“Uncertainty” has been used almost as a mantra in recent days to describe the economic environment since the threat of trade war has loomed over the North American economy. For financial markets and business decision-makers, the word is usually a four-letter one. But it is also a constant in business and investments.
For institutional investors, strategies to mitigate risk have always started from controlling what we can in the present, and identifying the places where smart decisions and actions can protect portfolios and promote resilience for the future.
To do that in times of turbulence is to have a clear plan, and to execute it effectively. Whatever one might think of former U.S. Treasury Secretary Tim Geithner, I am a big fan of his maxim, repeated regularly during the 2007-08 financial crisis: “Plan beats no plan”.
Making an investor action plan and sticking to it sounds quaint when there is turmoil around us. Won’t any plan be up-ended by ever-changing events?
Not if we see plans as a way to orient ourselves and our work, and create robust operational structures, rather than as a bet on a specific external scenario or a rigid set of actions set in stone.
So what does this mean?
First, plans are about confirming our understanding of the fundamental risks and opportunities that, as investors, we need to address, based on evidence. Climate risk, for example, is a fact. The recent wildfires in Los Angeles are a reminder that investor climate action plans that help mitigate those risks are more essential than ever. Diversity and equity are fundamental values that have also added and will continue to add financial value within companies and contribute to building a more robust and productive economy. Fact. Investor votes and other actions that help improve board and executive diversity have been and will continue to be critical to improving corporate governance and performance.
Second, a plan is a way of thinking through how those fundamental risks and opportunities can be addressed within the institution’s specific constellation of asset mix, asset selection, active ownership and stewardship, manager structure, and collaborative opportunities. These are things we can influence directly, even if changing the broader political or trade environment is beyond our immediate reach. A good plan must take into account the external political, social, business and economic environment we work in, but it focuses on what can be done.
Third, a good plan is not rigid – it identifies policies, operational systems, oversight, actions and collaborations that make the institution more flexible and resilient, so that it is better able to respond to uncertainty. Then it gives the board or investment committee a road map for which of those steps is most desirable and achievable within a set time-frame (e.g. three years) and prioritizes accordingly. Things will change, but if the plan is about equipping the institution with the tools to perform, monitor, and adapt accordingly, those changes become inputs to decisions rather than obstacles.
The reason SHARE is working with more and more institutional investors on developing investor action plans – and helping them to resource the most important elements of those plans – is because of a firmly held belief in the importance of getting better at identifying where we all want to go, and not where others want to take us.
These days, when uncertainty is abundant, that resolve, forethought and resilience is going to be more important than ever.
