Title: Wrap Up: All Angles Season 2 Insights and Reflections
Abstract: Miss any episodes or want a reminder of the key sustainability insights from Season 2? Episode 7 of the All Angles podcast turns the tables, with host Vish Hindocha taking the guest seat and sharing his reflections on this season with George Beesley. Join them for a whistlestop tour of the previous six episodes.
Vish Hindocha:
Hello and welcome to another episode of the All Angles podcast. This is our last episode for Season 2. So I invited George Beesley from the Sustainability Strategy Team at MFS here to interview me on what are the reflections and learnings from Season 2, and what are some of the things that we can carry forward into our day jobs as we move forward.
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. Past performance is no guarantee of future results.
Vish Hindocha:
So George, welcome to the podcast.
George Beesley:
Thanks, Vish. Good to be back. So yeah, keen to kick things off and delve into a few of the interesting topics and questions that you brought up with some of the guests that we maybe didn't get a chance to hear your thoughts on. So let's start with Episode One, Bob Eccles. So I think you did a really good job of illuminating the state of play in the culture wars in the US. Any key takeaways, thoughts or quotes that you had from that episode? What was the main thing that you walked away with?
Vish Hindocha:
Bob really elucidated, for me, where there's so much confusion in the culture wars and the politicization of some of these things. One of the things I took away was, it's heartwarming to hear that from the right or the more red states, but actually they're not so much anti-ESG as you might think. There's a lot of noise in the media, but there's some really sensible people on both sides that are working together across party lines to bring forward what needs to happen.
Then you think about what actually happened and transpired over the course of the year, and I'm sure we'll get into, but as geopolitics continued to bubble away and play center stage, but you have the fallout from the Inflation Reduction Act, which we talked about a little bit on the podcast, but we didn't probably fully foresee actually there's been so much positive momentum in the US from some of those things. So lots of good quotes. Bob is very, very quotable. So lots of things that really made me think differently about how I approach that conversation and lots of interactions with US clients or US regulators or policymakers that we've had over the course of the year.
George Beesley:
Yeah. What do you think that we should be doing as MFS and as an industry more generally to help us move beyond the culture wars? As you just mentioned then, it's actually not so much of an issue of ESG integration being a problem. So there are, I think, few investors who have a problem with integrating genuinely financially material ESG factors with the view the only objective of delivering competitive financial returns. But because ESG is used synonymously with sustainability or sustainable investing, as you mentioned, there's a lot of confusion over what ESG means. So what do you think that we should be doing at MFS and as an industry more generally to help us get past this ESG confusion?
Vish Hindocha:
The onus is on us to be far more precise and clear in our language of what we mean and don't mean. Sometimes that can feel like it's semantics. We talk about this a lot internally about having our own and having a clear and coherent taxonomy across the organization of how we use specific terms, what we mean by them, but also being attuned to the fact that all language evolves very rapidly, and it's evolving very, very rapidly in this space. Sometimes that feeds confusion because how some groups of clients . . . so for example, the term ESG is very, very widespread in the US, and we use maybe more sustainability as a core term in Europe, sometimes those are used interchangeably and sometimes people mean very, very different things when they use just those two terms. So how do we be more clear? How do we be more precise in our language? I think the onus is also on us to depoliticize the issue and to come back to our core. So what is our fiduciary duty?
What does [FK(1] long-term investing really mean and how do we think about this as common sense as part of that? We don't have to make it a political issue. It doesn't have to be about my beliefs on climate change or natural capital or human rights or the way that companies should do things and imposing ethics in a certain way, but we can actually boil this all the way back down to what are just good long-term fundamentals and the things that we know and that we understand. So again, and other guests came on and talked about their perspectives on some of those things, but I think those are maybe some of the key things — be much clearer about what we are doing and our intentionality, be much more precise in the language that we actually use and actually just boil it down to its simplest form, which actually doesn't need to take on a particular color or political swing.
George Beesley:
Yeah. Yeah. Yeah. I think all very valid points. So the secret question that you actually asked Mahesh was, but I think it fits better in this episode, was, what do you think is the most valid criticism of ESG, so actually of ESG? So we've just talked about how that term is used interchangeably with other forms of what can be thought of as sustainable investing. There's some criticisms of say, positive, negative screening, ex-ante exclusion of fossil fuels, does that really have the desired impact? Then we have impact investing and then also socially responsible and values-based investing. So let's separate those for a minute and actually focus on ESG itself, ESG proper, ESG integration. What do you think are the most valid criticisms of ESG?
