Ahead of COP26, Allianz’s Oliver Baete and Enel’s Francesco Starace join a panel discussion at the PRI’s annual conference on what policy makers urgently need to achieve.

Two leading executives voiced their hopes ahead of next week’s COP26 but also their concern that the climate conference won’t bring the change that is needed to tackle the environmental emergency.

Speaking at the PRI’s digital conference in a panel session ‘A Net Zero Future: Credible Ambition and Solutions,’ Oliver Baete, CEO, Allianz, the Munich-based insurance giant and founding member of the UN-convened Asset Owner Alliance, urged COP policy makers to urgently eliminate fossil fuel subsidies that still exist in so many countries – including his native Germany.

“It would be a great step if we could eliminate these subsidies,” he said.

He also called for urgent progress on enforcing transparency, particularly in the private sector and in government-owned assets. He argued that the lack of ESG transparency in these sectors could create a shadow market, impossible to scrutinize. He also urged policy makers to do more to shape a just transition. Developing countries, emerging from the pandemic and navigating the energy transition need support from developed countries.

“It needs to be fair,” he said, adding that developed nations “have created the problem” and now have an obligation and motivation to support emerging economies.

For Francesco Starace, CEO, of Italian energy giant Enel, the biggest win from the conference would be a global carbon price. He said technicalities like whether the price should be based on a cap-and-trade system or taxation, mustn’t side-track from the bigger goal of putting a price on carbon.

“This is the missing part,” he said. “We need to achieve a carbon price.”

Panellists were joined by Hiroshi Shimizu, president, Nippon Life Insurance, a new member of the Net-Zero Asset Owner Alliance who stressed the importance of corporate engagement and better disclosure.

Starace also voiced his concerns about a disorderly transition, urging COP governments to do more to prepare for the years ahead. He said that disorderly transitions created inequality and losers; those that were slow to move will fall into the second category. He said governments need to “tell the truth” to companies and employees so they understand the transition and said that small adjustments are preferable to one seismic shakeup.

“It is much better to have a series of small earthquakes rather than nothing, and a big one at the end.”

Reflecting on the energy crisis in Europe, he said it showed how the market is structured for the short-term. Volatility would be dampened if we bought and sold sizeable quantities of energy over longer five to 10-year horizons, he said.

He said that Enel is preparing for the transition, embarking on a huge investment initiative stretching over the next 10 years to decarbonise.

It will treble renewable generation, install millions of charging points for electric vehicles round the world, and phase out coal.

“We have the technology and the money; the limiting factor is policy,” said Starace, adding that policies are the deciding factor as to whether countries slow down, or accelerate decarbonisation. The other factor is skills and manpower.

Baete also urged politicians to do more to explain to their populations the challenges that lie ahead. Asking people to pay for the cost of climate change through additional taxes will become increasingly difficult.

“You can’t, always, just add the cost to the end consumer,” he said, calling for “intelligent policy” that doesn’t “just penalise people when they use their cars.” He concluded that although there is very strong public support for the transition, research shows people are not prepared to commit more to finance it.

“We need to resolve this dichotomy,” he said.

Baete added that the pandemic has led to a short-term focus at the expense of long-term planning to combat climate change. He said the changing economics of insurance and risk raised the spectre of misallocating capital over the next decades. He also noted that much of the change today has been driven by the private sector.

Reflecting on greenwashing, Starace warned of the dangers of companies not decarbonising, opting instead to compensate via carbon offset initiatives.

“Zero is a clear word,” he said. “The whole issue of compensation and carbon offsets needs to be well understood, otherwise we risk the equivalent of bitcoin in the carbon market.”

Of course, some industries can’t get to zero and offsets and sinks are important, but it must be science-based, concluded Baete.

Consulting firms at the centre of driving change around diversity disclosure in asset management turn the focus onto their own organisations with a commitment to reporting by the same standards. President of Verus, Shelley Heier, who is the driver of the IIDC explains the impact.

