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A lang cat production for The Transparency Task Force



However much the agreement of a global code represents a major achievement in international co-operation, FX markets remain opaque in a number of ways.… 7 Learning the lessons of Northern Rock for a fairer future… 4 Knowing who to trust with your money… 10 Why caution is needed when discussing stock picking… 13 Putting benchmarks under the spotlight… 15 Putting the final report from the Task Force on Climate-related Financial Disclosures into action… 21

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3 Hello from the Editor 4 10 Years After: where do we go from here? 7 Defining what transparency means in the wholesale FX market 10 How do you know you can trust someone with your money? 11 The Transparency Task Force Teams 12 Transparency Statements 13 Beware the misleading stock picking stories 14 Confidence game or imperfect science? The professional fund investors’ view of benchmarks 17 The Directory of Pro-Transparency Organisations 21 Could the G20 task force make 2017 the year business is clear on climate?

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Hello from the Editor Here’s my report on recent happenings events, activities and news regarding the Transparency Task Force… Tuesday 18 July Annual Public Meeting of the Financial Conduct Authority I attended my first ever Annual Public Meeting of the Financial Conduct Authority. It was held at the Queen Elizabeth Conference Centre, Westminster and was packed with a large (not to mention eclectic) audience of interested parties. The FCA gave an account of its activities over the last 12 months and it’s certainly been very busy. The part which interested me most related to the Asset Management Market Study Final Report. I put a question to the panel about what could be done by the FCA to promulgate its research and analysis for the benefit of other countries. Andrew Bailey and Chris Woolard explained that they are aware that the Chris Woolard Market Study has been of interest to regulators and observers in other countries and, as the output is in the public domain, it can be used freely. The TTF’s International Best Practice Team (which is developing our Global Transparency Index) will no doubt note the tremendous regulatory progress that has been

taking place in the UK over recent years. My overriding thought about the event was that it was good to witness the FCA being challenged on numerous issues. It is wholly appropriate that the FCA open itself up to public scrutiny in this way – it’s transparency in action – and I think the FCA representatives gave a very good account of the organisation and its activities overall. I’m looking forward to attending next year’s event.

Wednesday 2 August Dr. Chris Sier appointed Chair of the FCA’s Cost Disclosure Working Group As many of you will know, Dr. Chris Sier Dr. Chris Sier has been one of the UK’s most active and effective campaigners for greater transparency on costs and charges in the asset management industry. He’s built a first class reputation as somebody who is doggedly determined to bring about transparency and he hasn’t pulled his punches when it comes to dealing with asset managers or their UK trade body, the Investment Association. To describe Chris as strong minded and highly forthright is an understatement, he’s both of

Andy Agathangelou Founding Chair, Transparency Task Force

those and much, much more. If you’ve not read it previously, Chris’ article in the launch edition of the Transparency Times provides a first class account of his extensive capabilities and perhaps even more importantly his commitment to the cause. Furthermore, Chris played a vital part in helping to get the TTF off the ground. If it wasn’t for Chris the TTF may not have even happened, that’s how significant a contribution he has made. So, it was with a sense of pleasant surprise and great pride that we learned of Chris’ appointment as the Chair of the FCA’s Cost Disclosure Working Group. For the FCA to appoint somebody to that role as capable and committed as Chris is just breathtakingly good news for the cause for greater transparency in financial services. Chris is the kind of person that will drive the agenda forward relentlessly, so it’s going to be very interesting indeed to see how things unfold in the next few months. Congratulations to Chris for earning the right to lead the working group through his actions over the last 8 or 9 years and congratulations to the FCA for having the vision and courage to appoint a man who isn’t going to be a pushover. Onwards and upwards!

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10 Years After: where do we go from here? BY HENRY LEVESON-GOWER

On 14 September 2017 it will be 10 years since the run on Northern Rock began, the biggest such crisis facing a British bank for about 150 years. A decade after the most recent comparable crisis, in 1929, the Second World War broke out. The historical parallels between the 1930s and the current era have been drawn by many. So how did we get here and what can we do to avoid repeating past catastrophes? This was not meant to be In the decades leading up to the credit crunch and the global financial crisis that followed, world leaders claimed that all the big questions had been settled. A New Labour government, after almost 20 years in the wilderness, was elected on the sales pitch of being a better manager of the economy, not on big ideals. There was only one answer to any question: more market forces. You had to get the incentives right. This was the view of all the ‘serious people’. To suggest people would do anything for any other reason was to be ‘naive’. New Labour was “intensely relaxed about people getting filthy rich as long as they pay their taxes”, according to Peter Mandelson. For many on the wrong end of the market, this was not a good answer as they were left behind and marginalised.  But people

were silenced by the certainties of market fundamentalism. They just had to accept the ‘natural order’ of a world driven by markets.

Then almost 10 years ago, out of the blue, the crash The run on Northern Rock was followed by a slow motion unfolding of events across the world, with US investment bank Lehman Brothers collapsing a year later, banks being bailed out with trillions pumped in and Gordon Brown ‘saving the world’ at the G20 summit in April 2009. In late 2008 the Queen famously asked economists why noone could ”see it coming”. UK academics said in response that “it is difficult to recall a greater example of wishful thinking combined with hubris”. The emperors, who thought they had ‘the answer’, were revealed to have no clothes.

Of course many did ‘see it coming’, but they were unwelcome marginalised voices. This could be the greatest example of international groupthink the world has seen.

The response does not seem to be promising The banks now know for sure they are seen as too big to fail. Bonuses remain eye wateringly excessive and of course can only be positive. Theirs overall seems an even more secure world of one-way bets. Of course for most individuals in the highly stressful and competitive world of banking it may not feel like that. Finance may be one of the few industries where those made redundant are summarily marched out by security guards. While there has been much regulatory tightening up, it has been dismissed by many as ineffective red tape. Talking to people who work in finance, the consensus seems to be that the one thing that hasn’t changed is the culture. It is back to business as usual, with minor tweaks.  The period of sackcloth and ashes following the crash is largely forgotten. Speculation is still the name of the game and asset values have soared while the real economy has spluttered.   Economics for the most part seems to have carried on as if nothing had really happened and pledges to bring more pluralism into academia have fallen by the wayside. The UK Government is currently making major investments into economic models of a similar type to those that couldn’t see the crash coming. These are meant to help guide us through a post Brexit world. Only very recently has a new centre been set up to initiate a process of ‘rebuilding macro-economics’. Economic illiteracy continues unabated. Many politicians

continue to insist on comparing the management of the national economy to that a household budget, overlooking a number of fundamental differences. Meanwhile the majority on low pay have paid the price of the crash with a more significant dose of austerity than even the 1980s. Pay is frozen, benefits have been cut and public services shredded.

