Impact Is Everything & Everything Is Impact with Megan Starr, Global Head of Impact, The Carlyle Group. Joanna Reiss, Co-Lead of Impact, Apollo. Erika Karp, Chief Impact Officer, Pathstone.
Moderated by James Ledbetter, Chief Content Officer, Clarim Media.
PRESENTED BY
SPEAKERS
Megan Starr
Global Head of Impact
The Carlyle Group
Joanna Reiss
Partner and Co-Lead of Impact
Apollo Global Management
Erika Karp
Chief Impact Officer
Pathstone
MODERATOR
James Ledbetter
Chief Content Officer
Clarim Media
TIMESTAMPS
EPISODE TRANSCRIPT
James Ledbetter: (00:07)
Good afternoon. I don't know about you, but that's the first time I've ever walked on stage to Maroon 5. Might be the last time. Welcome everyone. Let me introduce this all star panel. I'm going to do it from left to right as you see it. First, we have Meg Starr who's global head of impact at the Carlyle Group. To her left, Joanna Rees, the co-lead of impact that Apollo. And finally Ericka Karp, chief impact officer at Pathstone. It's a high impact panel. Welcome all of you.
James Ledbetter: (00:42)
I thought it might make sense to start by trying to define terms a little bit. There are people and I might be one of them who will use ESG investing and impact investing more or less interchangeably. There aren't really fixed definitions of any of these things. I wonder as all of you have impact in your title, what does impact mean to you? And we can go alphabetical, so Erika, you can go first.
Erika Karp: (01:10)
Well impact means that it matters. Something happens when you do something, you move something. By the way, I would argue that ESG it's not an asset class, it's not a style, it's not a strategy. It is not ESG investing. ESG is an analytical lens. It is simply a starting point. It's a discipline. That's how we see it. Once you do ESG analysis, you can do any kind of investing you want.
Joanna Reiss: (01:43)
How we think about it is ESG is ownership practices. Making sure that we are mindful for any specific business of the ESG risk factors, opportunities, managing them carefully the same we would manage factors associated with any part of an investment. We're going to watch the company's debt covenants. We should also be watching its governance policies. Impact we think of as the next iteration and separate. For impact, we look at companies that are actually through their products or services, doing something good in the world, whether it be socially or environmentally. And so you could have pretty much any company with good ESG or we certainly try but not every business can be an impact business in our definition.
James Ledbetter: (02:24)
One handy way of remembering it, it came up on our call on Friday, somebody was talking about investing in the Venetian. The Venetian can have the best ESG policies in the world but it's really hard to make the case that they're doing good in the world.
Joanna Reiss: (02:40)
Well, they might be bringing joy. But at least in our definition it's not quite there.
Megan Starr: (02:46)
But I also think we're entering a next phase of this space, where I agree with Joanna of ESG is typically about how a company operates, an impact is what it does to make a profit. And those have been separate tools but I think we're seeing a lot of convergence because the market is starting to price in companies that are helping to solve environmental and social challenges. And so you can take a company that might not look impactful at face value. Carlyle bought a company called Weiman a couple of years ago, cleaning supply company. Our thesis was around changing consumer preferences for green, safe cleaning supplies. And so our investment was all about how do we transform that company into a clean producer? And so I do think in some instances, there's this intersection of you need both of those as we think about what's being valued into the market.
Erika Karp: (03:35)
James, I just have to say that ESG analysis gives us an opportunity to get away from good and bad. We don't have to say good and bad. In fact, our investors, our clients are the ones that say good and bad, even though we might not agree with them. But ESG analysis allows you to align your values with your investments but it is about value, not values when it comes to doing this kind of analysis. We don't have to say good and bad.
Megan Starr: (04:07)
I love that because I feel like so frequently that topic comes up, but people saying, "Well, is Amazon a good ESG company?" Or arguing that someone has an S&P 500 type equivalent that's lower carbon and they're picking out individual names saying, "How could you call that name?" And the whole point is it's not labels and it's not binary. It's how are they doing vis-a-vis peers on material, environmental and social dimensions for their business.
