Vish Hindocha:
Hello, and welcome to another episode of the All Angles podcast.
Speaker 2:
The views expressed are those of the speaker and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as an offer of securities or investment advice. No forecast can be guaranteed as performance is no guarantee a future result.
Vish Hindocha:
In today's episode, we are going to take a slightly different approach. We are going to look to close out season one of All Angles by taking a look back at some of the previous episodes and some of the key themes that have emerged for us over that period of time, and also reflect on what was missing or what we should do next as we plan ahead for season two.
Remember that you can access All Angles on all of your usual favorite podcast platforms, including Spotify and the Apple Store. And we would love to hear from you, so if you have ideas of what we should be tackling in season two, please feel free to email us at allangles@mfs.com.
For today's episode, I invited a member of my team, George Beesley, to come on with me to discuss what we think we've learned so far and where we might go in the future. George is a strategist in my team, the Sustainability Strategy Team here at MFS.
Welcome to All Angles, George.
George Beesley:
Thanks, Vish. Looking forward to chatting.
Vish Hindocha:
Great. So like we said, this is going to be a bit more of an informal discussion of what some of the key themes are going forward. I'll start and think about for me. I learnt a lot by talking to the various experts at MFS about how they think about sustainability and how they apply it. The first sort of theme that comes to mind for me thinking about it now is the idea of 'embracing complexity', which was sort of spearheaded by Barnaby in our first conversation:
Barnaby Wiener:
Embrace complexity. And related to that, be comfortable with uncertainty and vagueness and nuances, because that is the reality of life. And every attempt you make to simplify it and compartmentalize it, it reduces your understanding of the world.
Vish Hindocha:
One thing that really resonated with me is that none of this is really very easy, and you really have to beneath the surface to really understand the nuances and the tradeoffs and the impacts as we seek to navigate through them, that there aren't unfortunately any easy ideas in this space. Did that work for you? Did that come through for you as well?
George Beesley:
Yeah, I think it certainly did, and in a number of different episodes. And I think even other themes that often relate back to this idea of embracing complexity, which is what makes the field really interesting to work in. But I love the willingness here, and I think we've heard it from all different guests where MFS is very willing to take the time to think deeply about things, whether it's embracing the complexity around regulation or reporting. So I think we can be fairly slow to react to some market changes, but I think it's because the firm really wants to do what's right and people are very keen here to do what's right as opposed to what's easy. So embracing complexity, I think we talk about it most days, Vish. It comes up in pretty much everything that we do.
Vish Hindocha:
Absolutely. All right, George, so I put embracing complexity on the docket. What would you add from the episodes that we've had so far?
George Beesley:
I'm going to go for one of my favorite hobby horses, which you know well, which is the right tool for the right job. A number of different guests brought this up. I think that Mahesh phrased it as don't just copy and paste.
Mahesh Jayakumar:
I want to reemphasize that the environmental pillar, the social pillar, the governance pillar, those pillars are the same across these different parts of fixed income, but the factors underlying each of those pillars might not be the same.
Speaker 6:
Might be different.
Mahesh Jayakumar:
Right? So, when you think about governance for a company, you're thinking about the management team, the board. When you're thinking about governance for a country, you're thinking about political stability, the administration in power.
Speaker 6:
The strength of institutions.
Mahesh Jayakumar:
The strength of institutions, the rule of law, regulation, et cetera. So, it's governance. It's the G pillar in both ways, but they're implemented and manifested differently.
George Beesley:
So given that ESG is this nascent field and often best practice hasn't emerged, it can be tempting to apply a model from maybe another asset class or maybe even another manager. It's really hard to think about these things and takes a long time. A bit like we mentioned before, thinking deeply can take a long time. But given that there are lots of nuances, we shouldn't just copy and paste, and take one thing and apply it to another, because the context is often different. So we need to think about, "Well, for this job, what is the right tool?"
So a couple of examples I think that Mahesh gave were under engagement. There's the idea of this agency and how it differs between engaging with corporates versus, say, sovereigns. So an investor might have different goals when engaging with a corporate versus the sovereign. With a corporate, it might be to help them manage a material ESG risk or opportunity whereas with sovereigns, given that we know that there's limited agency, it might be to instead learn more so as that we get a better, clearer idea of how we want to value that security.
