From tusk to tail

John William Olsen   16/05/2017   Comments Off on From tusk to tail

For centuries, the parable of “The Blind Men and the Elephant”* has been used to illustrate how overemphasising a specific part of a complex situation can lead to the wrong conclusion, even if that part is indeed both real and important.

The same is true in the world of equity investments. Identifying the characteristics of a good company to invest in, at the right time and valuation, is a complex process. Yet there is a tendency for the market to overly focus in on specifics when characterising a fund proposition, such as ‘Growth’, ‘Income’ or ‘Value’ – and during the last two decades, Ethical, ESG or Impact funds have become more prevalent.

On this latter point, the adoption of softer values in the investment industry is a great development for all stakeholders. But does the singling out of these elements, at the expense of other equally important considerations, cloud investors from seeing the whole picture, much like our visually impaired friends from the village?

Well, keep in mind that Impact funds or Ethical funds are not really designed with wealth creation as the sole aim, but are for investors with a social and environmental goal, or a wish to avoid specific sectors of which they disapprove. Some potential economic benefit from the structural trend of environmental values might be claimed, but the label will put pecuniary considerations in the background, and benefits from the trend will likely be overemphasised.

Do investors targeting long-term wealth creation then have to settle for low ESG standards?

For long-term fund managers it does not have to be a binary choice – we can do both! We can choose to take off the blindfold and create an investment philosophy and process supporting superior wealth creation while taking into account ethical issues and stakeholder concerns – including how companies treat their customers, employees and the environment.

Environmental, Social and Governance (ESG) considerations are then seen as the vitally important trunk of the elephant, rather than the elephant in its entirety. They are – or should be – critical considerations for all long-term investors, not just for “ESG funds”.

For short-term investors and stock market speculators, ESG values are largely irrelevant. For us, on the other hand, they are highly relevant, because companies that exploit or mistreat their stakeholders and surrounding environment will risk their reputation and ability to attract talent and business. They might trade at a permanent discount because of the risks imposed by the lack of responsibility, and we have seen several examples of companies focused on a sustainable future benefitting directly from this as a tailwind to their revenues.

The assessment of companies, management teams, risks and opportunities related to ESG can be holistically integrated into all stages of the research process to support investment decisions. And after an investment has been made, management teams must be held accountable. We can influence, give guidance and ask the inconvenient questions. As professional investors backed by the collective wealth of our customers, we have unique access – and because we don’t waste time grilling management teams on monthly sales trends, we can focus our conversations on more important matters such as sustainability, culture and strategic matters.

In most cases, I believe that achieving sustainable wealth creation is ‘the elephant in the village’ for investors. A tusk-to-tail approach of long holding periods, proven investment principles, thorough fundamental research, valuation discipline and deeply integrated ESG considerations is likely to capture the full picture.

* It is a parable that has crossed between many religious traditions and is part of Jain, Buddhist, Sufi, Hindu and Bahá’í lore. The tale later became well known in Europe, with 19th century American poet John Godfrey Saxe creating his own version as a poem.[1] The story has been published in many books for adults and children, and interpreted in a variety of ways.


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