VI. Investing in the Future: the Story of a River
This Chapter aims to conceptualise intergenerational equity in resource management as an issue of long-term investment. To do so requires a series of links and analogies that have only been hinted at in the relevant literature. Long-term investment is generally described within the context of financial markets; this Chapter associates the strategies for and barriers to long-term investing in the financial world with longterm natural resource management. In doing so, it draws extensively upon Brown Weiss’s seminal treatise680 on the virtues of an intergenerational perspective for the environment and considers her proposed Planetary Trust – an institutional solution to the problem of governing long-term commitment. Crucial for the argument presented here is the suggestion that her solution looks very much like the governing structure of a funded pension plan – a beneficial institution that carries obligations to different generations, with time-horizons as long as 80-100 years.
The problem, though, is that these types of institutions have struggled to be effective long-term investors. Crucially, the trustees of these institutions often fail to balance the competing interests of current and future beneficiaries, typically focussing on short-term rather than long-term outcomes. Where they succeed, they remain vulnerable to intervention by the state on behalf of current generations (who are, of course, political constituents). The Planetary Trust notion, while conceptually useful in the context of resource management, is flawed in theory, just as its resemblant institutions are in practice. The theoretical insights gained through a critique of the Planetary Trust concept are then tested within the practical context of water management in Australia’s Murray Darling Basin. The Murray Darling Basin Authority (the Authority) is an institution that adopts some of the Planetary Trust’s essential features as an independent (trustee-like) institution charged with managing Australia’s most significant freshwater resources over the long-term; likewise, it faces many of the challenges predicted in this Chapter’s critique of the Planetary Trust.
The management of water over the long-term involves the interests of current and future generations. Rainfall patterns differ from year to year, leading to highly variant ecological pressures over the short-term. Over the longer-term, population growth and development are expected to put an increasing strain on water resources globally. If current rates of growth continue, global annual water use is expected to increase to 6.9 trillion cubic metres (2 trillion more than currently). This is 40% more than current water sources can provide. Climate change presents additional uncertainties to the availability of water across space and time over the next century. In these circumstances, the gradual depletion and degradation of river systems could lead to significantly compromised access to water resources for future generations in some regions. The management of water for the future becomes, increasingly, an immediate concern.
The Chapter begins by conceptualizing long-term investment as a means to strive for intergenerational equity. In order to do so, it is necessary to return briefly to the notions of intergenerational justice and equity, which were discussed in Chapter V, before detailing the concept of long-term investment and the barriers obstructing its realisation; adherence to long-term aims, whether in investment or in management of resources, often proves difficult to achieve. The next section begins by describing Brown Weiss’s notion of Planetary Trust as a rare attempt to produce an instrumental means for facilitating justice between members of different generations. The Planetary Trust concept is flawed, however; this section continues with a critique of both the theoretical underpinnings and the practical implications of the Planetary Trust concept. In particular, it notes the similarities between the Planetary Trust and the defined benefit pension fund – an institution which must now be considered largely failed as a communal savings vehicle.
The final section relates the Planetary Trust concept to the practice of water management in Australia’s Murray Darling Basin, arguing that the Murray Darling Basin Authority (the Authority) has a role with respect to the long-term management of water that can be categorized as analogous, in its essential features, to that of the Planetary Trust. The section outlines the role and structure of the Authority, its recent findings with respect to the longterm environmental requirements of water use in the Basin, and finally the political reaction to these findings. In short it is argued that the stated reasons for the government and other stakeholders’ negative reception of the Authority’s findings, couched in fantastical demands for a ‘triple bottom line’ approach, in fact demonstrate the most fundamental theoretical flaw of the Planetary Trust: the impossibility, in a politicised context, of protecting long-term interests from the meddling hands of the present.
Intergenerational equity through long-term investment?
The notion of intergenerational equity was examined in detail in Chapter V; the earlier discussion need not be repeated here. Suffice it to say that determining what constitutes justice between generations is very difficult ‘if not impossible’. As Chapter V notes, part of the failure of law to facilitate justice effectively over extended time periods within the context of the environment is a product of the difficulty more generally, including in more informal normative contexts, of constructing a satisfactory regime for determining justice between individuals who are not contemporaries. Nonetheless, according to the conception of justice most aligned with this thesis (that of Rawls), equitable allocation of resources amongst generations requires each generation to preserve institutions of culture and civilisation and to put aside for each generation a suitable amount of ‘real capital accumulation’. Leaving aside the questions of substitutability of other assets for natural resources that have been argued extensively elsewhere, this must include a sufficiently rich natural environment.