There are now signs of emerging hope, but what should we actually do? Now there is recognition amongst many that we need a more inclusive economy. Even the Organisation for Economic Co-operation and Development (OECD), the home previously of market fundamentalism, is suggesting that. The UK Government talks about rebalancing the economy and building an economy that ‘works for all’. The recent UK election result has been interpreted as an indication of a desire for change.  

But what change? How can we design an economy that is not only more inclusive but also sustainable and resilient? How would such an economy work? What would it look like? No-one in authority seems to have worked this out, nor do they seem to have the right tools – in terms of economic thinking – with which to do it.

10 Years after: time for a people’s inquiry So what is the ‘10 Years After’ project about and why should you get involved? We believe that the lessons from the crash have not been learned and our survey suggests we were not alone in this. There has been no independent inquiry into why it happened. The question has been treated more as a political football, with politicians seeking to assign blame in search of political advantage when the issues seem much more fundamental than that.

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So we want to use the 10 year anniversaries as rallying points to create a people’s inquiry for the people potentially spreading around this globalised world. We want to bring together a whole range of different perspectives and develop a serious, in-depth conversation. We want to spend the 18 months or so until April 2019 – the 10th anniversary of the famous G20 meeting – working on building a consensus as to what the fundamental reasons for the crash were and how we can design a fairer, more sustainable and resilient economy. The events in September are intended to start this process. We are bringing together a lot of the organisations and people who have already started pondering these questions, but we want to expand and diversify this conversation. So please come along and join the conversation. See here for more information and to book.

Henry Leveson-Gower Henry has been a practicing economist and policy analyst for almost 25 years. He has worked on issues from international trade and environment to economic and environmental regulation design. He has always sought to draw on a whole range of economic and social science thinking and techniques from international political to behavioural economics. He has particular expertise in using agent based modelling (ABM), having produced the first Government impact assessment using an ABM. He is now advising UK Government chief economists on building capacity to use ABMs across government. He also has expertise in institutional and complexity economics and is advising organisations on the implications for regulatory design and implementation. Henry is an internationally recognised expert in water policy and regulation but he also has knowledge of a wide range of environmental policy areas including sustainable consumption and production, climate change adaptation, industrial pollution and waste. He has worked in the public and private sector at the local, national and international level both in the UK and Australia. He is also a Research Fellow at the Centre for Evaluation of Complexity Across the Nexus, Fellow of the RSA and a qualified chartered accountant.

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Morningstar, 1 Oliver’s Yard, 55 City Road, London EC1Y 1HQ Our thanks go to Paul Barnes, Director, Business Analysis EMEA at Morningstar, who has very kindly agreed to host a Transparency Symposium on 13 September in London. This is a particularly important event, entitled “It must never happen again!” because it’s all about the causes and consequences of the Global Financial Crisis and the role played by a lack of transparency. We have timed the event to be exactly 10 years after the collapse of Northern Rock. Confirmed speakers so far: • Tony Greenham, Director of Economy, Enterprise and Manufacturing, RSA • Professor Andrew Clare, Professor of Asset Management at Cass Business School and former Senior Research Manager in the Monetary Analysis wing of the Bank of England. • Markus Krebsz FRSA, Chartered MSCI, GRCP • Martin White BSc FIA, Board Director, UK Shareholders Association • Leandros Kalisperas MA, Economist and Independent Consultant • Andrew Mills, Expert Financial Analyst and Writer; Founder, Insight Financial Research • David Pitt-Watson, Executive Fellow, London Business School More top speakers are being added.

Click here for our special ‘It must never happen again!” Transparency Symposium, all about The Global Financial Crisis; London, 13th September, 10 years on from the collapse of Northern Rock

THE BOSTON TRANSPARENCY SYMPOSIUM 28 September 2017 Mercer, 99 High Street, Boston, MA 02110 Confirmed speakers so far: • Preston McSwain, Managing Partner and Founder of Fiduciary Wealth Partners • Stephen Davis, Associate Director and Senior Fellow, Harvard Law School Programs on Corporate Governance and Institutional Investors • Andrew D. Eschtruth, Associate Director for External Relations, Center for Retirement Research at Boston College • Jon Lukomnik, Executive Director, Investor Responsibility Research Institute • Richard Field, Director, Institute for Financial Transparency • Knut A. Rostad, Co-Founder and President, Institute for the Fiduciary Standard • George Kinder, Founder, The Kinder Institute of Life Planning More top speakers are being added.

For further details and to book your place click here

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Defining what transparency means in the wholesale FX market BY XAVIER PORTERFIELD | HEAD OF RESEARCH, NEWCHANGE FX

Earlier this year, the final instalment of a new, voluntary global code for the wholesale FX market was published. This represented the culmination of efforts by regulators and market participants around the globe to ensure foreign exchange markets are fair, and to borrow the phrase of the Global Code, ‘appropriately transparent’. However much the agreement of a global code represents a major achievement in international co-operation, FX markets remain opaque in a number of ways. The publication of a global code for FX provides us with an opportunity to examine what ‘appropriate transparency’ really means. A market that is sufficiently transparent should allow market participants to understand who they are trading with, and whether their counterparties’ interests are in conflict with their own. Markets should allow participants the ability to identify the full costs of participation, including both implicit and explicit transaction costs. Finally, participants should be allowed to identify clearly when their order was exposed to the market, and the time their orders (including child orders) were filled. FX markets are still conducted primarily over-the-counter (OTC) on a bespoke basis between counterparties that act as principal to each trade. This means there is not one single price at any one time, but rather, a situation in which there are multiple mid-rates. The ability to access FX prices depends on

the breadth and depth of credit relationships. This means that two asset managers with similar credit ratings but with different sets of market making counterparties can end up receiving different prices, for the same currency pair, and in the same amount at the same time of day. FX prices are bespoke. In 2004 a research report by Russell Research, It’s time for more choice in FX, highlighted the extent to which currency transactions could be costing investors. Their work, based on thousands of trades, showed that custodial FX rates were heavily

skewed to the worst rates of the day. The reason this may occur is that custodial FX is still traditionally conducted on a principal basis. The Fair and Effective Markets Review (2015) called for a global FX code to ‘set standards for the treatment of clients and counterparties… especially concerning mixed principal and agent roles’. The Global Code does not address the issue of how custodial FX should take place. The evidence, from years of Transaction Cost Analysis, suggests fund investors are

