Contributed by: Show Editorial Team
Billy Nauman, Afsaneh Mashayekhi Beschloss, Martin Whittaker, Jonathan Bailey, and Megan Starr at Greenwich Economic Forum (Greenwich, CT)
- ESG Investing is estimated at $20 Trillion in AUM and could reach over $50 trillion in the next 2 decades
- $31 trillion invested into ESG globally per year
- Beschcloss: the US is 10 years behind on the ESG conversation
INTERVIEW TRANSCRIPTS: Billy Nauman, Reporter/Producer of ‘Moral Money’ at Financial Times, Afsaneh Mashayekhi Beschloss, Founder/CEO of RockCreek, Martin Whittaker, CEO of Just Capital, Jonathan Bailey, Managing Director/Head of ESG at Neuberger Berman, and Megan Starr, Principal/Head of Impact at The Carlyle Group
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 00:00
I’m Billy Nauman and I work for the Financial Times and I work with our head of our editorial board Gillian Tett on a new product called “Moral Money.” And I think what we’ve seen in the last couple months since we launched this product is kind of a pivot where we are at a pivotal point in the discussions around capitalism. The FT you know, kind of the bastion of capitalist Western liberalism. You know, when you walk into our New York office now as you come in the door, there is a 10-foot-tall sign, It’s a vinyl wrap on our conference room that says “capitalism, time for a reset.” And we’re not the guardian. I mean this is so you hear it with the business Roundtable, with the statement on stakeholder privacy and these conversations just all throughout this morning, these topics keep coming up and keep coming up and it’s really been something that’s shifting.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 00:53
And I think we’re at a point now where people are really rethinking kind of how business is done and what it means to do business well. And for this panel we’re going to talk about ESG investing, which is a very, very broad topic. There are many different ways we could go on this, but ESG investing is kind of a big part of this moment. It’s a big part of what we’re seeing in terms of shifting views on the way the world of business works. And our panelists here all come from different sides of the of the industry and they’ll have different viewpoints that’ll have a really good discussion here. But you know, I wanted to kind of start with, when you look at the ESG space, it’s really kind of hard to see what’s actually going on the ground.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 01:40
There’s so many numbers out there. You know, the big number you always see of, of money invested in ESG around the world is 31 trillion, which I think that’s ambitious. You see others that have questioned that. There was a JP Morgan research piece that says it’s probably closer to 3 trillion. Either way. That’s, that’s a lot of money and it’s a lot more money than used to be in ESG. And I think, you know, what we’re seeing with conversations with institutional investors and retail investors is this topic is not going away. So I’d like to ask the panelists and, and whoever would like to start on this you know, kind of what has changed, what makes ESG something that is this important and how does it fit into, in, you know, your, your role as an investor or as an asset manager. And yeah, how much of it is, how much of it is real and how much of it s marketing? Go ahead.
Afsaneh Mashayekhi Beschloss – Founder/CEO, RockCreek: 02:31
ESG as a term has been around for more than 25, 30 years. I remember my old world bank days when the term was used and mainly in emerging markets, it’s referred to G for governance. And of course it that more of, to activism investing across the globe. And then and then as emergent markets were growing very fast, it became evident that having not just looking at the global climate for all of us, but looking at energy consumption locally was a really, really important thing. So that the E became very important. And obviously if you’re starting with very, very poor societies, the S is incredibly important. So I think a lot of these terms were created for different situations but now are getting used globally because poverty is still there. And we have people like Steve Case who look at venture and how can you bring venture and entrepreneurial spirit to the whole country, not just to Silicon Valley or New York. You have you have also climate change and we have lots to talk about that today. Of course, given everything else being at this pivotal time. So the size of the market has obviously expanded and I think there’s nobody really who disagrees that there are great, great investment opportunities in ESG. Whether you are a believer in climate change or not.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 03:51
So do you think that there’s still kind of a stigma around the term ESG? I mean, one of the things we experienced, you know, trying to get the ‘Moral Money’ project off the ground, it took a few years to get buy in at a high level that this wasn’t just hippie, do good or nonsense basically. And I, I feel like there probably is still a perception around ESG that it hurts returns or it’s just window dressing or it’s just, you know, something to give yourself a halo effect. Martin, did you have some thoughts on that?
Martin Whittaker – CEO, Just Capital: 04:18
Yeah, you’re absolutely right. ESG sustainability, mission impact days are like dog whistles. You, what we’re really talking about is just smarter ways to invest. You know, I think to reflect on your first question, if you trace the arc of investing. In this general area, what you see is just a broadening out of things that drive risk and return. And I think where we are today as a society, we are seeing a whole new set of criteria emerge that are driving risk and return in new ways, some of which are creating a huge amount of opportunity, some of which are creating huge amounts of risk. And I think as a society, when you think of ESG, to me, I just think of these are core drivers of how we and. companies and investors in companies think about the world and what’s really driving value and what’s really creating risk.