Vish Hindocha:
Yeah, and this sometimes surprises people — being the head of sustainability strategy — that I would often stand up on stage and talk about some of the very valid criticisms that the so-called anti-ESG lobby has. So I think there are several, don't know, we might not get time to talk about all of them today, maybe four or five that I think about as most prevalent across our industry. So the first is that there's a false dichotomy between ESG investing and regular investing. I think the tide is turning on that one —slowly, but it is turning. So again, once you start thinking about this poly crisis era that we're in, once you start thinking about the interconnectedness of the problems that we actually face and how land security, water security, food shortages, energy security play into refugee crises, hot wars, the kinds of economic issues that we're facing, cost of living crises, you actually start to see that to separate it out and treat it like a whole separate discipline is a false move to begin with.
So this cottage industry that grew up around ESG being a separate or special thing is in some ways maybe gone a little bit too far. It's a good idea. We needed it at a point in time because those things lived outside of our economic models. They were externalities and treated as separate. We now have the computer power, the thinking, the systems thinking to be able to bring them in. Now that they are in, we no longer need to keep them separate. So this false dichotomy would be one.
There are a few others that I often think about. I think we're obsessed with measurement in our industry, and we failed an Einstein test of “things should be made as simple as possible, but no simpler.” I think we've massively oversimplified and over-indexed to this idea of the single scoring of ESG, this idea that we could assign one rating to encompass all of the myriad factors that we should think about in a fundamental . . . and we wouldn't accept that in any other domain of investing.
Yet, as a broad industry, we run into that headfirst and then wonder why that's not actually resulting in a better allocation of capital or value creation when we actually look and observe the real economy. So we're metrics obsessed, measurement obsessed. I think the measurement can get better. I'm not saying we shouldn't measure it, I'm not saying perfect should be the enemy of the good, but I think we are oversimplifying what is often an intangible really complex issue. I think one of the key lessons that I've learned and reflected on over the year has been that complex problems often need nuanced solutions, and I think that we sometimes want a magic bullet or a one-size-fits-all version of it. Last one — maybe I'll mention for now and we can obviously talk about more — is the ESG industry overclaims its agency sometimes.
So again, a valid criticism is, what is actually the limits of and the duty of your agency as a fiduciary owner of that capital? Whether that's you as what we call asset owners or an intermediary, whether you are an advisor or a pension fund or an insurance company or an endowment, or whether you are an investment manager and you are again allocating that capital hopefully really well for your clients, I think sometimes we're seduced into thinking that we have the ultimate power to wave a wand and vote one way and then change the entire real economy. But equally, sometimes I think we underestimate the influence that we can have through constructive dialogue and stewardship and adopting an ownership mindset of a . . . what would it take to have a 20-year view or even a 200-year view of wanting to own something for a very long period of time? Then some of those things become immediately obvious. So maybe I bundled up too, that one is the time horizon, so there's a decent amount of long washing that happens in our industry.
That's a phrase that I've taken from Carol Geremia, our president and one of my mentors. The other is this idea of what are the limits and duties of our agency and making sure that we're not overclaiming what we're actually capable of doing as a financial actor, which is just one of many actors in the real world that need to work in concert to actually make change happen. So we talk about this all the time, even where we're a very, very large shareholder of a particular company that we might own and we adopt that ownership mindset, we are acutely aware that we are just one shareholder — which is one stakeholder that is driving a force for change — and that we have to be careful about how we talk about our influence over what can actually happen, but still take that duty very, very seriously. So again, it's a nuanced position that I think we're learning to take as an industry and one that hopefully, I think, we've occupied for quite some time.
George Beesley:
So finding that balance between doing enough but also realizing that finance is just one of the key pillars. You've also got government, you've got businesses themselves and then you've got consumers and it's not possible for us to solve every issue, but also that's not an excuse for inaction.
Vish Hindocha:
Exactly.
George Beesley:
Okay, great. So you touched on Carol before and her idea of playing the bigger game. So I think that's a good segue way into Episode 2. So I think we always love listening to Carol talk and her main message now is all about playing the bigger game and there's a number of different parts to that. I think that there is potential for some people to misunderstand the message there. So MFS's role, our fiduciary duty is to maximize financial returns for our clients. However, I think that you can square that circle with still caring about systemic issues and instead, thinking more about long-term investing, even if your only goal is to maximize financial returns. But I think that some may see it initially if they don't clearly hear the message as overstepping our fiduciary duty. How do you think about the role of finance and the role of MFS in ensuring that we maintain stable systems and also incentivize for the long term for the end saver whilst not all being clear of what our fiduciary duty is and why we're doing that?
Vish Hindocha:
These are things that we think about, I think about a lot. I'm not sure I've landed on a concrete position that I . . . so I'm still holding this opinion with conviction, but loosely, and I'm still open to countering evidence. The way I think about it is there is a spectrum in our industry where different players will have different levels of agency. So to take an extreme example, the MFS-UK-DC plan of its small size has almost no impact or bearing on the global real economy and its ability to transform that. Having said that, some of the largest asset managers in the world, or some of the largest asset owners in the world, definitely have an impact and have a systemic role to play and can only generate long-term returns if there is a viable system that is actually capable of generating those returns.
