Matt Orsagh talks with me. We discussESG integration, ESG education, demographics, Economist Thomas Malthus, and the future of capitalism. We also talk about current and impending regulation and policy around ESG disclosure as well as the intersection of art and ESG. One section:

You are someone in 1650, do you think we would ever not have slaves? I'm guessing 99% of people would say, "You'd be crazy. We've had slaves for 4,000 years. Our whole economy would disappear. Why would that be possible?" Yet it was. So fast forward to the 1950s. You had a lot of movements, from faith based and other investors thinking about a kind of ethical or value based judgment about how they would want to invest. They just wanted their investments to reflect their mission and values.

Then you fast forward kind of into the 1980s, 1990s where you had thinkers like Milton Friedman come along thinking about markets and capitalism in that respect. And then 1990s, you started thinking about triple bottom line, a lot of talk about people, planet, profits; all three going together. Then you had the birth of what we're calling environment social governance; ESG. So that kind of takes us to where I started where actually ESG wasn't yet a term in terms of where we started. But we started thinking about how these extra financial matters could affect long term value. I guess this is where you had the initial bifurcation between what we might call value and values. So you had a lot of people who were still thinking about it from an ethical lens, but you started to think about a lot of people who thought, "Well, actually there might be a lot of circumstances where if you do good by your customers, if you do good by your employers or employees, if you don't have environmental spillages, if you had good relationships for your regulators you would create long term value."

So a lot of people today can talk about stakeholder capitalism or enlighten shareholder value. You don't even have to produce the ESG terms. You just go, "Well, I'm looking about where long term value is." By serving my customers and by not having a good relationship with regulators you're going to get a lot of value. So a lot of the debate today now is around that. What is material to long term value creation? What might be value and what might be values? I think there's a lot of debate around that. I think I did want to pick up on two or three other things which have changed and this is in the nature of fund management itself. So again, if you go back 50 years ago, you did not have what we would call passive index funds, or rules based tilted funds, or quantitative funds. So that has changed the nature of stewardship voting and what we would call active ownership; so how to use your vote. But this idea of stewardship or active ownership actually goes back hundreds of years.

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Lightly edited Transcript below

The Sustainability Story: A Talk with ESG Renaissance Man Ben Yeoh; Portfolio Manager, Educator, Podcaster, Playwright

Matt (00:04):

Hey everybody. Welcome again to The Sustainability Story. I'm Matt Orsagh with CFA Institute. Our guest today is Ben Yeoh; Senior Portfolio Manager, Royal Bank of Canada Global Asset Management. Good to see you again, Ben.

Ben (00:19):

Thank you. Thank you for having me.

Matt (00:22):

I think in the title I've written-- I don't know if you've agreed yet. But I'm calling you an ESG Renaissance man, if that's okay with you.

Ben (00:30):

Fine by me. Call me whatever you like.

Matt (00:33):

But you have a very interesting background and very interesting stuff you have going on. So before we jump into the details, tell us a little bit about you, your journey on sustainability, and how you got here.

Ben (00:44):

Sure. So I was born in London, UK to a Malaysian father and a Singaporean mother. I did all of my schooling or high schooling in London. Then I went to Cambridge, Harvard and then back to London. As an undergraduate, I pretty much specialized in science; kind of neuroscience and behavioral science. Then when I was in America, I tried some of the liberal arts things and did actually a lot more in theater making, poetry, and writing. And then I started my career over 20 years ago now as an analyst in what we call the city of London in terms of doing investment analyst. I started as a healthcare analyst because that's from my science background. Then around 2002/2003, there was a lot of work being done in the pharmaceutical industry or around pharmaceuticals to do with access to drugs in Africa; particularly HIV drugs in Africa.

I was very much involved in the multi stakeholder debate and discussion there where pharmaceuticals were wanting to be seen as part of the solution rather than part of the problem. There were a lot of supposed hurdles. Well, they were real hurdles; things like parallel importing, patents, pricing. But there were also solutions which a lot of players could see in terms of trying to get that round in terms of regulation and all of that. We were involved in actually getting a lot of that work kind of done, and the end result was that HIV drugs did end up going through to Africa at cost of very little money on the back of beer trucks and soft drinks trucks going around Africa. So it was one of the kind of early success stories of collaborative engagement around back then almost 20 years ago.