Jonathan Bailey – Managing Director/Head of ESG, Neuberger Berman: 05:27
If I might add to that, one of the things that if you talk to the average person on the street, in fact they representative survey of five and a half thousand British people was done by the UK government on this topic to ask them what would they like their money to be put to work on? And when asked, most people say they would love to have ESG incorporated into their investment strategy, but the number one concern is will this hit the performance of the strategies? Right? That’s the legitimate concern that people have. And the good news is that we’ve actually looked at the data over the last 20 years, look at active large cap us equity strategies, which is the biggest pool available. It’s said that they incorporated ESG in some form. We didn’t evaluate how well or badly they did. We just took that on phase.
Jonathan Bailey – Managing Director/Head of ESG, Neuberger Berman: 06:08
Those performed a NetApp B better than the S and P 500 and better than the passive S and P a ESG index, the Dow Jones sustainability index. So over a 20 year period, ESG integrated strategies of adding value. And that’s where some of the reasons Martin is talking about, right? These are social preferences of consumers. These are things that are about where do you want to go to work, what are the places of employment you want to be at, what are the regulatory trends that companies are either in line with or against? And that’s what will create value in the past and into the future. So our view is that this is an ability for individuals to align their portfolio with what they want and also to be able to have an attractive return profile.
Martin Whittaker – CEO, Just Capital: 06:45
Good. Can I jump in on that? I’m sorry to barge in, but over the last five years, Just Capital, you’ll hear from my boss this morning, Paul Jones, I’m sure he talked about this. We’ve surveyed almost a hundred thousand Americans all around the country focus groups, qualitative polling, quantitative polling to find out what do you, what do you care about when it comes to corporate behavior? And there are five major themes. How a company treats its workers, how a company treats its customers, how a company is investing in the communities where it operates and throughout its supply chains, impact on the environment. And lastly, how does a company serve its shareholders? Is it well-governed? Now these things are not a zero sum game. You don’t, you don’t, you know, invest in workers at the expense of meeting the needs of your customers. This is about creating a bigger pie. And I think that voice of the public is just a really, really important voice when you’re trying to restore faith in markets and capitalism. That’s why I bring it up. You mentioned the survey. I just think this isn’t, this is not something that’s happening in an ivory tower. This is happening around the kitchen tables of America.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 07:57
I think you bring up an excellent point and I think that one of the problems with ESG investing at large is that ESG means something different to everyone. You know, does that mean fossil fuel investment, does that mean investing in fossil fuel companies that are also putting money into renewables? Does that mean investing in nuclear power and without, you know, set definitions of this is what this means. It is really open to interpretation. I mean, we’ve done a couple of stories looking at ESG branded ETFs and looking what’s actually in those. And they may meet the criteria of an ESG fund according to what was in the prospectus. But you’ve talked to people on the street and it may not mega, I’d like to, to get your perspective on, on the private markets. And we’ve seen a lot of, you know, big private equity companies coming into the impact space or ESG space. I’d like to get some perspective from you on what that looks like. What sort of factors are you looking at and how are you deploying capital in private markets? And, and how is ESG evaluation helping you do that or not?
Megan Starr – Principal/Head of Impact, Carlyle Group: 08:58
Well, so I was raised by progressive environmental radicals and now I work in private equity. So existential question for me. You know, our, we’re in the business of buying good companies and making them great companies and great companies generate sustainable economic value. And I think we hear that we hear the word sustainable, particularly in places like the U S and you think people wearing Birkenstocks, dancing around a campfire when sustainable literally means the ability to persist over time. And so I think one big challenge in this space is that we’ve conflated these ideas of morals based investing with what makes sustainable business models. If you have a very clear preference you want to see in your portfolio, you don’t want to own fossil fuels, you want to orient towards solving poverty. Great. There are really interesting ways you can do that that don’t sacrifice return.
