In Davos: Investec CEO Hendrik du Toit flexing brainpower. Must listen.

LONDON — It’s been my privilege to have known the subject of today’s episode for many years, almost since the day arrived 27 years ago at a then small banking company with an idea of starting an asset management business. Deciding to back this one man and a briefcase was one of the smartest moves Investec’s Stephen Koseff made. Under Du Toit’s direction, Investec Asset Management is now a multinational company that trades punches on equal terms with the best in the world, with $150bn in assets under management. So this mad keen marathon runner, is an entrepreneurial star in his own right. Du Toit will soon be getting the opportunity to stretch these muscles when Investec splits into two units, with the asset management listed as a separately investable entity. But that’s a story for another day…The focus of this episode is all about change. And specifically the mushrooming field of Environmental, Social and Governance (ESG) reporting which has become a core element of every ambitious business. So important, that Du Toit reckons every public company needs an ESG expert as a board director. – Alec Hogg

Davos 2019 – this coverage of the global conversation on change is brought to you by BrightRock, the first ever needs matched life insurance that changes as your life changes.

This is The Rational Perspective – I’m Alec Hogg, and in this episode Investec’s Hendrik du Toit goes on the record in Davos. It’s been my privilege to have known the subject of today’s episode for many years, almost since the day he arrived, which was 27 years ago at a then small banking company, with an idea of starting an asset management business. Deciding to back this one man and a briefcase was one of the smartest moves that Investec’s CEO, Stephen Koseff made. Under du Toit’s direction Investec Asset Management is now a multinational company that trades punches on equal terms with the best in the world. With $150bn in assets under management it has the fighting way to do so.

So, this mad, keen marathon runner, who built this business from scratch, fully justifies to be called an entrepreneurial star in his own right – du Toit will soon be getting the opportunity to stretch those muscles still further into the international arena when Investec splits into two units. With the asset management operations that he’s looked after for so long, now being separately listed on the stock market but that’s a story for another day. The focus of this episode is all about change and specifically, the mushrooming field of environmental, social, and governance reporting, which has become a core element of every ambitious public company. So important that du Toit reckons every public company needs an ESG expert as a board director.

I’ve been coming for a few years. It’s normally good to short the theme or go the other way, where Davos is bullish the markets go down, and Davos… It’s a part like The Economist’s front cover, well I can give you a long study on that – we invest covers in the world but typically, if you don’t let that sway your investment decisions you can do quite well. So, I think the broad… I’d rather comment as opposed to this year’s theme, and by the way the Fourth Industrial Revolution (4IR) is not, it’s very difficult to criticise your host but before we go to a 4IR we actually need a new energy transformation and no Industrial Revolution has ever been led without the very serious energy usage transformation before.

I think we can argue about the names but I think energy transformation, to me, is one of the key indicators of sustainability success over the next few years. Sustainability is finally, and that’s the real credit to Davos and to Klaus Schwab and his team. As we’re starting to identify sustainability at a far wider concept than saving polar bears or planting a few trees. I was very privileged to serve on the Business Commission for Sustainable Development, which was formed here at Davos about three-years ago, and delivered its final report last year. As I came in, I walked past Paul Polman rushing to about the third breakfast already.

Paul was the chairman of this committee and Mark Mueller-Brown was the other chairman. They came up with something where business and all of us participated. Where business contributed to the concept of sustainability and what we really did is took it much wider than the classic sustainable investment or environmental protection, or living a bit cleaner. It is about creating an economic future for this world and for the people of the world, which doesn’t clash with the logic of our planet, the design of our planet, and I think that’s a simple thing.

We don’t want our grandchildren to live on a planet, which is as beautiful as the one we inherited, probably more beautiful, more clean, more healthy and that also, therefore includes economics or business, and jobs and profits because if you can’t do that… If you can’t give people jobs, they are going to chop down trees. If there are no jobs, they’re going to illegally mine, they’re going to over-fish – all of these that are troubling our planet. So, my point is the Davos annual topic is important. There is a revolution on the go whether it’s the 4IR or an energy revolution, (we can argue about that outside) but it’s time we interpret the sustainability concept very broadly because if we don’t do it now, we will really be depressed if we sit in this room in 15 years’ time.

That’s a fantastic introduction to the topic. So, I guess if we pin this to the UN’s sustainable development goals, it’s an absolutely enormous global undertaking for policy makers and corporates. Within that we can put the financial services industry, whether its banks lending money into the economy, or if it’s investors like Investec Asset Management investing in companies. What is the role here in corporations, generally and the financial services industry specifically making the world meet these goals?