That set me on the path of thinking about how you can have a lot of win-win situations. So when you're looking at extra financial type of things like access to drugs in Africa, that you can have win-win solutions which work for corporates, which work for society and actually a collaborative engagement getting you across there. So that's where I started a lot of my work and what we now would call an integrated fashion of looking at this. I picked up non-executive work working for a kind of ethical investment trust on policy issues. That kind of kick started my journey on sustainability and thinking about extra financials and investment.

Matt (03:17):

I've warned you about this upfront. I ask all my guests to help frame the conversation we're going to have. Is there one number, or fact, or kind of a series of those that you've come across that helps frame what we're going to talk about for our listeners? So you've warned me that you may ask me some questions back. I've never been quizzed before on this. I'm a little nervous. So what do you got?

Ben (03:40):

Yeah. I love data. I think investment analysts or portfolio managers at the end really do love data. So that's a worrying question for you. So I have some around life expectancy, literacy rates which think about social, women's votes, and actually deep poverty. Let's see how much of this you know yourself. So life expectancy in India in 1950-- kind of a generation ago-- In 1950, what was the average statistical life expectancy? Do you think I would be dead or alive?

Matt (04:20):

Well, I don't know how old you are. But I'm not going to...

Ben (04:22):

I'm in my forties.

Matt (04:23):

I was going to say mid-forties, so okay. I'm going to try. I think you'd be dead because I'm guessing today life expectancy is probably in the mid to high seventies, low eighties. I remember seeing this for the US like a hundred years ago. Life expectancy was around 50 or something in the US. I can't remember. Or like high forties or fifties. So I would be about dead because I'm a little older than you. So I'm going to say India in 1950, I'm going to say 39.

Ben (05:03):

That's super close and good line of thinking. So it's 35 in 1950 in India. In India today, it's closer to 70. But you are right, in the US or the UK you're talking about high seventies. In some places low eighties; demographics and things. The point of that and the same with the other two is that we've come a long way, but actually we still have further to go. So literacy rates is thinking really about a form of, I guess, education or social progress or social capital. We're going to go to Portugal and we're going to go around about the same time. I have the data for 1960. So 1960 in Portugal, what is the percentage of the population who can read and write? The percentage who are literate in Portugal only in 1960.

Matt (05:55):

This is dangerous because I feel I'm going to be insulting the Portuguese people if I guess too low. But this is over 50 years ago.

Ben (06:04):

Yeah. Develop the European country fairly rich.

Matt (06:08):

I’m going to say two thirds. 66.67%.

Ben (06:13):

That’s pretty close. It's 60%. So six out of 10 could read and write. But the amazing thing is, most people get it wrong at first because that means four out of 10 people in Portugal in 1960 could not read and write. And of course, today you are over 90%. So I think you are pretty close to 98/ 99% actually. So again, we've come a long way and people don't expect that in a European country. 

Social progress; women's vote. Going to take you back to 1950 because that's where I have the data. What percentage of the world allowed women to vote? This is percentage countries really. So what percentage of the world countries allowed women to vote in 1950?

Matt (06:59):

Okay. It's only been about a hundred years here in the states. So I'm going to say 30%.

Ben (07:09):

It's a bit higher than that. So in 1950, 66% of the world allowed women to vote. That did mean the other side, one in three did not allow women to vote.

Matt (07:18):

I was retrospectively more negative about the world.

Ben (07:21):

Yeah. A little bit too negative about the progress we made, but you're right. So a hundred years ago, I think the data's pretty close to zeros. Those countries had just started around there. There are a few pre 1900 but not very many. Today, it's by countries. It's 98.5%. There's just one nation state holding out. It's a little bit of a trick question because actually it's the Vatican in terms of a nation state.

Matt (07:46):

Oh, that's not true. Come on.

