to, again, unpick. They have to ask themselves why. Why are we doing this? Why can’t we open the filter, as it were? Open the funnel, because I think until the funnel is more open, you’re not going to get either diversity of thought or diversity of backgrounds.
That’s such a powerful idea because just in my own experience. So, I started my career at McKinsey like you did as well, Tilly and it wasn’t very diverse, but at the time that I joined, which was in the mid nineties, right? The profiles of consultants were pretty much the same, all MBAs from a certain set of schools. And, I think the firm concluded that they were only going to get so far in terms of growth if they kept such a narrow funnel. So they said, “listen, let’s expand.” Right?
So folks who have their degree, but from non-traditional backgrounds, I myself and some of my peers at the time, I was a law school graduate, there were medical doctors, others, right? But it certainly challenged that ingoing ethos that says everyone has to come from the specific MBA program to say, look, we can find talent elsewhere and we can train them on the nuts and bolts of being a consultant, and that worked, right? I had a good career, and you can see others went on even further, certainly than I did.
And, I think we can bring that same thing to asset management as well, not just challenging the places where we kind of recruit and hire from, but even as we’re looking at those firms that looked to stand up and sponsor new managers and support them. Everyone doesn’t have to come from the same three firms, right? Because, if you do that you’re almost by definition going to have a very, very, very narrow and homogenous funnel. But if you can look for the core skills that are important, right, and that are being developed by other means, right? I do think that there’s really an opportunity to open the aperture.
Yeah, and I think sometimes people who come from a slightly different route can actually be hungrier, or more hard working in a sense. I had a really interesting conversation with one fund manager a year or so ago, who’s firm had traditionally recruited from a small number of schools in the US, and then they found it very difficult because they were competing with everybody else for those particular graduates.
And they said, “well, let’s actually go to the next tier of schools.” In terms of the ranking of those schools, but look for the top graduates in the next tier, because those people have worked harder and they’re not necessarily getting called on by every single asset management firm in the land. So, if you haven’t studied a subject, you need to teach yourself, so maybe you’re more motivated to do that, or maybe you developed some insights along the way. So I think it’s really interesting.
Yeah, and you mentioned at the beginning, Colin, the pure returns of emerging managers that you observed, maybe we can talk a little bit more about this meritocracy aspect here, and how to square basically diversity equity inclusion with returns, with meritocracy from an organization, from an asset management perspective, any ideas?
Sure, Yeah. I think that it is squared, right? I think where people get troubled is where there’s this, a belief or that if we focus on diversity, we won’t get the best folks, and therefore this idea of meritocracy will go out the window.
I fundamentally reject that because I don’t think any serious person is talking about things like quotas and so forth, which I think do lead to un-meritocratic outcomes. I think what we’re talking about here is ensuring that at every stage of the funnel or pipeline, that the diverse voices and representation is there.
And so I think in particular with things like, if you’re looking for diversity amongst your senior management ranks at an asset management firm, right, you’ve got to ensure that you’re getting diverse candidates at the front end, that they are being given the same amount of training and mentoring as everyone else, that they’re given the same promotion opportunities as everyone else. And in my view, if you do those things well the rest will ultimately take of itself, and you’ll get outcomes on the backend that are by definition meritocratic.
I think what also often happens is the hard work is not done on the front end, and then we look at the outcomes on the backend and say, “well, we haven’t been able to be successful.” And I think that’s where we have to really challenge ourselves to ensure that the processes are very much there.
And so certainly at Invesco, that’s one of the things that we’re focused on, particularly at those early stages, both at the recruiting standpoint, and at the early promotion standpoint. I do remember seeing something quite recently that suggested that there’s, in many cases, they’ve broken wrong at the first stage of promotion for diverse young managers, and that because they are being passed over or missed for that first promotion, they never get to that second, third or fourth one. And so, I do think the intense focus around those types of things, I think can ultimately go a long way towards solving the problem.
And Tilly, would you agree with that declaration?
Yes. I definitely stand with Colin in terms of rejecting the idea that you can’t have meritocracy and diversity equally and strongly. I think if you go back to one of the points I made at the very beginning, in terms of doing the maths though, I mean, if only 20% of applicants for the role are female, but we say, “well, we have to have gender parity in class intake.” Then, of course you do have a problem because you’re trying to get 50% of the class out of 20% of the applicants.
So, you need to go back a step further and say, “well, what is it about this industry that’s failing to inform, or failing to inspire the population that we’re trying to attract.” You need to get the message out there. You need to send envoys into the colleges and the high schools, and get people excited about what you’re doing at a young age, so that then they are going to apply. And then, eventually once you have parity in terms of the candidate pool, then you can just select the best candidates from that pool equally.
And, I totally agree with the point that then after that, you need to make sure that you’re not just losing people, because there is a tendency that we all have to want to be with people who are like us, right? You have a lot of confirmation bias in interviews. You have confirmation bias in terms of evaluations, performance evaluations and the like.
