Saving the Planet: ESG & Impact Investing with Faheen Allibhoy, Head, Development Finance Institution, J.P. Morgan. Les Brun, Co-Founder, Chairman & Chief Executive Officer, Ariel Alternatives. Karen Karniol-Tambour, Co-Chief Investment Officer for Sustainability, Bridgewater. Gareth Shepherd, Co-Head, Equity Machine Intelligence, Voya. Tina Byles Williams, Chief Executive Officer, Chief Investment Officer & Founder, Xponance.
Moderated by Gillian Tett, Chair of the Editorial Board & Editor-at-Large, Financial Times.
SPEAKERS
Faheen Allibhoy
Managing Director & Head
JP Morgan Development Finance Institution
Leslie A. Brun
Co-Founder, Chairman & Chief Executive Officer
Ariel Alternatives
Karen Karniol-Tambour
Co-Chief Investment Officer for Sustainability
Bridgewater
Gareth Shepherd
Portfolio Manager & Co-Head of Equity Machine Intelligence
Voya Investment Management
Tina Byles Williams
Chief Executive Officer, Chief Investment Officer & Founder
Xponance
MODERATOR
Gillian Tett
Editor-at-Large
Financial Times
TIMESTAMPS
EPISODE TRANSCRIPT
Gillian Tett: (00:07)
Well, good morning, everybody. My name's Gillian Tett, I'm with the Financial Times, and I'm going to be chairing what some of you might think is the do-gooding panel, the panel on ESG, environmental, social, and governance issues and impact investing. And I have to be honest, when I first heard the phrase ESG as a journalist a few years ago, I joked to colleagues that it should stand for eye-roll, sneer, and groan, in the sense that to a journalist used to covering the financial markets, having covered Wall Street for years, and the great financial crisis, a lot of this seemed to be a lot about corporate PR spin rather than hardcore investing and didn't seem to be particularly core to the financial sector.
Gillian Tett: (00:54)
Well, guess what? I was dead wrong, because in the last few years, the ESG world has exploded in size dramatically and it's become very clear that ESG is actually about a fundamental zeitgeist shift that no company or investor can afford to ignore. It's about moving from tunnel vision, where you just look at a narrow definition of the balance sheet towards lateral vision, where you recognize that things that used to be viewed as footnotes in the balance sheet or externalities to the economic models, like the environment, actually cannot be ignored. They're not external, they really matter. It's about recognizing that ESG is not so much about activism these days about trying to change the world, it's also about risk management, about recognizing the environmental risks, the social risks, the supply chain risks and other issues that can trip up investors and companies if they think that ESG is just, eye-roll, sneer, and groan, it really matters.
Gillian Tett: (02:02)
We have fantastic group of people to talk about this with us today. Starting on my far left, your right, we've got Tina Byles Williams, who's Chief Executive Officer from Xponance, large asset manager. Next to her is Gareth Shepherd, who's Co-Head of Equity Machine Intelligence at Voya. Next to him is Karen Karniol-Tambour, who is Co-Chief Investment Officer for Sustainability at Bridgewater. Then we have Les Brun, who's Co-Founder of Ariel Alternatives, and Faheen Allibhoy, who's Head of the Development Finance Initiative at J.P. Morgan. So four asset managers and one banker.
Gillian Tett: (02:40)
Thank you for coming here today. Welcome, it's great to have you. And what I want to do in this conversation is not talk so much about the why of ESG, because we can spend a lot of time looking backwards at that. I want to talk about the how and how it's changing and what people in this audience need to know about the shifts in this space, which are very rapid. Perhaps I can start with you Gareth and say, from your perspective, what are the key ways in which the ESG and impact investing world is changing right now that people here need to know about, even if they haven't traditionally cared much about trying to do good?
Gareth Shepherd: (03:20)
If I can start with... It's been a long time, but if I can start with George Bushism, I think ESG is misunderestimated in many different ways, but one of the main ways in recent times it's been labeled a fad, as you said, Gillian, but we're at a point now where even in the U.S, which is behind Europe, et cetera, there's about 12 trillion in assets in public markets that are allocated to ESG strategies. That's a big and growing part of the book, in fact, many of the flows are going in that direction. So clearly if it's a fad it's a pretty long term and pretty big fad.