So somewhere along that spectrum — and it's a little bit like when does matter become conscious — a question, somewhere along that spectrum, you actually do have a dual role, I think, as an agent. I would argue that MFS as of the size and caliber and quality to actually be in the gray zone of actually we're certainly big enough to have an influence. Again, we have the luxury of only owning the things that we really, really like. We're a pure active manager. We're very fundamental. We're very bottom up. We're extremely long term. Therefore, we're likely to own in size the things that we like and we want to own for a very long time. We're likely to understand those companies well that knowledge compounds through time and puts us in a great position to have saliency when we think about what is the availability for us to institute change or think about the transformation that is likely to happen across multiple industries.
So I think we probably do have that, but we have to balance those two objectives. Not everyone has that obligation thrust and that duty thrust upon them, but I think what Carol is instigating — and Alex Edmans talked about — what is in your hand, and I really love that ending question of what is in your gift to give to others? I think everyone's self-reflecting on that and being able to think about how could I, in my seat, my role, be able to influence for a better, bigger outcome in the future? One of the other things that I often think we grapple with that is in this, and again, I'm not sure that I've landed on the precise position, but just as a thought experiment, I think sometimes we get really hung up on single versus double financial materiality in our industry.
Single materiality is often seen as a safe haven for that fiduciary duty, that “how are we maximizing long-term, risk-adjusted returns for the end saver,” and double materiality is often seen as the domain of impact players of actually wanting to . . . is that scary? Is that stepping beyond what is a narrow definition of fiduciary duty in some markets? Obviously, other markets have interpreted a much broader sense of fiduciary responsibility. I actually think, again, back to false dichotomies or red herrings or mental traps that we can fall into, I think if you're thinking long term enough, there isn't a difference between single and double materiality.
George Beesley:
The two collide. Yeah.
Vish Hindocha:
You can't separate the system that is going to have to generate those outcomes from the outcomes that you want to generate if you're discounting cash flows from 20 years back into the present or thinking long term. Again, we know this from Benjamin Graham and Warren Buffett, most of the returns to any business are really in its out years, not in the next one to two years. So I think the more that we embrace a genuine long-term mindset, which is really difficult, and I think one of Carol's core messages is, how do we actually really think long term and not just claim that long term but continue to incent a system that is actually acting on more and more short-term impulses every go. I think that will actually do away with a lot of the confusion that we currently face.
George Beesley:
Yeah. Yeah. Have you been able to play the bigger game in your role specifically? How have you thought about that? Do you have any things that you think about where you've tried to initiate that in your work as global head of sustainability strategy?
Vish Hindocha:
Sure. So we actually have some trainers come in and do a bigger game training. So I think I'm the person that's gone through the bigger game training the second most in the entire organization. I've gone through it five times, so I was really bad at it the first four. No, I've done it with different teams. So I've done it as part of our management committee. I've done it part of global distribution. I sit on our president's council and in the sustainability team. One of the things about the bigger game training or being able to play a bigger game is actually embracing the fact that we have to step out of our comfort zone. So this gets to where Carol has been for a time, we can all stick to the very narrow definition and the very safe definition of where we are today in our job roles and what's in our job description, or you can start to take some actions that are congruent with that, but also with a more compelling purpose. They move you around an actual physical board, what is the compelling purpose? What are some of those gulp moments?
How do you think about your allies in the space, and what are the bold actions that you are then prepared to take as a result? So I'll touch on a couple. I think it's really helped to reframe a compelling purpose and vision for the team internally, you can comment on that too, George, about what is it that we are here to ultimately, do and the role that we play not as leaders just within our own organization, but also within the industry at large. Of course, again, we're not trying to claim our role or our significance or importance in that, this isn't an ego trip, but the allies is actually super important. So I'm really, really proud of taking that bigger game approach and that lens and stepping out and saying, "What would it take to engage with world-class academics, with world-class NGOs, collaboratives with some of our peers in the industry that we would otherwise compete with in order to raise our game and move us all collectively to the next level?"
So the work we've been doing with the Oxford Rethinking Performance Group, the work we've been doing with MIT around aggregate confusion, the work we've done in various collaboratives, be it under the auspices of the PRI or series or the IIGCC or the Net Zero Asset Managers initiative. So I think we've really tried to step up and step into some of those collaboratives and make sure that in every case we're learning from those peers. We're humble and we're open-minded about the things that are outside of our immediate echo chamber, but we're also contributing as much as possible. We're putting our best people in those positions that can contribute and add something different, add some cognitive diversity, add something to those different conversations.