Vish Hindocha:
Yeah, I love that. I think one of the phrases that I've definitely stolen from some of our speakers is this idea of the scalpel and the sledgehammer, which gets to how you have to be discerning about what the right tool is for the right approach. Sometimes it is you need a very blunt tool and a really powerful tool, and sometimes you have to be extremely precise. And I carried that through in terms of our communication, our reporting, as well as some of the tools and tactics that we've used in the kind of corporate sphere as well. So yeah, I totally agree. The right tool for the right job, I really like that one.
Nevin Chitkara:
I think initially when there is change, government or society has to really mandate change, oftentimes with a sledgehammer, and things have to be worked through. An analogy with the scalpel would be the amount of work we're doing in engagement with companies to understand if they are relying on natural gas, which frankly they have to for some time, that they're also really innovating and advocating and working directly to look into long-term battery storage, which would be a solution, into utilizing hydrogen for gas turbines for peaking capacity, into carbon sequestration for natural gas. So there's a whole host of types of work in order to really implement the top-down, but the top-down is necessary in order to be a catalyst to get the work going.
Vish Hindocha:
Maybe, I'll go again. One of the themes that, again, where I felt like my position shifted slightly was on systems thinking. You and I read a lot of books in this space, and we've definitely been influenced by people who take a very systems approach and who would advocate that actually more systems, top-down systems thinking needs to occur in the finance system in order to really understand sustainability and some of the forces at play. But I really loved how Pooja spoke to how you can think about systems thinking from both of top-down and the bottom-up perspective, and it's the marriage of the two, which is where some of the magic really lives in our fundamental process.
Pooja Daftary:
I think that, yes, systems thinking is important, but you have to understand all the different components in that system. I think that's where my training as a bottoms-up fundamental analyst really helped me with doing the ESG work that I do now. I mean, these are really big open-ended topics, and if you're only going to come at it from a systems view, you end up basically amalgamating the views of lots of other researchers and coming up with some sort of consensus view. So it's very difficult at a systems level to come up with differentiated research. So instead, my strength was really kind of digging into companies and using what I learned from companies and their experiences, which is what I was familiar with doing, to piece together at a systems level where I thought the system would go.
Vish Hindocha:
It helped me rethink how we advocate for systems thinking, maybe using more of a kind of bottom-up approach rather than, or not just using a top-down approach.
George Beesley:
Yeah. I thought that was fascinating, and I don't think I'd actually heard of that kind of bottoms-up application. I think there's also a meta point there around what mental models can we take from other fields and apply them to finance to give us an edge. So whether it's models from ecology where you might typically find systems thinking, or psychology, or even engineering. So we talk about this a lot within our team and think about how we can use different models, whether it's Charlie Munger, "Invert, invert, always invert," or what are the different models that make sense for analyzing different parts of society or the environment or the economy that we can apply to give us a more holistic and complete understanding of things potentially before others are doing the same.
Vish Hindocha:
Yeah, absolutely. And Charlie Munger, obviously the author of investors thinking about mental models to begin with and then some of the ones that he uses. A piece of work that we talk about a lot is in behavioral psychology and using some of the learnings and the applications there to think about what will it take to actually move the needle on some of these issues, and how will the real economy actually evolve, be it on the net zero transition or how it thinks about human rights or inequality. How will that actually take place? So really interesting to think about the power of systems bottom-up and, again, how it applies to various mental models.
Okay. So far, we've got embrace complexity, the right tool for the right job, and systems thinking, both bottom-up and top-down. What else would you add, George?
George Beesley:
Another major theme for me was what Barnaby brought up, and he phrased it as "excessive short-termism." Within, I think, investing, but also in business more generally, there is this kind of obsession around quarterly reporting and quarterly results. So that gives us a lot of perverse incentives where instead of doing things for the long term, which often relate very closely with what's kind of sustainable in the true meaning of the word, companies are forced or incentivized to take action in a way that actually just maximizes short-term value.
