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Transition talk

Delay tactic or credible plan?
Transition talk

Written by Vincent McCarthy, CFA

Editor’s Note, The ESG Factor Magazine Issue, Issue 17 l Q1 2024

‘We are in a transition period’.

In this issue of the magazine, among other articles, we share insights on what characterises a meaningful sustainability transition, the need for companies and individuals to adapt, the regulation intended to drive the transition, and the concept of transition investing.

Policymakers across the globe are in broad agreement that we need to transition to a sustainable economy, albeit there are differences on how to get there, when we’ll get there and what it looks like. It is critical that all the talk of “transition” is not just another way for leaders to deflect from taking the tough decisions that are needed today.

When I hear the word transition what first comes to mind is the go to excuse from football managers under pressure due to poor results, the classic ‘we are in a transition period’. While it might be technically true, it is an easy fall back to assign the blame for current failures to the past while making promises for the future that may never be realised.

This time last year, an article in The Guardian newspaper ran with the headline “Liverpool lost in transition, but Jürgen Klopp could be their golden thread”, after they lost to Brighton in the FA Cup. It was a tough year for Liverpool FC, with many fans succumbing to hysteria and hyperbole. A year on, the transition is ahead of schedule and the direction of travel is clear. Great leadership matters. A large part of this is ensuring that the right structures and people are in place, to help empower individuals to implement an agreed strategy. Companies take note.

This is the exception. Transition periods are notoriously difficult, in football and all walks of life, particularly where there is some fundamental shift involved. For example, Manchester United has changed course repeatedly since the departure of the legendary Sir Alex Ferguson in 2013 and has failed miserably to move forward. The club has become a case study in poor decision making.

These examples relate to a football club. Magnify that challenge 1000x and more to grasp the gargantuan task of successfully transitioning to a sustainable economy, with all its moving parts. The current state of play with the UN’s Sustainable Development Goals, established in 2015, would suggest we are genuinely lost in transition, or at least mired in the status quo of our prevailing system.

If we fail to transition to a sustainable economy in a timely manner, the consequences reverberate across the globe and into the future for life on planet earth. It won’t be easy. At a political level we are short on leadership and character. Regulation is changing, but too slowly and often failing to tackle the root of the problem, unsustainable business practices. Companies must lead the change, turning challenges into opportunities.

For investors in the search of long term returns, the skill will be in identifying the companies that will emerge as the winners of the sustainability transition. This will require conviction and patience, as there will be times when the pace of transition will fall short of expectations. Remember, after taking over in 1986, Fergie came very close to being fired in 1990 as Man United fans became dis-illusioned with the lack of progress. He went on to become the club’s most successful manager over the next 23 years, one of the greatest managers in football history.

For all stakeholders, change takes time. However, for the transition to be more than a buzzword or a delay tactic, long term plans must be credible, and short term oversight must ensure the right steps are being taken today to bear fruit down the line.

That is where this note ended. But then Jurgen Klopp threw a spanner in the works, with the shock announcement last Friday that he will leave Liverpool FC at the end of the season. I was going to edit what I had written, but if anything, the surprise announcement merely reaffirms what I believe is the fragile nature of any transition.

We talk about long term plans like we’ll live forever. But everything can change tomorrow. The CEOs today promising net zero by 2050 will have long departed by then. The decisions being taken in the short term are as important as the long term plan.

All leaders are merely caretakers, they cannot lead forever. Therefore, great leaders don’t shy away from the toughest decision of all, to relinquish control. Collectively, the challenge we face is to keep the transition to a sustainable economy on track, irrespective of who sits at the top table.

End

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