That has really helped elevate us and take some pretty bold actions. So I think about our commitment to net zero, I think about our human rights policy. I think about some things that three or four years ago, if you'd said MFS is going to commit 92% of its AUM to achieving net zero by 2050 under a certain framework, I think people would've been very, very surprised by that. In the end, once you have your allies and you have the systems in place and you have the compelling vision and purpose in place and people understand that was actually weirdly one of the easiest decisions that we had to make. It was a well-vetted and thoroughly investigated decision, but ultimately, actually, a broad sway that the organization felt extremely comfortable about the kinds of commitments that we were going to make and really excited about moving towards what that objective really looked like.
George Beesley:
Yeah, you mentioned external partnerships there and one of those is with Eurasia group. So we had Shari on for Episode 3, and it was interesting to hear her external perspective and how she frames it slightly differently, but this idea of embracing complexity, that's how we term it internally. She thinks about it as there or terms it as being like no one-size-fits-all. So there's a lot of black and white. There's a lot of nuance. In that episode, you touched on biodiversity, you spent quite a long time on climate, but also on biodiversity. So it feels like, particularly at the PRI that we were at last month, that biodiversity is going to be a big topic for investors going forward, but it's still at the start of its journey. Where do you think we are on biodiversity and what do you think investors really need to be paying attention to? What are the biggest challenges there?
Vish Hindocha:
Of all the places in the sustainability landscape, as a personal confession, this is probably where my heart goes the most and where if I had the complete freedom, I would spend all of my time thinking about. So I think this is one of the most significant and material issues that we are going to encounter, but I also think it's one of the hardest things for us to grapple with as an industry. So yes, you're right. I think it's coming up fast up the learning curve. We've got some really important pseudo regulation coming in with the task force for nature-related financial disclosures that is in place. We've got the ISSB that is adopting some of those frameworks. So yes, we're likely to see the conversation ratchet up really, really fast. If we thought that actually the gap between Paris in 2015, TCFD, the climate-related financial disclosures in 2017 to where we are today and the trillions of dollars that have committed to net zero felt quite fast for the industry within the space of eight years, I feel like this is going to actually be a much shorter hockey stick of adoption.
That being said, let's just pause for a second. In climate we have a single currency that is universally accepted as not being perfect, but good enough. It's accepted by the scientific community. This is obviously CO2e, carbon dioxide equivalence, scientific community, universally accepted as being material to climate change and human-caused climate change. We can disagree about the impact factor and what that means for future warming and what future means. But generally speaking, there is huge consensus across the academic community, scientific community, investment community that this measure matters. There's a single currency, there's a way of measuring it, and we can think about scope 1, scope 2, and yes, scope 3 is far from perfect, and we're moving towards some of those issues. I think about natural capital, and again, my thinking is constantly moving on this and I'm spending a lot of time on it. There are five domains that we need to care about. There's air, land, water, flora and fauna. So instead of just one area, you've actually got five things that you need to simultaneously care about.
Each one of those has at least three or four key metrics that you should care about if you want to measure the quality of air or land or water or flora or fauna. Therefore, you're already at 20x the complexity of climate, and that's hugely simplifying. So probably still failing the Einstein test of too simple. This is going to be incredibly hard. If you have a very prescriptive regulatory regime, say, for example, in the EU that is likely to want to see the exact metrics and the formula that everyone's using — we're not ready yet. It's so nascent in the industry, and again, there are some really phenomenally talented people in our industry. I'm not trying to do them a disservice. They are working really, really hard on making this much easier for investors. We talk to some of them all the time, and if anyone's listening and is working hard on this, then we would love to hear from you. So the starting point being 20x more complicated is interesting.
This is another one where there's a pit that we could fall into if you over-anchor to simple financial materiality in the short term. It is not as obvious that the right thing to do to protect the oceans, for example, on life on water is a financially material short-term consideration in that single financial material. Yet, we know it's an important and the right thing to do for long-term returns. So this is another one where it's going to stress test our ability to really think long-term and to really understand what we mean by financial materiality in that context. So I think it's going to be really confronting to some of those initial assumptions that we made as stepping stones towards this journey of this idea of setting aside values and what we know to be right normatively with value and what we know to be right economically. So I think those things are going to have to collide when we think about natural capital, but it is the next big wave, I think, that's coming and it's going to dwarf climate change in terms of its significance and impact.
George Beesley:
Let's move on to Alex's episode and grow the pipe. There's lots that we could talk about here, but we're both big fans, and I thought it might not be that interesting if we just fanboy him for the whole of this section. So I was trying to think about something that maybe I take a different stance on, and there were a few things, and I thought it was interesting that you challenged him on a couple areas of his thinking and his work. For me, I was thinking about this just yesterday, actually. So one of the things that he said was that companies shouldn't be praised for doing something on ESG any more than they should be on any other areas of intangibles like management quality or innovation. I think generally that is right. As you talked about before, we don't want to carve genuine ESG out of something different or special.