Gareth Shepherd: (04:01)
We definitely think there are a lot of things happening that makes this legitimately an important source of future growth and value. And in part it's a convergence of incredible new sets of data, which can really make it hard for companies to hide. It's a convergence of new technologies, so machine learning, natural language processing, all of these technologies can be brought to bear on very specific problems. And it's also a consequence of some new thinking on the topic, and we're getting much more rigorous now. This is not a cottage industry and a starry-eyed view, this is rigorous investment managers applying the same tools that they do to financial analysis through ESG and there is some value to be gained if you dig deep enough.
Gillian Tett: (04:51)
Right. Well, I'm going to come back to the question of data and greenwashing later on, but, Karen, I'd like to ask you from Bridgewater's point of view, because Bridgewater has spent much of the last few decades not looking like it was out to try and save the planet but rather to make a lot of money for its founders. Why has Bridgewater got involved in this and what for you are the key, big challenges right now?
Karen Karniol-Tambour: (05:19)
Bridgewater, we've been around for 40 years and the one constant we've always had is engaging with our clients that are investors all around the world to basically say, "How do you accomplish your goals? How do you best engineer for that? Start with a deep understanding of whatever it is that's happening in the world and markets and then engineer for that." And three, three and a half years ago, I let a small team saying, "I think more and more of our clients are going to be interested in thinking about environmental and social goals when they're investing."
Karen Karniol-Tambour: (05:52)
And I think it seemed a little bit crazy that the type of investors that we have that are large global institutions would feel this way. Today that's taken almost as a given. We have almost no investors around the world that don't think about these issues with the simple understanding that investment is about taking money and leaving it for some time in the future for the next generation or generations. More, more people are asking themselves, "What's the point in thinking about investing for the next generations if the world I'm leaving behind is not the world I really want to leave behind?"
Karen Karniol-Tambour: (06:25)
Different investors have different ways of thinking about how they incorporate these goals, but in our minds, we want to be there to apply the same rigor, the same structure, the same amount of deep, systematic, and fundamental understanding to this new set of challenges. And it's really, in my view, pretty revolutionary in terms of how you look at markets to have to incorporate the impact on the world dimension into everything you look at. And so what you have to make is risk management. When risk management was new, it seemed like a fundamental change from just talking about how much an investment was going to make to thinking about risk and we've developed, I mean, just decades now of different ways to measure risk. You can have a tail risk, you can have this kind of measure, that kind of measure, and it seems obvious to all of us that as investment professionals, of course, we have to do very deep and rigorous risk analysis. That seems obvious.
Karen Karniol-Tambour: (07:22)
In my view, we're going towards a world where that same amount of rigor it'll seem obvious to investors that you need to do rigorous analysis of how your investments affect the real world. What is their interaction with the social, the environment, the governance of the world? That'll seem just as intuitive to us as a risk practice. And we decided we're very committed to developing that, to developing that same amount of rigor through that sort of study.
Gillian Tett: (07:46)
Right. I mean, it's interesting you say three and a half years ago, because in fact three, four years ago was when I first started paying attention to ESG. And we noticed that certainly amongst readers of the Financial Times was a huge increase in interest, a huge rise in the hit rate of stories linked to things like climate. And partly because of that we went out at the Financial Times and created this platform called Moral Money, which is a newsletter that covers ESG issues. And I'll be honest, we had people inside the FT saying, "Well, do we really need to do this? Is this really going to be core Ft stuff?"
Gillian Tett: (08:24)
It's become one of our most successful newsletters, one of our most highly read bits of our newsletter universe, which has come as a surprise to many people and really something did change about three or four years ago. I do want to get to the question in a moment about whether though we're seeing a bit of a bubble in this area. Before we do, though, Lee, can you tell me from the point of view of Ariel, how and when did you guys start focusing on this and how core is it to your investment operations now?