I think firstly, we were all very excited in Paris a while ago. Then came the seismic change in US politics, I shall say no more, and interestingly the Chinese are onboard, almost all the big polluters are onboard except the biggest historic one and also, the sort of out was given to not only the corporate world but the world at large. I think this is a temporary thing. I think the American people are far more perceptive, whether it’s down to the political process or not, on the ground people are starting to understand and if you go, and I’ll just tell a story, if I may, about sustainability?

We have, now please don’t write this, an office in Mauritius, and  we have a very good man running the office there. He likes fishing and if you go there, and if they have time, they can do a bit of fishing. And when the Somalis were at their peak in hijacking big ships the fishing vessels fished further off the coast of East Africa, and of course the fish stocks were covered very quickly. This is evidence from the ground, rather than stuff written in journals but it’s really important how quickly the environment can come back and recover. Therefore, I think ordinary people see that. Ordinary people around the world see climate change affecting agriculture. If you live in a country, well I come from Africa. If you live in a place where agriculture is a means of life for most or many people. Old people will tell you, it is now tougher to sustain yourself.

Why? And the reason is getting out. People are starting to understand that there’s a problem with the way we run our Earth, our system. So, my sense is we’ll get through the political breaks on the sustainability movement. The difficulty is actually implementing it at government, local government, corporate and small business level. Now, I think we’ve failed in the business commission. There’s one thing that I really tried and we argued it, but we haven’t succeeded yet because the world is not truly mobilised yet and that is that every public company should not just have an audit committee chair or a risk committee chair, or a human resource or remuneration chair. But there should be a non-executive director, appointed to oversee the drive for sustainability in a business, and shareholders should police it. Why, because we all know, it’s well proven, it’s good for long-term profits, it’s good for mitigating liability as we’re going to see some humongous court cases.

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What we need to move into is how we can satisfy the need for near term profits, which is part of capitalism and by the way, if you stop that you’re going to get a whole lazy system. So, we shouldn’t throw out the baby with the bathwater. We should drive for profits but we should put in a framework, which is long-term and sustainable. I think companies are trying and companies are doing well but what we lack at the moment, particularly in the investment community is standardised data. Once you have standardised data you can compare. Once you can compare how companies compete and actually, the system self-corrects and the beauty is, we have the market system, which allocates and re-allocates capital.

Neil, may I just do what politicians do, and I’m not one but to give you an answer to a question you didn’t ask? That is that I’m a huge believer and I’m very optimistic in the current capital system of self-correcting. What we’re doing, we’re driving ourselves into a depression because a few people became truly successful, and we say 1% or the 0.1%, not the 1%. By the way, you’re all part of the 1%. It’s the 0.1%, it’s the guys who arrive at Davos in the jets, not the guys like us who come by train. They own everything. What’s wrong with that, by the way? They’ve provided something, which was bought by people around the world, which benefited consumers and most of them give that money away when they die and invest in good causes, by the way. That’s noted with a current sort of Gini coefficient. The fact that the Brazilian Gini coefficient has improved significantly over the last 15 to 20 years, it’s not set, and the fact that this system is very powerful and lifts up the bottom is not set.

So, if we go there, we say, this system can implement faster than any government system can. We should use it to implement the transition towards the sustainability and allow the profit motive to exist. Now sadly, and I’m going to end here because my answer is too long. My profession, the economics profession has miserably failed us. They spend time in Ivy League classrooms writing complicated formula on blackboards, and no one but themselves and physicists understand. They created these wonderful models for which they won Nobel Prizes, which contributed very little to the understanding of how our system works, how it should work and over the next decade – if we’re going to win this war against the sustainability threats, we have to develop a sufficient consensus on why our system works? Why the benefits are outweighing the costs, and how we can all, as ordinary people, contribute to that success? I think we’ve got a huge job to do.

Thank you, Hendrik. So, I have a couple of thoughts on some of the things you were saying. From what I’ve seen in the last couple of years, sustainability, ESG, responsible investing is now seen as the kind of mainstream positioning for every asset manager that we’ve come across. You can see with the PRI, the Principles of Responsible Investing, in 2010 I think there were around $20trn managed against the PRA standards. It’s now something like $85trn has been signed up to the PRI standards. Everybody talks about it. In reality, how much of that is PR and how much of it is asset managers, and asset owners, genuinely believing that there is a way to reach sustainability goals through managing businesses responsibly?