Clearly, this approach cannot be perfected in practice: we are unsure of how many generations are to come; we are uncertain of the relative productivity payoff to be achieved from a particular amount of consumption; we cannot even predict, with acceptable certainty, the extent of the natural resource base available to us. Nonetheless, the most acceptable practical means for addressing the problem of providing for future generations, however imperfect, is to conceive of our dealings with future generations as investment, and to strive for longer term investment. As Chapter IV has shown, it is possible for investors to implement governance structures for longer term investment; could a similar approach be taken with natural resources? It may be that in the context of natural resource management, we must satisfy ourselves with building structures that aim to prevent the impulse to focus on the short-term.
Societies, from individuals to organisations, tend to focus on short-term goals. At the very least, a move toward a longer term perspective with respect to the natural environment could help to achieve a greater level of intergenerational equity. Environmental policies that are designed to preserve environmental quality in the future are consistently whittled away in their implementation in order to meet the vocal demands of the present. The management of the Murray Darling Basin provides a strong example of this phenomenon, discussed at length toward the end of this Chapter.
The argument made here is that this sort of acquiescence to short-term demands over long-term environmental needs is closely aligned with the impulse for short-term investment (to the potential detriment of long-term gains) that beleaguers the finance world. Therefore, while the discussion that follows is most clearly relevant to the financial world of institutional investment, the arguments made about the barriers to long-term investment are, in this author’s view, no less applicable to the context of intergenerational equity with respect to natural resources. Before proceeding to the financial context, however, it is worth sketching several ideas relevant to the assertion that intergenerational equity in the context of the environment may be conceived as an issue of long-term investment.
Most individuals struggle to picture themselves and their needs in the future, to say nothing of the difficulty they have conceptualising the future needs of others. The cognitive difficulties involved in conceptualising the future drive rational individuals to rely on fuzzy sources when making decisions about their future: hunches, heuristics and ‘animal spirits’. Very few people actively plan for their future; more effective savings policies, such as Australia’s compulsory superannuation policy, use a more paternalistic approach. For better or for worse, moreover, our conception of the future fades as the timeframe becomes longer (as is demonstrated by the notion of discounting that is ubiquitous in economics).
From a familial perspective, while parents have an immediate interest in the future of their own children, this interest usually does not translate into a broader interest in the future of society in anything other than a fairly abstract sense. While Elinor Ostrom has demonstrated that in some circumstances local communities can manage common natural resources in a sustainable, long-term manner, it is unclear that the approach Ostrom describes could be successful on a larger scale.
For governments, moreover, there is a temptation to meet short-term demands for resources at the potential expense of long-term planning because of the immediate political benefits of rewarding local interests (in both a spatial and temporal sense). In most countries, future generations are unrepresented politically in any direct way, and arguably are unrepresentable. Notable exceptions to this rule exist in Israel and Hungary where a member of parliament for future generations and an ombudsman for future generations exist respectively. However, the extent to which these positions hold any real potential for power is questionable: in Israel, the post has been left unfilled since the first term of the post ended; in Hungary, the duties of ombudsman for intergenerational equity might be better described as those of an environmental ombudsman.
If the objectives of environmental policies include the interests of future generations, then it is arguable that some of the methods used to enhance long-term investment in the finance world could be applied with some effect. In so doing, the capacity for these policies to facilitate intergenerational equity might well be enhanced. However, as the following paragraphs argue, long-term investment is very difficult to achieve.
Conceptualizing the ‘long-term’
It is useful as an exercise in clarification and nomenclature to begin by exploring the meanings of the ‘long-term’. A simple way to begin is by considering the different time-horizons that seem natural to humans, given the average length of a human life. To conceptualise the long-term in this way is to subscribe to a form of anthropocentrism which, in itself, requires reasoned justification rather than simpleminded acceptance without debate. Nonetheless, assuming that this notion has wide appeal, the most obvious way of grounding the meaning of the long-term is to refer to a timeframe which is short enough to be conceptualised by humans, and short enough to presume continuity of political and institutional processes.