In late 2020, we issued a call to action to our fellow institutional investment consulting firms to unite around the importance of gathering diversity data on asset managers.

Our focus was not simply on data at the firm ownership level, the traditional metric of evaluating diversity, but on leadership and investment team levels as well. As a result 24 consulting firms, representing $32 trillion in assets, are now members of the Institutional Investing Diversity Cooperative (IIDC).

The IIDC holds two core beliefs: first, that diversity of investment teams leads to better results and, second, that diversity in our investment industry can be realized only if investment firms cultivate diverse talent and offer opportunities for advancement at all levels. This means developing diverse talent in portfolio management and analyst roles where future leaders and owners of asset management organizations will come from.

One year into this initiative, our data partner eVestment reports that 947 asset managers have provided diversity data on nearly 9,000 products.  This is over 37 per cent of the active products in their traditional manager database.  Membership in the IIDC has grown from 17 original founding members to 24 today, and more are engaged in discussions to join.

To further underline the importance of diversity data, compel the asset management industry to provide their data, and meet asset owners’ increasing appetites for this data across their vendor landscape, we at the IIDC have agreed to apply the same diversity reporting standards to ourselves. All IIDC members will gather and report on their diversity profiles using the same definitions that have been set for asset managers. While asset managers will focus on investment product teams, consultancies will report on diversity of ownership, leadership, and investment professionals.

Reaching agreement with 24 independent consulting firms was not easy and was likely representative of conversations happening in the executive offices of many asset managers as they grapple with if and how they provide their diversity data.

First, getting the data is hard! Small firms don’t have the HR systems to track employee census data in this way. Large firms have very complex HR systems and changing them is incredibly complex. The data we want is different from the EEOC’s. It will be a big task to get the data, and it will take time to do it well.

Second, this is scary! How will the data be used? Will this result in binary decision making? “We know we have a lot of room for improvement but we’re in a non-diverse region” or “given the size of our firm it will take a long time to move the dial, will we be blacklisted in the near-term?” The concerns shared in our IIDC meetings tended to end with something like “but we are actively making the right changes in our recruiting practices, our inclusion efforts, and our pay practices, and we believe these will result in real change.”

Yet in spite of these concerns, all our conversations reaffirmed that a more diverse investment management industry – asset managers and consulting firms alike – is a valid goal which can be achieved by doing a better job at attracting, retaining, and promoting diverse talent. Because we shared this vision, we were able to bridge our fears and the many logistical challenges we face by acknowledging that we need to start somewhere. Therefore we agreed to not worry about rigid application of this standard yet, and just like we are with asset managers, engage in telling the what and how along with the numbers. Providing more transparency on practices and being willing to be measured is an important first step in progress.

In the future, we will provide asset owners a good bookmark for where our industry diversity was in 2021 and how much progress we have made since then. This measurement of progress and emphasis on the teams impacting investment performance will require our industry to invest more significantly in the recruitment, retention, and cultivation of diverse talent. As they say, you get what you measure. We have to start measuring to get the progress we need.

Shelly Heier is president of Verus.

To access the consulting firm diversity template visit www.iidcoop.com.

 

 

In a discussion on the changing relationship between asset owners and managers when it comes to integrating ESG, panellists including PGGM’s Arjen Pasma at this year’s PRI Digital Conference emphasised the importance of collaboration, long-term goals and being very specific in mandates.

Arjen Pasma, chief risk and compliance officer at PGGM Investments which has around 50 per cent of its €266 billion ($322 billion) portfolio with external managers including large private market allocations, said success of ESG integration with managers depends on specific details within the mandate, and asset owners reiterating their long-term objectives.

At the same time, he warned against asset owners placing tight restrictions on their managers as it will impede performance.

“It’s about being specific about the type of behaviour you want from the manager and the type of voting you like,” he said, adding that specifics should include compensation, alignment of interests and details on how managers should report.

