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How Resilience Drives Investment Returns

How Resilience Drives Investment Returns

Good things are happening even as we endure a global crisis.

A Mumbai-based startup has successfully reversed the aging process in rats, a previously unthinkable breakthrough.

A new era in American spaceflight begins tomorrow, when two astronauts travel to the International Space Station onboard a SpaceX Falcon 9 Rocket. It will be the first crewed launch from the US since the shuttle program ended in 2011 and the first time a new type of spacefaring vehicle has carried humans from Cape Canaveral to the heavens since 1981.

And Blackrock — the world’s most humongous asset manager — reported that the recent downturn in financial markets had only strengthened their conviction in sustainable investing strategies. At this and other firms, Environmental, Social, and Governance (ESG) driven investment strategies are increasingly understood as a source of comparative resilience in portfolios, not just ethically admirable allocations that are “nice to have.”

This is clearly rad.

But it also pushes one to wonder about the harbingers of resilience. We wanted to do better than hoping we’d know it when we saw it. So we called Jean Rogers, Chief Resilience officer at the Long-Term Stock Exchange (LTSE) and a founding mother of the global sustainable investing movement.

As founder and CEO of the Sustainable Accounting Standards Board (SASB), she created industry-specific materiality frameworks that opened the investment profession’s eyes to the promise of ESG investing. And she’s hard at work to compound that contribution.

In our conversation, she pushed us to see the set of things that matter to a company’s performance as more than just a static list. Conditions change. And circumstances can arise where something “wasn't material for a company one day and now stakeholders are up in arms about it. Now it's a material condition for the company.”

She recently outlined a framework for this process of transformation in a paper co-authored with Harvard Business School’s George Serafeim which urged investors to understand materiality as a “process of becoming” rather than a “state of being.”

In our conversation, she outlined five factors analysts can use to assess a company’s capacity for resilience to acute events or exogenous shocks:

  • The transformative impact of their vision. “Bigness of vision matters because it creates momentum. People — other stakeholders, policy makers, employees, and investors — rally around the company because they want the company to succeed in achieving that big vision. So think of Tesla and its vision not only of producing amazing cars, but transitioning to a renewable infrastructure. That bigness of vision really can carry a company through volatile events and tough times.”

  • Inventiveness. “That's prolific innovation where you don't have to really worry about your intellectual property much because you're actually confident you're going to produce more. So you don't have to protect it, you can open source it and enable human progress, enable others to build on what you're doing. And you're going to continue to execute because you're investing in innovation and you’ve created a culture of experimentation. Think of Google, which puts a great deal of of its capital expenditures into innovation and long-term strategy. Think of Amazon, which invests more in R&D than marketing.”

  • Culture. “It's how you build a company that puts people first. This is a really important aspect which gives you a talent advantage over the long-term.”

  • A signal advantage. “Being able to read through all these crazy information sources that we all are exposed to now 24/7, and at a corporate level, being able to make sense of and quickly act on it. That is something that companies really have to be built for, to process and act on information really quickly. Think about Square. They're a financial services/mobile payments company, but they have decentralized project teams. They are organized around sourcing really high quality customer feedback through surveys, numerical data, and customer conversations. And they keep their teams at twelve so that they can move really quickly on the information. That's a great example of a company that has a signal advantage.”

  • Alignment. “Maintaining true alignment with all of their stakeholders is a hard one. This is not only maintaining alignment with your long-term investors, your board, your management, and your employees, but also your customers and other constituents. They all have different priorities. And your job as a company is to think about how you maintain alignment in the face of those differing priorities. We really see this when it's out of whack. Think about Wells Fargo and opening all the fake customer accounts. There's no way if you’d built a culture of alignment you would have any kind of that practice happening. Think about Boeing and putting planes out that you know are unsafe. It's also more subtle things like young companies that are maybe looking for product market fit and they don't quite have the business model worked out. Eventually they're like, wow, we got to make money, we're going to start selling data. And there you go.”

Considering the framework as a whole, she observed “the interesting thing is that while we saw these attributes to a certain degree in companies that outperform and not at all in the ones that under perform. We actually see them a lot more in private companies. And what I don't know is, is there just a new cohort of young companies now that are coming up where this is more natural way of building a company that’s really different than the companies that are mature and in the public markets who were built with Michael Porter's rivalry model of like, kill or be killed.”

You can read more about these elements in a Medium post Jean wrote about a month ago. And if you’re interested in the values which underpin them, you might also check out the Long-Term Stock Exchange’s principles.


As usual, we also answered questions from listeners at the end of the podcast. This week, we discussed:

  1. What’s the better disaster risk hedge, gold or bitcoin?

  2. How does the pandemic change your view of the active vs. passive debate, if at all?

  3. The Patagonia vest used to be a staple of VC wardrobes. Are they still prevalent in the era of quarantine?   

If you’re enjoying this podcast or just want to do something nice, please consider leaving us a review on your favorite podcast listening platform.

Quotes from our conversation were lightly condensed and edited. Our header image is courtesy of the National Parks Service.

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Free Money with Sloane and Ashby
Sloane Ortel and Ashby Monk explore what's holding the world back from investing in progress, answer the questions on the minds of people in the know, and deliver the Brooklyn-Bay Area consensus about institutional investing that you desperately crave.
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