A couple of different examples that I was thinking about where it might just be chasing short-term quarterly financial performance. So a board, for example, might choose to focus on a risky business operation. I think we can all think of examples right now, not going to name any names, but within the banking industry where there's kind of questionable governance there in arguably being managed in, I think, potentially reckless ways so as that they can continue to meet quarterly expectations of earnings reports. But it's not just in the chasing the financials. I think we're starting to see it in ESG metrics as well. So we might see, for example, a portfolio manager divest from heavy emitters, because what they're trying to do is green their portfolio, and they're doing that on the back of enthusiasm for ESG and funds that perform favorably versus others.
Relating this back to the idea of embracing complexity, some of those heavy emitters may be key in the transition to a low-carbon economy. And importantly, the portfolio is still at risk of the systemic risk of climate change, right? If you are just divesting your heavy emitters and not actually doing anything to try and help them manage the transition to a low-carbon economy, your clean portfolio is still going to be at risk of those systemic risks. So I think there's lots of different manifestations that short termism can have, but those are a couple that stood out for me.
Vish Hindocha:
I think short-termism and long-termism could definitely be a theme that we pick it up next season. I mean, I've often thought about this and ended up chasing Mytel. I don't know if you or any of our listeners feel differently. I think an argument could be made that actually the sustainability or ESG investing is a symptom not a cause, and the root cause really is kind of pervasive short-termism that is leading to these unsustainable outcomes over the medium to long term, which we're now manifesting themselves, which is really interesting. I think it also gets to a lot of what we talk and think about in the realm of sustainability or ESG investing is really the fact that this lives in intangible aspects and facets of investing that are really, really hard to quantify short term, and actually can manifest themselves in very erratic and episodic ways that are hard to measure point to point.
So because of all of that, and again you touched on the complexity, I agree with you that the short-termism is only likely to exacerbate some of the problems and some of the agency issues, the principal agent issues that you pointed out. And not just in our investee companies, but all the way, I think, along the value chain within the investment system.
I'll maybe add one more, or maybe I'll combine two. There was something that Pilar talked about which I really appreciated, which was this idea of the whole being more than the sum of its parts.
Pilar Gomez-Bravo:
Connectivity is hugely important and being able to bring knowledge from other areas to whatever the discussion is at hand is really important. Because frankly, I guess what I would say is that two plus two can be five. And for two plus two to be five, you need to bring more than just the expert knowledge to the table. And so a lot of the investment world focuses on specialization going narrow and narrower in that field, and sustainability is the same, right? You end up talking very complex level of detailed analysis on whether you're looking at carbon emissions or you're looking at exactly how to measure Scope 3, or again, evolution of the board, et cetera, when sometimes actually just being able to take a step back and putting the pieces together, pattern recognition, assessing examples that you've lived through in other areas, other industries and how they could apply to that specific company or that specific investment actually brings a lot of value.
So for me, what I think is different, and when you think about sustainability as well, is being able to have that holistic approach. And the holistic approach comes from connectivity and being able to draw from other areas and having that more generalist view rather than ... I guess, what's common expectation is that very deep expertise is really going to drive the alpha and the sustainability approach. So I would take the other side, I think, having that general perspective, having the connectivity. Being able to draw from different areas of knowledge brings a lot to the table, and you can get two plus two equals five.
Vish Hindocha:
Given the complexity, given the nuance, given the fact that the subject is likely to prey on some of our worst kind of unconscious biases or behavioral traps, the power of the team and the power of the collective can really help us get to a much better outcome than any one very, very smart individual can. What that really requires then is for you to have collective expertise - for you to have a team of people that can challenge your thinking. What it also requires, the part B of that, is to not be too dogmatic about how you believe this to be.
I'm a huge believer. I think I must have said this in multiple episodes that I think best practice in the whole field of sustainable investing is yet to fully emerge. It's sort of being built under our feet as we speak. So what it means is that we can absolutely have conviction, but I think that we have to hold that conviction fairly loosely and be open to challenge and debate and robust evidence providing better approaches or better ways for us to do that. We shouldn't close ourselves off to those things.
So I think about those two things and how we can facilitate that not only within our organization, but how we advocated for that more broadly is the value of this kind of collective wisdom, the collective expertise, but also not falling down and being too dogmatic about certain things of ways that we can approach them today given what we know, given we know how much there is to come and how much is yet to emerge in terms of how we're actually going to address some of these systemic issues.
