Barry O'Dwyer: Stewardship in the Climate Era | Adam Smith at the COP | Path to COP26

Thank you very much, Gail, and good evening everybody. It's a real privilege to be here, and I'd like to start by thanking our hosts and organizers at GEFE for their hard work putting together this event in Glasgow with COP26, and also in the six months leading up to bringing the essay series to life. It's our pleasure at Royal London to have been involved and to enable it to happen. I want to pay tribute to our own Casey Raynor, who's a force of nature and has been a driving force behind this project. Royal London is a major provider of pensions. With the rise of private pension provision through modern workplace pension schemes, our society has moved away from a model where governments and employers provide pensions to one where the emphasis is on the individual, creating what we call a new investor generation. Many of these new investors feel ill-prepared, but our research shows customers are more interested than ever in the impact their savings can have, relying on us as providers to make good decisions on their behalf. The UK has the fourth largest long-term savings market in the world, looking after about two trillion pounds of assets. The role of investors as stewards of our customers' capital has never been more important. Within the long-term savings market, Royal London operates as a mutual insurer owned by its customers and run for their benefit. This is relatively unusual today, as almost every other large UK mutual has demutualized and become shareholder owned. Some of this was driven by a carpetbagging trend in the 1990s, but while most other major economies have protected their mutual sector—upwards of 40% of insurance in Germany, the US, and Japan is provided by mutuals—we've allowed the market share of mutuals in the UK to dwindle to below 10%. Royal London is now the largest mutual in our sector by some margin, and the only positive I take from the reduction in the number of mutuals is that it gives us a unique competitive advantage. With that context, I'll explore why being a mutual makes it easier to do the right thing for our customers, what stewardship in the climate era means to Royal London, and why we must rethink our decision-making frameworks to incorporate the value we rely on from the natural world. Unsurprisingly, my view is that mutuals are a natural way for people to organize long-term savings because they allow people to pool risks and share the cost of investing. When managed well, mutuals are inherently more efficient than stock companies because there are no shareholders demanding dividends. If Adam Smith were here today, I think he would agree. Despite his image as the father of the free market, he was less than complimentary in his critique of the typical corporate structure. He believed directors of such companies would not look after the interests of stakeholders with the same anxious vigilance with which people would watch over their own money. It's also reasonable to assume he would have been aghast at the way many people invest their life savings passively into tracker funds that buy every company in the index regardless of management. What Smith referred to is the agency problem, which we as a mutual believe we face to a lesser degree because we have no shareholders. Instead, we're run for and on behalf of our members. However, this agency problem is ever-present in the companies we invest in. So let me turn to the need for robust stewardship by asset owners as we face the climate challenge. The UK has taken a leading position through the FRC's Stewardship Code, revised in 2020 to reflect that stewardship with a focus on the long term and a desire to deliver social as well as financial benefits is key to securing the best outcomes for our customers and society. I commend the essay series; in the review of book five, Dr. Zetty Aziz extends this concept beyond the current financial services definition of stewardship and proposes that decades of negligence and plundering of the natural world confer additional responsibility on the owners of capital to ensure the sustainability of our planet. She proposes a vision of a 21st-century Adam Smith as a strong voice for the protection of the environment, calling for urgent action from both the state and the market. David Attenborough's words at COP26 rang true when he talked about the potential for the smartest species to be doomed by failing to see the bigger picture in pursuit of short-term goals. This is the essence of stewardship in the climate era: we must challenge the companies we invest in to overcome their inherent focus on the short term and think and act long term to meet our current needs without compromising future generations. This is why we must rethink our decision-making frameworks to incorporate the value we derive from the natural world. The distinguished authors have argued that nature determines the worth of our future and that the reductionist concept of rational economic man is insufficient. Effective government and institutional interventions are key, as highlighted by Sir Muskatelli in his revisit of book four of The Wealth of Nations. The