Ben (07:48):

So the last one, which actually I think is maybe even the heart of all of those because life expectancy, literacy rate, social progress all go to that. In 1990-- So this is really quite close. This is just 30 years ago. What number, let's go absolute number of the population were in deep poverty; were below the poverty line in 1990 in the world?

Matt (08:12):

Global?

Ben (08:13):

Global.

Matt (08:13):

Okay. I'm going to go back to my number that was so wrong before for women's vote. I'll go back to my 30% because I'm going to guess it's a little above or a little below that

Ben (08:33):

I don't know as a percentage. We can do it in percentage. I'd have to convert that to the popular-- what's the population now? About 7 billion?

Matt (08:48):

It's going to hit 10 billion by the middle of the century, isn't it?

Ben (08:53):

Yeah. But I have to go back to 1990.

Matt (08:56):

I'm trying to work back. This is a fantastic podcast where you listen to people do math on a podcast.

Ben (09:01):

So it was 5 billion in 1990 world population. So 30% is 1.5 billion. You are really good. That's almost there. So 1.9 billion. So in 1990, 1.9 billion were below the poverty line. I'm just going to fast forward to today. Today, that figure is probably around 600 to 700 million. I make that point because it really expresses two things. On one hand, that's unbelievably brilliant. You have made 1 billion people in 30 years lifted out of deep poverty. That's deep poverty. So there's still a lot of sort of normally poor people, but this is kind of below the poverty line. But you still have six or 700 million which is still significant. That's still about 9% of today's population; 9 or 10% who are below poverty. So you have really decreased that.

So I think my theme here is that we've come a long way, but we have a long way to go. But we mustn't give up on the fact that we have made progress. I think that's number one, and this applies to actually what everyone thinks in terms of extra financial and environment social governance sustainability thinking. But it also means we still have a long way to go. We want that number really to be zero, and there's kind of no theoretical reason why you couldn't get very close to zero except for the fact that it's getting much harder. In fact, the forecast of that is it already has a shallow decline in the next 10 years because it's increasingly hard to get people out of deep poverty. But I think those stats to me says a lot of the story that we've come a long way, but we have to go a long way further. We've come a long way in all of the dimensions that we think are important. So you mentioned sustainable development goals. The idea here is that we value more than what might be GDP, call it GDP plus, or the wealth of the nation that's in your social capital, your human capital, your natural capital. We're doing better in terms of women's votes, social capital, life expectancy, as well as in things like GDP.

Matt (11:08):

Wow. Well, three things actually. Those are very interesting numbers and I think it is great to remind people of the point that you can despair quite a bit if you're in this world of what's going on with the climate, are we ever going to get to where we need on climate, natural capital as well has many challenges. But take a step back and look from with the hindsight of history of where we've come and that we won't get to a perfect utopian society on any of these issues. We have come a long way, but we still have a long way to go. These goals are achievable. A lot of these ESG sustainability goals are achievable. It just takes policy and will and invest. We're talking to investors and investors to push the needle on these things.

The second thing is, I think I've said a horrible precedent that now my guests are going to be expected to quiz me. I'd be fine with that but I don't know if my guests would be fine with that because I think that was fun. This could derail the whole podcast, but it made me think about... We talk about demographics and that's something that I'm interested in. I look at what are projections for demographics around the world in the next 10, 20, 30 years in our lifetime and our children's lifetime. We're likely to hit a peak of population in the world in about two decade’s time and then slowly go down in China and Russia and other large countries. Meanwhile, Nigeria will be exploding. But around the world, we're likely to have a demographic-- not crash, but slowly go down that hill.

I think we're going to top out at somewhere projected 9.5, 10 billion, somewhere in there. And then by the end of the century, it'll be like 8 billion or something like that. My numbers might be wrong but that's the trajectory we're on. My question is-- and as I said, maybe this is a whole different podcast. So maybe we keep this short and I'll either have you back or have a demographic specialist on to talk about this issue. What does that do? Does that help with sustainability or does that hinder with sustainability? We're both people that have spent too much time in finance and the dominant theory in finance for the past hundreds of years is capitalism. That's what we live under. Capitalism assumes every growing markets, every growing resources. It's fascinating to me how capitalism will be challenged and have to change and adjust over the next 20, 30, 50 years, and what we will we even be calling it during that time. I know that's a huge topic and we didn't really discuss that. But any thoughts on that before we move on?