George Beesley:
Yeah, I think both of those are key points that you raised there in relation to teams, but I really like the work that the Thinking Ahead Institute did around super teams. Just to build on your point, one of the additional layers is DE&I, right? Diversity, equity, and inclusion. And I think for fields of knowledge work, it's incredibly important. So you need really smart people who have different views, and you need that culture where people feel like they can offer a different view up. And it's really difficult to do in reality, right? I think a lot of us talk about this idea of a very open and meritocratic culture where the best idea wins, but I think it's difficult to do in reality but so important in order to make sure that we're not stuck in our eco chamber and that we're really sourcing the best ideas and we are not just being dogmatic, relating it back to your last point.
Vish Hindocha:
Yeah, I totally agree. I think Cass Sunstein wrote a book called Wiser. There's a few other books been written on how to avoid group think. We talk about this quite a bit. I think Michael Mauboussin, also. I stole a line from his work on this, which is actually what we want is really high cognitive diversity and really low values diversity. That often requires a footnote or explanation.
So I think what he means by that, what I interpret he means by that is there's a kind of core set of ethics, i.e., "In this team, we believe in putting our clients first. We believe in long-term fundamental investing. We believe in the way in which we approach core problems and what our mission is." And we want very, very low diversity on that. We probably don't want someone in the team that puts clients last, for example. But actually, what we do want is high cognitive diversity. We're dealing with problems that are unlikely to have a very, very simple and singular solution oftentimes, as to your point in the knowledge economy. And therefore, we want people in the team who will solve problems in different ways and bring different mental models to bear, and therefore as a collective we're better off from it.
So I think that's that idea of how do you facilitate and nurture a team that has high cognitive diversity but low values diversity, i.e., is ultimately after the same goal, but can solve problems differently and can work together and be a better unit for it is incredibly important, as well as the super team work that you mentioned from the Thinking Head Institute and the importance of culture to facilitate all of those things.
George Beesley:
Yeah. I think on a personal note, I definitely experienced it. We used to work together back in our investment consulting days, and then I left the field of investment and went and did the startup thing for a while. Still related to sustainability, but then ended up coming back in this role in our sustainability team. I think it's really proof in the pudding that what could have been seen as a kind of gap in the CV from serious investment work was actually, I think, probably actually helpful in landing me the role.
So given that it's such a different culture, you use different tools. You have to assemble the team in a completely different way. You make decisions very quickly in a startup. You act very quickly, and it's a very iterative cycle. And I think some of those things are completely the opposite with how finance does things in general, right? Because it's an industry where you're managing people's money, you have to be very thoughtful. You can't just move fast and break stuff. But there are definitely some lessons I think that we can use and we can apply. So I think that's definitely helped me bring some things to the team that perhaps I wouldn't have encountered if I'd have stayed in the world of finance.
Vish Hindocha:
Yeah, super interesting. Actually, given that, I want to ask you what you think we missed in season one so far. It's not been that many episodes, and we've definitely got really good feedback. By good feedback, I mean some really positive and some kind of critical of, "Did we go far enough, did we go deep enough on some of the issues? Did we expand upon some of those things?" I also have got feedback that we are too technical and too in the weeds on some of those things, so you're never going to please everybody. Something you said there sort of sparked to thought. What do you think we missed, and what should we maybe focus on for next season?
George Beesley:
Well, I think picking up on that same point, that having some outside voices on who may be outside of the MFS eco chamber might be useful. Whilst we tried to be very thoughtful, engaged with all of the literature and be as critical as we can about our opinions, there is something very useful about getting people on who are outside of the four walls of the company that you work at who have different contexts as well. I think that something that we talk a little bit about is how we'll meet with clients who might actually get what we're saying, but then there are end beneficiaries or there's other things within their context that mean that they can't actually act in a way, even though they might think that it's the right thing to do. So I think getting some other, maybe not dissenting opinions, but just people from different backgrounds might be very useful, and that can really help us stress test our assumptions. How about you, Vish?
