The Responsible Investing Podcast, Ep.7: An eye for good companies - with Devan Kaloo
In front of the mic for our next Responsible Investing podcast is Devan Kaloo. Here, Devan takes us through his storied career, from his roots in emerging markets to his current role as Global Head of Equities. Throughout this time he has seen many market booms & busts, as well as a number of crises. This has given him first-hand insights into a variety of topics, especially one of the most exciting issues today – the future of responsible investing.
Amanda Young: Welcome to the Aberdeen Standard Investments Responsible Investing Podcast. I am Amanda Young, your host for today. Now, these podcasts are designed to hear from a range of guests on responsible investment issues and today, I am delighted to be joined by our Global Head of Equities at Aberdeen Standard Investments, Devan Kaloo. Welcome, Devan.
Devan Kaloo: Thank you very much, and thank you very much for having me.
Amanda: A little bit about Devan. He graduated with an MA in Management and International Relations from the University of St Andrews and an MSc in Investment Management from the University of Stirling. He joined Aberdeen Standard Investments on the Asian portfolio team in 2000 from Martin Currie. Devan leads our equities franchise at Aberdeen Standard Investments.
Devan is Malaysian. This is where he grew up, but he did do the last two years of school in Aberdeen in Scotland. Devan admits he did some terrible jobs during his time, such as working in a chicken factory in Aberdeen. Despite this, and one of his sons now being a vegetarian, his guilty pleasure is an occasional KFC!
Devan clearly knows how to make an impression. I have recently learned that he accidentally broke his wife's nose in an unfortunate dancing accident the first time he met her, but she's clearly got over this, so they now have three boys together, including a set of twins, which he declares to be the most fun thing in his life.
As a mother of a boy myself, I couldn't agree more. Spare time is spent persuading his teenagers that there is merit in hill walking, but I am sure the table tennis, badminton, and cricket they play is an easier win.
So Devan, moving beyond the most fun things in your life, I am keen to explore the merits of responsible investment with you. As we know, responsible investment has its foundations within the ownership of companies, particularly in understanding governance issues.
I'm really keen to begin our conversation by getting your views about the investor journey in responsible investment within equities and what you really think drove the growth in understanding the importance of ESG issues.
Devan: Well, I suppose if I take it from my perspective, I started investing in markets in 1994. The first market that I covered was Mexico, and that period there was a tequila crisis, which was one of the recurring crises that we saw in emerging markets since and to this day. One of the big things that came out of that particular crisis, for me anyway, was that you wanted to be in companies that were well managed. Whether that was in terms of their business model, whether that was in terms of the balance sheet, but companies that were honest, that were well managed, certainly did better than companies that didn't, and that is something that I've seen recurring through the years and the various crises that I had to work my way through.
The reason why that's important is that as we've gone through, or as I have gone through that, what I've noticed is that companies that, first and foremost, have a high regard for governance and the shareholders and stakeholders, companies that manage the environmental and social issues typically do better than companies that don't. For me, that's probably the biggest learning I've had in my investment career to date.
Amanda: It really comes on to the performance question. I'm sure you've often had to answer the question on performance. You've just talked about the value and the merits of how companies are better investments. Now, when people ask you how you prove that greater ESG factors as part of an investment process actually adds value to the share price, how do you respond to that?
Devan: Well, I think it's a misleading question because when we start talking about ESG issues, there isn't a clear definition or common definition of what's important and what's not important. Part of the issues around ESG is that you have this qualitative component where you're making a qualitative assessment of whether the company is good or bad, management is good or bad, balance sheet is good or bad. There isn't the same data points that perhaps you find in a P&L statement when doing an earnings report.
It's only more recently that you started to see that quantitative data coming through, and as a consequence of that, only more recently that you started to see the ability to be able to show companies with better ESG quantitative data are doing better than companies that don't. Now, that data hasn't been around for a very long period of time, so there's no clear track record. I think in that regard, it's a bit misleading.
I think the question if I turned around a different way is, are companies responding to it? Are businesses being driven by it? I think when you start thinking about it that way, it's a very different answer. I don't know of many businesses today that aren't having to think about their governance issues, aren't having to think about the environmental issues, aren't having to think about their social issues.