All investors should care about it. But when I was thinking about it yesterday, the thought that came to me was . . . I think there are some E-exceptions to that. So if we think about the nine planetary boundaries from the Stockholm Resilience Center, those are ecological ceilings that once you go past those tipping points, it's effectively impossible in any meaningful timescale to go back. That, for me, is very different too — it's terrible for those 150,000 people at Kodak who lost their job that Alex mentioned because management didn't foresee the technological change that was coming and the start of the digital era, and that is a problem. But those people, ultimately, a lot of them can go and get another job.
But if we pass a genuine ecological boundary that you can't go back from and there's this regime shift, then that is a lot of trouble that's caused, that's a huge issue for millions of people for potentially a very, very long time. So I was thinking, I think that that generally is true. This might be the exception that proves the rule, but there are some things like novel entities or climate change or biodiversity loss that, for me, I wonder if actually we should praise companies more for doing well or doing less bad on those specific areas. Now there's two different lenses, there's societal lens and then there's investors’ — maybe there's three — then there's companies themselves. I'd love to gauge your thoughts on that. Do you think that there's any legs in that? This is a very new kind of line of thinking for me. What do you think?
Vish Hindocha:
It's interesting, isn't it? The exciting thing about our job and our industry and our part in that part of the industry is there's always new lines of thinking. So I think it's really important that we critically re-examine our ideas. Something that you and I talk about a lot is Adam Grant's work around rethinking. So I like the idea that Alex started with, which is, we should be proportionate in our praise and our blame of companies and not put ESG in a special place. It's so important that it should just be fundamental, and if it's fundamental, we should treat it with the same level of hysteria that we would have over any fundamental factor. Again, living in the real world and understanding how the real economy can very quickly transform and shape around a particular narrative and how much intellectual property or intangible value that is attached to some of these companies, these things can escalate really, really fast. So we have to be paying attention to where some of those things are. So I'm not sure I have too much of a counter view.
I do like the fact that we should be proportionate in that. I was speaking at an event last week with a professor that we've worked very, very closely with at MIT, and he had a really, really interesting turn of phrase. This is a Professor Roberto Rigobon at MIT, who was part of the team that wrote Aggregate Confusion, which is a paper that many people will understand and will have probably come across. We've been working with him and his team around Aggregate Confusion 2.0, and he said something that really made me laugh and made the audience laugh. He said, "We are really forgiving in some things in our industry and really merciless when it comes to ESG for some reason." So he used the example of if a company in a really hard-to-abate sector has gone through the work and set a science-based target, but misses its short-term, one-year scope 1 number by one turn of CO2e, the industry loses its mind and will vilify and will demonize that company and claim they're not doing enough and claim it's greenwashing and look to de-list and de-platform it.
The example that he used was central bankers missed their inflation target by about 8% and nobody blinks. It's accepted that they can say, "Well, we measure these things in decades as we should and we do." So he said, "It's really funny that we're merciless when it comes to things that we understand so poorly and yet, so forgiving when it's things that we've been doing for hundreds of years." That really made me think as well about our role, my job, how we think about this, how we communicate to clients and how we do that to how do we do that in a proportionate way, but how do we also make sure that we have the same levels and standards that we have for sustainability that we have to other things? A stream of thought that I've been having recently that, again, could be controversial is the concept of additionality and whether additionality is too high-minded a concept and too high a bar that we place on ESG that we don't place on anything else in our investment world or in our personal world.
Yet, the concept of opportunity cost is one that's incredibly well understood by economists. I studied economics at A level and it's one of the first things that you learn is about opportunity cost. I wonder if additionality is actually opportunity cost in a slightly different disguise but held to such a high bar in the ESG or impact space that we wouldn't really need it to pass that threshold in any other space at all. So again, still thinking about that, but again, it's one of those things that comes up often when we think about climate modeling or scenario analysis or understanding the role of different metrics or gauges or what actions we want people to take. But we use opportunity cost in other roles, but we don't use additionality in its purest form in other spaces. So anyway, just something I've been thinking about of “Do we hold something in the ESG space to a much higher standard or lower standard than we do elsewhere?”
George Beesley:
Is there anything else that you've changed your mind on over the last year or so in relation to sustainable investing?