Ben (14:07):

Sure. Let me try and keep this short because it has very interesting philosophical roots. I'll give you both views. So if you go back really to ancient philosophers, but more recently Malthus. Malthus the Malthusian challenge would talk about that. It’s what do you do about growth? The modern movement of that would actually call themselves de-growth economist and thinkers. So they would worry about how that growth happens. Even though that capitalism has lifted a lot of people out of poverty, they would point to those people still left in poverty. But I think there are two or three interesting things to put on top of that. One is you are likely to, or you seem to be able to be getting what we would call carbon light growth, or growth which is decoupling from the use of natural resources. You can argue about whether we're doing it quickly enough. That definitely seems to be a trend.

The second thing which you could point to which is kind of interesting from a philosophical point of view is that human beings have made a lot of these challenges. But uniquely, human beings are probably going to have to be the ones to solve a lot of these challenges. If you come to that point of view, then actually we need humans and we need new ideas to solve these challenges. You can end up in what I would call something called techno realism. Whereas techno optimist would say, "Okay, it's definitely going to be technology.” They would say this to you and you get to a kind of utopia. Techno realist are kind of one stage back where they go, "Well, we have these problems about carbon intensity. We have to decouple. And actually some of the ways that we're doing it for things that we want; food, cement, fertilizer, airplanes, and things like that have to be done by technological progress and that will be an intersection between government state and private actors.

They would generally discount de-growth because:

1. Malthus wasn't correct at his time and hasn't been so far. Or be it the future could be different.

2. They would talk about this decoupling that you have.

3. How do you get those deeply poor out without growth?

Now you could say, “Yes, if you are in Sub-Saharan Africa you should be allowed to grow. And maybe if you are in some other nations you might not.” But they would point to that problem about getting those people out of poverty. So can you triangulate all of that? I would err on the side of saying, "I think it's possible.” It's not definitely in the bag. But if you talk about the climate challenge, if you look 10, 20 years ago on the policy scenarios that we were looking at, we were probably at the median scenario looking at something like a four degree world, give or take, which would have been a huge disaster. Today, we are looking at somewhere between a two degree to three degree world on central policy scenarios. That is far from great. You're still going to lose huge waves of places which become uninhabitable and that's still not great. But it is, you have to admit, greater than where we were at four degrees. So we have come quite a long way in 10 or 20 years even within that.

I think part of this is the fact that we need to have good economic growth, but we do need to try and decouple that from natural capital use, carbon light growth. Maybe people will go, “Rather than buy for us fashion and buy a fashion brand, you'll buy that as an intangible piece of computer digital clothing that you'll wear for your avatar.” You'll still spend $5,000 on your avatar rather than on a fur coat that might have the same sort of decoupling and signaling. Seems to be happening now. I think those were the two debates about where it's happening. But I remain, I guess, cautiously optimistic. That's what portfolio managers like to say.

Matt (17:59):

Yeah. I mean, just as a student of history thank you for bringing up Malthus. He's one of my favorites just because he seems so negative about the prospects of humanity. If I remember correctly, he was right around when the industrial revolution was starting. We had all this oil and coal to supercharge capitalism. And so it will be very interesting to see how that decoupling changes things. It doesn't mean capitalism, is it real? Or does it work? It will have to change. But capitalism and high carbon intensive economies have been the norm for the past 200 or so years. So what does that look like 50 years from now when we're in something else? I don't know.

I don't want to spend all our time on that. It's just a fascinating topic. So thank you for the quiz. I may have to add that to the podcast now. But before we start diving down into more detail, you've been in this sustainability world for a while. As a portfolio manager, where have you seen us come from? We've already talked a little bit about this. Where are we now and where do you see sustainability going in the future?