So, another thing that we do on our own team, for example… And then McKinsey was good at doing this, I think. It’s being very specific about the kind of behaviors and skills that professionals need to develop in order to progress. And then, really coming back to the facts and not letting whether that person is like us, or has the same interests as us, or a similar personality to us bias us in terms of how much time we want to spend with that individual, but looking at their skills, their attributes, and their experiences that they’ve developed during the course of their tenure in very factual way and providing the support that they might need if they haven’t managed to develop those skills, because it might very well not be down to any omission on their part. It might just be that again, it might just be a self-reinforcing cycle that they haven’t been invited onto the right projects. And we need to make sure all along the way that opportunities are being provided and then the results of those opportunities are being judged on the basis of the facts.
Right. And, and that’s basically the inclusion part, right? To work on all diversity, and equity. And then you have to have that inclusive culture where everyone is heard, right?
I think we all agree progress is being made here, right? But more remains to be done, and looking ahead, Colin, maybe what should we be aiming for to achieve, and what’s likely to be the biggest barrier for the foreseeable future?
So a couple of thoughts I would share and then maybe reflect a little bit about some of the work that we’ve done at Invesco over the last couple of years. I think that the first is almost like an ethos, which is this idea of bringing our whole selves to work, which is in some ways kind of a radical idea, particularly in fairly homogenous industries like asset management, right?
But it goes back to this idea that the whole is at its best when everyone is bringing their best to the job. And that’s how you start to get this reinforcement from a diversity of thought standpoint. I think you have to have systems in place to ensure that. I think Tilly mentioned unconscious bias as being one of the blockers for that happening. One of things we’ve done at Invesco is mandated unconscious bias training for every manager, and the point of that is to ensure that you’re not unconsciously stifling voices that frankly need to be heard. And on the flip side that you’re actually actively seeking them out. And I, do think that there’s real power in that, and that ultimately makes for a better firm. So that’s around ensuring that it’s okay to speak up.
We’ve also, I think in making it okay, and frankly encouraged to challenge ourselves on diversity is important. And so I think frankly, the conversation that has been had certainly over the last a year, year and a half, I think has been healthy towards that as well.
And so look, I do think that those things are important. Ultimately though, you do have to start to… We’re managers, and so, you’ve got to measure things and then you’ve got to manage towards it.
Again, I don’t think we want to be to a place where we are kind of mandating outcomes, but I do think being really intentional about the inputs to the process, diversity interview panels, diverse candidates, slates, et cetera, I think are crucial tracking how diversity is occurring as people move through the organizational pipeline is frankly crucial. And ensuring that at that first rung of promotion, that if we aren’t seeing the representation that we think should be there, that we’re challenging ourselves as to why, not to force the outcome, but to understand what’s happening and maybe steps leading up to it.
And so look, I think those are the things that all organizations need to frankly, challenge themselves on. I think if we do that systematically, this will have a major impact.
Right, and Tilly, when we spoke previously, you mentioned the need to turn perceptions on their head. Can you tell us more about that?
Well, I do think yes, that the industry tends to throw it on the diverse populations to get their act together and apply to work in the industry. Actually, if the industry is kind of unappealing to certain populations, maybe it’s the industry itself that needs to do something a bit differently.
So, I do think that that is beholden upon the asset management industry and all the participants to actually get to the bottom of, and if they do have very unrepresentative populations of candidates, for example, applying to actually challenge themselves and not just show it back on those populations to change their own behavior. It’s the industry that blatantly needs to change because it is currently so un-diverse, and again, you can only do that one candidate at a time.
I mean, in terms of how will we know that we’ve succeeded, obviously the statistics will tell a story, but I think there’s also a point that Colin sort of alluded to, which is that it’s also no good having diverse populations if people don’t feel empowered to actually speak up, because one of the benefits that you introduced this session with right at the very beginning, is the benefit of having different perspectives. But if diverse groups come together, but then for whatever reason, because they may feel intimidated or they don’t feel empowered, don’t feel they can actually speak up, disagree, dissent, offer their contrary opinion. Then the business benefit that we started off with will have been lost.
I mean, there were some famous studies that showed that in certain air crashes, copilots were so intimidated to speak up and disagree with the pilot that they’d almost rather that there was a crash then to dissent, which is really something that we can think of as quite a good analogy for investment decision-making, I think. So, we have to accept that sometimes it might be quite uncomfortable. If we’re all disagreeing, it might not be as pleasant as all agreeing, but we’re going to come to a better decision. We can have a better investment outcome if that’s the case, as long as it’s of course constructive.
Right? If there’s a psychological safety environment, right?
Tilly, Colin, thanks for joining me today, and for delivering this positive message about a crucial issue. I think one thing that’s clear from that discussion, I just listened to is really, we have a real important part to play in advancing that cause and, with that in mind, Gain is obviously an initiative that deserves support. I know it has already had a great impact during the past few years, but as we’ve heard today, there’s always more that can be done, and you can learn more about Gain by visiting the website, address it’s on the screen now. Please check it out. Many thanks for watching Game Changers. We hope to see you again soon.