Mandates should also include specifics on collaboration and shared endeavour around, for example, sharing data and engagement.

“Our AUM isn’t huge; it is only possible to achieve by partnering with others.”

In Australia, the balance of power between asset owners and managers has shifted to asset owners increasingly shaping and driving mandates said Angela Emslie, a member of A$56 billion HESTA’s impact committee. Given the sophistication and influence of the country’s vast super funds collectively managing some $3.3 trillion, asset owners now call the shots when it comes to integrating ESG into mandates.

“They are mandate makers not takers; if asset owners can’t get what they want, they will internalise investment management,” she said, speaking during a debate at PRI Digital.

Still, Australia’s asset owners haven’t always wielded the power. Emslie said that when HESTA first engaged with managers on sustainability some 20 years ago, the conversation only centred on the fund’s fiduciary duty to members and beneficiaries as stewards of their capital. Conversations on voting and ethics and the need for long-term sustainable investment followed, as did selecting and monitoring managers on ESG. Now the conversation is about building a bridge to real world outcomes, she said.

“The evolution of responsible investment has sped up over the last 18 months. It’s an idea whose time has come. ESG is mainstream and asset owners who don’t take it seriously are left behind and open to operational risk.”

Signs of change

Fellow panellist Sara Bernow, partner at McKinsey & Company agreed mandates once framed around risk and return now take into account responsible investment, sustainability and the expectations of all stakeholders. Transparency and ESG performance have become central to mandates. She noted how asset owners and managers are collaborating in this space and customizing mandates, creating specific and tailored investments that take asset owners sustainability preferences into account.

“We see innovation and partnership in this space.”

Panellists reflected on the need to “empower” asset owners in their relationships with asset managers, demanding ESG progress and holding them to account.

Collaboration

Collaboration between owners and managers was a key theme picked up by panellists. Doug McMurdo, chair of the United Kingdom’s Local Authority Pension Fund Forum, the industry body for the eight pooled funds with a combined £350 billion assets under management, said local authority funds had shown the power of collaboration in the investor backlash to Rio Tinto’s destruction of a an Aboriginal site in Western Australia that resulted in senior executives at the company stepping down.

In another collaboration, local authority pension funds are now working with Brazilian asset managers to address dam failures, putting pressure on Brazil’s mining sector.

PGGM’s Pasma added that collaboration ensures a bigger seat at the table, resulting in better engagement, particularly evident in private equity.

“Not so long ago it was very hard to negotiate anything in terms of ESG in private equity; now private equity firms are opening up.”

He said the industry should also come together to help shape regulatory change. “The last thing we want is 35 different reporting standards.”

Tensions

But panellists acknowledged tension in the relationship. Asset owners need to ensure asset managers are proactively moving on engagement and stewardship and delivering financial value to underlying beneficiaries for the long term. McMurdo voiced his concern that asset managers are still acting in the short term in a conflict with pension funds long term priorities.

Moreover, he said that “all too often” financial institutions and companies use the TCFD as a “cover,” not giving asset owners the information they need.

Another block to effective asset owner engagement with managers lies in the fact many funds have large passive allocations.

“You can’t do effective engagement with 4000 companies; how can you give these companies enough attention? If you want to engage, you need to rethink about how you invest your money,” said PGGM’s Pasma, highlighting that many Dutch funds have large passive allocations.

He suggested asset owners work with fewer external managers.

“Don’t partner with 300, partner with 100.”

He also advised on investing time in strategic relationships forged around beliefs, risk tolerance and a clear delineation of roles between the asset owner and manger.

At PGGM, the current focus is on getting the right ESG governance internally with trustees that can then align with asset managers. Pasma noted caution amongst trustees to engage around ESG, yet said being “a good ESG investor” involves taking an active stance, shaping active policies and accepting risk. Both trustees and asset owners need to step up and be more transparent, he said.