James Ledbetter: (04:32)
Meg, you touched on something that, that I want to go into a little deeper. And that is this idea of the categories merging a little bit or perhaps both being necessary. Just stepping back a little bit, I'm curious to hear from all of you too, how do you think about, how do you describe what has happened to this sector over the last, say three to five years? And what is making that happen?
Megan Starr: (04:58)
Well, I think Erika.
Erika Karp: (05:00)
It's not a sector.
Megan Starr: (05:01)
I'm just going to thesis that we're in the second wave of this being a contrarian thesis. And in its early days, when people thought about ESG or whatever they termed it, they were like, that's feel good investing or fuzzy math. How can you possibly make money when you're busy thinking about carbon emissions for people. The world has flipped where we realize that companies are thinking about engaged, safe, productive workforces, that companies that are in the forefront of the energy transition, they're outperforming. And so a lot of capital has flowed towards those ESG leaders. And I think what we're seeing now is that the kind of next phase of saying, "Actually, how can you invest in companies that maybe don't have great environmental or social dimensions, improve those and that's actually the kind of activism thesis of improving those companies into the higher multiples."
James Ledbetter: (05:47)
Interesting. Joanna.
Joanna Reiss: (05:49)
Fundamentally for any business we own or lend to or otherwise engage with, you have a certain level of responsibility in the same way you are responsible for helping them figure out their procurement strategy, you're also responsible for making sure that the appropriate employment policies are in place. What have you. And I think that importantly, that is become table stakes. Our investors expect it. They're shocked if you're not focused on it and it's a major area of investment and we think opportunity to make our companies better. Which is fundamentally what we try to do, buy a company, make it better, make some money for our investors along the way. But the impact side of it I think is quite interesting because impact investing is not new. If you were to go back, we're talking decades of people focused on whether it be micro-finance in emerging markets.
Joanna Reiss: (06:38)
That is the quintessential impact investing. What we think is new is the focus on at least what we're doing here at Apollo is impact at scale and trying to think through how do you take that mindset? How do you take all of those approaches, practices that have been built up over the call it decade or two and apply that to more businesses and accomplish what Meg described? Which is find businesses that have potential for impact, that are in that marketplace and where you see an opportunity to take a company that's doing something that's fine and turn into a company that's doing something really good in the world. And that's what I think is new.
Joanna Reiss: (07:15)
And the other part of it that is clear is just the level of attention has grown exponentially. And I think that's frankly, one of the good things to come out of the pandemic is a greater mindfulness of the externalities of everything we do. Whether it's business B to B consumption patterns, B to C, people are more mindful. And of course the government overlay is that we should be thinking through how do we help underserved communities? How do we help the environment? All of that is just the secular tailwind behind what we're trying to do.
James Ledbetter: (07:48)
Erika.
Erika Karp: (07:49)
What I would add is there's a bunch of new things going on. One thing that's new is that we have every kind of piece of the capital markets lined up like we never did. You have the asset managers and the asset owners and the investment banks, the exchanges, the accountants, the lawyers, the students. We have everybody lined up to think about this in a really transparent way. And on top of that, we now have standards for disclosure that are coming along, the SASB, the GRI and what's going on there. The standards for disclosure transparency is really transformational. That's critical. And another thing that's new is that we have data that is turning noise into signal. We have social media making everything, everybody knows everything all at the same time. We have an intergenerational transfer of wealth of trillions like we haven't seen before.
Erika Karp: (08:46)
All of this stuff happening at the same time, that's new. And then further, we are moving away from myths, stupid myths that there's some breach of fiduciary duty when you do ESG analysis. It's quite the opposite. And then a myth that there has to be under performance from the investment standpoint. Stupid and it's being put aside. There's a lot new that's going on. The risk though, is as the movement, if you call it that, I call it a discipline. As the discipline shows asset flows, we're getting everybody coming in to try to do this type of analysis and that's problematic. We have to be careful that we don't kind of undermine the whole economic and impact proposition because of new players that are basically marketing. We got to be careful about that.