Megan Starr – Principal/Head of Impact, Carlyle Group: 09:43
I think the question that’s interesting for most investors and most fiduciaries is this idea of where and when does ESG data help us make better investing decisions. And I think that the marketing issue has been a real damaging one for this space. And there’s a great piece of research that came out that looked at companies that had more ESG policies and disclosure. So these binary indicators of yes, now we have a policy. Yes, no, we disclose it. Companies that had more of those policies financially underperformed peers by about 380 basis points on an annualized basis. The only alpha signals you could find where, where you found ESG data that you could measure. So actual quantitative performance data and the strongest alpha correlate was diversity as measured by number of women in your workforce. Companies that have more women financially outperform peers were about 330 basis points on an annualized basis. That’s why 50% of our money is run by women.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 10:37
In, in terms of finding the data. I know that can be very challenging. Measuring the, the, the gender diversity of, of the workforce is one thing. But when it comes to other sorts of, you know, environmental measures and stuff like that, a lot of times, I mean there, you know, there are efforts out there like Saxby and GRI and CDP and all of these different things, but there is no necessarily industry standard to make apples to apples comparisons. Jonathan and I have talked about this before, but I’d like to get your perspective on kind of finding those alpha signals and how do you find that meaningful data that’s not just, you know, people have checked a checklist and said, yes, we’ve got a policy.
Jonathan Bailey – Managing Director/Head of ESG, Neuberger Berman: 11:14
Well, I think, I think it’s right. I mean, having a lot of policies out there is not enough. In fact, if you look at just the proportion of CEOs who aren’t earnings calls talk about ESG. The highest sectors in terms of the proportion that talk about it is utilities, oil and gas and materials, right? But primarily metals and mining as well. So it’s sectors that you might not think of as being historically is very sustainable, but they’re under pressure. And so CEOs are talking about it doesn’t mean that they’re necessarily getting it right. So you have to dig a bit deeper. And I think there’s a couple of ways that we think it can be done effectively. The first is frankly just engaging, right? Having dialogue with companies, being able to assess things on a qualitative basis. Take pharmaceuticals. There’s no data you can buy out there that will tell you who has a progressive drug pricing policy that’s going to keep them out of Congress, congressional hearings next year.
Jonathan Bailey – Managing Director/Head of ESG, Neuberger Berman: 12:00
But if you go talk to different CEOs and the heads of the pharma companies, you can get a sense of how they’re approaching that issue and then come to a qualitative judgment. So that’s one way in which we think that you can assess these things. The second way, and this is obviously where buzzwords get thrown around, is big data and advanced analytics. You got to be a little bit careful, right? Just pulling Glassdoor ratings off a website isn’t going to solve the entirety of this. There’s lots of flaws with it, but there are ways in which you can look at how a company’s performing in the perception of workers and society as well as other signals that are out there. So, for example, on climate risks, and one of the things that we increasingly do is to look at the physical risk associated with the locations of stores.
Jonathan Bailey – Managing Director/Head of ESG, Neuberger Berman: 12:44
But not just where are they going to get hit by a hurricane or by increased days of heat, but actually what happens to their revenue. Right? It turns out that if you are Home Depot after a hurricane, you have a bounce that’s bigger than black Friday because there’s obviously amount of repairing and everything else that’s going on, whereas for Starbucks, you don’t see anything like the same recovery and revenue during periods of extreme hurricane. So as we think about the increased levels of extreme weather through a global warming, right, who is going to benefit and who’s going to lose? These are the types of things that advanced analytics can help us to assess.
Martin Whittaker – CEO, Just Capital:13:17
So, I would say Paul founded Just Capital in order to address that self-same issue, right? So the whole idea is if you can gather reliable data and we do that for the Russell 1000 companies across 30 different issues with hundreds of different metrics and thousands of data points and put it out into the world. The market can use that data. So that’s exactly our as a nonprofit just capital is at 501C3 there to try and provide the market with that data. To address that exact question you asked Bailey, which is how do we know, how do we know which companies are paying a living wage and which aren’t, which companies are doing well on, you know, gender pay equity and which are not? No, we have that. And as a nonprofit we want to put it out into the world so that you all can use it.
Afsaneh Mashayekhi Beschloss – Founder/CEO, RockCreek: 14:13
I was talking with Martin before we started and I think it’s exactly that point. It is data and we are talking about data science, but it’s interesting that investment management and investors who are sort of a cutting edge when it comes to telling other companies how to run themselves have not necessarily invested in that. But I think when we talk about ESG, what is very interesting is the next generation of investing, if it’s qualitative, people would be doing the thought of things we were just talking about. They will be the ones who go and talk to the company management, not just about the next quarterly returns, but the sorts of things we’ve just heard about. In terms of sort of data, we also did a recent study with IFC looked across several thousand private equity firms and venture firms. This was an emerging market, so I’d only looked at diversity with the gender lens and we took 700 of the largest private equity and venture firms in emerging markets and found the following things.