“You can’t hide behind benchmarks.”

HESTA’s Emslie noted that asset managers are still primarily incentivised around alpha. Rather than thinking about “what the world does to companies” she urged managers to think about “what companies do to the world.”

The success of the UK local government pool, Border to Coast, is a walking advertisement for the benefits of scale. In the three years since formation the fund has proven success on both sides of the ledger, providing significant cost savings for its underlying partner funds and giving them access to investments they would not have dreamed of as single entities. The passionate CIO of Border to Coast, Daniel Booth, talks to Amanda White about the fund’s success and what is next in its quest for constant improvement.

Back in 2015 the UK government directed the 90+ local council pension funds to be organised into eight pools of capital enabling the more efficient management of assets.

Border to Coast is the largest of those with 11 underlying funds with £55 billion in assets.

While the asset allocation ultimately stays with the local councils, the pools implement the investments and work closely with the partners in what is a big change management program. Border to Coast is building a funds management organisation and a big part of that has been to collaborate and ensure investment funds are built the partners funds will ultimately use.

“Cost is a big driver but we are not aiming to be low cost,” says CIO of Border to Coast, Daniel Booth in an interview with Top1000funds.com. “We are aiming to be a high-performance organisation that is efficient.”

Building the team

Border to Coast has undergone rapid growth over the past three years as it built an asset management business that is customer-owned and focused.

The investment team has increased from 15 to 50 people, with 100 in total within the organisation. About two thirds of the team has been hired in the past 18 months, during lockdown, and about a quarter of the employees had never been to the office until the past month when the office re-opened.

“It is important for culture that people are with each other especially for younger people,” Booth says. “It takes a bit more logistics to be working in this hybrid way, to make sure the right teams are in on the right days. People have been apart for such a long time, there is an excitement to be back. There was a bit of fear and hesitancy at first, but people are social creatures and like to be around each other.”

From a personal point of view Booth said when working from home he missed the creative conversations and the brainstorming with other people.

“Pre lockdown I thought it would have been the technical things we needed to do in person but it’s the creative stuff, and brainstorming is hard to do remotely.”

There are six teams reporting to Booth: the internal equities and fixed income teams, external equities and fixed income, alternatives which includes private equity, private credit and real estate, and then the risk and research team.

Internal versus external

The fund manages about £25 billion of the pools’ assets, soon to be £30 billion, in active equity and fixed income, with the internal and external split evenly.

“As we have been building the business it’s been partly about what we want to build in house,” Booth says.

For example in emerging markets there is an internal fund but for some countries, such as China, the opportunity for high alpha meant the fund was willing to pay for external management to get value.

Generally speaking the fund expects more from its external managers. To justify the fees a 2 per cent outperformance for external management is the benchmark versus 1 per cent outperformance for internal management.

“We expect more for external management. We look at the relative cost savings to manage internally, the probability of success and the alpha potential among other things. There are about 10 things on our checklist.”

But it’s not always black and white. For example investment grade credit management could easily have been managed internally but the cost savings were minimal so the fund decided to award it to external managers.

Border to Coast manages about £6 billion in alternatives with this asset class expected to have the most growth. About 40 per cent of that is in infrastructure and 30 per cent in both private credit and private equity.

“We are raising larger sums each year. As the underlying client funds diversify they are increasing alternatives,” Booth says.

At the moment the investments are mainly funds but it does have some co-investment and Booth is keen to build that out.

“We are generating quite meaningful savings through the aggregation of the assets and getting discounts. Alternatives have a very costly implementation cost so we are making sure we are as efficient as possible on funds and co-investment which is usually fee free or half fees.”

Both internal and external management is outperforming benchmarks Booth says.

“We are generating about £250 million of alpha over passive each year through active management. Our partner funds are aligned with that, they want us to optimise performance subject to a reasonable cost base.”

Cost savings

In addition to the alpha being generated, the fund is targeting £250 million of cost savings over 15 years.