Les Brun: (08:58)
Thank you for the question, and good morning to everyone. ESG, three letters that have varying meanings to different constituencies. And so I'll start with the premise that no one really has focused on, a general consensus-driven definition to the term. And so everyone focuses on that which is most important or that which resonates most for them. And at least in the corporate world in which I tend to live, the focus has been on the E and G and less so on the S, and so from Ariel's perspective we're focused on the S. And that is just suggest, as Karen was suggesting, that folks who are investing have a view as to what it is that they would like that investment to yield both from a financial return perspective as well as from a social impact perspective or a broader impact perspective.
Les Brun: (09:52)
And there's now this convergence and a belief fundamentally that you can do good and do well at the same time, so you can actually... There is no discord, there is no disconnect between achieving an appropriate financial return and accomplishing some other element of your mission especially as we look at a world that is to be inherited by a group of people who are mission-driven in many respects and for whom these questions are of equal and in some instances, greater importance than what is that financial return that's driving the activity that you're undertaking.
Les Brun: (10:25)
From our point of view and from our limited little world we're trying to do those things which have a significant S impact in trying to begin to address inequality that exists between the majority community and the black and brown communities, both in terms of wealth creation and life in the more broad terms.
Gillian Tett: (10:45)
So you're treating it more like an impact investment opportunity, are you, or more of a targeted hunt for new opportunities for investment?
Les Brun: (10:53)
Yeah. There's a tendency to fall into... For me to check a box in terms of a definition. And I think of it as being a true capitalist investing for a solid financial return first and foremost, but being able to do that in a way which drives, as a corollary, in a social impact, if you will. Yes, we're driven by a social impact to some degree but that can only come if you generate the appropriate financial return, otherwise it's broadly philanthropy.
Gillian Tett: (11:26)
Right. Well, Tina, you are also quite focused on the S factor, aren't you? Because, and it's worth stressing that because certainly when we started Moral Money at the Financial Times in the summer of 201, for the first six months or so almost everything was about the E the environmental aspect, courtesy of Greta Thunberg, who has this wonderful knack for irritating middle-aged CEOs and putting herself on the front page. Everything was about E and yet, of course COVID put S into the radar to a greater degree and then of course the Black Lives Matter movement again put S into the radar more. But I mean, how do you navigate the S and are you looking at all aspects for just the S factor?
Tina Byles Williams: (12:10)
No, we look at all aspects but the last 20 months have been a wake up call that have refocused the importance of addressing the S. And so, Xponance is 25 years old and the notion of diversity being an alpha driver was core to our founding mission. And so we incorporate ESG factors across our fixed income and equity strategies. We have multi-manager strategies of roughly 200 products that we've seeded. 60% were offered by female or diverse founders. And then in our private equity business which is focused on providing strategic acceleration and seed capital to diverse and female-owned GPs in the mid-market.
Tina Byles Williams: (13:25)
Again, it's this notion that that focus leads to differentiated alpha Y because in the mid-market you tend to find founder-led firms where performance is competitive dynamics. And then particularly diverse private equity GPs we've found have access to differentiated network and the ability to proprietarily access deals in under-researched, under-invested segments of the economy. I would just sum it up to say, we live and are entirely about in our entire history about the notion of driving alpha through diversity and ESG factors.
Gillian Tett: (14:20)
Right. Well, I'm going to come back and ask both of you in a second about how this does or does not impact returns and create opportunities because we have an audience that's all about returns and opportunities. But before I do, I'd like to ask you, Faheen, you are looking at development finance institutions from the point of view of J.P. Morgan, which used to be seen as a rather slow-moving sedate part of the financial landscape, lots of multilateral groups doing projects. And yet now it's really in the crosshairs of a lot of investors because if we are going to start moving the dial on things like green climate initiatives, there's going to be have to be a lot of blended finance, a lot of investment capital flowing into innovative types of financing structures. Can you give us a sense of what you are up to from J.P. Morgan's point of view?
Faheen Allibhoy: (15:10)
Thank you, Gillian. No, I think absolutely. I think that the other realization to talk about about trends is that this is not just a U.S., developed world or financial sector issue, this is a global issue. And we've seen this, I think COVID has also highlighted we have a global health pandemic. We've had supplied chain issues that affect global companies. And so as we work together, there are many of these different institutions that can come and play a role. And I think for example development finance, what has brought to the market are two things. One is an impact framework. I think these institutions have been way ahead. I think, well, before your three-year mark, I think 15, 20 years ago, all the MDBs and DFIs had a framework to evaluate E and S risk, environmental and social risk, and to look at impact metrics.