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better served when fiduciaries are not given an opportunity to trade against the interests of their clients, whose assets they hold.

trade reports do not necessarily contain a reference to the time, nor the relevant market mid-rate when a trade took place.

One remedy at least, might be to impose the mandatory time stamping of all trades, recording the time an order was received, and the time an order is executed.

Another example of cost shrouding is the continued use of point in time reference rates designed for valuation purposes that are offered to market participants to conduct their actual FX trades. In lieu of time stamping, custodians and asset managers often pretend to offer transparency by declaring they will convert currency at the 4pm London fix. Because market impact can only be seen in the context of trading activity before and after a trade, choosing to transact at a fixing price makes market impact costs invisible to the underlying investors in a fund.

A 2012 study (Olser, Savaser, Nguyen) found that market participants may be choosing to outsource their FX trading in order to ‘shroud’ cost information from underlying investors. A recent paper published by the UK Investment Association, which represents UK based asset managers, presents a defence of cost shrouding (Enhanced disclosure of dharges and transaction costs 2017). The IA paper proposes a lower level of cost disclosure than the level of disclosure required by European legislation for packaged retail investment and insurance-based products (PRIIPs). Enhanced transparency? No. The rationale for cost shrouding is that underlying fund investors may not notice the efficiency gains from negotiating currency deals individually. Improved performance may be credited to other factors. Transaction cost efficiency is hard to demonstrate, but shareholders notice employee costs. When FX orders are ‘shrouded’, prices are set relative to the high and low for the day. Because a customer’s loss is a principal counterparty’s gain, the distribution of customer fills is heavily skewed to the worst prices of the day. This is demonstrated by evidence from transaction cost research from Russell, (2004 Op. cit, revisited in 2010) and Record Currency Management (2011). Abuse is difficult to spot. Custodial

In OTC markets, price is bespoke. As markets have become increasingly electronic, time has become bespoke as well. A number of practices allow market makers to tailor how quickly they will respond or provide prices to clients. The Global Code reaffirms market makers retain sole discretion on whether a trade is accepted or not. Hold times are tailored to each client, and it is difficult for market participants to work out whether their trade was rejected because their counterparty’s systems were slow, or whether a trade was rejected because ex-post, the market maker was disadvantaged by the trade. A solution to cost opacity in FX markets will only come when market participants are offered greater transparency on when their orders are received and filled. Liquidity is fragmented across different venues and market makers. Transparency requires a break from the traditional view of the FX market, where the best

price is determined by how well counterparties treat their clients. The going market mid-rate, which can easily be aggregated from consolidated feeds, the time it takes to respond to clients, and the time a trade takes place are key elements of what it means for FX markets to become appropriately transparent. Given these realities Transparency Task Force’s Foreign Exchange Team, of which I am a Leader, is disappointed with the final result of the recently-produced Global FX Code. In our recent White Paper, which can be downloaded here (scroll to the bottom) we urge for further progress to be made to protect the interests of UK consumers and businesses. In light of the shortcomings of the Code, and the very real need to enhance transparency in the notoriously opaque FX market, the TTF recommends the development of a set of principles that encourages the following: 1. Obliging custodians to act as agent when they are trading on behalf of the funds whose assets they hold. 2. Mandating accurate time stamps of all trades. 3. Full disclosure of activity once a price is transacted, including pre-hedging activity during hold times between receiving an order and accepting. 4. Being transparent about how hold times are applied to client orders. 5. For retail transactions, disclosing transaction costs to the consumer in full, including the revenue percentage included in the provider’s reference rate on the day.

Only by incorporating such principles will investors’ best interests’ be properly served. The drag and friction of costs has a corrosive impact on net returns to savers, and the longer the time frame the worse the impact, so removing unjustified costs is especially important to pension savers. There is much wisdom in Jack Bogle’s comment that ‘The

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miracle of compounding returns is overwhelmed by the tyranny of compounding costs’ so it is a terrible shame that the Global FX Code has failed to deliver on its potential, especially as, according to research conducted by Capital Economics in August 2016, UK consumers and businesses lost over £5.5bn in a year to hidden charges in foreign exchange

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transactions. We can just hope that the thought leadership in the White Paper gets noticed by those that truly have consumers’ interests at heart. I am pleased to report that following publication of the TTF’s FX White Paper the following responses have been received:

members of the team and they may wish to discuss these issues with you further if and when the reference from the FCA is confirmed. In the meantime, I would like to take this opportunity to thank you for bringing these important matters to the CMA’s attention.