Fee savings are evident across a range of areas; cheaper mandates on passive; savings on active mandates due to scale; co-investment in alternatives; implementation efficiency; and internal management.

Internal management has already proven to have demonstrable cost savings for partner funds. On the launch of the Sterling index-linked bond fund one partner fund transferred a £500 million investment resulting in a £0.7 million annualised cost saving. In addition, when two partner funds transferred to the global equity alpha fund it resulted in £0.9 million in annual savings for them.

Booth says the benefits of a professional investment team also means the underling funds can benefit from efficiency of implementation with attention paid to withholding tax treaties, tax optimisation, and stock lending revenues as well as service provider fees.

In July last year Border to Coast completed its first crossing deal on behalf of two of the partner funds. As part of strategic asset allocation changes one fund was looking to make an investment in UK listed equity and another was looking to redeem. Through collaboration the transactions were managed at the same time and the cost of cash redemptions was reduced resulting in £3.5 million of cost savings. Since then a further five crossing deals have been completed.

Investment opportunities

While the cost savings are real and plentiful, Booth says a more interesting benefit of pooling for the underlying fund partners is the investment opportunity that scale presents.

Border to Coast has produced 10 vehicles so far across public and private markets.

“We are giving them access to opportunities they didn’t have before including capacity constrained managers,” Booth says noting Brazilian infrastructure and Chinese healthcare as examples of nuanced investments.

In addition the larger alternatives firms want to build relationships with large funds as strategic partners and the local councils as individual funds wouldn’t have been able to do that.

“We can get access to oversubscribed funds where we haven’t been cut back on allocations, venture funds, access to deal flow, co-investments where our pipeline is very active, and we are in a good position to be quite selective,” he says. “Also having a professionally managed team with external managers supporting us, is allowing active management and that means risks are managed and we are earning a premium.”

A centralised professionally managed investment function means there is less dependence on any one person and instead there is a big team with established processes. It also means the fund can be a collective voice for its partner funds for company engagement and as a catalyst for change.

The fund has just announced a net zero commitment for 2050 and is also working with industry initiatives such as one with Albourne to improve reporting on alternative assets.

What’s next

The fund continues to develop new investment vehicles for its underlying partners. From an investment perspective Booth says early stage venture is interesting at the moment as it benefits from the environment. He also says emerging market asset valuations look attractive and currencies look cheap.

“There are a lot of the interesting opportunities there like infrastructure and healthcare. These are interesting things clients couldn’t do by themselves.”

There will be significant expansion into private markets. There is significant interest in specific climate opportunities from new technology to operating assets.

Global and UK real estate is the focus for the next little while, with the pooling of real estate a large undertaking due to the intricacies of tax among other things.

New equity offerings will also be developed including global equities with different weightings and work on factors.

“Everything we do is fundamental active. All the equities indexes are very concentrated and we think in a period where active management is going to do very well we are well positioned for that.”

There is also a plan to build out the co-investment programs for alternatives which will require a lot of work.

“I am a big believer in continuous improvement, everything we do we can do better. We want to continually enhance our offering and learn best practice and keep evolving,” Booth says.

From a process and management perspective the fund is building out the tangential parts of the organisation such as the research team, risk management and systems that allow for more active positions among the internal team.

“We want to be able to review positions and understand the risks. Risk management is managing the probability distribution of your outcomes and so while research allows us to take active positions, risk management allows the distribution to be managed,” he says.

“I am proud of building a funds manager during a change management project, during a crisis and producing good performance. This is a tribute to a lot of hard work from a lot of people.”

 

America’s university endowments are reporting blistering returns thanks to soaring equity markets and their large venture allocations. Washington University’s managed endowment pool is an outstanding performer, returning a whopping net 65 per cent for the fiscal year 2020-21 and nearly doubling its size to $15.3 billion. CIO Scott Wilson explains how they did it.