Megan Starr: (09:40)
And do you think it's problematic in some ways but I also, we're applying a ton of scrutiny right now to anyone that purports to do ESG, which I think is a great thing. I also want to see people apply that level of scrutiny to the people that don't claim to be thinking about environmental or social dimension. And so on one hand, I do think this market rush to focusing on this, there will be a wide dispersion of what that actually looks like, but I think the market will sort through that. We sorted through that before when venture capital became a thing and everyone raised a vendor, hedge funds. We've been through this before. And so I think we're in the early innings of it's been recognized as a major discipline and now we'll sort through who's actually doing it well versus who's putting in a pitch deck because they think people want to see that.
James Ledbetter: (10:24)
Erika, I just want to touch on something you said there to capture the moment. It's I think at this point in the discussion that someone usually brings up the Milton Friedman article from 50 years ago, that the only social purpose of businesses to maximize profits. You're saying if I'm understanding you correctly, that is dead. As a philosophy that is dead.
Erika Karp: (10:44)
No, I love profits. It's not dead. Unfortunately he just left out two words, had he put in long term, we'd be good. We really would be good. And so in Friedman, if you read the work, he wasn't totally tone deaf to society. Not at all. With those two words, just like with Adam Smith, The Wealth of Nations. Go back further than that and think about The Theory of Moral Sentiments. He cared about human beings but in The Wealth of Nations, he didn't talk about these negative externalities that could happen. And so there's a miss. But now we're at a place where we're at least conscious about what's going on and we can start accounting for profits while taking into mind, not just financial capital but human capital and natural capital so we have an opportunity. But I love profits as much as the next person.
Joanna Reiss: (11:51)
And yet what I think is critical here is finding the right businesses. Finding business where profit and purpose are not intention every day and then owning them with a focus on both is how we get to the outcomes our investors want, that we want, that's good for impact investing. If you just pick a business where you do have that fundamental, if we're going to improve profit margins, we're going to be hurting this environmental issue, this underserved constituency, what have you, then you find yourself in the opposite condition where you by necessity are putting one to the side. That's the tricky part in my mind is finding those businesses that where you move in the same direction.
Megan Starr: (12:30)
And I think to that point about if the purpose of business is around generating profit, what we're finding is that you generate more profit in today's day and age if you're conscious of your environmental and social footprint. And Erika was talking about if we can actually have data, you can sort the signal from the noise. And at Carlyle, we have really granular ESG data because we asked for it for our companies. We have 250 portfolio companies give or take and we have really granular financial data because we're investors in them. And so when you combine those together, you can actually start seeing where those levers are. And one quick example, we hear a lot about diversity, equity and inclusion, our portfolio companies that have at least two diverse board directors have 12% faster annualized earnings growth than our companies without diverse directors. And so this whole point about the purpose is profit, the data's there.
James Ledbetter: (13:17)
If you do it right.
Megan Starr: (13:18)
And not all ESG things matter for any company or for a specific company but there are specific levers and being smart about finding those, that is maximizing profit in a changing world.
James Ledbetter: (13:31)
Joanna, you said something that I wanted to frame slightly differently. The title of this panel is Impact is Everything, Everything is Impact. I think what you just say is that's not actually true. Within maybe a sector there are businesses where it's true or in individual businesses. What did you mean when you said you have to find the right business where those goals where they're not in conflict?
Joanna Reiss: (13:59)
Fundamentally my take and our take at Apollo is that not every business can be an impact business because not every business that is still investible, that does still have good ESG where we think we can drive the type of returns we look to accomplish across our various strategies, demonstrates what we're looking for from an impact business, which would be Fidelity with the IMP five dimensions of impact, in fundamentally doing good things for either people or the planet at its heart. There are plenty of things that we like that are investible that don't help underserved communities. How does cosmetics become an impact business? I struggle but I think we're going to continue to have cosmetics into the future and that's something that's not even.