Vish Hindocha:
Yes, all the time. I think some of the thinking around single versus double materiality, understanding time horizons, I give a tremendous amount of credit to our clients, the consultants, the interactions that I have outside the four walls of MFS for really influencing my thinking around the role of public markets and secondary markets. So again, adopting, there's that word again, but adopting more nuanced take on the power of exclusion or engagement, so a stream of consciousness that we've had for a while, but it really helped crystallize for me this year and alter my view is what is the role of fresh capital versus secondary capital, but actually what's the signaling value of exclusions? So again, talking to people that maybe have a different philosophy than ours but that do pursue exclusion as their main pathway to understand and impact sustainability in the broadest sense, sitting down and understanding their perspective has actually been really helpful to understand.
Actually, I think we can achieve that signaling in other ways that I think of as more germane to how we are built and what we can do in the way that we create value. But that's an angle that I hadn't really considered before, so yes, absolutely. Again, there's so much great work happening around sectoral-based pathways in the realm of climate or the just transition and how we square social and climate and natural capital and how we solve the trilemma. My thinking is constantly evolving on some of those topics. Again, I'm increasingly convinced that it's at the intersection of those ideas, which is where the greatest value, differentiation, opportunity, and risk is likely to be found, and we have to keep moving towards those things rather than be exceptional in just one of those areas.
George Beesley:
Switching gears a little bit, for Episode 5, we had Mahesh on when he was talking about emerging markets and the differences and then even on ESG. So some of them were just generic differences between expectations around developed markets versus emerging markets and ESG, how it differs, how there might be different weights that you might apply to those and depending on asset class as well. So fixed income is just a very different beast. One thing that I thought was interesting, so 10 years ago or something, I remember we both read a book called Guns, Germs and Steel by Jared Diamond, and we talked about how we thought it was great. It was really interesting, it was an academic piece of work. One of the main tenants is that one of the key things that you need for a very successful society is strong institutions. So you can supplant or you can take democracy, for example, you can go and put it in the Middle East like the States did and thought, "Well, democracy is a great system. It gives everyone a voice."
Then they try to implant democracy in a place that doesn't have the shared understanding and the collective ideals and the strong institutions of what are required for a democracy to work. I'd read this theoretically, but it was interesting in the Mahesh episode how he said governance really sets the foundations for a country to develop, and it's particularly important in all countries, but really in order to be able to develop the S, so strong civil institutions and stable society, then from there you get to the E. But I liked how it was a practical example and even from the back testing, so they said, this is, it's not just our ideas about I think that probably G is the most important factor. They instead have run some regressions and found that probably G is the thing that has led to. Of E, S and G, G is probably the most important factor. So I like to see a practical, real-world example of something that we just read and talked about. Any key takeaways from that episode for you?
Vish Hindocha:
Yeah, no, I think it's really important that we test our intuitions and look hard and cold at data where we have it and where it's high quality. So to your point, we can have an intuition that governance is incredibly important. I'll maybe give a counter example in a second, but actually going back and testing actually, how has that affected in that case spread levels in fixed income and what can we say about the signal and the quality of the signal and what does that tell us? Again, our job is to price forward-looking risk and return, not to worry about what happened over the last 10 years. But the last 10 to 20 years, or again, however long we've got quality data for can better inform us and better guard against some of the biases that we have as investors and as human beings and suffering from all of the things that we do.
So an intuition that we might have personally might be that climate change is incredibly important and that those countries that have embraced climate, actually, when you back test and you do the models hasn't actually had any bearing on the quality of sovereign bond spreads or the quality of returns, or it doesn't mean to say it won't in future and we can make a future focused assumption on that. But I think, again, back to where we have to be rigorous and robust to some extent around what our intuitions are and what does it even mean for a company to embrace that would be really powerful. My travels . . . a dear friend of mine now, she's a governor for the South African Central Bank, and we were at a similar event and we ended up speaking and I ended up speaking. Again, it really illuminated for me how whilst some of us, particularly in the markets where some of this has been invented, so there is a little bit of a risk of not quite cultural imperialism, but something close to it.
If you are from the US or the UK or Europe, one of the biggest risks that you face is likely to be transition risks of climate. If you are in an emerging economy or you're a small island in the middle of the Pacific Ocean, physical risk is going to be pretty important to you versus some of the transition risks that you might face and your mitigants and the way that you adapt to that. If you're a commodity-rich country and you are an exporter versus a commodity-impoverished country or an importer of those commodities, again, the way that you embrace the net zero transition is going to be different. If it's easy to read the IEA report and say, "Yeah, we should have no new net thermal coal," there are 750 million people in the world that have no access to steady power today, and that would be 2 billion people if we switched off thermal coal tomorrow.