Afsaneh Mashayekhi Beschloss – Founder/CEO, RockCreek: 15:06
1: More women GPS in emerging markets than the U S two gender balanced teams had 20% more return. So this was not a very touchy feely thing. It was just that a lot of growth in emerging markets and the rest of the world is consumer goods. So if you have 50% of the population included or excluded, it does impact your, your returns. And of course what’s also happening is that you’re seeing the those kinds of gender balanced teams also investing in more women entrepreneurs. And we’re seeing the same thing in the US for the first time in the last seven, eight years. We have a series of venture firms that have been started by women. And if you look at growth firms, if you look at Mary Meeker’s latest investment, you know, it’s the first a company that’s got a 3 billion valuation and a started by a woman.
Afsaneh Mashayekhi Beschloss – Founder/CEO, RockCreek: 15:56
So, we do need to keep the data. And I think if we, for example, did the same study we did with IFC for emerging markets in the U S and found that private equity firm X had so many, you know, this kind of population and next year it doesn’t, it’s not a shaming thing because next year it got better. And the following year it got better. That would be a good thing. Same thing for companies. So I’m of the belief having done this kind of a measurement for the last 30 years, I was doing shadow pricing 30 years ago. Literally. There’s a lot you can do. You can also throw your arms and say it’s impossible to measure this and there’s a good in between where you can’t be exact, but you can see if you know, carbon emission by what I’m doing with the way I drive or not makes a difference. I think those are straight.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 16:45
All right. So I’d like to stay with you for a second and get some of your perspective as an investment committee member at, at foundations. We were talking earlier about your experience at Ford and trying to deploy capital into impact, mission-driven ESG strategies. And what was your experience in terms of the availability of investment products that met the needs of that investor or other investors that you’ve been involved with?
Afsaneh Mashayekhi Beschloss – Founder/CEO, RockCreek: 17:12
Great question Billy. I think what I’m finding and I think a lot of investment committee members and chief investment officers and we have some great ones here from Doris Duke and from the Institute for Advanced Study, the population here among others. What we are finding is that when you are thinking about it, it actually is not easy. There is they to imbalance in finding good investible situations. And that is because a lot of people who are doing really great ESG investing don’t see themselves as that. We recently invested, for example, and this was very apropos what you were talking about before, in a company in my day job at RockCreek, which happens to have an African American CEO and happens to be providing the last mile in cotton threads as telecom connectivity, which happens to be for the rural poor. He never thought of himself as an ESG investor, but he was as much of an ESG investor as anyone could.
Afsaneh Mashayekhi Beschloss – Founder/CEO, RockCreek: 18:09
And I think when at Ford or other places people think about financial inclusion or housing affordability or social justice, there is a lot that you can do. But when you then go and say, okay, I want to invest in those kinds of specific areas, where are the firms or funds that I can invest in? There is a data imbalance. It’s not easy to find those. And I think finding that data will be very, very important for the future.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 18:34
Meg,what’s your experience been on this? There’s a lot of dry powder in private equity in general on this space. How’s it working?
Megan Starr – Principal/Head of Impact, Carlyle Group: 18:39
I think when challenges, we hear the kind of feedback a lot about there not being a lot of capacity in this space. And I think that comes down to a kind of marketing and labeling exercise. If you were just looking at the universe of managers who are like waving the ESG impact flag, that’s a vanishingly small portion of the universe and it’s not always perfectly correlated with the best investors. I think it’s almost the opposite of nimbyism where sometimes we see investors, they say, you know, I want to invest in affordable housing and I want it to be on the South side of Detroit and I want there to be a gender balance in the investment team, your number of investible opportunities pretty quickly, it gets to zero isn’t part of the challenge is stepping back and saying what does the market offer? And so where are we seeing investors, you know, ESG investing is not magic. It doesn’t help you out perform the laws of investing poison by thinking about these issues. That doesn’t mean that you are giving up return inherently.
Megan Starr – Principal/Head of Impact, Carlyle Group: 19:16
And I think in my day job, I’m not in the market and I’m not in the job of saying this is a morally good company or that’s a morally bad company. I’m in the job of saying, given this company where are their material risks or return opportunities because of their business model. And it’s going to get one quick portfolio company example. So we invested in a company in 2015 called Axle Tech. It was a 100 year old conventional manufacturing business. They created kind of heavy duty power trains for commercial and defense vehicles. Look at that and you’re like classic impact investment. But at one of the board meetings, the CEO brought up just in passing that one of the customers had asked if they could prototype an electric powertrain for electric trucks.