When Scott Wilson took the CIO helm at Washington University Investment Management Company (WUIMC) in St Louis, Missouri, in 2017 he set about a radical overhaul of the endowment’s investment partners and underlying holdings. He added capital with high-conviction partners and redeemed capital from others, refrained from investing in certain follow-on funds and sold holdings on the secondary market.

The results of that overhaul were dramatically on show in the fund’s 65 per cent returns, the bulk of which Wilson attributes to performance from investments and capital deployed since 2017.

“We have turned over the vast majority of the portfolio since 2017. Given the huge move in capital markets last year, probably 50 per cent or more of our returns can be attributed to being mostly long risk assets.”

Concentration

The 2017 overhaul and decision to increase investments with the fund’s most favoured managers was part and parcel of a deliberate strategy to strategically concentrate the portfolio, allowing for exposure to fewer, but more substantial, investment positions in which WUIMC’s managers have the highest levels of conviction.

“Concentrating capital has increased our tracking error significantly but we have not seen a significant increase in volatility. We have more idiosyncratic risk that is driving returns which doesn’t necessarily translate into higher volatility. The primary risk is still choosing who to partner and invest capital with,” says Wilson.

Volatility

Moreover, Wilson stresses that diversification isn’t lost with a concentrated approach.

“On a look-through basis we still have many hundreds of individual exposures broadly diversified across asset class and geography. You can make a strong argument that we are still overly diversified.”

Diversification is achieved via a bottom-up process, he explains.

“We try to concentrate capital in investments that we think have independent outcomes over our 10+ years investment time horizon – we believe this is real diversification.” He notes, however, that viewing investment in public equity and private equity as “separate asset classes” is irrational. “The primary difference between those two asset classes is how often they are marked to market and they are both still driven by equity factor risk.”

Wilson stresses the fund “rarely adds” new managers – much of the last year was “spent trying to figure out how our current roster of partners were taking advantage of price movements and volatility in certain markets.”

Still, the strategy makes manager selection crucial, and the team search far and wide for the best, including smaller firms, or firms that are newer to the investment industry in the hunt. A recent review of the university’s portfolio revealed more than one-third of the endowment’s assets are managed by diverse-led firms.

“We look for partners who we think are great investors with an attractive opportunity set, definable and repeatable investment process, an appropriately sized capital base and who we can partner with closely,” he says.

Managers also have to agree on the fees in a structure that pays for producing exceptional returns – not by raising and accumulating assets or charging high management fees.

Manager due diligence involves multiple in-person meetings with the senior investment leadership, but also with analysts, traders, and operations professionals at the GP. The team also engages with the senior management team of the underlying portfolio companies.

Alongside concentration and diversification, other key strategy pillars include fundamental orientation that prioritises the characteristics of each individual portfolio holding rather than macroeconomics.

Revisions to the strategic asset allocation are infrequent and gradual – and as of June last year assets were divided between real assets (6 per cent) cash and fixed income (6 per cent) absolute return (11 per cent) global equities (32 per cent) and private capital (45 per cent). Annualised returns for WUIMC’s MEP for three, five and 10 years are 24.9 per cent, 19.2 per cent and 12.2 per cent, respectively.

Impact allocation to grow

Going forward Wilson hopes that impact will grow to account for more than 30 per cent of the endowment. The fund does not screen for impact, but it plays a major role in the investment process.

“We believe that ESG is a significantly long-term investment risk and therefore those companies that are having a positive impact will have more sustainable business models over our investment horizon. We believe this will positively impact both risk and return over time.”

College and university endowments have posted their strongest annual performance in 35 years, according to new data from Wilshire Trust Universe Comparison Service. The median return before fees was 27 per cent in the 2021 fiscal year, which ended on June 30.

Co-head of the Willis Towers Watson Thinking Ahead Group, Tim Hodgson argues that to solve human issues, such as climate change, investors need to bring their heart as well their head to the job.

