The ethics of investing for dictators

0:06Toby,

0:09tell me what you do for a living. Well, Rob, I'm a contributing editor for the Financial Times and an independent analyst. And before you did those things, you did something else. What was that? Yeah, I spent 25 years in asset management, most recently as global head of asset allocation for a large asset manager. I can only imagine your mother's dismay when you left the perfectly respectable profession of managing other people's money to write things in a British newspaper. What brought that about? Yeah, well, I mean, well, it was a case of...

0:53Okay, I need to get my head in this. I felt increasingly uncomfortable about the idea that I was working for a firm dedicated to managing money for authoritarian regimes, which were engaging in some pretty heinous stuff. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. Today, we are talking about sovereign wealth funds, the ethics of managing money, and many other things. My guest is Toby Nangle, who's a contributing editor to the FT, a sometime consultant, and a former asset manager. Toby, thanks for being on the show. Great to be here. Thanks very much, Rob.

1:41I'm very interested by the decision you made when you left the asset management industry. Talk a little bit about how your mind changed and what the Damascene moment was for you. So, I mean, I've been managing money for a long period of time, since 1997. We managed a lot of money for different sovereign wealth funds or central banks or pension funds or insurance companies. It was sort of a normal array. and then there was I became increasingly kind of uncomfortable by news I was learning about coming out of Xinjiang in China about things that were coming out of Saudi Arabia most notably the assassination of Jamal Khashoggi who people might remember as someone who used to write for the Washington Post and was assassinated after he was lured to the consulate in Istanbul and then I met up with an old college friend who was working at a capital punishment NGO.

2:41And he told me this story that he'd been sort of covering and working on, which was about this kid in Saudi Arabia who'd been arrested for attending a pro-democracy rally. And this kid was basically up for execution. They were just waiting for him to be old enough to execute him for attending a pro-democracy rally. And I thought, wow, these are basically clients, right? These are folks who are major clients for the industry I'm in. And I'm basically working as a senior outsourced civil servant for a variety of governments if I remain in the industry. So I didn't feel that was something I could really kind of do in all honesty.

3:24I feel a lot of sympathy for what you're saying. And, you know, of course, as journalists, the Khashoggi murder, which was a state murder by Saudi Arabia, we can be quite sure, you know, was horrifying for all of us. But let me press you here a little bit. Is there really a causal connection here? You have these pots of money that are run by these states, and they have a lot of different uses for them. And then you have the sort of security, intelligence, secret police aspect to these states. Is there really so much overlap here? No, I mean, listen, I'm not going to overstate it here. I'm not saying that you work in asset management and you're some kind of, I guess, sort of hired gun or anything like that.

4:13But what you are is you're working as an outsourced government employee. That's what you're doing. The whole point of the job is to make your clients wealthier. And some of your clients can use this enhanced wealth to send their kids to college. They can honor pension promises made to their employees or they can use it to murder journalists. If your purpose for work is to make your clients richer and increase their agency, then that's something that you're going to feel a little bit complicit about. We all have our own moral compass or to use a slightly different metaphor, lines that we won't cross in our own professional or personal lives or whatever.

4:51But there is a kind of question that occurs to me about where this stops. We draw the line in murder or is it unethical working practices or is it climate stuff or, you know, putting aside governments? at what point do you disagree with a company enough that you won't? Do you know what I mean? How do we make the kind of gradations that allow us to make the kinds of decisions or not make them that you made? Yeah, I mean, again, I think that's really fair that people have different views, different lines in the sand. I think that it's pretty healthy to have some kind of line in the sand. So if you're an asset management company and you say, this is the point at which I'm not going to manage money for a particular client anymore, then that's great.

5:40They will have come through a view about what that line is going to be. I haven't actually encountered a single firm that has a line that isn't, we will do everything other than what we are compelled by law not to do in terms of line and sound. So companies don't tend to have a kind of a particularly ethical line. And you could say, well, why should they? They're going to have thousands of employees, millions of shareholders. They're going to have to arrive at something which is going to work for them. Is it really their job to set out any ethical boundaries? But as an employee, I think it's good to have some kind of line in the sand, something that you wouldn't do.

6:22And for me, I felt that the line I couldn't cross was going to work for a firm that's going to be managing money to make a bunch of international human rights criminals richer. Do you ever think that if you don't do it, I mean, this is a kind of classic justification for whatever horrendous piece of behavior you care to name. But do you ever think to yourself, gosh, or did you think to yourself, gosh, if I wasn't doing it, somebody else would be doing it? It's like, you know, you're a cog in a machine and as smart as you are, Toby, another person would make the asset allocation decisions very much like the ones you would have made.

7:05And given the pitches and made the slide decks, their slide decks probably would have looked a lot like your slide decks and et cetera, et cetera. Yeah. Yeah. Now, there was a friend of mine who put that question to me in a really nice way, which was kind of like, are you trying to change the world or are you just trying to make fewer asset managers go to hell? You know, it's about personal redemption or agency for changing things. And I'm under no illusions that, you know, personally, I would have made very, very little difference, maybe no difference at all. even the entire industry, if the entire industry stopped managing money for authoritarian sovereigns, then they'd maybe be a little bit less rich, but they'd still be pretty rich.