So again, I'm not saying that thermal coal should be on forever for everyone, but I can certainly understand how India and China say, "Well, I'm not going to put my entire country or most of my country into energy poverty as a result of adopting this policy. I'm going to wait for that industrialization or the renewables or the technology to be there before I make something like that kind of commitment." So again, I think it can be easy from our own seat and feeling the risks or feeling the weight of certain types of risks and taking a myopic perspective and getting out there and actually broadening those horizons and understanding that it's not quite as straightforward as what is impacting me is the same thing as that impacts someone in South Africa or India or China or Australia or the US is actually really, really important.
That again, we need to thread some of those issues through it. So I agree, strength of institutions, quality of education, of all of those things that again, intuitively we know now are being backed by evidence that matters for investors for over our investible time horizon. But taking some of those things and making sure that we're not just supplanting from one particular set of factors and variables and cultural norms to another is also really, really important. That's where having colleagues and collaboratives on the ground in some of those regions that can really challenge your thinking is super powerful.
George Beesley:
Yeah. So you mentioned a few of the different variables or factors that make up our emerging market sovereign characteristic there for SFDR. So there's lots of changes going on with SFDR now, so a big review. Europe was very brave and did something very important going first, but I think it's fair to say that SFDR is far from perfect, and now it looks like they want to have a big revisal of the approach of SFDR from disclosure maybe to labeling, but what do you think is going to be the future of SFDR and sustainable finance regulation more generally?
Vish Hindocha:
There's two possible answers. There's what do I think it will be and what would I hope it to be? Maybe I'll try and answer both, like you said, and this isn't meant to be a damning indictment of SFDR or any regulation, this is an incredibly complex space and all regulation will have some unintended consequence or byproduct of it. I think SFDR — having just said that I'm not going to hopefully be too pejorative— SFDR, whilst intended to be anti-greenwashing and stamping out greenwashing, which is essential and something that we need, we need high-quality disclosure in order to really understand the risks, opportunities and the processes that investors are taking became a lightning rod for greenwashing, unfortunately, because it set out the rules of the game. Some people will game that system if you tell them exactly how they can qualify to be light green or dark green, particularly if you compound that problem with a taxonomy that is otherwise incredibly hard to qualify for and the pressure placed on the financial services industry to promote ESG product and then to have to qualify using SFDR.
So it became a pseudo requirement and a pseudo labeling regime because of the sister regulation around it. What we are lobbying for, what I hope for is that SFDR, so this is where I hope it will be, but I'll answer where I think it's going to go, I would hope that it remains a disclosure regime. I think that's critically important that we have a high-quality disclosure regime. If it becomes about labels, then I think it actually diminishes the quality of what we are actually doing and limits our thinking and forces us to be put into pigeonholes or boxes, and we're never going to invent all of the categories that we really need. So for example, when SFDR was first conceived, there is no transition category, for example. Now that would be common sense, right?
George Beesley:
Yeah.
Vish Hindocha:
When the UK . . .
George Beesley:
. . . SDR.
Vish Hindocha:
. . . regulator, SDR, one of their categories very clearly is transition finance, and that's clearly the space in which we play, so it's close to our heart. So again, in five years’ time, there's going to be something I believe that's going to be really obvious then that probably wasn't as obvious now, can regulation keep up with that level of change without creating all sorts of unintended consequences? I think that's really difficult. Where I think it's going to go is probably it's going to do both. The intelligence on the ground is it will likely remain disclosure based but have a strong labeling component to it because the regulator has acknowledged and recognized that whether it likes it or not, market participants in the main, not MFS, but in the main are treating it like a labeling regime and therefore they have to understand and govern for that.
I think we need to walk back some of the precision that we pretend to have around some of the issues. We can talk about scope 3 or we can talk about biodiversity or we can talk about supply chain risks, where the data coverage is so poor today that it actually is potentially misleading to have disclosure against things that are very, very low quality. Something you and I think about all the time when we are reporting out to clients, we want there to be really high veracity of that data. We want it to be authentic. We want it to be decision useful, that we have certain principles that we want to hold to. Unfortunately, ESG data is improving from a very, very low base. We are not over some of those critical thresholds yet across some of the metrics that we would love to be able to measure.
So I believe we'll get there. Can the regulation inspire and move us towards that and create the operating conditions where that becomes absolutely fundamental and necessary? Yes. Do we need to jump to the end solution now and be really precise about every single metric that we should be measuring? I think that is probably a bit of a false economy as well. So I think we are learning as we move through. It looks like the UK regulator is going to jump up the learning curve a little bit. I know the SEC is paying very, very close attention, Monetary Authority of Singapore, the Australian regime, they're all paying very, very close attention to what is happening in Europe and not blind to the fact that, again, like you said, Europe to its credit moved faster, was an early adopter in this space is likely to have gone down some cul-de-sacs that maybe it needs to veer back from, and not everyone needs to go down that same journey.
