We Need a Radical Refresh

I spoke with Jessica Hamlin from Institutional Investor a few days ago about new research into decarbonizing investment portfolios. The article is great and it’s worth reading the whole thing, but here’s a quick quote to give you a sense of what we talked about:

In adopting environmentally-friendly portfolio strategies, investors often worry about the repercussions for returns. But Mike Chen, PanAgora Asset Management’s head of sustainable investments, argues investors can have the best of both worlds: low carbon emissions and high returns. 

For a new white paper, Chen created a simulated carbon reduction portfolio aimed at minimizing risk and limiting carbon emissions. He then compared the simulation to a benchmark, which was, in this case, the MSCI World Index. 

As UN Sounds New Warning on Climate Change, Research Shows High Returns are Possible with Low Carbon, Jessica Hamlin in Institutional Investor

My bit comes towards the end. I bolded my favorite section:

Ortel also challenged the indexes investors use to measure performance. In his report, Chen used the MSCI World Index, a commonly-used benchmark. But, Ortel said benchmarks like MSCI and the S&P 500 often limit the opportunities available to investors. 

“In general, I think that it’s a failure of imagination to allow the existing way that we describe the opportunity set available to investors [to continue],” she said. “The S&P 500 is this hegemonic narrative. That’s what we talk about when we’re talking about investing. And I think we need to radically update.” 

Ibid

I opened this blog post intending to be like “hey check it out, I was quoted in something! Isn’t that neat?” But I realize the above statements have implications to me that may not be immediately clear to others. So let’s unpack them a bit, shall we?

Cultural hegemony is the domination of a culturally diverse society by a ruling class which manipulates the culture of that society — beliefs, explanations, perceptions, values, and mores — so that the imposed, ruling-class worldview becomes the accepted cultural norm.

Sound familiar?

This is exactly what happens in investment management, where a handful of indices (in this case the MSCI World) are seen to define the universe of opportunity. And the investing public is left owning index stuff in index weightings because it’s the normal thing to do.

But think about it: the climate is changing quickly. The businesses of the past — those that pollute, extract, exploit, and profit from cruel corporate practices — are not changing with it. Yet they have been successful in the past, so they are assumed to be relevant to the future.

Unconsciously. By like, everyone. And that’s a shame.

We’ve taken care to predicate our investment process on a more holistic vision of the investment landscape. 

In time, I hope that will be normal.