Vish Hindocha:
No, I agree. I think if we are saying that one of the things, or at least two of the things that we learned so far is embrace different mental models as well as complexity and not be too dogmatic about our own views, I think definitely bringing on people, even those that will be contrarian and challenge those views will be really interesting to do to tease out what we know is emerging best practice. I totally agree. So let's definitely do that. Let's bring some outside experts and some people taking maybe even different approaches to the platform and talk to them and understand the process that they're going through.
I think maybe on embracing complexity and thinking about systems thinking more bottom-up, I do wonder if we could go deeper on some of the sectors and to really kind of unpack some of that complexity. I don't know what you think, but I would love to hear more. I think we sort of deliberately took quite a holistic view and maybe kind of scratched the surface on portfolio construction-type considerations. The next step for us, just given even how MFS are built on this global research platform that is designed into different sector teams to develop deep nuance, context specific experience and expertise on those companies. It would be really cool, I think, to hear from them on how they're seeing the application differ to really tease out some of that complexity.
George Beesley:
Yeah, I completely agree. I think that would be really valuable. That's one of the things that I like the most about podcasts as the format, right? It's not a quick three-minute bite on something that's very complex. You are able to go into the detail and appreciate the context and the minutia. So, I think that would be really valuable. You can find quite a lot of high-level information on this kind of stuff, whether it's philosophical debates on engagement versus exclusion or ratings, but I think digging really deep into how this might apply at the sector level is really fruitful and something that's I think quite difficult to find.
Vish Hindocha:
Yeah, I totally agree. Okay, one more thing. Anything else that you think was a sort of blind spot for us in season one?
George Beesley:
I don't think so. Well, we talked before about getting some outside voices. I think the discussion format is one that's really interesting. And I think a good discussion is incredibly valuable with two experts, because one thing that you'll find is if there's a host or somebody who just has one view, but you don't get the rebuttal from another expert, it can be really difficult as a layperson or as an educated audience member to really know whether they're telling you the whole truth or kind of cherry picking. So, I think other than that, I think that would be what I'd be really excited to listen to.
Vish Hindocha:
Yeah, I agree. And maybe just to stretch that a little bit is if I think about the power of teams. I'm a big believer actually in the power of peer mentoring or peer learning. I think a lot of the time we learn from those like us. So maybe as well as outside experts and people like us taking different approaches, maybe it would be helpful to have of asset owners, consultants, NGOs, others across the value chain, even companies on talking about the different approaches that they're taking. I think our audience base is broad, and maybe there's something to be learned there by shared challenges, or how they've overcome some of those challenges could be really powerful as well.
George Beesley:
Yeah, absolutely - have that humility to say, "Well, let's actually ask other people in the value chain, 'What are the difficulties that you are facing, and what is the context that we need to appreciate as investment managers?'"
Vish Hindocha:
Yeah, I totally agree. All of us are beholden to other stakeholders, all of whom care about this issue one way or the other. I know it's been sort of politically divisive in some regions more than others, but either way you care about this issue and what approach people are taking. So I think that's really powerful.
Okay, so maybe just to wrap up then. If I think about what I've got in front of me as highlights from season one, we've got the idea of embracing complexity, making sure we pick the right tool for the right job, how we apply that to systems thinking both top-down and bottom up. Thinking about of short-termism, which I think is a recurring theme that we could also address in season two. And then the power of the collective to help overcome the nuance complexity, contextual analysis that you need to do as well as help keep some of our biases in check.
For next season, in the absence of feedback from our listeners -- So again, please email us if you would like to hear something different -- but maybe getting some more outside experts and people from outside of MFS talking about the different approaches that they're taking, going deeper on some of the sector-based pathways on the complexity therein of applying this in real time. And as part of hearing those outside experts maybe along the value chain and for our audience to hear from their peers on how they're overcoming some of their challenges.
Thanks, George, for joining me on this shorter and quicker version of the All Angles podcast. Been great to have you on.
George Beesley:
Thanks, Vish. And yeah, just a quick thank you to say thanks very much for hosting season one. I've certainly learned a lot and it's been a fascinating journey, so looking forward to season two.
Vish Hindocha:
And thank you everyone in the audience for listening. And again, we would welcome any of your input or thoughts as we look ahead to season two.
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