Megan Starr – Principal/Head of Impact, Carlyle Group: 20:09
The meeting went on, but that was something that actually one of the investment team members latched onto and they said, we’re seeing this thing happen in the vehicle market. We’re seeing the electrification, the vehicle market takeoff that might be worth looking into. That moment wasn’t obvious because that was a hard decision that cost about $20 million to invest in designing, prototyping and manufacturing in electric power train. That ended up being a core driver of growth for that company. We sold that company to 6X because of the core growth market of we are seeing the energy transition happen and I think that’s a great example of saying that wasn’t someone starry eyed saying we should care about the environment. It looking at the market that that company operated in and saying, where do we put our chips down and where growth is heading. And I think ESG is not this idea of good companies or bad company that’s saying let’s use all of our available data and signals to try to figure out kind of how we create economic value. Again, it’s sustainable.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 21:04
I think that brings up an excellent point and something I’ve, I’ve spoken about with the heads of ESG at various asset management companies and, and you know, theoretically they hope that their job doesn’t have to exist at some point where if you’re looking at examples like that or you know, the research that Martins team does and these are real tangible financial material, financial factors, then it should just be part of good investing is the theory. Jonathan, how are you doing that?
Jonathan Bailey – Managing Director/Head of ESG, Neuberger Berman: 21:37
I’m not about to get myself fired. But, I think the point is that the issues change, right? So yeah, plastic straws, right? Five years ago, this was not a topic that was front and center. Now it is a topic that I’m sure everybody who has a firm here that has gone through what they’re doing with their plastic in their office, right? These things change. Social expectations, change the work that Capitol have done, have kind of looked to that and that will, I’m sure will evolve over the future. So it’s going to always be a role for people to kind of keep on top of that. But I do think that there is also a preference that we’re seeing being expressed, right? There are some things that are not relative value decisions. They are absolute outcomes. And sometimes the United Nations Sustainable Development Goals are used as a way of assessing.
Jonathan Bailey – Managing Director/Head of ESG, Neuberger Berman: 22:24
They’re saying, right, we really don’t want any children to die before the age of one, right? These are things that are just, you know, good things for society, right? And so healthcare companies that are helping to address that clearly are part of a solution to that absolute outcome. So as institutions talk to their beneficiaries, talk to their clients about the things that matter to them, I think we’re increasingly going to say, well, what are the impacts that companies have? You have to be in an impact investing strategy, but every company has an impact on the world, whether positive, negative to the fullest extent or not. And so I think institutions are going to start saying, well, if I look at my portfolio as a whole, am I doing as much as I can to ensure it’s having a positive impact while still delivering the return profile that I expect?
Afsaneh Mashayekhi Beschloss – Founder/CEO, RockCreek: 23:09
And I would say, I want to maximize returns and in order to maximize return, I need to invest in things that are longterm value. So if I’m investing in a fuel that is cleaner and cheaper, most likely that has longer term value than one that’s not, not because I’m a believer or not. And Megan was saying so I think we’ll see much more of moving towards longterm value creation. Which has been what we plan to do.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 23:36
Are there any asset classes or sectors that are particularly lagging behind? We’ve talked about public markets and private equity, but hedge funds or real estate or any, any of those where there’s still a lot of work to be done.
Martin Whittaker – CEO, Just Capital: 23:48
Fixed income. Let me, I think there’s been, you know, if you look up the sort of history of ESG investing, it’s primarily been focused on large cap equities and you had different names being applied to different other areas earlier stage impact investing, etc. But it’s all converging under this, this single sort of goal of, of, or a single theme of, of sort of an alternative way to think about companies. But I’d say, you know, we talked to asset managers, pension funds a lot. There’s across the fixed income space, there’s really, you know, precious little product along quite sure why that is.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 24:26
Is that I mean there’s obviously been a lot of issuance of green bonds on the rise. Is that something that’s changing or, I mean, I know there are also questions about, you know, green bonds and whether or not those, actually I’ve spoken to green bond managers and say 75% of what hits the market doesn’t meet their criteria. Do you see any shifts going on to fixed income managers taking that more serious?
Martin Whittaker – CEO, Just Capital: 24:49
I would say it’s more a shift around scale. You know, one of the problems that whole impact ESG space has had is a lack of scale. It needs to become the norm to instead of thinking about just SPY, how do we think about products that are SPY flavored with ESG or with justness or with impact? I mean, when we get to that point, when CNBC is talking about how companies are investing in their workers and customers, when we talk about the business Roundtable’s embrace of the stakeholder model, when that becomes the norm, when it’s embarrassing for a CEO to walk into a room of his or her peers and know that they’re making, you know, 3000 times the lowest paid worker in their company. You know, just the same way. It’s a bit embarrassing now around other sort of social norms. I think that’s when you begin to see this, this whole thing become the norm and not the exception.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 25:54
Does that extend to asset managers as well where you have the CEO 3000 times the workers? Do asset managers have the same issue and do they need to take less money, change their fee structures?