Faheen Allibhoy: (16:06)
And so I think that's something that we have taken from and the MDBs, is to have a framework to say, "When I look at a transaction, what are the development caps? What are the investment contributions and how can I bring increased disclosure to my clients?" So as a sell side player in the market, our job is to work with our clients to help them raise money, but to tell the whole story to their clients. And today investor clients want to know about ESG risk, they want to know about potential impacts of that transaction. And so I think the best practice of the MDBs and the DFIs can be brought to bear.
Faheen Allibhoy: (16:42)
The second is the interlinking of all of these things. I think it's very hard to, and I will be harder just to put E, S, and G as separate and say I focus on one and not the other, if you build infrastructure it's going to have a link to productivity or technology, not just to climate change. If you build a solar farm, for example, it's going to impact bringing goods to market or agric or the MDBs to bear. And then if we want to be as ambitious as the world to be, and that's why we have some of these global agenda, be it the Paris alignments or the Sustainable Development Goals, we will need potentially funding by way of governments. There's going to be regulation and many other factors that take us to the next level.
Gillian Tett: (17:28)
Yeah, absolutely. And the scale of potential capital flows in the coming years, if people are even half serious about trying to get action on climate change are going to be absolutely enormous. I mean, people like Larry Fink.-
Faheen Allibhoy: (17:39)
It's a fact.
Gillian Tett: (17:39)
... have said it's the biggest shift in the financial sector he's seen in his career beating even the securitization revolution and the mortgage revolution. For Larry Fink to say that given that the securitization and mortgage revolution is what made him originally so successful, for him to say that he thinks climate is going to be even bigger is quite remarkable. But one of the things that my more cynical journalist colleagues often say is, "But what about greenwashing? What about..." This new phrase woke-washing? When you get a bunch of middle aged asset managers thoughts about developments are happening that could give people comfort on the greenwashing issue. I mean, how bad is greenwashing? I mean, Karen, you said you're spending time looking at data sources at Bridgewater. How do you deal with the greenwashing charges or the woke-washing charges?
Karen Karniol-Tambour: (18:29)
Hey, now, I think this is a very normal part of the development of an ecosystem, which is, you get an interest. Investors say, "I'm interested in this topic. I'd like to know about this topic." And then a whole industry has to line up behind that to try to meet those needs and be able to fulfill those needs. And what's happened in this area is there's this for barrage of data. I mean, you can literally be buried under a mountain of data that providers will tell you is ESG-related. And right now it takes a lot of work to figure out what here's relevant, what here's not relevant. Why am I even looking at this series? Does just have anything to do with impact on the world or evaluation of a company. And a lot of hard is required to basically say, "What are your goals? What are you trying to do?"
Karen Karniol-Tambour: (19:14)
I mean, for us, I thought about it like any other investment challenge that we've had for many years, which is, it's also not easy to say what do you think the U.S. economy or the Chinese economy will do tomorrow? There's lots of data out there and it's messy and part of the reason that you have investment professionals is to help sort that out and have a process that's fundamental, that's systematic, that helps figure that out. And we really emphasize systemization and diversification with the idea that you have to be able to move past someone's personal opinion on ESG issues, something that feels good and measure it as objectively as possible. And diversification in terms of, if I triangulate a bunch of different reads, I feel a lot better, then I'm on the right track than if I just have one data point pointing in that direction.
Karen Karniol-Tambour: (19:58)
And so when you look at the industry now, there are a lot of products called ESG that actually do very little, they look almost identical to the index they're matching. In fact, many of them say, "Our goal is to deviate as little as possible from the index and still be ESG." That's obviously going to change. Investors are going to raise the bar and say, "That's not what we want. It was a way to get started." And at the same time, the data providers are going to catch on and there'll be standards and governments hopefully will play their role in starting to mandate certain amount of disclosures and accounting standards and so on just like the process of having accounting standards in the United States has made a huge global difference in how hard it is to assess whether or not everything is going as you'd expect in a company. That's probably going to develop and make it in 10 years a lot easier to both sort out the data, understand what are the relevant questions to answer, and be able to do this in a rigorous way.