Ben (19:10):

Sure. So I want to stretch back a little bit further to where I start and then take it from there. We touched on this about Malthus and the long history sale of capitalism. I want to go back to the fact that for thousands of years in all human cultures we had slaves. Then about 200, 300 years ago, human beings decided that slavery wasn't for us. And now slavery is pretty much outlawed. You can talk about modern slavery and the things like that, but slavery is legal. You go back a couple of thousand years ago, you put a price on human life and you traded human life within slavery. And you didn't. You go back to the 1700s, you had objects, you had glassware, you had pots where you had labels and the pots were said, "Not made by slaves." That's the roots of the fair trade movement today.

Fast forward to women's rights which we've talked about. Women couldn't vote a hundred years ago. They now can vote. Great social progress within that. So you have this fast forward about these social change movements which seem impossible at the time. You are someone in 1650, do you think we would ever not have slaves? I'm guessing 99% of people would say, "You'd be crazy. We've had slaves for 4,000 years. Our whole economy would disappear. Why would that be possible?" Yet it was. So fast forward to the 1950s. You had a lot of movements, I guess, from faith based and other investors thinking about a kind of ethical or value based judgment about how they would want to invest. They just wanted their investments to reflect their mission and values.

Then you fast forward kind of into the 1980s, 1990s where you had thinkers like Milton Friedman come along thinking about markets and capitalism in that respect. And then 1990s, you started thinking about triple bottom line, a lot of talk about people, planet, profits; all three going together. Then you had the birth of what we're calling environment social governance; ESG. So that kind of takes us to where I started where actually ESG wasn't yet a term in terms of where we started. But we started thinking about how these extra financial matters could affect long term value. I guess this is where you had the initial bifurcation between what we might call value and values. So you had a lot of people who were still thinking about it from an ethical lens, but you started to think about a lot of people who thought, "Well, actually there might be a lot of circumstances where if you do good by your customers, if you do good by your employers or employees, if you don't have environmental spillages, if you had good relationships for your regulators you would create long term value."

So a lot of people today can talk about stakeholder capitalism or enlighten shareholder value. You don't even have to produce the ESG terms. You just go, "Well, I'm looking about where long term value is." By serving my customers and by not having a good relationship with regulators you're going to get a lot of value. So a lot of the debate today now is around that. What is material to long term value creation? What might be value and what might be values? I think there's a lot of debate around that. I think I did want to pick up on two or three other things which have changed and this is in the nature of fund management itself. So again, if you go back 50 years ago, you did not have what we would call passive index funds, or rules based tilted funds, or quantitative funds. So that has changed the nature of stewardship voting and what we would call active ownership; so how to use your vote. But this idea of stewardship or active ownership actually goes back hundreds of years.

In the 1920s, Benjamin Graham talked about being an activist shareholder and essentially saying, "If you feel that corporates have a poor policy, you should vote against management and you should be active." He famously was an activist investor himself. But the nature of that has changed in quantitative techniques and things like that. Then the other side on the value side; the kind of ethical or philanthropy side of arms has launched what we might now call today, impact investing or impact charity. So this is the idea of trying to measure to some extent, the impact you are having on the world. I think this is a very interesting idea which has rolled into what we are now talking about in terms of ESG and mainstream investment as well, but also have its roots when you're thinking about extra financial or non-financial.

I think the philosophical movement here which is really interesting I would call long termism and also effective altruism. So in the way that this is a kind of philosophical roots in terms of John Stuart Mill, even pieces like human things like that, about how to do the most good in the world. That's a kind of another interesting arm away from pure financial returns which is really influencing how to give an impact. That impact is then influencing those who have financial return as well in what we call mainstream integrated ESG.

Matt (24:17):

That was a very succinct summary. I think that got us. In discussions I've had on the topic, I haven't heard things go back hundreds of years. But it's interesting to think about it that way when you have things labeled out as, "Not made by a slave." The conversations that I've had and listened to on this topic usually go back to apartheid. In the late eighties, early nineties as a start. Kind of the modern focusing on governance, focusing on ESG. It was SRI back then; Social Responsible Investing. When you stop and think about it, it goes back much longer than that.