Megan Starr – Principal/Head of Impact, Carlyle Group: 26:13
Should we ask David for a raise?
Martin Whittaker – CEO, Just Capital: 26:17
I think you got to walk the talk. Yeah, for sure.
Megan Starr – Principal/Head of Impact, Carlyle Group: 26:20
I agree on your fixed income point. I think that’s something that we saw that there wasn’t a ton of product in the market. What I think is interesting though is we’re now seeing market dynamics, particularly in Europe where a lot of institutions have mandates to invest in things like green bonds, but there’s limited issuance in the markets. There’s actually a supply demand imbalance. That creates a really interesting opportunity from the perspective of a private equity investor. If we’re looking to get financing for our portfolio companies, good financing be cheaper if we’re actually looking for it. Ring fence to do something like build renewable energy to provide our electricity or its ring fence for energy efficiency retrofits. And I think the interesting thing about this whole market as you asked the question of will ESG investing just become absorbed into good investing?
Megan Starr – Principal/Head of Impact, Carlyle Group: 26:58
I think more and more of that is getting priced in overtime as people just realize that these things are material. But I think it creates a really interesting dynamic to find alpha when you’re taking a contrarian bet because people think the field is a little bit more woo-woo than it actually is. And so if we can find ways to get cheaper debt financing because that’s actually the way the market is moving, that’s a great outcome for our companies. And you know, we’re trying to exit at the highest possible valuation and so if we’re getting higher evaluations, if we’re getting cheaper financing because our companies have these characteristics and they’re valued by the market, we’ll take that all day until the market catches up.
Jonathan Bailey – Managing Director/Head of ESG, Neuberger Berman: 27:32
Just on that they want to be seen as interesting is a lot of private equity funds now do consider ESG as part of the diligence work and maybe have an impact fund. But even just in the mainstream work they do, we don’t see the same thing so much in the private debt markets. And it’s something we spend a lot of time working on in the last few years. Because if you think about the risk profile, right? It’s the same companies in many cases, but you’ve also, you’re just on the downside. So if it’s material for a private equity investor, it should be even more material on the debt side of the transaction. So that’s an area outside of the green bond discussion. Right? That doesn’t make sense to me why this is not being given the same focus.
Afsaneh Mashayekhi Beschloss – Founder/CEO, RockCreek: 28:06
Also, if you look at the skill level of people who have been engaged in these areas often come through the equity. You know, you remember with like Bob monks and Nell Minow and you know, that whole area that started with the creation of ISS it was really towards looking at the equity market, the bond market. One of my colleagues at right quick can lay, did the first green bond at the world bank. And if you talk to him, his biggest concern as sort of the innovator to create the green bond is what you said, which is greenwashing. And the people who are on the bond side for some reason have not yet developed the skills just because this is a new area. Whereas equity is really started talking about governance especially, which was one part of this, you know, 20 years ago.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 28:49
We haven’t talked much about climate change, the climate crisis and, and how that plays into your investment decisions. I think to the point Meg was making about using this data. As just part of your investment process. How are you guys looking at climate risk in terms of where you’re putting your money, how you’re investing in and using that in your long-term projections? If you are putting money in for the long term, how does climate change factor into that?
Megan Starr – Principal/Head of Impact, Carlyle Group: 29:19
Yeah, I would say it depends on the asset class and it depends on the industry. And this is where the concept of materiality comes into play. You know, what’s material for a tech company, you might be vastly different than what’s material for an oil and gas company. So I think across our energy platform, that’s something that we’re living every day. The energy transition is reality. It’s not something that we see that’s, you know, in happening in 2020 years, 30 years. And so I think the challenges, how do you confront the economic reality of our energy mix today while still preparing yourself to be investing in the future? And a lot of what we’re seeing from investors is they’re saying, you know, if I’m going to lock up capital for 10 plus years in a private market structure and I have two things that are priced equivalent today, standards, I’d rather double down on the one that’s oriented towards where the world is going. And so I think we’re seeing that at the margin of how people are thinking about the next 5, 10, 20 years. And it’s a challenge because our current energy mix runs across a hydrocarbon to renewable spectrum. And so how do you place bets where you’re helping to facilitate the energy transition, but you’re still aware of the mix of what supports our energy today.