Gillian Tett: (20:50)
Right. Tina, I can see you smiling when Karen said about trying to produce things that seem right close to the index, because basically it's recycling a lot of regular data.
Tina Byles Williams: (21:00)
Well, first of all, I love the term, woke-washing. I told you I'll steal it. I'll steal, but... Look, this is an industry that as we just said has had explosive growth. And with any sector as it gets to maturation, there's a weeding out and standards are established, then there's a weeding out of the wheat versus its shape, so to speak. And so we are in that phase. I saw a study for example where a significant majority, a significant number of firms that are PRI signatories clearly said, "Well, we just did it to gather some assets." So there is going to be a lot of that going on but I do think that as standards still develop, as the SEC completes its work that we're all waiting on by the end of the year, there will be some greater discernment.
Tina Byles Williams: (22:11)
And certainly in the woke-washing and category, because of the events of last summer, you see a lot of folks purport to address that. And I think quite frankly, the racial disparity gap and gender disparity gap is so wide. We welcome all new converts. But I do think, look, we are in the investment industry where track record matters. And so many years ago I invested in a pension fund, and what I would look for is a track record. Did the firm or the principles of the firm evidence any sort of track record in driving change and driving value from those factors in their prior lives? And if they didn't, we welcome all newcomers, but I think what I'm hearing from investors it's a clear ability and a desire to identify those who have been on the threshing floor, if you will, in driving change.
Gillian Tett: (23:46)
Lee, I can see you wanted to come in here.
Les Brun: (23:52)
I think it's really interesting that we're always looking as investors, we're always looking for some arbitrage. We're just looking for a place where we have some asymmetrical informational advantage or something, or rather, that allows us to identify a spot where we can intermediate our capital and drive a better outcome than would otherwise be the case. And it happens to be that ESG is the new flavor of the day. It's been a flavor for quite a while and it becomes more institutionalized as each day goes by, and it will have its naysayers. It will have those who look at it and suggest that it's temporary or it's driven by something other than financial return. But at the end of the day we're all living off what we make and so if we don't make it sooner or later we won't have the raw material required to try to make it right.
Les Brun: (24:41)
Unless we can drive return as the first order of the day in any of these activities and have the other benefits be corollary, then we're just wasting our breath in many respects. And I do believe that first movers, and even though the ESG topic, investing topic has been around for a few years now, we're still first movers because it hasn't been fully embraced. And yet that embracing will be drew driven by the folks who control the capital as it's currently being driven. The index funds certainly demand some ESG philosophy if not policy of all of the investments that they have. Others will continue to do likewise and so at the end of the day, this is an opportunity that we either grab the bull by the horns on or go find someplace else to play in somebody else's sandbox.
Gillian Tett: (25:30)
Yeah, well, certainly a number of people, financial veterans draw parallels between ESG and say what happened in the early years of leverage finance in the sense that you get the proliferation of labels, a lot of apposity, a lot of category confusion. And some people, as you say, arbitraging information gaps are doing very well, and then gradually hopefully the industry matures and grows up. But, Gareth, you were saying that you think machine learning and other innovations can help tackle the data issues? I mean, tell us what you mean by that.
Gareth Shepherd: (25:59)
Yeah. I think it will help because it's a chess game, some of this stuff. Let's take greenwashing, specifically. Right now, corporate treasuries and CFOs have figured out that if you can window-dress some of your ESG characteristics at your big public-listed corporation, that you'll get increased investor flows. And just as a quicker aside, because I just saw this this morning from a McKinsey study in 2020, they find that companies that have a high ESG rating have a 10% lower cost of capital, so CFOs are all over that. That is a real number to them because it influences in a competitive sense what it is they can invest in. If you can get 10% lower cost of capital you're going to do it.
Gareth Shepherd: (26:53)
Back to greenwashing, it's very tempting just as management teams might want to manipulate their earnings and you need to forensically look through that as great investment managers as will. Similarly, you need to look across the whole spectrum of ESG and figure out if corporate teams are playing with things. And very, very interestingly, there is some data to show that companies that have a plethora of ESG policies, for instance, actually underperform because they're focused too much on the window dressing than they are on the reality.