I think it’s really interesting. If we sat here five-years ago I would have said to you there’s a lot of hot air and PR, and we had a few managers who really understand people like Generation – David Blood and built a fantastic business. Some of the other smaller boutiques who focussed on this. Today, I think, and you get these big ads by Amundi all over the FT yesterday – talking about ESG integration. Now, Amundi is Europe’s largest asset manager. A lot of asset managers now have integrated to a very serious extent, proper ESG filters. They initially started looking at governance (G) – that was the easier big. I think we’ve kind of reached the apex of the intervention in corporate governance because it’s now really hard to be a public company.

But on the social and the environmental side the sophistication of the work has improved but is still captive to the lack of consistent data. You get consistent accounting data – you can look at the profitability, look at the cash flow of the business. You can understand the number of products over time, you can monitor it, you can discuss the price of the stock. You’ve got everything at your fingertips. You don’t have these things… There are many providers competing. You don’t have standardisation. Call it the reporting councils or reporting boards – they need to do a lot of work.

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Now, of course, we know the world is still split between American accounting and the rest, but at some point, I think this will kick over, and therefore you’ll have very good objective data to look at over time, because the point is over time. It’s very important – asset managers should not simply impose their opinions on companies because they are part-owners. They must reflect the opinion, largely of the society, the people who invest with them, and we get very clear guidance from the institutional investors. On the retail side it’s more difficult but now, these days, you have the tools to ask your mutual fund investors what they think about certain things. Then really fight very few battles because you don’t have the economics to fight every battle, and we are learning.

But what’s interesting is the younger people coming in the firm are genuinely serious about this because they are frightened about the kind of world they are going to inherit. So, the 60-year-old portfolio manager may still think it’s okay to buy just carbon cash flows. The younger don’t, but I think where we get it wrong is, and maybe I’m now giving my age away, but would I have done the same as the young students running and protesting in front of an Ivy League Foundation or endowment saying dis-invest. You know there’s this, there was an interview in the FT, and a comment, ‘look at the contradiction.’ When in the 80s Americans were disinvesting from SA, they forced IBM to give their business away. IBM was probably the best corporate citizen in that country at that point in time. Alec and I can tell you that because they gave, lots of those days, people chances who wouldn’t have got chances because of the apartheid system, because of he way they ran themselves.

So, I think it’s very important that we don’t turn ESG into a disinvestment movement because then large cash flows will end up in the hands of the so-called stranded assets, of bad people, who buy those cash flows really cheaply and care even less about the environment. So, we want BP to transform over time. We don’t want BP just to cut off it’s nose to spite its face and go bankrupt because the world is still dependent on carbons for a time. So, the balance in how people interpret ESG is a bit like how people interpret religion. We need to have a much, more vigorous debate on that, and in our case, we believe this to be client led. This is constituency led, and it’s led by the communities you serve, and asset managers therefore, have to become much more sensitive to their constituencies and not simply impose a one size fits all.

We, for example, focus our activism in areas where we actually can make a difference. It is a huge problem today and particularly driven, may I say so, largely by the media who always want to stage fights between activist investors and companies. Now that is not a healthy case. When a company’s CEO spends half his time fighting one of his own investors instead of delivering to the shareholders, it’s a problem. I think we need to evolve the sophistication of that because you cannot just go and spray paint at a company and say, ‘stop doing something.’ You need to help a company to put in structures and systems, and I’m coming back. There should be a non-executive director on every public company board that holds management to account on its sustainability agenda. I think each company that sustainability agenda is very different.

I agree and again, you say something, which kind of prompts me to think through. In 2015, VW was seen as the best investment on the Dow Jones Sustainability Index and then obviously, not long after, we had the VW case, which obviously we all know and read about. Now, to what extent is culture because this is clearly an issue driven by culture – to what extent is culture important when you’re running an organisation? How do you align your culture to your strategy, and how then do you align your culture to meet those sustainability ambitions, both corporates to have, and actually as an investor’s perspective, how does that fit into the mix?

I think, firstly you mentioned the word ‘index’ and I had to take that bait. Everyone now is index, and index. If you just invest in the index, you’re going to always get the Volkswagens. People are necessary in the ecosystem to smoke out the Volkswagens, to find them, and to ask them the hard questions, and not just to hold them because they’re there and because they’re big at that point in time because you believe they’re good. That’s the value that is so beaten up every day, in the press – active management, yes, you can’t beat the benchmarks. But let me tell you what markets looked like without asset managers. Without managers who think differently or try to separate winners from losers, and try and withdraw capital from people who do wrong or who don’t do well and allocate people.