The businesses themselves are increasingly being differentiated between those are doing a good job around ESG, and those are not, and as a result, I think it would be foolhardy to ignore it or to say that the data doesn't support it because quite clearly when you look at the companies, they are responding
Amanda: That's an interesting perspective. I think one of the challenges as an investor when you're investing in companies, is really getting your head around whether a company is paying lip service to something because they think it's what investors want to hear, whether it's actually truly part of what they do. How do you approach that when you're talking to companies?
Devan: Increasingly it's a function of triangulation. As I mentioned earlier on, there is more quantitative data than there used to be in the past in terms of companies supporting information and being able to track that information. You can look at the quantitative data in terms of independence of boards, number of women on the board, or indeed, the carbon footprint and stuff like that, but there is a huge qualitative element of the data as well that you need to do.
That, in my opinion, is best served by actually meeting companies and talking to the company management. It's only through that, that you get a sense for management's conviction around these topics and whether or not they're less likely or more likely to follow through on what they're saying, but also you get a sense of the quality of the underlying assets of the business and whether or not it's going to be able to achieve it's ESG goals or stated goals.
That triangulation between this quantitative data, this qualitative data is crucially important, but it is a triangulation so there's a third point. The third point is simply this, that actually you need to exercise judgment, because as you're talking to companies, you will find that in different places, in different industries and different geographies, the answers you get are somewhat different, and actually how companies answer those questions are also quite different.
If you weren't aware of that, then you're likely to make the wrong sort of conclusion. Just because a company isn't really proactive in expressing itself around a particular ESG issue doesn't mean necessarily it's not implementing it. You've got to have that judgment to be able to differentiate or make those distinction between companies that are saying something and actually doing something.
Amanda: Have you seen a shift in those discussions you've had with companies over say the last 10 years?
Devan: Absolutely. I can tell you that when I started the conversations were generally how's business, and how do you ensure that you manage your risks well? Today the conversations are how’s business? How are you managing a regulator? Are you bleeding your customer? Are you making sure that you can deliver on the various policy statements that you signed up to, and look at all the various different quantitative and qualitative data to support that.
There is a significantly more information and a much greater willingness for companies to talk about these issues than that has been at any time in the past. We're seeing that across the board. It's not just in one particular area, although it is true that in some geographic areas it is more advanced than in others, but every area is responding to this.
Amanda: I think that takes us on to a really interesting point because obviously some of these issues that we are looking at are not black and white, and even more so when it comes to the regional difference on both standards and views. Now, you've long managed money in emerging markets. Can we perhaps touch on this, the differences in perceptions, standards, clients' expectations, and your general view of these regional challenges?
Devan: Absolutely. One of the things that is often a big problem when we have ESG issues is that you have potentially well-meaning individuals talking to companies or indeed countries and telling them that they should stop doing something which they themselves have historically done. For instance, stop cutting down the rain forest despite the fact that the industrial revolution in the United Kingdom, for instance, was fueled by the cutting down of its forests.
For a lot of the recipients of this advice the big issue is, "Well, what's essentially telling me is that I need to keep my people poor and that is for the benefit of your people who have already made their wealth." That sort of argument sits very poorly and actually doesn't drive things forward. Actually the discussion has to be a different one. If you carry down this particular vein, then there will be consequences for that.
There's environmental consequences, there's social-economic consequences if the forests disappear, but also, there's consequences if there's going to be your customers globally not wanting to buy these products because it comes from unsustainable forest or deforestation alike, then the conversation shifts to how do we achieve this sustainable? How do we generate sustainable growth? The conversations need to be orientated differently to talk about how this benefits the underlying company and/or country in terms of adopting these better standards.
We see more of that today than we have in the past, but there's still an element of you really need to stop doing something and therefore, stop growing, which potentially puts an individual country or company at a disadvantage.
Amanda: On a personal level, what is it that drives your passion to integrate responsible investment ESG practices into your processes?
Devan: At the heart is, as I had mentioned at the very beginning, the experiences I have had through various crises in emerging markets and indeed, I suppose capital markets more generally, that well-governed, well-managed, responsible companies ultimately thrive. The passion for me is to make sure that we're identifying and rewarding companies which have sustainable businesses, and that means they need to think about how they impact on the environment, the wider stakeholders, and the same time, make a good return for the underlying shareholders.