Ben (24:55):

Much longer. I make that point because markets are driven by humans. They're not driven by animals and they're not driven by plants. You could call it an intersubjective construct. They have value to humans because humans believe in them. A lot of these market constructs going back even to the early days of thinking about capitalism like Adam Smith and the like, have always had this component about what humans believe is important and what they believe is important in the future. In fact, talking about the long history, the early capitalist-- So around the times of Adam Smith, if you think about what they were articulating I have an anecdote here which is actually one which is told by Amartya Sen who is a developmental economist and Noble Prize winner. In his reading of the early capitalist he said, "Well, imagine you are being chased down the street by someone who wants to mug you or kill you for whatever reason. They want your money. They don't like the look of you. They're coming down the street at you.”

But what happens is that before they get to you, money rains down in the street. You have coins which you can collect and there are notes of value there. They stop chasing you and in their own self-interest they go and collect the money. Early capitalists believe that by directing self-interest to something like money, you would direct humans away from their more violent and base urges. So to them, early capitalists was a way for actually fostering a kind of self-interest or interest in money away from what they would view as bad behaviors, and to something where you could systemically have good behaviors. I think that's very interesting in thinking about that. But it was still very much constructed around how we would use markets essentially for the values that human find important. That's why I think the modern databases around ESG and all of these have these roots much deeper in history than we would acknowledge, and you can actually find this by reading Adam Smith. You kind of think he is the godfather of capitalism. He's also the godfather of thinking around about this social value of markets.

Matt (27:14):

All right. Well, now we're going to get into the Renaissance Man part of the conversation. Let's talk about first of all, something that started a couple years ago by the UK society; The UK CFA society. It is this certificate in ESG investing that you've been participating in. Now it’s part of the CFA Institute and it's global. People are taking the exam and getting their certificate in the ESG investing. So tell us a little bit about how you came to be involved. You've written the same chapter and updated a couple times, and I think broadly kind of-- I've seen the past 10, 15 years-- I'm sure you have as well, just the need for more and better education around ESG, how the ESG certificate is fulfilling that, and how you see the state of ESG education in our financial world.

Ben (28:01):

Sure. So we built on the work for instance, that the PRI; Principles of Responsible Investment did with you guys at the CFA doing ESG case studies and the like. We realized here in the UK driven by the society that we needed more ESG education. There was a cluster of, we would call it consensus techniques that a lot of practitioners were using in an integrated ESG fashion without any value assignment for saying, "Are these good techniques? Will they definitely produce better risk return or not? What are these techniques that investor practitioners are using?" In much the same way that in the early days of value investing you would say, "Well, these are techniques that value investors use." There was still a huge debate as to, “Are you going to get better risk return by a values process or cheap price to earnings or something like that?”

So we formed a consensus as to what the techniques are. We went out to a lot of investment practitioners around as to, "Well, what is the consensus of these type of techniques?" The first half of the book was a lot of more of the basic terminology. “How does governance work? Stewardship work? What might you mean by an environmental factor or a social factor?” Then my chapter and Jason Mitchell's chapter on portfolio management about what were the techniques that people use. We were very interested in trying to get to specific questions. So there's a lot of talk about this blob called ESG. "Does it work? Does it not?" It's a very unhelpful question because the blob of ESG-- I think you said it yourself. In some way there is no such thing as ESG investing. It's kind of a meaningless term.

You're just using it as a catchall to say this is something you're interested in. It's almost the same as saying, "Are you a value investor?" Wow. The next question is, "What sort of value investor?" Because actually a value investor today is almost meaningless as well. So we looked at that and specific questions. For instance, looking at Alex Edmond's work on the fact that if you have happy and engaged employees, you seem to get better company return metrics and stock return metrics. We looked at how to look at extra financial factors, how people are embedding it in their valuations, looking in terms of intangibles and competitive dynamics. We looked at it in terms of portfolio management, different scores, how quantitative managers were all looking about this. We gave people the kind of techniques that investment practitioners were doing in order to try and help their investment process.

You can go back to the roots that investors disagree at the moment whether you can get value from active managers over passive managers. People disagree about what sort of passive management you would do. There was a lot of investment debate around how to invest generally. ESG is part of that debate and we wanted to say, "Well, these are the set of consensus techniques that people are using." Then you can decide for yourself which techniques you think are useful, which are maybe less useful, which would be useful for your own investment belief, and processes. And that's how it came about.