For me it happened in a very old room. I was told by the facilitator that the group would now take part in a structured exercise. My role was to say nothing. I sat and listened, and by the end I was angry. I don’t often get angry, but I was Greta Thunberg-level angry. I had passed from head knowledge to heart knowledge. It was May 2019.

I thought I knew about climate change and had already been talking about it as one of the two biggest risks facing humans. But this was only head knowledge. It was an intellectual exercise. I could pick it up and put it down when I chose. Heart knowledge can’t be put down. It can be supressed for a while, but it can’t be ignored indefinitely. Heart knowledge has been internalised. It is now part of who you are.

It is worth stressing that I am in no way suggesting we subjugate our thinking to our feelings or emotions. We are still talking about knowledge. In fact, we are talking about the exact same knowledge. The difference is how the knowledge affects our behaviours. Head knowledge implies rationality and cost-benefit analysis; a careful weighing up of probabilities and consequences and the like. Heart knowledge has access to all this data, but runs it through a new algorithm – call it the ‘love algorithm’, if you like.

Here are a couple of illustrations – one preposterous and the other more reasonable. Imagine one of my three children falls into a dangerous ocean current. Should I use head knowledge to assess the probabilities and consequences, and possibly conclude that being alive for the remaining two is the best course of action? Or should I let love decide for me – use my heart knowledge and jump, whatever the possible cost?

More reasonably, consider a subsistence farmer and her family, somewhere in Africa. Head knowledge recognises that climate change and the associated increase in extreme weather events is going to make her life more difficult. Heart knowledge knows this too, but also feels a twang of pain. In neither case do we immediately change our portfolio. But perhaps we would consider future investment opportunities differently.

What’s driving this thought experiment? I feel frustrated at the lack of movement relative to (my judgement of) the size of the need in respect of climate change and wonder if it is, in part, as a result of head knowledge that hasn’t yet made it to heart knowledge.

Also by reframing climate change as the symptom of a human-built system, I’m led to ask how best to fix a system so that it is fit for human habitation. With head knowledge alone? Or do we need heart knowledge for that too?

Furthermore, we think it is becoming increasingly apparent that individuals want and deserve personal attention from their employers. For their part, employers can become more humanistic and approach every issue from a human angle first. We believe organisations will need to provide purpose and meaning as key attractions for talent. I interpret this as a shift in emphasis – to more fully embracing issues of the heart alongside the traditional strengths of the head.

Then there is the net-zero journey. We foresee that investment decisions are likely to become harder and harder as time passes. If the rate at which I have committed to decarbonise my portfolio is faster than the actual opportunity set, will head knowledge alone show the way forward? Or might heart knowledge make the decision making easier and better?

In her book, Doughnut Economics, Kate Raworth describes five different levels of response a corporate could take in confronting planetary boundaries and social floors, ranging from ‘do the minimum’ through ‘do my fair share’ to ‘be generous’. Head knowledge might, by working very hard on enlightened self-interest, get a bit beyond ‘fair share’ – but the natural domain of head knowledge is ‘fair share’. Being generous is the natural domain of heart knowledge – because love is largely about putting the interests of others above self.

Combining these thoughts suggests that by bringing more of our heart to work, not to replace but to complement our heads, will result in us being more human and effective at solving human-caused problems. Starting with compelling us to spend more of our self in pursuing solutions to climate change.

These thoughts work more logically at an individual level, but they can be mapped to the heart of organisations and their purposes. And increasingly, investment organisations are being drawn by society and their employees to become more purposeful, particularly in response to the climate crisis.

So if you’re not sure what that nagging feeling is at decision-making time perhaps it’s heart knowledge and perhaps, if not surpressed, it will help make for a better choice, and a better organisation, all things considered.

Tim Hodgson is co-head of the Thinking Ahead Group, an independent research team at Willis Towers Watson and executive to the Thinking Ahead Institute (TAI).