Yours sincerely

Andy Agathangelou Chair Transparency Task Force

From: Andrea Coscelli Acting Chief Executive Direct line: 020 3738 6286

By email only

Andrea Coscelli Acting Chief Executive

21 July 2017 Dear Mr Agathangelou White Paper on the effects of the Wholesale Foreign Exchange Market on pension savers Thank you for your email of 11 July 2017, highlighting the White Paper that the Transparency Task Force (the Task Force) has recently produced. In the White Paper the Task Force raises concerns about problems the wholesale foreign exchange market is causing pension savers through hidden costs, and calls for greater transparency in the foreign exchange market, recommending the development of a set of principles to address a number of issues. The White Paper also makes recommendations to encourage greater transparency in retail foreign exchange transactions. I am also responding to your email of 13 April in which you highlight the benefits to pension fund clients of netting down their FX portfolios, but state that banks are unwilling to offer this benefit to clients, insisting instead that individual trades are booked as such. You suggest that, as a result, customers are losing out on high levels of costs savings achievable through netting down their portfolios. As you will be aware, the FCA is currently consulting on a potential market investigation reference to the CMA of investment consultancy services to institutional investors, which includes pension schemes. The information that you provided in your emails of 13 April and 11 July 2017 will be helpful background for the team working on the scoping of this potential market investigation, and I have passed it on accordingly, for their information so that they can assess the relevance of these issues for the potential investigation. I understand that you have already met some


Victoria House Southampton Row London WC1B 4AD • Telephone 020 3738 6000 • Facsimile 020 3738 6067 • • Twitter @CMAgovUK

Xavier Porterfield CFA Xavier Porterfield CFA, is Head of Research at Newchange FX. He began his career at Idea Global, a research house based in London in 1997. He then joined FX Concepts to work in research in 1998 and stayed there until moving back to Paris in 2009. Since then Xavier has been involved in research and development in the currency field, and has been instrumental in the development of the New Change FX benchmarks.

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How do you know you can trust someone with your money? A TEDX TALK BY NORB VONNEGUT, PARTNER, FIDUCIARY WEALTH PARTNERS

While the written word is a powerful thing, listening to experts discuss subjects they are truly passionate about has an extra edge to it. For that reason, we’re adding video content to the Transparency Times. Our first video was originally published on 11 June 2015 and features Norb Vonnegut giving a thrilling TEDx talk on finance, his work in the finance sector, and the events that led him to his successful writing career.

Norb Vonnegut Norb Vonnegut is a partner at Fiduciary Wealth Partners, a multi-family office dedicated to thought leadership and the best practices of wealth management. He is a New York Times-acclaimed novelist and writes both fiction and non-fiction about the financial services industry. He also writes a regular column in the Wall Street Journal. Prior to joining Fiduciary Wealth Partners, Norb was a Managing Director with a registered investment adviser in New York City as well as an Executive Director at Morgan Stanley, where his team managed $1 billion+ in client assets. Vonnegut is a graduate of Harvard College and Harvard Business School, and he believes that any day spent on the seat of a bicycle is a beautiful thing. Follow @norbvonnegut on Twitter or Norb Vonnegut Books on Facebook

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The Transparency Task Force Teams The teams are the Transparency Task Force’s collective response to what we see across the global financial services industry that needs to change. We firmly believe that those who can see problems, admit to them and are motivated to tackle them should collaborate to put things right. It’s in everyone’s interest to do so. The Transparency Task Force teams are less about individual experience and more about understanding the potential power of working together to drive much needed change.




Improving transparency and professionalism.

Foreign Exchange

Challenging the opacity.

Market Integrity

Championing ethical practices.

Costs and Charges

Helping investors access better value for money.

Stewardship and Decision Making

Working to correct the ‘asymmetry of information’ problem.

Scams and Scandals

Raising awareness to help shut them down.

International Best Practise

Mutual learning to inform the Global Transparency Index.


Purpose, Impact Investing, Sustainability, CSR, ESG and SRI


Progressive asset managers working together.

If you want to make your opinion count by joining our 250+ strong group of volunteer team members, contact for more information and details of the monthly conference calls.

The Transparency Task Force Ambassadors While we value every member of our campaigning community, some go over and above. They are particularly aligned to our cause and, as such, are profoundly impactful for positive change. They are our Transparency Task Force Ambassadors. Name




Jackie Beard

Director of Manager Research Services EMEA Morningstar Europe Ltd

JB Beckett

UK Lead

Association of Professional Fund Investors


Steve Conley

Chief Executive

Values Based Adviser


Ralph Frank




Ian Fryer

Head of Research

Chant West

Daniel Godfrey


The People’s Trust


Catherine Howarth Chief Executive



Con Keating

Head of Research

BrightonRock Group


David Pitt-Watson

Excecutive Fellow

London Business School


Robin Powell


The Evidence-Based Investor


Paul Secunda

Professor of Law and Director, Labor and Employment Law Program

Marquette University Law School


Anna Tilba

Lecturer in Strategy and Corporate Governance

Newcastle University Business School




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Transparency Statements

the link work fine just need to set it in

Transparency statements are a great way for individuals and organisations to show support for our international campaign for improved transparency in financial services. We believe that higher levels of transparency are a pre-requisite for fairer, safer and more efficient markets that deliver better value for money and better outcomes for consumers. Transparency breeds trust. By fostering greater transparency across financial services, together we can positively impact the reputation of the market as a whole. Which is good for everyone. You can add your transparency statement by completing this sentence: ‘I believe there ought to be higher levels of transparency in financial services because…’ and sending it to

Here are some examples from thought leaders showing their support. Sophie Baker

John Hunter

London Bureau Chief, Pensions & Investments

UK Shareholders’ Association

‘I believe there ought to be higher levels of transparency in financial services because we need to restore the trust of the man on the street.’

‘I believe there ought to be higher levels of transparency in financial services because it is fundamental to the trust necessary for a viable industry.’

Alexander Rush Senior Pensions Lawyer, Stephenson Harwood LLP

Steve Conley Managing Director, Workplace Pensions Direct

‘I believe there ought to be higher levels of transparency in financial services because 95% of the population have been disintermediated, orphaned and underserved by a legacy of scandals. But our industry is about a promise to pay the bearer on demand, it’s built on trust. Restoring trust and confidence starts with transparency.’

‘I believe there ought to be higher levels of transparency in financial services because it is vital that the effect of charges is known as far as reasonably possible when making long term investment decisions.’

Hugo Wuyts Pension Board Member, London Borough of Barking and Dagenham

‘I believe there ought to be higher levels of transparency in financial services because it is in everyone’s interest.’

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Beware the misleading stock picking stories ADAM FRENCH, CO-FOUNDER AND CEO OF SCALABLE CAPITAL

Recently I’ve noticed a number of active managers publicly talking up the advantages of their own investment style. The arguments used are invariably based on the success of one stock with which they happened to have got lucky, omitting to mention their less fruitful investment decisions. This one stock is apparently evidence that active management works better than any other investment strategy. Some of the articles I have recently read would not be permitted in any official provider documentation, as they are often misleading and most certainly not clear or fair. If regulated firms are required to operate this way within their own material, why do they feel they can do anything different through the media to a much wider audience? Transparency is not just about pricing, it’s about how you communicate. These articles are highly irresponsible.