7:49They wouldn't necessarily decide to change their ways. So it's more about just having some kind of view of what I exist in the world to do. And does it involve managing money for folks where there is no ethical line. Let me raise another worry. If the Toby Nangles of the world sort of systematically leave the money management industry because they've had enough of making creeps richer, doesn't that leave only creeps? This is kind of a version of the classic question about, you know, shareholder engagement with companies. Like if everybody who cares about global warming stops owning Exxon shares, then who is going to influence Exxon to change its practices or whatever?

8:43This is a bit of an exaggeration. In other words, are less Tobin angles in the industry just to make the industry more kind of creepier and more unethical? Okay. I like this. There's a couple of things going on there. First of all, I don't necessarily think that I'm less creepy than the average asset manager. I think that would be a little bit sort of self-absorbed. Secondly, there is this, yeah, yeah, you're absolutely right. There's this issue about engagement, right? Engagement is way better than exit. So one of the things I was thinking about was this existing framework called the United Nations Guiding Principle on Business and Human Rights, which by the way, about half of asset management firms in the world have signed up to through their signature of the United Nations Global Compact.

9:25And the other ones are kind of bound by it because it's software anyway. But there's this whole sort of series of gates that you kind of go through right so it's like number one do i have sufficient influence over the client and if you do then you stay and you use that influence if you don't then you think you know can i increase my influence somehow to get sufficient influence and if the answer is yes and you again you stay and if you can't do that then you have to think can i explain the choice to continue this relationship and if you can't explain the choice to yourself and to others then at that point you exit and that's that's where i got to and since since leaving and i you know i i wrote about this i guess you know not long after i i left i've had literally dozens of investment managers contact me and i've gone out for so many coffees and lunches and things when people are saying you know maybe i should leave the industry as well i don't understand what we're doing i'd like to change and my advice to them is well why don't you stay and see what you can do because I'm going around the boards of pretty much all your companies to talk to the leadership about why I think they should be changing.

10:34I'd love to hear more about what those conversations with boards of other asset managers have been like. To be honest, they have not been the most fruitful conversations. One of the things about hanging around an industry for 25 years and becoming more and more senior is that all of your peers who are maybe moderately more successful for you are all running these firms right now and so you know i i'm very much an insider i um i'm on really good terms with lots of very senior people in the asset management industry and i i really like them and they've all been you know polite they've all been really good natured they've all been really interested but when it comes to the bottom line it's like they either don't feel even the ceos that they've got agency to make that kind of decisions or it's like yeah but you know the money right this the traditional asset management industry is in a really tough spot and one of the growing areas is sovereign wealth funds i mean it's a big big part of the market now and the idea that you might somehow terminate a client for falling below some kind of non-legal boundary is just such a foreign idea.

11:53I wonder if you ever heard a kind of accountability shifting answer along these lines. For a publicly traded asset manager, they can say, well, our shareholders, they expect us to maximize profit over the long term. we're not in the business of making ethical decisions of this kind. Did you hear that one? Yeah. No, I've spoken to CEOs who said, like, listen, this is above my pay grade, right? You know, I don't own the company. I'm thinking here of, you know, for the newsletter, I interviewed Dan Davies, who you probably know about his book, The Unaccountability Machine. And there's a kind of round and round we go aspect to this.

12:39Everybody says it's someone else's decision. The shareholders look to the company, the company looks to the shareholders, the asset, you know, and the company looks to the clients, like who is a cat, you know, who, whose decision is it here? Right. If not the CEOs, if, you know, if not the board of directors, et cetera, et cetera. I think Dan's book is great, by the way. I think everyone who hasn't read it should go and get a copy and buy it. The book is called the unaccountability machine and the author is Dan Davies. Well, We'll pitch that one because we like Dan. Yeah, it's terrific. But I think that there's an aspect, which is that people don't feel necessarily massively accountable.

13:17On the other hand, there's also another thing of people are not necessarily, even if they agree that it's bad to manage money for regimes that are doing pretty nasty stuff, they've also got responsibilities elsewhere. So they'll feel very loyal to their staff. And so the consequence of maybe terminating a sovereign wealth fund could be that maybe you've got to fire some people. And that's pretty tough. You've got your families of your staff that you might feel very loyal to. And you're asking to weigh up two things. It's not necessarily I get paid more money. Maybe that comes into it as well. It can be all sorts of other things that asset management firms and executives are trying to juggle.