Matt (31:02):

I've seen just talking to people and looking on LinkedIn and hearing from people just in our world and here internally at CFA Institute, it seems to be quite successful. I'm heartened that the education we see and you mentioned about five or six years ago, CFA Institute partnered with PRI on a number of papers around ESG integration. We asked you to do one of our case studies and that's how we first met. We went around the world and talked to people about what they did and didn't understand around ESG. What was the current state of ESG where they were from? From Toronto to Sydney, to Sao Paulo, to London and everywhere in between. One of the big things I saw was the huge gap in ESG education and demand from clients to get up to speed.

And then in supply of folks like yourself at firms like RBC and other places, that really had a good grounding in sustainability in ESG. I think this curriculum and others as well is doing a lot of great work in getting folks up to speed on that. I've looked through and I've read it myself. It's very rigorous. I'm fortunate enough to have taken the CFA exams and the amount of rigor and amount of time you have to spend on it is about the same for what it is. People have joked that it's CFA level 4 because it's kind of the same amount of study. And now the CFA UK society is coming out with a climate. They just came out with something similar on climate. I've read that as well. I would argue it's actually too rigorous. There were things in it I was like, "This chapter is 150 pages long. You have to cut out some stuff.” But for anyone interested in really diving into this stuff, I think they're a great resource.

Ben (32:48):

I would say you can buy the textbook from your favorite online retailer to have a look. I do think we aimed quite a lot of the material at below CFA level 1 to some extent. So an introductory part. But you are right. The portfolio management techniques that Jason Mitchell and I talk about are in some ways very advanced. Not all portfolio managers would use them. So it's a very interesting blend. I would say though that you can look at this work even before you've done CFA level 1, 2, and 3 because it takes you all the way through it. I think the other thing to highlight is we were quite good at involving other asset classes because a lot of people just think of equities. We talked about debt, bonds, government bonds, and we don't talk about that much, but we allude to property, real estate, VC, private markets which are now all deeply ensconced in their own expressions of how to integrate a lot of these extra financial factors. I think that's really positive. If you are a believer in markets, which I am, then actually new techniques, new competition, and new debate is all very healthy for this.

Matt (33:58):

Yeah. Agreed. Now, let's get into your day job. As a portfolio manager, how do you see the ESG sustainability landscape and how do you integrate it into what you do?

Ben (34:09):

So I'm a deep fundamental portfolio manager. So we always deal with the fundamentals of a company. It happens that when you are thinking about the fundamentals of a company, many of those drivers are extra financial. How you are dealing with your customers. Your relationship with your regulators, and with your suppliers. How we look at it is if you over borrow from one of those sources of extra financial capital, you tend to end up destroying long term value. You treat your employees badly, they leave you. You get a bad glass door reputation, you're not hiring back. So that's a destruction of long term value. But if you can see that's true on the risk side, call it an extra financial liability which is not on the balance sheet, you can see that it's probably true on the asset side as well.

So if you invest in your own people, you invest in the future, you have a good relationship with your supplies and regulators you are creating an asset and value. It's really interesting that this intersects with a lot of work or what people would so-called intangibles. So even if you don't use the phrase ESG or extra financials, you call a lot of this stuff intangibles. And economist at the same time-- There's some very interesting work for instance by Jonathan Haskel and Stian Westlake. Jonathan Haskel sits on the Bank of England committee, like the fed committee for selling interest rates, and Stian Westlake is a long time innovation economist. They've done a lot of work about how the value of a business and the value of the economy today is increasingly, if not majority intangible. A lot of that is human capital and ideas.