Megan Starr: (14:43)
I have a differing argument.
Erika Karp: (14:45)
Totally different, sorry.
Megan Starr: (14:46)
We just bought, at Carlyle we just invested in a company called Beautycounter, sorry. Invested about $500 million, billion dollar valuation company, unbelievable founder, Gregg Renfrew. And she is focused on how do you become a differentiated consumer brand by leading the market in green safe ingredients? And in the US we don't have this thing called a precautionary principle, which most European countries have, which means that we have to prove chemicals are safe before we put them in our products. Beautycounter has taken that upon themselves. They have 1,800 ingredients they won't put in their products. They've gone to the mat on issues like mica or palm oil and sourcing sustainable palm oil. And they're focused on this idea of how do you take makeups or cosmetics from just being a consumer product to actually saying, "How can we be at the forefront of sustainability?" Because that's actually driving consumer behavior now. And so that's our differentiated angle.
Megan Starr: (15:38)
And so I agree with you about this. The idea about, I know we're talking about casinos is not every business is an impact business. I think every business has an opportunity to improve on sustainability dimensions that will increase their value. And that doesn't mean if it will be a pure play impact business but I think there's some really interesting things there.
Joanna Reiss: (15:55)
That's where we fall back into what's ESG versus what's impact at least but everyone I've ever met has their own definitions. It's part of the problem.
James Ledbetter: (16:03)
Erika.
Erika Karp: (16:05)
Sustainable investing, it is the systematic analysis of the material, environmental, social and governance issues that go into an investment discussion. That's what sustainable investing is. Impact investing adds two things, the idea of intentionality and then measurability. Those are definitions that we have found very helpful. But I have to tell you, what's so interesting again. I get away from good and bad. I get to investing. The history of sustainable investing was very kind of ideological, sometimes politicized, divisive. The future of sustainability, of impact and sustainable investing is in pragmatism and enhanced analytics. And then it's about the values of asset owners. At Pathstone, we manage about $30 billion for families and foundations and endowments. I can tell you that there's interest in sustainable investing and impact investing ranging from zero, to ranging to all in impact. But it differs for everyone.
Erika Karp: (17:19)
Again, we're talking about these families and foundations. We have clients who are sustainable and impact investors who are invested in tobacco. We have clients that believe that that's a product that if used as designed, it will kill you. We have the clients that have the tobacco and point out that the tobacco plant is a unique manufacturing facility for very interesting drugs and compounds. It's all over the map, just like with Amazon. And by the way, at this conference, we're talking about cryptos and Bitcoin. Arguably Bitcoin is the tobacco of currencies. Think about the carbon emissions and environmental impact of the blockchain system when you mine these Bitcoins. It's going to kill us potentially. Another thing we try to talk about, again, not to be ideological, we talk about the idea of again, pragmatism. As a sustainable investor, do I care more about the negative environmental impact of Bitcoin? Or do I care more about the potentially really positive impact on society access to finance?
Erika Karp: (18:33)
The reason I use these examples is because there is not one definition. It is the wealth owners that we need to be able to have intelligent and non-divisive, nonpolitical conversations when it comes to everything. And also as it relates to sectors or industries where you can or cannot find impact, every investment, every investment whether it's corporate or wealth owners has impact, whether it's good or bad we don't necessarily know but everything has impact. It really is the way to really have impact at scale is to bring in everybody, trillions. That's impacted scale. We need to inform and be transparent and be honest about what we know and what we don't know.
