In an email discussion thread on the subject of climate risk and transitioning out of a carbon economy, the conversation turned to the power of stewardship investors to manage the problem of stranded investment as we de-commissioned unburned fossil fuel reserves.
We were reminded of the famous Freshfield's research paper establishing the rules of fiduciary duty for stewardship investors as extending to considerations of environment, society and governance in investing. It was observed that Freshfield's has received more critical acclaim than practical implementation.
There is a reason for this. If we are going to give our stewardship investors an new purpose, we also have to give them new methods with which to achieve that purpose.
Consider, for example, the letter that was sent by the British Academy to Her Majesty the Queen in June 2009. A most remarkable document. In it, the top-ranked economy thinkers and financial policymakers in England responded to the Queen's demand for an explanation as to why they had not seen the financial crisis of 2008 coming. The answer: they did! In the letter, they explained that they new the global financial asset pricing markets were in a bubble, but they could not calculate exactly when it would burst or identify exactly what would trigger the collapse. So, other than issuing a few tepid warnings, they did nothing, hoping they would be able to clean up the mess, after the fact.
The point is this. These are money and credit guys. Credit does not start bubbles, although it usually is what causes them to pop. So, we can't expect the credit guys to stop the boom-and-bust. They do not have the right tools.
Same with stewardship investing. We can't expect good stewardship, if we do not have the right tools.