Jonathan Bailey – Managing Director/Head of ESG, Neuberger Berman: 30:25
I think one of the things that’s begun to shift right is move away from the looking at the present and what’s the carbon footprint, maybe what’s good or bad from a fossil fuel or renewable today. Exactly what you’re describing, which is this forward looking view. And one of the things that we spent a lot of time thinking about is how to model that, right? So people talk about scenario analysis. We don’t know whether the Paris climate agreement will be implemented by all but one country or maybe all countries, right? But we can scenario out the various different paths that might take and what would be the impact on both fixed income and equity markets, where that to happen. So having that kind of capability to be able to actually turn this into ultimately value at risk type of quantification, combine that then with engaging with companies to encourage them to move their business model in an appropriate manner and looking at the physical risk that applies to companies. That sort of I think where many institutions want to go rather than just saying right, good, bad today based on perhaps a static view of the risk profile.
Martin Whittaker – CEO, Just Capital: 31:23
Unfortunately, it’s become a political issue for what 15 years ago when I was at Swiss re we looked at climate essentially as an unfunded liability. It was an economic issue and re-insurance pricing adjusted on account of that. It was all about modeling and trying to calculate essentially portfolio value at risk. And I suspect that that model still holds true today.
Afsaneh Mashayekhi Beschloss – Founder/CEO, RockCreek: 31:48
I was just going back, I think it’s interesting because regardless of what the governments decide, companies no, as Megan was saying, that they have to make the long-term investments. So if we look at the numbers that are out there in terms of, and they are the biggest users of carbon, or emitters of carbon and they are the best way to reduce carbon emissions. So if you’re really serious about it, I think what, what we heard about in terms of sort of polling, it’s the young population is the 15 to 25 year old’s today who are we’re talking marching and saying that they want their climate to be a more positive impact on the future of their lives.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 32:30
So what, what do you, I’ll just throw this to the panel. What do you, what do you make of the debate over divestment versus engagement on, on fossil fuels? I think divestment, obviously there’s political, a lot of political motivations there. And the argument being that trying to, they understand that they’re not going to move the needle, that there’s not going to be enough capital pulled out of these companies to have any sort of impact. I mean, the impact investing market, if the number is correct is 502 billion Aramcos pricing their IPO, trying to get 2 trillion or whatever it was. So there’s not enough money to move the needle. But the idea is to shift the perception around the investment in fossil fuel companies. There is the argument that well, you can engage with fossil fuel companies and get them to be better fossil fuel companies or, you know, move more towards using renewables. But you know, that may work for the super majors. But does that work for mid cap producers? Does that work for their, you know, they don’t have the money. They’re cash poor, they distribute everything back to their investors. They don’t have the money to develop renewables even if they want it to. So at what limit is there to the efficacy of engagement and at what point does divestment become the right call? I’ll throw that up to every, anyone
Martin Whittaker – CEO, Just Capital: 33:42
Happy to jump in! I think it has a role to play depending on the asset owner strategy. It all depends on how active they want to be and how aggressive, you know, with their approach. And when you see it, not just in climate change, you see it with other social issues. I do believe my 20 odd years in this space has taught me that engagement really can work, especially with companies that are trying to change. And I, I think the whole world of proxy voting you know, the democratization if you will, of the retail markets. How do the teachers, the public employees whose money’s being invested, how do they think about the issues that are being played out in the investment committees and boardrooms of America? What, what is serving their broader best interests? So I don’t know that divestment itself can be answered in isolation outside of an overarching approach. Now we think about, you know, how capital being invested is going to achieve the outcomes that we’re looking for.
Megan Starr – Principal/Head of Impact, Carlyle Group: 34:44
I think my parents are probably at a divestment protest right now, but in a previous life Afsaneh and I actually worked together on an endowment. The world resources Institute doesn’t really need about a $40 million endowment. It’s a scientific organization based in Washington, DC and their whole mission is counted change at scale it from an organizational standpoint. And they wanted to apply that to their endowment, which is some of the work that I’ll sound a lead. But they took a really pragmatic approach to it. You know, they are an environmental NGO, but they wanted to understand the technical aspects of how that data would make them better investors. And as I looked across the portfolio, some sectors like you know, potentially coal fired power plants, it doesn’t matter how that business model, it’s pretty fundamentally misaligned from a pure economic standpoint with where the world’s going.
Megan Starr – Principal/Head of Impact, Carlyle Group: 35:27
And so they were really pragmatic about saying things, you know, we need Russell 1000 like exposure. Is there a way to take a risk managed way of tilting your portfolio towards companies that are more carbon efficient relative to peers, intro sector where you’re locking up capital for 10 plus years? Can we find investors that are top notch investors but are orienting towards the energy transition? And they put, there’s a great paper on their website where they built out kind of a 100% mission aligned portfolio, but very much from an investment standpoint and the returns have held up against any conventional benchmark.