How many of the original investors are still invested in Amazon today? Not many I suspect. Risk has been unpredictable and deeply volatile; those are not the sort of words that you want your life savings exposed to. Pinning your financial future to one stock is a seriously risky business.

replicated, and the associated risks, then these articles could genuinely educate, rather than mislead. Risk Warning: With investment comes risk. The value of your investment can go down as well as up and you may get back less than you invest. Past performance or future projections are not indicative of future performance.

I most recently saw Amazon used as an example – the article explained that had savers invested in Amazon at inception and stayed invested until today, they would have generated returns 210 times greater than those from the S&P 500 over the same period. Investors reading this may then be encouraged to try to work out which current start-up would be most suitable for their lifetime savings. The article neglects to mention the emotional turbulence that an Amazon investor would have suffered and worse, the word ‘risk’ is not mentioned once. No guarantee of success Anyone who bought into Amazon in the early days will have suffered daily declines in the region of 6% on more than 200 occasions and losses of 15% over 3 days more than 100 times. They will not have slept well through the dotcom crisis, when Amazon lost 95% of its value. Choosing the right stock in the first place is hard enough; keeping faith in it is even harder.

These examples illustrate the importance of controlling risk. Any investors trying to find ‘the next Amazon’ would be better off finding a new investment strategy. To generate decent long-term returns, risk should stay under control.

Those who choose stocks for a living don’t seem to get it right very often either. As at 31 December 2016, 88.3% of large-cap funds in the U.S. had underperformed the S&P 500 over 5 years. Europe didn’t fare much better, with 74.2% of funds underperforming the S&P Europe 350 over the same period. One-off examples of success prove nothing and anyone reading these articles should pause for thought before making any investment decisions. Or even better, if the authors were more transparent about the likelihood of such an investment strategy being

Adam French Adam is CoFounder and CEO of digital investment manager Scalable Capital and commodity products. Adam studied Business Mathematics and Statistics at the London School of Economics

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Confidence game or imperfect science? The professional fund investors’ view of benchmarks BY JB BECKETT, UK LEAD | ASSOCIATION OF PROFESSIONAL FUND INVESTORS

As an industry obsessed by them, and currently under regulatory glare, how well we do we even understand the function and construction of fund benchmarks. How transparent are they in the way they are communicated to investors. How do they incentivise fund managers to behave? Are they a con? I’ve never been much of a gambler; I always expect the house will usually win and that the odds are stacked against the gambler. My one exception was in Vegas in 2013, when I turned $50 into about $500 over two hours at the roulette wheel playing simple Red-Black mean reversion based on counting the previous 12 turns. Most others around me lost their shirts on low probability odds. Small wins, small losses. More wins than losses. Just luck of course. How do I judge my success? In a confidence game, it builds up a player’s framing and anchoring bias that a certain outcome becomes more likely through repetition. The bet (thus risk) increases as the player’s confidence grows, just before the trick. In some ways mutual fund benchmarks and indices can have a similar relationship to funds. For investors they set an expected outcome that may eventually disappoint.

What do we, as investors, expect a benchmark to do? At its most simple, it should provide some sort of understandable, transparent reference point by which to measure fund managers’ value. Arguably this is best done

either in aggregate, over various time periods or at the individual client level. The aim is to somehow compare and match the expected utility of the fund with its outcome. Where there is confusion is when discerning between benchmarks and targets. One relates to a compliance requirement, while the other relates to an aspiration or intended customer outcome. Fund managers and investors need to tighten up reviewing those expectations and outcomes. That conversation probably requires a far better view on investment horizon, risk-adjusted outcomes, absolute returns and factor based benchmarking, which is already beginning to occur within Professional Fund Investor (PFI) circles.

How are benchmarks being used today? Benchmarks now appear to operate as blunt tools with which to bludgeon active managers on a month-to-month basis, rather than assessing the fund manager over their target investment horizon and accurately in context of the positioning and profile of the strategy. They have also become much more readily investable and so the relationship between fund manager and benchmark has irrevocably changed. Benchmarks not relevant to the strategy should not be stated or relied upon. If a fund manager has a three-year horizon then the fund investor should be interested in that rolling number versus benchmark and the hit rate of the number of times a fund manager meets the aim, beats the benchmark and otherwise builds up a picture of persistency. The investment horizon of the fund should also be clearly stated alongside the benchmark and assessed against it.

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This extends even more into fixed income benchmarks. Should the benchmark have a similar spread and term duration to the fund manager or future cash flows?

years – it’s been a shifting goal post as one rule creates an issue to later be fixed by another rule, and the needs of investors have also changed over time.

Does the type of fund matter?

The PFI view

To even discuss passive benchmarking is to be quickly dismissed. However what isn’t spoken about is how passives should be benchmarked today. Currently they are simply being benched to themselves and thus far too much focus is put on tracking error monitoring rather than stepping back and questioning the end outcomes for the investor. Likewise when it comes to target return multiasset funds – the use of risk-free rates as benchmarks has been deemed unjustifiable. These funds should, by default, benefit from carry above that rate and I’m sure absolute return and diversified growth fund managers in the UK and globally will (should) be reviewing their position on this (and quickly, we would suggest).

The PFI experience of active fund manager benchmarks tends to be one of agnostic bemusement. The common but slightly galling statement we most often read being ‘unconstrained but benchmark aware’ in terms of performance comparisons. PFIs often set their own benchmarks, specific to the attributes of the fund manager, strategy, liability or honed set of expectations of what a fund should deliver over precise investment horizons. Meanwhile the industry remains overly fixated with standard time period returns, which has made some investors more short-term in their risk appetite.