The long-term is quite elastic: when fully extended, it may refer to time periods relevant to the natural world: from the supereon at one extreme, to geological eras (hundreds of millions of years) and so on down the scale. If we leave aside these extreme geological timeframes on the grounds that they are incomprehensible with respect to political and institutional life, we can frame the environmental long-term in the context of climate change, the effects of which will be felt within a time-horizon of 50 to 100 years, at a minimum. The timeframe of climate change is such that the interests of several generations are relevant at the point that any one decision is made. The long-term may also refer to the length of the social contract binding generations (25 to 75 years).
As the elastic retracts, it may refer to the time-horizon of structural change occurring where technological innovation and development privileges certain industries and regions (10 to 25 years). As the elastic retracts further, the long-term may, in the context of institutional investment strategy, be relevant to asset allocations that focus upon fundamentals (whether found in structural change or in cyclical change) (one-five-seven years). The upper-limits of the definition of ‘long-term’ relevant to a particular context are determined by the time-horizon of the inherited commitments and obligations of the institutions involved (whether investors or governments). So, for many institutions the long-term has two interrelated meanings: it refers to the search for value or utility and it refers to a set of possible time-horizons for planning, each of varying relevance given inherited commitments.
Barriers to Long-term Investment
It is widely recognized in the institutional investment industry that long-term investment in both senses (value and time-horizon) is far more difficult to realise than 215 to plan. A number of barriers to long-term investing exist, ranging from fundamental traits in human behaviour to failures in government policy-making.
The first barrier has to do with the cognitive bias (myopia) of those that design investment strategy and those that make day-to-day investment decisions. Whereas much of social science takes as its object the uniformly rational agent, the accumulated evidence suggests that financial markets are characterised by the coexistence of agents with varying degrees of decision-making confidence, competence, and consistency. Recognizing that human beings vary in terms of their cognitive abilities, and recognizing that markets are very demanding settings in terms of risk and uncertainty, it is widely appreciated that the lessons of the behavioural revolution associated with Kahneman and Tversky apply with some force. That is, identified behavioural anomalies and biases, including the problems people have in planning for the future and attributing value to possible outcomes sequentially distributed into the future, may conspire to foreshorten the time-horizon of any entity charged with acting on behalf of the future.
The larger problem is that much of human behaviour is responsive to social cues; norms and conventions impose significant limits on decision-making. As Chapter III argued, trustees and fund managers in the institutional investment world are encouraged, under the current common law position on fiduciary duty, to invest like their peers. As a result, in a climate in which short-term decision-making is the norm, many investors simply fail to even consider the long-term connotations of their decision.
The myopia affecting individuals is mediated by institutions. For Herbert Simon, one of the fathers of the behavioural revolution, institutional context was as important as cognitive ability in producing human behaviour – the implication being that institutional design is a crucial element in producing desired long-term goals especially in circumstances where human predisposition may undercut both individual and collective competence. By this logic, institutions can make a difference to human predisposition by amplifying, neutralising, or managing its effects in ways that produce results that are substantively different from that which individuals left to themselves may produce, or that which groups of individuals without the benefit of institutional protocols and procedures may produce. If this sounds optimistic with respect to achieving long-term goals, it should be noted that poorly designed institutions can amplify human predisposition so as to undercut long-term goals.
Writing in the context of institutional investment, Clark and Urwin emphasise the importance of both institutional design and governance in collective decisionmaking. In particular, they argue that there is an intimate relationship between the process whereby decision-making is organised and resolved, the skills and qualities of those involved in decision-making, and the ways in which commitment to the enterprise and its objectives are mobilised and maintained. This relationship is prima facie an issue of institutional design (as broadly conceived by Ostrom in analogous terms of rules, conditions, and community attributes). However, in many cases, we do not have the opportunity to design or re-design investment institutions; more often than not, the design process takes place at some ‘distance’ in time and space from the loci of those responsible for institutional performance. For Roe the design process is inevitably political, where the interests of those involved in the design process give shape to institutional form often at some cost to functional efficacy. In this sense, institutions are, more often than not, imperfect.
