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MANAGEMENT METRICS
ACCOUNTING FOR TRUE VALUE
Daniel Aronson: Author ... The Value of Values (MIT Press, 2023)
Expert on quantifying Submerged Value and Submerged Risks.
Peter Burgess COMMENTARY
Thanks to Daniel Aronson for getting this bit of dialog to my attention.
It is really appalling that so many people in the finance and investment community have so little understanding of how real things actually work. This may not matter very much if everything that is important is financial in nature and it all happens in six months or less, but a human lifetime is more like 'three score and ten' (that is 70 years when that phrase was penned, and somewhat more now in 2022). A working lifetime can be considered to be maybe 50 years, and it would be good if we all worked towards optimizing social and environmental and economic progress over a period like this rather than the stupid 6 month horizon that HSBC's Stuart Kirk talked about!
The management metrics that are embedded in modern 'financialization' are a very weak subset of the management metrics that are needed to plan and implement for a sustainable better world.
While knowledge of science and technology is way better now than it was a hundred years ago, a surprisingly large proportion of the population of the world have little knowledge of this knowledge. Worse, in modern times, a growing number of 'bad actors' have started to 'game the system' in ways that essentially 'weaponise' little bits of knowledge for all sorts of nefarious purposes. This is clever and dangerous.
It has been known for a very long time ... centuries ... that there need to be checks and balances to make it difficult to do bad things and spread misinformation. This was the 'raison d'etre' for accountancy and audit as they became key parts of oversight for participants in the industrial revolution in the 19th century, something that continues today. I argue, however, that it is about time that the financial accountancy that has been the basis for oversight for over a century gets to be exhanced in a substantial way so that it serves not only for the financial or economic dimension of life, but also social and environmental dimensions.
Unfortunately. much of the work that has been done to analyze the social and environmental impacts of economic activity has been done over the past several decades in a way that makes it difficult to integrate social and environmental progress and performance with economic progress and performance in a logical, coherent, and comprehensive manner.
I have concluded that one of the things that must be avoided is using money as a measure in all the dimensions of progress and performance. When I was a student of economics in the university setting, money was described as a medium of exchange and a store of value. Before that I was a student of engineering, where I had already learned that units of measures were constants that simply do not change. They have been defined with more precision over time, but essentially the size is exactly the same.
In contrast, modern money is valued more than anything else by reference to 'supply and demand' which can be argued is a reasonable thing to do ... but using the result of this market driven computation as a measure is fatally flawed and needs to change. It amazes me that money is being treated as a measure in all the conversation about economic performance and related policy choices.
Another issue that creates confusion relates to the use of simple 'one number' measure to report both progress and performance. Profit on its own does not tell you enough. Rather one needs to know about profit as it relates to the total of revenues and the total of expenditures. It is also valuable to know the relationship between profits and the assets employed in order to earn those profits. This information is not easily or generally available ... and is essentially meaningless when it is applied to the very large companies that dominate the global economy.
The framework for management metrics needs reworking from top to bottom. I like the idea of starting with financial accountancy and working out to all aspects of social progress and performance and all aspects of environmental progress and performance. I don't want for one interest group to dominate the process of design and deployment, but want to see a framework where everyone can get to participate should they be interested. This should not be simply a system that serves the rich and powerul, but one where everyone is valued.
Peter Burgess
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Daniel Aronson
Author: The Value of Values (MIT Press, 2023)
Expert on quantifying Submerged Value and Submerged Risks.
There's a lot of chatter about HSBC's Stuart Kirk saying investors don't need to worry about climate change risk. It's good Kirk shows the world what he really thinks.
He also exposes that he is simplistic and wrong *on his own terms.*
Investors are *already losing billions* due to sea level rise, $14.1 billion according to an analysis of 9.2m transactions in just a handful of US states. And that's only through 2016! (https://lnkd.in/ger75yfa)
Plus about $14 trillion (with a 't') in infrastructure risk, plus, as Stanford said in 2020, increased flooding will require a transportation redesign in Northern California or else 'more extreme weather conditions could paralyze road transportation.”
And adapting, as Kirk says will happen, is not at all like his simplistic mental picture, as MIT points out. (https://lnkd.in/gjYAq7Jb)
(More on all of this here: https://lnkd.in/gjXTnqrP and here: https://lnkd.in/gEKJH6C7)
A lot of people consider themselves 'savvy' for believing they see through 'oversimplified' and 'alarmist' thinking from 'tree-huggers' (or whatever their favorite insult is). But they almost always only end up showing how limited and simplistic their own thinking is.
#csr #sustainability #climatechange #esg #esginvesting #thevalueofvalues
Response from Alison Taylor
It’s grimly amusing watching HSBC people trying, and failing, to respond to Stuart Kirk’s talk at Moral Money last week, and not coming up with much beyond the need to support clients on a “journey” to “net zero”, the very arguments Kirk himself joked about, in a speech that HSBC signed off on. I dunno, defending yourself by proving you are indeed the butt of the joke seems weird to me?!
I think it’s very positive to get the quiet part out loud and on the table, and with such smug, condescending delivery, so we can tackle it without having to wade through a swamp of distracting PR first.
Here’s the quiet part:
- Finance only plans six years out at best, so climate is irrelevant.
- Who cares if Miami is six feet under water in 2100, it can adapt like Amsterdam, who cares about all the places without that option.
- Money is divorced from societal impact, and on past trajectory your money will be fine, so who cares about the real world.
- The past is a good guide to the future on this issue, and all progress is linear.
- The only real investor concern is a climate tax, so investors need to focus on resisting regulation.
I’m not here to unpick these arguments, I’ll share some good pieces that do this in the comments. Interestingly though, the responses don’t tackle him either, they just parrot the usual talking points in a panicked way. Could it be that HSBC doesn’t know how to do anything else?
Kirk did us all a huge favor by actually being honest about what he thinks. You could present the identical slides and easily make a powerful case for why we shouldn't rely on the status quo financial system to solve the climate crisis, rather than sneering. You hear this frame in the back room conversations Fink has with the oil industry too. Perhaps we can all stop shadow boxing and actually have a proper debate?
Update: they have suspended him! (Perhaps in return for a cut of the book deal, ugh I’ve got a feeling he will be everywhere)
#ESG #finance
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