Paris Agreement gives us the north star to guide our action, going beyond limiting temperature increase to reorient finance to achieve sustainable outcomes in a just, fair, and equitable way. The Sustainable Development Goals codify this, and recent rulings on the inclusion of a sustainable future as an inalienable human right show we're moving in the right direction, even if the pace is sometimes problematic. There is hope emerging from Glasgow with the Glasgow Financial Alliance on Net Zero and UK Treasury announcements on rewiring the financial system, recognizing that market forces alone can't tackle the problems we face and that regulatory interventions are required to drive financial flows into a Paris-aligned pathway. We have seen an energy transition in the UK before—the deindustrialization and closure of coal mines left scars that many communities still experience. At COP26, we've seen great ambition to end the era of coal, but the way we do this is important. We must transition in a way that protects the most vulnerable while making changes to protect the environment. This may mean moving carefully and spending more on developing new skills. This is important to mobilize all sectors of society, retain the consensus on climate change, avoid alienation, and ensure that widening inequalities are not exacerbated. It's not just coal; many other sectors will need major upheaval, affecting jobs and creating a need for reskilling on an unprecedented scale. Alongside this, we'll ask people to change how they heat their homes, the cars they drive, and even their eating habits. Change at this scale requires a major overhaul of how companies interact with their customers and communities. That's why a focus on a just, fair, and equitable transition is at the heart of the Paris Agreement and one of our priorities at Royal London. We believe simply divesting from climate-destructive assets is insufficient; changing ownership won't change a company's activities or reduce real-world emissions. That's why we're working with the Grantham Institute and our peers to create a Financing a Just Transition Alliance. The alliance recently announced a new report outlining elements for a just transition plan. At Royal London, we're putting this into action through engagement with utility companies. In the last 18 months, our work with other members has secured just transition plans from five leading utilities: SSE, E.ON, Centrica, EDF, and Scottish Power. We'll continue this engagement and extend it to some of the largest emitters in the UK in 2022. Through engaging with the companies we invest in, living up to our responsibilities as stewards, and using our voting rights, we believe active ownership and effective stewardship will enable real change with real-world impact. At this point, I'd like to focus on the Theory of Moral Sentiments, Adam Smith's first book. For Smith, that was his magnum opus, and The Wealth of Nations was subsidiary. If The Wealth of Nations explains wealth, markets, and self-interest, it's the Theory of Moral Sentiments that boldly asserts the role of empathy and articulates a fundamental principle we have overlooked: that for society to function fairly, the invisible hand must be guided by a moral compass. Smith explores how excess of hubris and consumption can be tempered by feelings of mutual obligation. He says, 'However selfish man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.' For the first time in decades, a serious mainstream debate has begun on the social purpose of the corporation, with organizations like Business Roundtable, World Economic Forum, and even religious leaders challenging the power of multinational corporations and their profit maximization motive, which is putting at risk the habitability of the planet. Smith might contradict his more fervent 21st-century free market followers: where company intentions and actions are not aligned with the needs of society, he would argue for intervention to reassert the human nature of empathy for others into our corporate world. So what would our economic system look like if we amended the concept of rational economic man to one where we prioritize the well-being of society rather than purely private profits, act in the interests of the multitude, and provide direction to the efficiency of markets via a clear articulation of the moral purpose of finance? I believe there is an opportunity for a renaissance of the mutual model, alongside B corporations and cooperatives, as a model that moves beyond individualism and recognizes our inherent interdependence. The recent pandemic has been dramatic, but it has acted as a catalyst for change. As we enter a new normal, there is a real opportunity to reflect our changing needs and aspirations with a greater understanding of our interdependence, the need for fairness and equality, and the fragility of the natural world. Ultimately, it falls to our generation—we are mutually responsible for determining the shape of the century to come. And the shape of the century depends a lot on this decade. We can no longer be passive bystanders but active participants and influencers of change. We have no time to lose. Thank you very much.