James Ledbetter: (19:25)
Your example about tobacco is so interesting to me. At Worth Magazine, which is owned by Clarim, we recently published an article that went through a little bit of the history of what used to be called socially responsible investing or sin stocks and the filters used to remove them from portfolios like tobacco, alcohol, military contractors, et cetera. What you're suggesting though is that because there is no single definition of either of these terms, ESG or impact, is it the advisor's role to come up with a definition of those things that fit the investment desires of the client? Is that what you're saying? No, you're not saying that.
Erika Karp: (20:12)
No, I'm not saying that. ESG analysis is a discipline. It's the starting point for recommending or not an investment and then aligning it with what the investor wants. That's what I'm supposed to do as an advisor. Transparency, risk analysis, all of this stuff and opportunity. All that's the stuff that we do as advisors.
James Ledbetter: (20:37)
I'm not trying to put you on the spot.
Erika Karp: (20:38)
No, I like it anyway.
James Ledbetter: (20:40)
Would you then endorse the view that a company that sells cigarettes passes the ESG test because of these pharmaceutical links?
Erika Karp: (20:51)
There is no ESG test. And there is no such thing as a good or bad ESG company. It doesn't exist. There is an analytical process. Can we decide if let's use tobacco again, can you invest in a tobacco company that is absolutely committed to transforming itself? Are you comfortable with the magnitude and the pace of transformation? My job is to talk to my clients and find out what are they comfortable with? What are their timeframe? What is their risk appetite? And again, show them and I'm going to give them my opinion. They're going to ask and I will share the opinion but it comes down to objectivity and honesty and transparency.
James Ledbetter: (21:40)
Yep. On the question of data and transparency, one of the trends in impact investing over the last say 10, certainly 20 years has been a big shift from private to public. The overwhelming majority of companies that got ESG or impact investing 15 years ago were private. Now it's something like 15 to 20% are public. It may even be more and the debt component associated with these investments has also become increasingly public. And I have to assume that that trend will continue. This is a question for all of you, how does that affect your job? How does that change your strategy, your returns, your relationship to the investors, the limited partners, or does it? Is it really just the same thing with different tools?
Joanna Reiss: (22:46)
I don't really see an impact to what we're trying to do from the public company side of it. Frankly, as I look to the massive inflows, the renaming of mutual funds to put impact in their name with no real change in strategy, what have you, it just seems like a bit of a completely separate. What is interesting though, is to the extent we as private owners who can actually make the hard decisions, who can actually have that intentionality around impact, transform business models, drive towards positive environmental or social outcomes, what's kind of exciting is if they're big enough, it's clear that there's a great deal of appetite in the public markets for those businesses. But on a day to day basis, it certainly doesn't influence the kind of companies that we're looking for. Just given the same way private markets, public markets there's some overlap but it's not every day.
Megan Starr: (23:39)
I would say it's an increasingly big part of how we think about managing companies under our ownership period because of the exit implications. And so we actually have a massive body of work that is already called ESG for IPO readiness because our companies are exiting through IPOs. We need to be locked up tight across how they think about the material issues for their business, what the story is they're telling to investors around sustainability themes, how they're measuring that.
Megan Starr: (24:07)
We sold a company recently called Liberty Tire and Liberty Tire is fundamentally a recycling company. They're part of the circular economy. Had never identified as being a sustainability company before started dealing in the tire sector. And they recycle about a third of the tires in the US every year. Turn them into really interesting usable materials like the pavement that goes underneath the playgrounds, that actually has a lot of safety characteristics and reduces injuries and pavement for roads, which actually has higher frictions or reduces car accidents. And so there are all these things that were actually core to how they made profit. And so my team at Carlyle actually spend a ton of time with them understanding those impact pathways, understanding the science behind them, helping them measure that. That was a big part of our data room. I was a big part of the kind of sale process and the meetings with equity sponsors because that's an important part of how companies are sourcing deals for their portfolios now.
Megan Starr: (24:58)
I think we've seen it in terms of exit demand, exit multiples and then increasingly cost of capital as we raise financing alongside of those deals.