How have we got here? Most active managers today still invest in absolute terms for their clients, but compliance requirements necessitate that benchmarks be added for performance comparison. Often the benchmarks were selected on market weight grounds, being the standard or a ‘typical index’ for a particular sector rather than bearing any resemblance or correlation to the strategy. The S&P 500 is a great example in a stock market of around 5,000 listed US companies. Conversely should some active managers be criticised for mediocrity? Absolutely. Regulators are culpable, with a degree of regulatory arbitrage over the

Confidence benchmarking? Fund managers should clearly set out an expectation that is a fair and transparent representation of the riskiness of that fund. Any target relies on confidence, but illustrating an expected range of return might be far more informative to an end investor (such as Best and Worst and Most Likely outcome). Perhaps illustrating fund performance against a range of expected outcomes would make for a more informative conversation with the end investor? Risk-adjusted benchmarks evolved from rudimentary Sharpe ratios have merit. Risk-adjusted benchmarks that remove more than 2 times deviation risk would change the very tone and narrative of the active-passive debate. Passive proponents may (perhaps rightly) baulk at such notions of

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(AMC) business model, and performance fees, as part of its Asset Management Market Study. Areas not openly explored include CASS’ symmetrical AMC and the proportionality of AMC to the performance fee. It’s about how well the fee structure is aligned between fund manager and end investor. Depending on how the fee structure is set up, a manager can become susceptible to a bias to not add incremental risk (to achieve the higher performance target) but rather add sufficient risk to create a continually growing cumulative return over the high-water mark and modest outperformance above the lower performance hurdle quarter-onquarter. What can then happen is that the fund manager may double their earnings above the quoted annual charge but the investor

may be facing returns of 50% of what was expected.

A: Capture lower fees by investing in lower risk assets >LIBID

A: Capture higher fees when low risk assets outperform

B: Capture higher fees when higher risk assets outperform

Invest in higher risk assets

Invest in lower risk assets

B: Loss of fees when high risk assets lose money

Invest in lower risk assets

Invest in lower risk assets

rehypothecation or repledging, but we should at least debate the practicalities, pros and cons. Correlation-adjusted benchmarks, to effectively strip out offbenchmark positions, is another possible approach. Product teams could find factor suppliers like or Style Research of immense value here. Even examining a fund versus an index on a money-weighted basis can produce quite different results to time-weighted or non-weighted. The devil can be in those details.

Benchmark related fee structures In terms of how performance benchmarks relate to fees, the Financial Conduct Authority (FCA) has missed an opportunity to more widely review the annual management charge Target A Target B

For example, this situation became exacerbated among absolute return funds that targeted returns above cash. Following the LIBOR/ LIBID collapse in 2008 many of these funds gathered large assets and earned huge profits. We noted that many of these funds produced low or negative returns in 2016. Where there is no performance fee but rather a basic AMC then the same behaviour can creep in as the manager is effectively incentivised on the basis of asset accrual and not performance outcomes. Often the manager can become more fixated on the volatility of the fund rather than the net return. It is no secret that many performance targets versus benchmarks are set up on a gross of charges basis.

Fig. Absolute Return fund manager’s ‘prisoner’s dilemma’ between investing lower target A or higher target B

What rapidly becomes apparent is that there are many areas in which the FCA could expand its benchmark review, well beyond what is being discussed in the mainstream or outlined in CP17/18 Consultation on implementing asset management market study remedies and changes to Handbook. We have not even begun to consider ESG incentives or how benchmarking and performance targets relate to LTIP and fund manager and analyst incentives

JB Beckett, Chartered MCSI UK Director, APFI, Author of New Fund Order, Author for CISI, SharingAlpha Advisory Board Member, Ambassador of Transparency Task Force, Member of Team P.I.S.C.E.S., Fund Gatekeeper and Consultant. #newfundorder

f o y r o t c e r i D The ncy e r a p s n a r T o r P O r g a n i s at i o n s

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A business shouldn’t stand out because it’s ‘pro-transparency’, it should be the norm. If you lead a pro-transparency organisation, join those already advertising in our directory. The more firms are seen here, the more weight gathers behind our argument that transparency is a commercial virtue and not a threat.

We’re happy to consider classifications beyond those shown here. Please contact for more information.

ACADEMIC INSTITUTIONS Prof. Dr. Heinz-Dietrich Steinmeyer University of Muenster, Germany School of Law, Universitätsstrasse 14-16D-48143 e: Muenster phone: 49-251-8329744 m: 49-171-8384816 I am a professor for Social Security Law, Labour Law and Civil Law at the University of Muenster Law School. My special field is pensions – occupational/ supplementary pensions as well as public pensions. I am doing consulting work nationally and internationally including international organizations (EU etc.). I am the Chairman of the European Network for Research on Supplementary Pensions.

AUTO ENROLMENT Steve Conley, Managing Director, Workplace Pensions Direct e: w: t: 0113 457 4563 m: 07850 102070 Since 2015, Workplace Pensions Direct has made auto-enrolment simpler for small businesses, enabling employers to focus on running their companies without having to worry about pension law, and the cost of poor pension decisions. Workplace Pensions Direct offers an affordable, end-to-end, auto-enrolment solution that guarantees compliance with the law. With professional expertise, a century of payroll and pensions experience, and professional indemnity insurance – Workplace Pensions Direct has removed the worry and risk of autoenrolment for thousands of small businesses and their advisers.

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Gavin Perera-Betts, Chief customer officer, NEST e: w: t: 020 3056 3719 NEST has been set up by the government especially for auto enrolment. We’re here to make sure that every employer has access to a workplace pension scheme that meets the requirements of the new pension rules. But we do more than just meet the regulatory minimum. NEST comes packed with the sort of high-quality features you need, whether you’re saving with us, using us for your workers or helping your employer clients.

COMMUNICATIONS CONSULTANTS Lesley Alexander, Managing Director, Ferrier Pearce e: w: t: 020 3772 5360 Transparency – clarity, straightforwardness, honesty. As communications consultants, we support transparency in financial products, especially long-term savings. This applies not just to charges, but to the way we describe the products and their benefits to consumers. We believe the language we use should be clear, unambiguous and direct, helping people to make the most out of their money.