Having inherited the form and function of an institution, those responsible for its performance use the tools of ‘governance’ to realise its objectives. Clark and Urwin identify three crucial resources that underwrite the effective governance of investment institutions: time, expertise, and collective commitment. The importance of devoting resources to a governance regime should not be overlooked. The potential costs associated with risk and uncertainty mean that effective investment management organisations should match their governance budgets with their risk budgets. Failure to do so can result in volatility against the market and, at worst, catastrophic institutional failure. However, institutional governance requires the expenditure of resources in the short-term for stability over the longer-term; as this thesis has argued, for many investors such investment is hard to justify given the normative landscape of their industry.
By this logic, the second barrier and third barrier to long-term investing are to be found in institutional design and governance respectively: design may be flawed and governance may be inadequate such that short-termism becomes the only viable option for those responsible for institutional performance. Inevitably, in these circumstances, the time-horizon of decision-making is foreshortened so as to cope with the dysfunctional organisational structure and the dysfunctional decision-making process; there is no organised means to reward long-term strategy and performance and, by default, strategy and performance are judged by more visible, tangible shortterm indicators. However, while this commentary is largely critical of many investment institutions, it is apparent that ‘best practice’ institutions have been developed in ways that have deliberately sought to overcome design flaws and match governance budgets with risk budgets in ways that extend the time-horizon for decision-making. As for many of the rest, the consequences of design and governance inadequacies have been revealed by the global financial crisis.
The fourth barrier to long-term investment is to be found in government policy and in the institutions that directly or indirectly oversee market performance. For many years, governments directly regulated the asset allocation policies of investment institutions by quantitative and qualitative restrictions on their desired asset allocations (see Chapter III). Until the enactment of the Trustee Investment Act (1961), pension funds in the UK were required to invest in a short list of governmentapproved asset classes, generally restricted to consolidated bank annuities, gilts, and mortgages of real property. This conservative regulatory approach to asset allocation did not disappear completely until the Trustee Act (2000) was introduced (see Chapter III). More recently, governments have sought to restrict domiciled investment institutions’ commitments to asset classes such as hedge funds, venture capital, and private equity. The effect of these types of regulations has been to limit the time and geographical horizons of investment. The return to stringent solvency requirements in the aftermath of the global financial crisis has had very similar effects.
The loosening of governments’ qualitative and quantitative restrictions on asset allocation and the resulting widened investment universe for most large investors reflected a recognition that these types of restrictions were self-defeating in terms of realising, on a global basis, superior long-term risk adjusted rates of return. But they demonstrated, nonetheless, quite a profound divergence in policy perspectives as to whether governments should set the time-horizon of investment or markets (this divergence echoing the larger divergence between bank-led financial intermediation in continental Europe versus market-led intermediation in the Atlantic economies).
While many argue that continental European bank-led financial intermediation is often more consistent with long-term investment, it is arguable that this regime has protected entrenched interests while imposing upon those outside of privileged networks the costs of such commitments. In any event, it is also arguable that bank-led financial intermediation combined with strictly enforced solvency requirements on insurance companies, pension funds and other institutional investors actually limited both the time-horizon and geographical scope of investment, reinforcing lower long-term rates of return.
Finally, government policy has encouraged professional accounting associations, ratings agencies, and investment companies to value long-term commitments against the short-term prices of invested assets. This practice has shortened the time-horizon of institutional investors and their clients to that which can be measured in quarterly rates of return. In doing so, a great deal of volatility has been introduced into what were otherwise long-term norms and conventions that distinguished long-term commitments from market risk and uncertainty.
So as to compensate for the pernicious effects such changes in policy have on the balance sheets of institutional investors, governments have, once again, introduced stricter solvency requirements, thereby prompting investors to switch from the frontiers of financial innovation to the supposedly safe world of government bonds. All in all, Western governments have sought to encourage long-term investing while in fact reinforcing market agents’ predilections for managing short-term market positions. Lack of consistency in public policy, combined with episodes of extreme risk aversion, has simply accentuated the rollercoaster ride of public markets.
Having outlined the barriers that exist to achieving long-term investment, the next section turns to a potential instrumental means for facilitating equity between members of different generations: the Planetary Trust.
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