I’m a huge fan of active management, by the way, I’m not just saying that but at Investec Asset Management we have, and the whole of Investec we have, for many years, thought about being purpose driven. Now, once an organisation has a sense of purpose it then can define itself. It can then create a set of values to which it holds its own employees to account, which is much more powerful than a set of rules. Or a legally driven set of requirements. In our case, we very simply after, it took about 20 years, the asset management part is almost 28 years old, but we came up with a simple thing. We want to build a better firm, we want to invest better, and by doing that, contribute to a better world – very simple.

What does a better world mean? If you work back, you’ll find somewhere down there that you have to learn, and it’s a learning process so, we’re probably halfway there. Embed decent ESG principles. At the moment, we’re living in a, and I do agree with the analysis that we have now moved into a multipolar world, decisively into a multipolar world. Most of us have only understood a unique-polar world. So, the risk with the ESG and the sustainability agenda, and the value as a culture agenda, is you impose American culture or British values or British corporate governance on everyone else. I tell the guys in the office you can’t vote – we had a very simple template and if you go to these voting agencies they really, sometimes come with simple templates and you do have to apply your mind to that and you do have to over-rule. So, for example, voting off any director that has linked to a State in an economy, which is largely led or controlled by the State, which happens to be apparently the second largest economy in the world.

You’re going to have a really ineffective board if you’re just going to have a bunch of people from abroad, who are truly independent and can’t speak to the State, okay, so don’t apply. Then you had people who had systems for four-thousand or five-thousand years who have run themselves in one way. Now, we’ve lived in a world where there was a lot of waste and preaching. A lot of less well-thought through advice given. I’m really fascinated by the way that the Washington consensus is now reversing itself. I grew up as a kid studying economics and I learnt that countries had to open their markets. That countries have to allow multi-nationals to come in and free flow of capital and all these good things. Well, at the moment, a small section of the voted group of a large economy feels hard done by – it changes the rules of the global economy on its head. It just turns on its head and it starts preaching the opposite without consequences.

So, I really believe we’re going into a world where we also have to have the subtlety of multi-culture, with multi-regionalism built into the way we interpret what’s right and wrong. It doesn’t mean that right becomes wrong, and wrong becomes right. It just means understanding the context and I think that is the challenge, particularly for investment managers. How can you tell a poor country not to develop its natural resources, if it only has one resource, carbon? How can you tell them not to? You could help them to do it cleanly, efficiently, and you can advise them to do the rest, but you can’t stop them and I think that’s where the real challenge of implementing this globally comes in because if you simply send an instruction to all companies  you’re invested in to behave in one way you are going to destroy value and that’s where I think a great deal of work needs to be done.

The first bit of work is to get the data consistent. Then make sure you represent the communities on behalf of whom you invest, and thirdly, make sure that you understand the context. So, for example, I went to a Singapore meeting on the sustainability issue, and the Western press it doesn’t get a lot, and Temasek in particular. Just go and read their website and it’s first in class. It’s better than, as Singapore does it, better than anything in the private sector. I always take my guys to their website and say, ‘just read this’ if we can be half as good, great. But I went to their annual sustainability week two-years ago and they had a whole lot of Asian family companies there, where the patriarch was there, and sort of three generations – in a large room and talking about sustainability and ESG.

Now, there was no chance that the patriarch was going to give up control – there was no chance. Whether the non-voting shares or either because he built the business, and he wants his granddaughter to do really well and he’s drilling her and there’s varying corporate governance in those companies but it’s a different governance. So, when he asked them about sustainability, the Temasek speakers were also really good and the people they got. They contextualised it in the communities those people operate. In fact, I saw a consensus there, which is probably stronger than the lip service we see in many large Western corporates with departments, which put many pages in their annual report. But actually, you know the CEO is driven by the next quarter’s profit.

I’m just using this example to say, one must be careful not to launch a voting campaign against an Asian family company that actually, is doing a hell of a lot for the community around, even if it’s for the patriarch’s personal account and not necessarily through the company, then the smart annual report that complies with everything that we’ve set, in terms of our stewardship guys. So, that’s really my point, and as emerging market investors we see it every day and we have to respect the way countries operate in their context.

That was Investec’s joint chief executive, Hendrik du Toit. He was hosted at a breakfast in Davos by FTI Consulting whose senior managing director, Neil Doyle, conducted that interview. This has been The Rational Perspective, until the next time, cheerio.

Davos 2019 – this coverage of the global conversation on change is brought to you by BrightRock, the first ever needs matched life insurance that changes as your life changes.