DATA SERVICES Larry McLaughlin, CEO | GSAV Ltd e: w: t: +44 203 655 2182 m: +44 7771 978 118 US m: x+1 646 946 5272 GSAV Ltd is Reg Tech/Fin Tech company exclusively serving the Buy-Side and delivering pricing solutions in the Collateral Lending Market to benefit Beneficial Owners and enable Managers to meet their Fiduciary and Regulatory obligations. GSAVr is a specialist pricing, tracking and regulatory tool and provides an independent price for collateral lending transactions that defines rate and use in a manner that the Regulators feels meets the test of both price and use. GSAVr is the only solution available today that addresses the current challenges of any form of collateralized lending, full price discovery and full price transparency.

David Rich MIod, CEO | Accurate Data Services e: w: t: 01603 813366 m: 07919918623 David is Chief Executive of Accurate Data Services, a specialistdata quality and positive people tracing business that is focused on unclaimed assets in the financial service sectors. ADS traces lost members, clients and policy holders for a variety of organisations including Life and Pensions funds, Banks and Asset Managers. The goal is to help businesses reunite their customers / members with their assets and deliver positive consumer outcomes. David is an active campaigner for transparency and action around the large unclaimed assets issues present in the UK.

FIDUCIARY MANAGERS Ralph Frank, CEO DC (UK), Cardano e: w: t: +44 (0)20 3170 5910 Cardano was founded in 2000 and now has over 150 staff with backgrounds in the areas of risk management, investment management, research, actuarial and investment advisory. Cardano studies the causes and impact of risk and costs in order to significantly improve financial performance and resilience. We currently provide Investment Advisory or Fiduciary Management services to over 1.3m pension fund beneficiaries with assets totalling over £120bn.

FINANCIAL PLANNING Mike Stafford CFP, Director, Stafford Wealth Management e: w: t: 01992 501601 Stafford Wealth Management was formed in 1986 to provide bespoke lifestyle financial planning and investment services to private clients. It is one of a small number of elite firms in the UK that is accredited by the Chartered Institute for Securities and Investment. Stafford Wealth Management is authorised and regulated by the Financial Conduct Authority for investment business.

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INVESTMENT CONSULTANTS Marcus Whitehead, Head of Investment Consulting, Partner, Barnett Waddingham e: w: t: 0333 11 11 222 Barnett Waddingham has grown to become the UK’s largest independent provider of actuarial, administration and consultancy services. Our total headcount is now over 850 – with offices in seven locations around the UK. The investment consulting practice provides bespoke, independent investment advice to over 360 pension schemes with assets from the millions to billions. We continue to provide the personal, quality, tailored approach that has made us successful and has led to high levels of client retention.

INVESTMENT GOVERNANCE CONSULTANTS James N Meenan, Principal | JNM Investment Governance e: w: t: +353 (0)1 687 1027 m: +353 (0)86 257 2646 JNM Investment Governance gives trustees independent coaching and support to develop strategies and techniques to stem the overwhelming resource handicap they face in discussions with investment professionals. JNM’s objective is to facilitate a constructive two way dialogue with attendant benefits for all parties.

Henrik Pedersen, Managing Partner & Co-Founder, Clerus LLP e: w: t: +44 20 3356 2845 m: +44 7767 656234 We partner with pension schemes and other asset owners to review and improve investment decisions, governance and value-for-money, through independent and informed investment analysis. As a result, investment outcomes can be improved without the need to change service providers or taking on more investment risk. We offer a free initial assessment, so why not try us out?

INVESTMENT MANAGEMENT Robin O’Grady, Head of Business Development, Hawksmoor Investment Management e: w: t: 01392 410180 m: 07468 697900 Hawksmoor specialises in providing high quality discretionary investment management services for private clients including trusts, pension schemes and charities. We are a privately owned business with no ties to a bank or any other financial institution. Our experienced and well qualified team of investment professionals is focused solely on providing clients with the best service and consistently good performance.

NOT FOR PROFIT Dr. Kara Tan Bhala, President & founder, Seven Pillars Institute for Global Finance and Ethics e: w: t: +1(785)865-8824 (mobile) Seven Pillars Institute (SPI) for Global Finance and Ethics is an independent, nonprofit 501(c)(3), nonpartisan, organization whose mission is to highlight and analyze issues of moral philosophy in global financial markets with a view to enhancing ethical practice and policy.

PENSION ADMINISTRATION Margaret Snowdon OBE, Chairman, Pensions Administration Standards Association e: w: m: 07983 565955 The Pensions Administration Standards Association (PASA) is a not-for-profit organisation which acts as a focal point to engage with industry and government on pensions administration matters. It was created to provide an independent infrastructure to set, develop, and provide guidance on pensions administration standards. It is an independent accreditation body, assessing the achievement of good pension administration standards by schemes and providers.

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RESEARCH Jackie Beard, Director of Manager Research Services EMEA e: w: Morningstar is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data and research insights on a wide range of investment offerings including managed investment products, publicly listed companies, private capital markets, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than USD $200 billion in assets under advisement and management as of 31 December 2016. The company has operations in 27 countries.


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e: w: t: +44 20 3290 6486 Perspective Investments is a multi-asset multi-strategy investment COLOURS CMYK C100 M88 Y0 K0 manager. We invest on behalf of our clients, including our founder C0 M0 Y0 K0 family. Our commitment to our clients is to help them achieve their financial objectives. We do this by aiming to deliver higher returns with lower volatility and better capital CMYKour investment performance track record preservation than conventional equity portfolios. Of course, COLOURS while C100 M96 Y8 K5 is consistent with this aim, past investment performance is not necessarily predictive of future results. C0 M0 Y0 K0


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26 October 2017

Aon Hewitt, Paalbergweg 2-4, 1105 AG, Amsterdam Many thanks Marlon Sahetapy, Principal at Aon Hewitt’s Global Investment Practice, who has very kindly agreed to host this Transparency Symposium. Thanks also to David Pitt-Watson, Executive Fellow at the London Business School and an Ambassador of the Transparency Task Force who very thoughtfully introduced Marlon to the TTF.

Please contact if you’re are interested in getting involved with the Amsterdam Transparency Symposium as a speaker, delegate, panelist, sponsor or media partner or if you’d like more information.