George Beesley:
Yeah. Well, lots of change coming. We'll continue to watch this space. So the final guest episode was Michelle, and you focused on DE&I. One of the most interesting questions for me is, how do we broaden the talent pool and what is the role of MFS finance more generally? I think that's one of the most challenging parts of it. We can have some internal policies about say, blind resume reviewing and all of that good stuff, but ultimately, the root cause of the problem is much further downstream. So how do we generally ensure that we broaden the talent pool and is there a role for MFS or finance more generally in that?
Vish Hindocha:
Yes to both. So we as an employer and MFS or whether that's any financial institution, I think owe it to everyone to think much more broadly about the types of skills and the talent pools that we fish in. I know that lots of people think about that. I'm convinced that the so-called soft skills are actually really, really hard and actually really hard to calculate in people, but those are going to be the things that count over the future. If everyone's got an AI machine in their pocket, the hard technical skills are going to be commoditized to some extent. They're creative. The influential, the communication, the ability to build trust, rapport with other individuals that be able to think innovatively and creatively into the future, those are the skills that are going to be the most prized. Those are the ones that we probably spend the least amount of time teaching our children or thinking about across the education spectrum.
So yes, I think we need to make sure that we're optimizing more for those skills than a narrower set of skills that maybe we have in the past. Again, I know that we and many other organizations are definitely moving down that track very fast. I think we also have a duty to society. So in the UK, for example, it always struck me as really odd, and this is also true in the US, we have one of the largest financial centers in the world in London where we're sitting right now, and yet we have one of the lowest rates of financial literacy in our country. So you've got this, one of the only things that the UK exports is financial services, and yet we seem to have one of the lowest rates of financial literacy across the world so when people are asked very basic questions about budgeting, finance, savings.
So bridging that has actually been an incredibly rewarding thing for people at MFS. So I've taken people into schools and we've done financial literacy training for children as young as six to eight, where you think, "Well, they're never going to understand about budgeting," but actually, all the research suggests that that's the right age, that where habits start to really form around money and actually opens their eyes to different career possibilities. So you start to inspire a generation that might've thought that financial services was so far out of reach, and they have the image in their head of an investment banker or someone that is super proficient at math, wears a suit all the time, comes into the city, is part of this network.
They don't realize that when they come in or sometimes when they come into our offices that actually lots of people found their way here through all weird and wonderful different ways and actually, is accessible to people. They just don't know that it's there for them. So I think we can break down those barriers. I think the firm can do that. I think we are moving towards that space the way that we . . . and it's actually really rewarding and engaging. It's like a triple win. It's a win for MFS. We get better talent. It's a win for our current employees 'cause they feel so good about their vocation and what they do, and they feel inspired when they walk into a school environment. It's a win for broader society if we can do that. So yeah, I think it's a no-brainer to move towards that space.
George Beesley:
Yeah. Yeah. So my last question for you is one that you threaded throughout and it's what is your wisdom? What should I do differently on Monday?
Vish Hindocha:
Introspection is one of the hardest skills and often really overlooked in the professional services industry. So we're a knowledge-based industry. Thinking about the condition of your thinking and your mind seems, to me, to be a really, really important thing. So if all anyone did starting next Monday was spend 10 to 15 minutes, whether it's meditation or yoga or breath work or you hate all of those terms and you just spend some time thinking and reassessing your thoughts and your decision-making from the prior week, I think it would actually force you to confront some of those underlying beliefs that may no longer serve you. Some of those habits or routines that no longer work or could be improved upon, or some of those ideas that you could carry forward into your team, into your organization, into the broader industry or society at large, my bit of wisdom would be spend a little bit of time really reflecting on the own quality of your thinking because that is likely to determine your happiness and your success not only in your career, but also the impact that you can make throughout your life.
George Beesley:
Yeah, I love that. I'm actually just reading Clear Thinking by Shane Parrish now, and that's one of the big takeaways that I've had. He recommends if there's one thing that you can really do, this force multiplier idea is to take breaks, and two, you don't even have to be thinking during them. So it's great to reflect as well, but just having some time where you're not constantly consuming new information. I think for me, I think for people like us, we have similar personality types where we love and encountering new ideas, talking to new people, and I'm just constantly reading or listening to a podcast or a book. But it's certainly a working point for me that I'm trying to ensure that I actually take some time out to do nothing, and it's been powerful in the last few weeks that I've tried it. So Vish, thanks so much for letting me . . .
Vish Hindocha:
Thanks, George, you as well.
George Beesley:
. . . ask the questions this time and put you in the hot seat. I think that will be really interesting for listeners to hear your perspective on a lot of that stuff that we heard from the great guests that we had, but it's great to hear from your purview as well. So thank you for having me on and taking the time.
Vish Hindocha:
Great. Well, thanks for the questions. It was fun to be here.
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