Martin Whittaker – CEO, Just Capital: 35:57
I can see the foundations, there’s a dissonance. If you’re the American cancer society and you’re invested in Phillip Morris, that doesn’t make any sense does it? If you are a nonprofit or foundation, you’re focused on your program side on alleviating poverty, why would you be investing in companies that are propagating poverty? So I could see that being a legit strategy to examine.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 36:21
You brought up proxy voting and engagement and I think that the sec is coming out with something today I believe on kind of chipping away at the ability for investors to have their voices heard. And that seems to be kind of the answer is always well engaged, vote your proxies, you know, get these shareholder initiatives out there and, and the power of investors to put those initiatives up there. Is being eroded. Is there a worry that the pro engagement argument is going to be undermined by some of the regulatory action being taken to kind of chip away at that power?
Martin Whittaker – CEO, Just Capital: 36:57
Absolutely. I mean, that’s why you see startups like say.com back by a Greenwich resident amongst others, which is all about bringing the voice of the investor and the shareholder directly to the C suite. And we’re actually partnering with them next week on a quarterly, Jessica with CNBC. But that’s the whole idea is to sort of disintermediate in order to propagate this idea that investors and shareholders should be having a voice. But I think your premise of your question is absolutely right. And it’s not just around voting, it’s around access to information across the board.
Megan Starr – Principal/Head of Impact, Carlyle Group: 37:31
I think Jess has done an incredible job on getting that information out there. So for your rankings, for any public company, it’s transparent on your website. And that goes into how you’re ranking companies within the rest 1000. But the important part of that is that companies can move up and down. And so that’s another component to kind of the proxy voting engagement. But this idea of progress, transparency around that and giving consumers the data to know how companies are changing or not.
Afsaneh Mashayekhi Beschloss – Founder/CEO, RockCreek: 37:53
It will be interesting, the sort of hardship people in government and this kind of this kind of information, because again, going back to what Megan Martin saying, that data will be the power. And so if the investors are looking and can access that information easily and if you can make it accessible to them easily, I think it may matter less if a regulation has changed.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 38:17
Do we also need regulation on the data side though? You look at what’s going on in the EU, they’ve got their ESG taxonomy legislation that may or may not happen, but they’ve at least outlined the framework here in the US that was pretty resoundingly defeated a couple of weeks ago. Is that going to be kind of a, a roadblock to more serious analysis and integration of these factors getting, you know, everyone on the same page about what data they should be looking at, how that data should be disclosed. And you know, right now it’s kind of a patchwork of different you know, CDPs, ASMI, all, all of those things. Is it, is it workable without a regulatory oversight?
Jonathan Bailey – Managing Director/Head of ESG, Neuberger Berman: 39:02
I actually think this is a great opportunity to be an active manager, right? Messy data, lots of unstructured insights, lack of clarity. This is where active strategies, whether you’re a hedge fund, whether you’re a working in private markets or in public markets, right? These are opportunities for you. I do think eventually the divergence between the US and Europe and now actually Japan is going to mean that there will have to be some changes. But the reality is, as a global investor, right, we’re going to look at companies on a global basis and we’re going to use the best data that we can. And eventually I expect the U S will catch up.
Afsaneh Mashayekhi Beschloss – Founder/CEO, RockCreek: 39:35
We’re kind of 10 years behind, right? This conversation 10 years ago in the US would have had no audience, right? In Europe, it would have had this kind of interest. We’re just 10 years behind.
Martin Whittaker – CEO, Just Capital: 39:48
The World Economic Forum. The theme for Davos 2020 is going to be measuring stakeholder capitalism. And there’s a group that the international business council, I think it’s called Brian Mornahans chairs that, and their purpose is to try and create a sort of universal framework. They’re not going to define which data or standards, but just a framework that will allow business leaders, investors to think about these issues in a consistent way.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 40:20
Is there a risk that the coming EU legislation, if it happens, will be something like GDPR where I think a lot of people in the US were caught a bit flatfooted by GDPR? Is this something that should be on their radar?
Jonathan Bailey – Managing Director/Head of ESG, Neuberger Berman: 40:31
I don’t think most North American investors realize the implications for their business model of selling investment products in Europe under the European sustainable action plan. So if you don’t know what that is, you might want to Google it.
Billy Nauman – Reporter/Producer ‘Moral Money’, Financial Times: 40:46
Great. Well, thank you all so much. I really appreciate you doing this and thank you all for listening. Thanks.
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