James Ledbetter: (25:06)
Erika, do you see any difference with the move toward public equity, public debt in transparency and the tools for evaluating these investments?
Erika Karp: (25:15)
Yeah, for us, it's wonderful because we start with our clients creating an investment policy and then we go and do our asset allocation work based on the markets. And then we go and across asset classes, we think about ESG integration. For us, it's it's as it should be. And then given that we think that ESG analysis is such a critical tool to every asset class, this makes all kinds of sense.
James Ledbetter: (25:46)
A couple of you have mentioned employment and the movement toward greater diversity, inclusion and equity as somehow related to the growth in impact investing. I'd like to flesh it out a little more and again, not to put anybody on the spot but the finance industry is not usually the highest rated industry in the DIE world. And frankly, neither is media at my own business. Neither comes out particularly good. But how are your companies tackling this issue both internally and how you evaluate companies that's different than it was just a few years ago?
Joanna Reiss: (26:33)
Well, I think there's clearly an increased mindfulness that is important. Frankly, how ESG integration started was LPs started asking questions and the best way to get a GP to do something is to have an LP ask about it. And so there's some similarities there and frankly, that's a great driver to action and to an appreciation that having a diverse set of viewpoints in the room leads to better outcomes and that there is talent that doesn't look and sound exactly like everyone else. At Apollo, we're very focused on just creating opportunity is how we think about it. And then opportunity comes in a lot of different ways. But as our CEO said, each of us had some lucky break in our career so let's find ways both at our company and through our portfolio companies to create those lucky breaks for other people. And recognizing that some people have more lucky breaks in a given life because of where they start than others and to be mindful of that and to create opportunity.
Erika Karp: (27:28)
I didn't have any lucky breaks. I've been working my ass off for 30 years. You got the interview, the guy thought you were funny.
Megan Starr: (27:40)
I would say, I think the S of ESG etiquette is the next frontier of our work. And I think in the early days we were focused on environmental issues and just realize that companies that can produce a widget using less water, waste, electricity, it's a more efficient business. That's just where we want to be orienting towards. And I think we were in the early innings of realizing that human beings are not just salaries that are reflected in an income statement, they're people. And when you think about productivity and efficiency and engagement and loyalty, those things are massive drivers of business value.
Megan Starr: (28:11)
We have a tech company based in Amsterdam called Dept. It's a digital agency and they're becoming a B corporation, which means they're kind of embedding purpose in their corporate girder. And then when you ask them why, they're a tech company, they don't have a big footprint, they're not manufacturing, they're not worried about health and safety. The answer is their people and talent. And so it's important for them to demonstrate to the market, measure and quantify that they are at the bleeding edge of environmental and social practices because they can attract and retain the highest talent, which is their competitive mode. And so I think there's a bunch of different ways that the S is playing out across different industries from health and safety and more traditional industrial manufacturing. But I think people are starting to realize that the human element has been undervalued, which means it's a source of great potential alpha.
James Ledbetter: (28:58)
Yeah. Certainly one hears it said that gen Z, gen Y plus gen Z is much more likely to want to work for some company with a stronger sense of mission and purpose. I don't know that that's ever really been put to the test but maybe if what you're describing is true, well it won't have to be. I'm curious at the mention of B corporations, just because it's something that I've paid a little bit of attention to lately. How do you think about B corporations? Do you have a bias toward investing in them? Do you follow who is B Corp and who isn't a B Corp? Are there enough companies out there that are kind of close enough the way that some companies don't label themselves organic but kind of play up all the sustainable things that they do? How significant a force are our B Corps in your world?
Megan Starr: (29:58)
I would say B Corps are one of many different frameworks that are driving towards what Erika was talking about. How do we get better quantitative performance data about ESG topics? And so some frameworks are better for other companies. B Corp is a really kind of crisp way to demonstrate to the market that you care about these things, that you're performing well on these dimensions. We have a lot of companies that the most material thing for them is just climate change full stop. And so the TCFD framework might be the right framework for them. But I think what we focused on at Carlyle is that it's not this binary of your B Corp or you're renewable or not. It's that change over time. And so you need data to demonstrate that progress.