14:00And so what I was really asking, and it became increasingly clear, was for whoever up in the executive committee to essentially burn all of their political capital on this one thing. And so I spent time building out a report, which would be a kind of a bare bones business case as to why this could work, how it could frame the business growth. but you know you need you need someone to say yeah this is this is where i'm going to put my my eggs after a short break we'll be back and i'll ask you about your own money toby

14:50okay we're back toby someone might say to you someone more cynical than myself might say to you you made your money. You did this for 25 years, working for heaven knows who. Some of them were probably unsavory characters. You got your bundle. Now you can afford to be a moral agent again. I'm sure your friends have teased you with this or pushed you with this possibility. How have you responded to them? Yeah, I mean, I am in a hugely privileged position. I mean, 25 years in asset management has paid me enough to be able to afford to be a journalist never all so how do i deal with that well i mean one of the catalysts to leaving was um was a promotion that i got which would take me more into the uh further up the um the corporate ladder where i'd feel that i needed to be much more accountable but yeah i mean earlier on in my career although the vast majority of clients that i've I've ever worked with have been pension funds, have been insurance companies, either US or European.

15:59I have been managing also money for sovereigns of various different descriptions, and they will have taken various different decisions at different times. And once it became clear to me what I was doing, I changed tack. And that's been the most expensive decision of my life, but it's not one that I've regretted. Toby, was there a moment or a conversation, something you read or saw that you look back on as the catalyst for your decision to change your career? I think there are a few things. Some podcasts even from Planet Money on Uyghur and Saudi developments. But I think probably the main individual catalyst I can point to was was meeting up with this old college friend of mine who was working in the Capital Punishment NGO.

16:55A particular example of this kid. Yeah, yeah, that's right, that's right. And I remember I tweeted out the story that he'd written about this kid who'd been on death row and was going to be executed. And the next week I saw him, and he came up and he said, because I had a reasonable Twitter following, and they didn't really, And he said, I saw you tweeted my story and I just wanted to say, you know, thanks very much. And I really hope you didn't get into trouble for it. And I was like, what? Why would I get into trouble? And then I kind of thought, well, I guess I can sort of see where he was coming from.

17:36There is a kind of a complicity. You don't upset your clients. You don't do something which is going to rock the boat professionally. um and and that was a fairly pivotal moment yeah i'm curious about your final few days or weeks at your old job did you tell the head of hr or the ceo or whoever it was you talked to or your colleagues or anyone why you were leaving and what was what was their response what was the exit like? I spoke a length with my boss, who I think is a wonderful man and I'm very, very fond of. And I think clients are lucky to work with him. And I had a great meeting with the group CEO who came over.

18:25And it was during that meeting that he was very generous with his time and let me know what he thought about my reasons for leaving and also some of the constraints that the asset managers and executives had. He indicated that he'd be happy to talk about any plans, any concrete ideas about how to deal with a couple of big issues that he had with my exit. And so I sort of took that conversation. I mean, there were two key questions. He said, like, number one, this is above my pay grade, right? So you're asking for management to do something which you haven't outlined a business strategy for. And then number two is, is there's this shades of gray problem, right?

19:09Like who decides who's good, who's bad? How do we deal with that as a business? And I thought that was really helpful. It was really, I was very grateful to him for outlining those because it meant that I could then go away and think about how to deal with this and maybe actually think that it wasn't simply me disappearing off into a void, but providing something that if asset managers generally wanted to think about this issue, how would they actually do it? So I basically put together some free consulting for them, wrote up a big report and have taken that round, a fair number of asset management's executive boards dealing with this issue of shades of gray and business strategy.

19:47I even got a nice letter from the parent company group CEO, and it was all very amicable, the departure. But I didn't speak to my colleagues about the reason because I didn't want to make them feel that I was judging them in any way. well I know what I'm going to do but I don't really want to make you feel that you ought to be doing anything yourself. As a way to kind of close this conversation I'd like to widen the lens a little bit. There's a lot of money in sovereign wealth funds many trillions of dollars and a lot of us think about concerned about the way that states project or exert force power over people in their own countries or elsewhere.

20:27But oftentimes, we don't think of that in terms of how they deploy their wealth. Are we thinking about this enough? Do we need to be more concerned about this? Can you help us think about the political and moral role in the universe of these huge pots of money? I mean, you're right that the amount of money out there is vast. sovereign wealth funds, the last count are about$12 trillion worth of assets, which is maybe a tenth of the total private assets under management of asset management industry. States have always pursued strategic non-monetary goals. And with this money, you'd kind of go, right, well, maybe they're doing some of that with that.

21:12From what I've seen looking at a lot of these funds, it's not clear that most or even a good portion of this money is is being invested in a way which is seeking to kind of bend the world to sovereign wealth funds desires there are some like shades in between like can i hand on heart look and see that saudi arabia's purchase of newcastle united football team was because they reckoned it was the most efficient use of of capital or you know Versus an idea that they'd really like to kind of distract people from thinking about them as the guys who murder journalists and execute miners. So I think that there are things around the edges.

21:54But, you know, the bulk of this wealth is probably invested more in line with kind of traditional market capitalism. And so it's sort of like states. Let's piggyback on the wonders of capitalism to get rich rather than, you know, let's do a kind of Frederick Engels of like state capitalism and bring about the end of capitalism by putting it all in the hands of the state. Toby, this has been interesting. Thank you for being on the show. Thanks for having me, Rob. It's been great. Listeners, we'll be back in your feed next week. Until then, stay sharp.

22:33Unhedged is produced by Jake Harper and edited by Bryant Erstat. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.

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