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Could G20 task force make 2017 the year business is clear on climate? BY JANE STEVENSEN

The final report from the Task Force on Climate-related Financial Disclosures (TCFD) was presented to the G20 in July by Bank of England Governor Mark Carney. The report provides clear recommendations on how businesses should disclose consistent information on the climate-related financial risks they face. It illustrates why all companies, not only those in oil and gas or extractives, should provide transparent information on the expected impact of climate change on their business models. It endorses the inclusion of voluntary climate-related financial disclosures in mainstream financial reports used by investors, lenders, insurers and other users of financial data. Backed by the G20 and financial heavyweights such as Michael Bloomberg, the recommendations alter the political calculations of the risks and opportunities related to climate

change, and encourage corporates to develop a strategic response. Transparency around climate risks has improved in the past decade, as companies respond to demand for data on their greenhouse gas emissions. A business’s carbon footprint can often be found in its corporate responsibility report. However, the TCFD introduces a new requirement on companies to disclose comparable information, consistently over time, in their mainstream financial filings. It also demands that corporates look much further into the future when assessing and disclosing climate-related risks. Thus, the recommendations shift the onus of climate reporting from the sustainability department to the boardroom, as every board is required to review and sign off on annual reports.

The basics of climate disclosure There are four core themes that the TCFD encourages corporates to centre their climate disclosure around. • Governance: climate-related risks and opportunities, board and senior management engagement in climate issues. • Strategy: the actual and potential impacts of climate-related risks and opportunities to the organisation’s business model. • Risk management: the processes used to identify, assess and manage climate-related risks. • Metrics and Targets: the tools to measure, asses and manage relevant climate-related risks and opportunities. One of the most significant points is the TCFD’s call for ‘scenario analysis’ to become a key

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component of corporate climate disclosure. This type of analysis examines the impact on business operations from both physical and transitional scenarios related to global warming; aligning with the Paris Agreement target of below 2°C temperature rise and complying with individual country commitments to reduce emissions. These should be contrasted with business-as-usual scenarios (i.e. the warming that would occur without any action to reduce emissions). Scenario analyses help stakeholders assess the resilience of the organisation’s strategy to emerging threats such as new climate regulations or supply chain risks associated with rising temperatures. They bring ‘future’ climate risks into the present, and will support greater transparency around the financial sector’s exposure to climate-related risks through their portfolio companies.

Transparency to drive the green transition The framework outlined by the Task Force creates the infrastructure for flexible and immediate adoption of climate action plans. It also provides investors and stakeholders with new means to assess companies against their peers. The hope is that better disclosure around climate-related risks will be used by investors as a tool for engagement as well as divestment, ultimately resulting in a shift in capital towards less emissionintensive business models. The recommendations force all companies to consider why their business model would not be impacted by climate change. Investors are already assessing companies on this basis, as part of wider strategies which focus

on companies making efficient use of resources. The Task Force helps create a disciplined process for this assessment, to be applied across industries. However, the recommendations do not call on companies to radically change their business models. Rather, they encourage them to be transparent about the likely impact of climate change on cash flows and supply chains, thus allowing the market to organically identify the companies that will be competitive in a low-carbon economy.

Promoting universal adoption The question now, following the release of the recommendations, is how to ensure that all companies disclose on climate. Companies are already disclosing their climate data to CDP (formerly the Carbon Disclosure Project) at scale. Last year nearly 6,000 companies provided environmental data on our platform, representing close to 60% of the market capitalisation of the world’s largest stock exchanges. However voluntary methods have failed to achieve universal disclosure. In the UK, for example, 95% of FTSE 100 companies report climate data to CDP, but only around two thirds of those in the FTSE 350. If investors are going to move capital towards the low carbon transition at the volume required, then they will need information which is consistent over time, comparable and of high-quality. To get companies which currently resist voluntary norms to report, policy that mandates and enforces the TCFD recommendations is likely to be required. However, given a fragmented political environment and the US withdrawal from the Paris Agreement, global

adoption of the Task Force recommendations by national governments is perhaps some time away. For now, it is up to investors to demand greater transparency from their portfolio companies.

Growing momentum behind greater transparency The momentum towards a cleaner, more resource-efficient economy is irreversible. As the effects of rising temperatures and caps on emissions grow more severe, organisations investing in projects that are not viable in the long-term, such as coal mines, will likely prove less resilient and ultimately deliver lower returns to investors. At recent shareholder meetings in the US, investors at ExxonMobil, Occidental Petroleum and the utility PPL demanded that the companies report on the long-term business impacts of climate change1. In the UK the Bank of England recently announced that it will examine banks’ exposure to climate change, as a part of efforts to tackle the significant financial threats posed by rising temperatures2. This will undoubtedly have trickle-down effects, as banks are forced to consider their lending practices in the most emission-intensive industries. This year over 800 investors representing US$100 trillion in assets are expecting and demanding that companies report through CDP3. Managing climate risk is simply good business, they argue; companies on CDP’s ‘Climate A List’ have outperformed the market by 6% over four years4. In order to help streamline the process of climate disclosure, CDP has committed to adopting all TCFD recommendations. The direction of travel is clearly towards greater transparency

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and a low-emissions economy, as investors, governments and other stakeholders recognise the material risks posed by accelerating climate change. This transition also presents opportunities as a result of innovation in technology, manufacturing and policy. The Task Force will help drive greater transparency, allowing investors to identify the companies that are alive to these risks and which have a strategy in place to seize the opportunities.

Jane Stevensen Jane Stevensen leads CDSB (Climate Disclosure Standards Board) and CDP’s engagement with the Task Force on Climate-related Financial Disclosures (TCFD). Jane is a highly experienced and respected Corporate Advisor in sustainability and sustainable business practice, and an expert in developing and managing sustainability programmes and partnerships for business, industry, and not-for-profits. She was Director of the Sustainability Advisory team for Grant Thornton LLP before joining CDSB in June 2015. Jane is a Natural Resources sector expert, and chairs the CDP Oil & Gas Advisory Group, part of the CDP Climate Change Mitigation Programme. She is also a Mentor for Inspiring Women at Inspiring the Future, and a trustee of TCV, The Conservation Volunteers. 1. 2. 3. 4. CDP Press Release


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