Megan Starr: (30:40)
I'd say climate change is one of the most fascinating places, because the story is not just the renewables. The energy transition is a transition across every sector of our economy. And so we've been really focused about traditional energy businesses. They need capital, they need expertise and they need a longterm time horizon so that they can transition into new age energy companies because that's the exit trajectory. And so I think this idea of it's a less about are you this, are you that? And it's more about what are you demonstrating over time that the market is really responding to?
Erika Karp: (31:11)
I should add that remember B corporation is it's a framework. It is not a corporate form. It's not the same thing as being a benefit corporation. That fundamentally is different. And a lot of corporate law has not been established, it's not been written yet. I would argue that some of the most sustainable companies and by the way, some of the most arguably sustainable asset managers that we know don't use ostensibly the frameworks, the labels, nothing. They just do their work and they do it really well in a really conscious way. I've known wonderful hedge fund managers that systematically integrate ESG factors. They don't even know they're sustainable investors but they are. I think B Corp again, it's a great framework and it's needed as we make progress but it's not the end all be all. There's no silver bullet.
Joanna Reiss: (32:10)
What I think you're touching on is kind of one of the fundamental challenges ahead of us, which is that there's no gap or IFRS for ESG for impact. And so if you are, I sympathize with an LP. They invest in this fund, this fund and this fund. They've got three apples, four oranges and a banana and they don't know what to make. And they don't know what to make of any of this. That is kind of one of the ways to try to tackle it. What's the BIA score? What's your TCFD, what have you? But we haven't had the emergence of a single gap like measure.
James Ledbetter: (32:46)
Should there be? Would it be a more efficient system if such industry standards existed?
Joanna Reiss: (33:00)
I don't think so.
Erika Karp: (33:00)
But we're getting there. The SEC is actively thinking about what do we do with regard to disclosure of material factors. And by the way, this isn't semantics. When we think about climate change and the systemic financial risk of climate change, that's real. That is something that we need disclosure on. It's going to affect outcomes. And so again, this is not ideological.
Joanna Reiss: (33:18)
But at the same token, if you imagine two public companies, one a services business, one a manufacturing business, their P and L's look very different but they have basically the same items on them. How would their ESG statement, what is relevant? How do you compare? And how do you know what to make of the fact that the carbon intensity of the accounting consultancy is so much lower? Does that mean the industrial business is doing bad? Well, worse than it could or that the consultancy is doing better than it should? We don't really know which goes back to the challenge of compensability and also figuring out for any given business what actually matters and whether they control them.
Megan Starr: (34:11)
I actually disagree. I think we're going to see it pretty soon. And your point is well taken of there's a barbell to data. There are some data points that matter across all industries, all sectors for diversity, board level oversight of ESG issues, carbon emissions, you have to compare it by industry but we need to know kind of climate positioning. And there's some metrics that matter to specific industries and SASB, one of the frameworks has done a great job of drilling down. Total recordable injury rate for heavy manufacturing. And I really think the market, the investing world has to solve that from within of converging on some data points that we will track in the same way, using the same normalization metrics because we need that. You need head count, you need enterprise value, you need revenue, you need industry and some metrics by industry because we need that data otherwise, we're going to keep splintering in different directions.
Megan Starr: (34:59)
And I've used this data point before but my team in one week this summer, I got 37 ESG DDQs from investors. They were all different. And so the amount of data we're actually able to provide back to those in a meaningful way, that's just a silly use of energy and resourcing. And so I think solving the problem collectively within the investment industry will lead to performance based, quantitative, comparable and frankly, useful data. But it's going to take us actually bringing down the kind of competitive walls and doing that together.