Gareth Shepherd: (27:29)
Back to your question, machines are great at this. It's a chess game and machines kill at chess. And so we employ machine learning in a big way to tease through some of these problems. And it will get us past this greenwashing phase, which by the way is a sign of success. Why do people greenwash? Because it brings investor flows and because ultimately it brings value. So it's in a sense it's a necessary evil along the path to enlightenment, and in machine learning to be very specific, not only can it help in teasing through the mundaneness of filings and corporate footnotes, et cetera, but then it can go to the next step.
Gareth Shepherd: (28:11)
Why don't we know precisely what the contribution is of ESG data and ESG factors? Why don't we know precisely the contribution of that to your investment performance, both returns and volatility, that can be explicit. Explainable AI tools can make... Another example, why do we say, well, supply chains are important and leave it at that. It's because, why not use technology to weave through that web, to crawl through that data?
Gareth Shepherd: (28:44)
Another final point because there's so many advantages, but another real problem right now for any folks in the room in the investment management space is, ESG data, let's say you have 3000 data points on a company, to be real practical. You've got Disney. That was a company that Dan Loeb spoke about this morning. There are 3000 ESG data points about that company, what are you going to do with that? How do you figure out what's the signal and what's the noise?
Gareth Shepherd: (29:15)
And machine learning again is very good at conditioning that, what industry, what material, what geography are we playing in, and how do we impute missing values, which is really boring and really technical, but there are ways that machines can help figure out what's the best estimate of a missing value and fill in some of the gaps. And then you've got some information to play with. This is all technical real stuff. This is not ESG is great and you can be good and do well, this is actually just drilling for value in the data and it's there for those that are working hard to get it. Sorry for the long answer but that was a bit-
Gillian Tett: (29:55)
No, it's fascinating, because, I mean, as Lee says, us investing is all about information arbitrage. And the one thing that's clear about ESG right now is it is an incredibly murky, murky complex world with numerous data points where so much rests on the ratings and the ratings are if not untested often incomplete. It reminds me a lot in many ways of what was happening in the mortgage and securitization world pre-2008. We're so much resting on the ratings and because of all the apposity and yet out of apposity comes amazing opportunity as well. But I'm curious, Faheen. I mean, tell me what you make of it from J.P. Mortgage's perspective.
Faheen Allibhoy: (30:35)
Yeah. Now, I think I fully agree with the panel that we're on this journey and I think we're coming from the perspective of risk mitigation, but we're moving towards much more intentional, what is the impact? What is the outcome? We're moving from corporate level data to say, "I'm this corporate. I have a sustainability framework. This is my ESG report," at the end of the year, to getting down to the instrument level, to actually following the money, looking at use of proceeds. If someone raises a bond or raises a financing, can there be intentionality to say, "This is going to fund this expansion of a certain project," a project and infrastructure piece and then track it.
Faheen Allibhoy: (31:22)
I think this naysayer world wants more disclosure, wants more data, but then is going to move away from getting to be at the company level but to be at the instrument level, to be at the project level, and then to demand for outputs and outcomes, not just where is the money going. For example, it won't be good enough to say I spent half a billion dollars on the solar farm, we're going to say, how many megawats of energy did that create? How many households did that connect? Was it provided to rule households that didn't have access to electricity before, or how did that change the energy mix in a certain country? I think that's the level of data that the industry is going to demand to be satisfied that some of these things that are being done really do have the impact that people are paying to have.
Faheen Allibhoy: (32:19)
Right. So getting much more granular, much more microlevel, much more demanding, frankly, much high levels of transparency. But at the same time there's a collision of trying to be standardized because you can't get too bespoke. I think these two worlds are colliding needing that very granular data, which I think you can have, and we have so much technology and AI to help us with but at the same time to say, "What are standards and metrics that we can all understand and apply?" Because we can't be all doing our own thing at the same time.
Gillian Tett: (32:52)
I mean, do you on the panel all think that adopting this lens and these tools produces outperformance? I mean, is it possible, do you think, to justify ESG today on the basis that it's going to give you a big investment edge? Tina, you are nodding enthusiastically.