Finding and rewarding those companies is so very important because ultimately, these companies are going to take us forward as a whole. Being able to play my role, in terms of the efficient allocation of capital, to identifying first these companies and then supporting them, I think is actually a wonderful thing and it's at the heart of what should be the capitalist system in terms of the efficient and appropriate allocation of capital.
Amanda: It's really interesting because you talk about the role you play in helping that capital allocation, but are there any specific ESG topics close to your heart or that you either feel very positively about or issues you find hard to wrestle with when you're making those investment decisions?
Devan: The difficult one is making an ethical judgment versus a sustainable judgment. Very often and indeed, the start of ESG investing was grounded in exclusion.
Amanda: Absolutely. Values led investment decisions.
Devan: I hesitate to put myself in a position where I want to be telling people that they shouldn't be investing in tobacco stocks, for instance, or alcohol and the like because that's a value judgment, although there are clear social costs from that but equally people have the freedom to make those choices.
That one, I find that a little difficult, but I understand why people want to do that and if they want to do that, that's fine. We're happy to run portfolios and exclude that.
Where I absolutely feel very strongly about is on this point of making sure that we're investing in sustainable businesses, because that is what, as I said earlier on, what drives improvements longer term, by finding those companies that are making a difference in the world.
Amanda: That's great. This leads me on to my next question which is one that I've asked all my guests. Have you got anything that will inspire our listeners, either with a book, or film, or recommendation that may relate to sustainability matters?
Devan: I'm going to go, I suppose slightly tangential here. One of the things I've been reading recently as being Matthew Syed's Rebel Ideas book. The reason why I would then talk about this book is primarily because the key thing it talks about is diversity of thought and how we need greater diversity in our teams, in our organisations and indeed, more generally in policymaking and the like.
The reason for that is because actually by having a more diverse input you get better output in terms of better decisions being made. The reason why I think that's important is that's the way I think about a lot of the ESG issues. When we don't think about the wider issues and we don't get that input of people being concerned about these wider issues, ultimately, we don't make the right sort of decisions and we don't make the right sort of capital allocation decisions.
I would say that actually, Matthew's book is excellent in terms of emphasizing the importance of having diversity of teams, and ultimately, diversity of thought to be able to drive better decision making.
Amanda: That sounds really interesting and I'll add it to my list, which I'm slowly getting through from some real diverse suggestions that we've had.
Now, we are drawing to an end to what's been a really interesting discussion and it would be great to hear what your view is of the future for responsible investing, and what perhaps the next big issue is that we should be watching out for.
Devan: I think the future for responsible investing is very bright because what we're seeing is increasingly a recognition that there are costs and consequences to doing them-- again, potentially a value statement here, doing the wrong sort of things with regard to environmental and social issues and governance issues. In this time of COVID, quite clearly companies that aren't meeting their social obligations, and that's to a wider stakeholder group, are going to do less well than companies that are.
Similarly, the desire to tackle some of the big climate change issues, which is quite clearly a big issue, has garnered more and more intention and governments are more focused on that. You're going to see companies having to respond to that, and there are going to be winners and losers in that, so you need to pay attention to that, but also, you're going to see as a result of COVID, a whole change in terms of how people work, play, interact.
A lot of that is going to be grounded in thinking about some of these ESG issues and how that's going to change and evolve as a consequence. So it's quite an exciting time. The challenge to investors today is that there's an awful lot of change going around and therefore, I just go back to the same thing that's guided me through all the many years of crises, booms and busts in markets, and that is that you want to buy companies that ultimately are being well-managed, has strong businesses, and are managing their risks appropriately, i.e you want to buy sustainable businesses.
Amanda: Absolutely. Have you got any final thoughts before we end our podcast today?
Devan: It's time for a beer!
Amanda: It is Friday after all. Listeners, we are at the end of our working week here today. Thank you so much for joining us today, Devan. Our podcasts would be nothing without the willingness of our guests to engage with us on these topics, and this has been an excellent discussion.
Devan: Thank you.
Amanda: Now that ends up our costs for today. To those who have taken time to tune in, many thanks for listening. Please do download our previous podcasts which you can find on our website or wherever you normally get your podcast. Watch out for our next episode and tune in.
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