Erika Karp: (35:30)
That's dead on. And I should say, we haven't gotten an RFP for advisory service that doesn't have something about ESG in it for ages. And we're getting questions about our own firm. And when we vet asset managers, we consistently ask about ESG and diversity data. We have to understand what their thought process is, how do they kind of systematically integrate? And this is a big change and it's good change.
James Ledbetter: (36:03)
Not to make it too complicated but because we're talking about climate change, shouldn't there be international standards for company reporting?
Erika Karp: (36:10)
Yeah, there will be but we've still got a lot of work to do.
Joanna Reiss: (36:14)
Well, even on the employment side, there is a very US centric context under which we're talking about this. If you ask the same question in even in countries in Europe, what constitutes that diverse? Is very different. And so are we going to address that? How do we have enough specificity that we get information that leads to better outcomes? What is our actual goal here? I think our actual goal needs to be driving towards better outcomes, not be another 300 page SEC rule that leaves us with the information that's not terribly useful.
Erika Karp: (36:52)
This is about transparency ultimately.
Joanna Reiss: (36:53)
Absolutely.
James Ledbetter: (36:55)
With only about three minutes left, I'd like to look a little bit toward the future. Tell me what trends you see now that you think are going to accelerate over the next two to three years in this space? Meg, why don't you go first?
Megan Starr: (37:09)
I think one of my favorite trends in the ESG and impact world is dynamic materiality. What is relevant today is not going to be necessarily what's relevant two years from now. Think MeToo was a really interesting moment of prior to that, I'm not sure people were going through legal documents with a spine to the comb about what happens if there's an issue and how you do background checks. These issues emerge and have moments and then they become priced in and become part of how we do business. And so I think there is always something that is emerging and so this idea of how do you look around corners see what's coming next? I think we've been really focused on mental health across our portfolio. We have almost a million portfolio company employees and how do you start thinking about some of these other drivers of wellness and productivity?
Megan Starr: (37:56)
We're really focused on human rights and supply chains, which have been really coming to the surface recently and then really focused on climate change and not just in the energy sector but that is kind of spilling across all layers of the economy. And we call it the net zero virus where more than half of global AUM has promised to have net zero carbon emissions by 2050 or sooner. Half of global emissions are covered by regulatory regimes that are mandating net zero. It's not just about the individual companies, they're pushing it up their supply chain, down their supply chain. And so it doesn't really matter what industry you're in, you're going to start feeling the pricing pressure and getting in front of that will be a major driver of financial return.
James Ledbetter: (38:37)
Joanna.
Joanna Reiss: (38:38)
I think we are, as we see specifically the interaction between the institutional investor and asset managers, we definitely see a lot of people who are relatively new to the party, who are building out their practice, who are defining for themselves what it is that they're looking to accomplish and starting to dip their toe in it with a subset of our PE allocation, we're focused on impact what have you. I think as we hopefully prove out the viability that it's non-concessionary, and prove this out in a way to many investors who have a bit of skepticism, they will see a continued inflow of focus onto this, especially because of all the dynamics Meg just so ably described, all those are secular tailwinds to a company that's going to be owned in an impact fund. I think we're going to see strong performance from this entire vintage, knock on wood, and a continued focus on the part of allocators.
James Ledbetter: (39:38)
Erika, you get the last word in the last 30 seconds.
Erika Karp: (39:41)
I actually think the trends in sustainable and impact investing are the same as the broad trends in the capital markets. Impact measurement is one I can see with the themes on climate, on diversity, on food systems, on healthy oceans. Those are the same. What I would also add is that not many people these days yet are talking about quantum computing. And so even if we're talking five or 10 years from now, the applications of quantum computing and ultimately achieving the sustainable development goals are huge. And so I think we need to be talking about that as it relates to access to all those sustainable development goals.
James Ledbetter: (40:24)
That'll be our panel for next year. I would like the audience to join me in thanking this fabulous panel.
Megan Starr: (40:30)
Thank you.