Tina Byles Williams: (33:10)
Yes. I mean, that's actually when we sell our wares, so to speak, or more better said, go to prospective clients that's what we say. And, again, we've been doing it for 25 years so we actually have a track record to back it. I will also note that if you... It tends to take you to larger and growthier stock. And so I think what needs to happen, and everyone has said it, is to have better, more granular data to dissect that. But I truly believe if the world has to move to a more sustainable place, then those factors is that measure that movement will outperform.
Gillian Tett: (34:06)
Karen, do you see that from-
Karen Karniol-Tambour: (34:08)
And then when you get the specifics, it feels totally intuitive and obvious to people that you'd have to look at these issues. And so if I tell an investor that I'm thinking about how the Fed is going to make decisions they're going to say, "Of course you have to do that. Of course that's what you're here for." But guess what? The Fed is telling you, "We care about the quality of employment, how it affects different communities. We're going to think about these issues in deciding how to set monetary policy." If I tell an investor I'm looking at things like whether or not the government is going to spend money, they would say, "Of course, you're supposed to be doing that." But then I would say, "Well, look at Biden's plan. Many of them are about combating climate change, affecting inequality." That just is actually what's happening in the world so if you want to study the world, that's what you're going to see.
Karen Karniol-Tambour: (34:50)
And I'll give you the more obvious one, which is, there's no real serious investor looking at anything in any commodity sector not thinking what's the supply and demand for this commodity going to be like in 10 years, they have to consider questions like, will oil be phased out? How am I going to know? Will my commodity be a piece of making electric vehicles? That's going to radically affect the demand. And so to me when you're actually in it doing investment analysis you want to be thinking about the pertinent issues that are obvious, and when you look at how the world's changed, the last decade, something extreme has happened and that social environmental concerns have just clearly become more pertinent to how the world is being run and managed.
Gillian Tett: (35:32)
Right? Gareth and Lee, do you have views on outperformance, at all?
Les Brun: (35:38)
I think there is outperformance and I think it will continue to manifest itself. And I take the point that Faheen and Karen have made, and Gareth really started it, around the data. Because as you can continue to drill down through the data and get more granular and find those elements of arbitrage that really move performance, you'll continue to see that outperformance. And what's interesting and fascinating to me is the connectivity at that point with the data between the E, the S, and the G, they all converge when you drill down through the data.
Les Brun: (36:10)
For example, and this is awfully simplistic, but if you think about the environmental aspect of having your workers closer to your productive facilities, does that improve performance if it diminishes your cost of getting your goods to market? Does it improve the social benefit of having your workers have a better life because they're closer to where they're working? You can go down and drill through the data and find those real elements of arbitrage that are unexploited, that can really affect and drive that outperformance.
Gillian Tett: (36:44)
Interesting. Have you seen that as well, Gareth?
Gareth Shepherd: (36:48)
Yes. But I hesitate because, of course if it was as easy as buying the ratings, the ESG scores, if that was the story then markets are going to look through that and arbitrage that away. We need to be in order to bring everyone into the tent, why don't we be realistic and talk about the fact that if there was easy ways to outperform the market, very quickly public markets will figure that out as they should. If we're talking about price discovery on companies who their ESG qualities are underappreciated, that's where it gets interesting. Finding not just a great company that is recycling 1% more but maybe an industrial mid-American company where they're improving their environmental footprint, their social relations are getting better, their employees are turning over less, they're stronger sentiment, et cetera, all of these really important things, that company which is trending in ESG has a much better prospect not only of outperforming it's sector peers, but actually of having a bigger impact on the environment and the society because they're coming from a place in the middle, not a place right at the edge.
Gareth Shepherd: (38:08)
We're much more interested in finding those stories. And that means looking way beyond the headline ratings, and that means treating ESG as an alternate data source and bringing some science to it. And again, the question you asked, Gillian, is exactly the right question and investment managers should be able to say, "But for ESG data, here are our returns." Meaning, if we run our entire investment process and take out our ESG factors and data, what are the residual returns? How much better are they with that data? And that should be part of the conversation. It shouldn't be, we just think it's great.
Gillian Tett: (38:50)
I mean, it also means looking at the rise of activists because certainly when I first started in financial journalism, activist was something associated with barbarians at the gate, a lot of profit-hungry, greed-is-good kind of activists. Now, activists seem to be more driven by ESG goals often. I mean, we've all seen what happened with ESG number one. Are you expecting a lot more activism to occur on the ESG side in the coming year? And do you welcome that? Do you think it's helpful or not?
Gareth Shepherd: (39:23)
There's activism on all levels, though. This is why this is the future of investing. Because you're a management team at a company, you've got your employees talking about this as a core value of this, especially millennials. You have your investors asking you what it is you're doing in this space. The regulator is treating you according to how you are perceived in the market, and then your customers are demanding it from you. That is enough constraints around corporations to ensure that they're going in this direction so the activism is a 360.
Karen Karniol-Tambour: (40:04)
I think the activism is probably the most intelligent backlash I'd heard against ESG. Is whether nerdy investors will just figure it out you don't have anything important to do anymore. And it misses that these things are very much connected. It's always an easy excuse for governments to say, "Well, I can't do anything on this issue. My companies are all against it. I'm being lobbied against it. I couldn't. Possibly it's going to destroy my economy." And so companies being pushed by activists to say, "These are the preparations you need to make. This is the future we're going towards." That has this positive feedback loop up with governments and their role is extremely important as a part of that. So I agree activism at all levels, the company part and the investor's role in that being extremely important and actually getting change.
Gillian Tett: (40:47)
Right. I can see that both Lee and Faheen were nodding pertinently.
Faheen Allibhoy: (40:49)
I mean, I think some of the activism we have seen especially around climate in the past 10 years have almost become institutionalized. The fact that we've had a 20, 30 climate goal, the fact that people are making net zero commitments, that's already translated into companies wanting to say, "We're in lockstep with the trends of the time and we're part of this institutional movement and framework towards improving environmentally. And then I would really second the fact that I think activism doesn't come from people with placards on the street, it's really coming from employees, stakeholders, communities around.
Faheen Allibhoy: (41:29)
I mean, if you think of the typical company town in the U.S. or somewhere else, those companies have provided healthcare, social services, there's a clinic. There's always been that sense that we have to take care of more than just the manufacturing process because the people who are part of it and live around it are also important. So I think it's coming from different ways and is becoming institutionalized and then will be part of our regulatory frameworks.
Gillian Tett: (41:54)
Right? Well, I often joke, I think we're seeing the rise of the activist accountants because I used to think it would be tie-dye wearing climate change protestors who chain themselves, the bulldozers who change the world, now, I think it's going to be the accountants when they start actually doing green accounting. But, Lee.
Les Brun: (42:09)
But I think to your point about the fact that activists are interested is the ultimate affirmation that there is alpha to be had in investing in ESG. Because in theory if you think about it, the notion of the activist, and everyone would accept this as a general supposition, is that they see an opportunity that's being missed. They see an opportunity to generate investment return that's being otherwise ignored by whoever else is looking at this. And so their presence alone effectively legitimizes ESG investing in the ability of ESG investment to generate alpha.
Gillian Tett: (42:47)
Right. Who knew that accounting and investment management could be so exciting? But, Tina, last word, you got 10 seconds, 20 seconds.
Tina Byles Williams: (42:55)
Oh. Well, my last word is I agree with everything that has been said. I mean, I do think though that, and this is perhaps unpopular in this rate milieu, but that there is a role for government interaction. I mean, if you look at the studies that look at the delta, if you will, between intentions and execution, where is that delta small? Things like avoiding corruption through fact and workplace and occupational safety where there's been lots of time and government regulation. Where is the delta big, where there's been light or no regulation. You have lots of business groups that have done a great job in providing standards and best practices but there's no enforcement.
Gillian Tett: (44:04)
Right. Well, I'd say it's a very interesting moment in history. I never thought I'd see the time when what people like Greenpeace are doing would collide with a world of arbitrage, delta, accounting and things like that. But it is indeed, as they say, it's genuine, it's serious. It's a very significant shift in the financial landscape. For all of you who are engaged in ESG, not eye-roll, sneer, and groan, but environmental, social and governance, I wish you the very best of luck in charting this new course over the next year. I'm sure it's going to be a very busy one. And thank you very much indeed for your time. Thank you.