So that comes through to the fact that these are assets and they're not reported very well in the annual report. Partly because it's hard to quantify and partly because this is not how our frameworks have come about, which is very useful for getting around the efficient market hypothesis. Because if it's all really neatly explained, as you'll know in CFA 1 , 2 or 3-- I don't remember which part of the syllabus it comes in anymore. But the fact that this information is not that efficient allows you to get better risk and return. Coming back to me as a portfolio manager, the first thing you are really doing whether you're looking at extra financials or not, is what are the core drivers and risks for the long term prospects of that business. You really want to try and hone down on those to use our pilot's material. What are the really important drivers? You want to ignore the ones which aren't that important and look at the ones which are really important.

And actually again, even your old school fund manager would say, "Well, that's exactly what we do. We wanted to disregard the stuff which is not important.” So we're probably not important for natural resource use or water stress for a financial services company. But actually we knew if we were a drinks company in Africa using those sort of resources, then how you are managing your supply chain or your natural resources would be really important for us. So you're looking at what we call materiality for how strong or good the company is, and then we will come up with the judgment about the strength of that company. Then we will embed it in the valuation how these things affect long term cash flows. Some people actually also like to do it in discount rates than a like. We personally prefer to do it in terms of how this is affecting long term cash flows because at the end of the day, the discount for your cash flows back is how you're going to value a company.

Matt (37:27):

That's a great transition into the next thing we wanted to talk about. That is getting those standards for that data around the world is really kind of at the apex of those efforts as we're speaking now. The SEC just came out with their proposals for required climate disclosures a little over a month ago. The ISSB; International Sustainability Standards Board did something similar. I'm in the middle of writing our response to the SEC; our comment letter as we speak. After we talk I have to go up to my desk and do some more on that. ISSB is due at the end of May. We're talking in late April 2022. The ISSB deadline I think is mid-July. Add to that, the folks at the TNFD; Taskforce for Nature-related Financial Disclosures, have put out kind of their first guidebook for their natural capital disclosures they want to do. That is similar in structure to this TCFD for climate. I know I'm throwing out way too many acronyms here. There's no deadline for that, but it's kind of a rolling comments if you want to get to them.

But my point is that we are at the height of trying to put some numbers and some structure to these standards on what is material; whether it's climate or natural capital. Europe has been at the forefront of this more so than other parts of the world. So as someone who's involved in this and closer to what's going on in Europe, what are your thoughts on where we are, all these efforts, and are we getting to where we need to be?

Ben (39:04):

So let's start with SEC and climate and use that as a lens. I will start with the opposing arguments which I think are probably best expressed by Hester Peirce; one of the SEC commissioners who dissents from this idea. You have to go back to her original source material, but from what I'm seeing she sort of claims two matters.

1. Where climate is material, companies should be disclosing this anyway, therefore these regulations are unnecessary. That's her sort of first line of argument.

2. The SEC is not an environmental regulator. So it's overstepping its regulatory mark. 

Those are broadly I think the strongest arguments on the other side. Now on her first argument saying that, “If they are material they should be disclosed,” I have a little bit of sympathy for that because I think that is true. If this is material, then you should be disclosing this kind of information. But there are two problems with it. One is the fact that some companies are not. So to the extent that we have better regulation that would force that from the point of view of investors, that is going to be helpful. So on the one hand, I agree that if it's material it should be disclosed. But actually you can see from market practice that there is a lacuna there. There is a little bit of a hole.

The second part of the argument though is kind of interesting that it's a little bit different. That is that even if for one small company, you could maybe make an argument that some sort of climate disclosure is not super material for that company-- which we can debate whether that's going to be true of any company. But say you had that argument and you bought that, you would fail if you say adding up all of the largest 2000 companies in America, you would definitely say that was systematically important. This is an interesting second leg of where you see it from, for instance, Commissioner Gensler in the arguments that he makes. That is then going to be interesting to investors. Particularly for instance, investors who hold all 2000 companies in the US; largest 2000 companies. They will need to have this information in order to make a materiality judgment on that systems basis.

I think that's a slightly newer argument that we've heard and that also kind of goes back to what we're talking about. The fact that in my work, and I think the work of a lot of asset managers, they're very interested in this revolves around active stewardship. How you use your vote and how you use your engagement, because particularly in what we would call secondary equities-- So when I'm buying and selling shares with another counterparty but not raising any new equity or debt, engagement in stewardship is one of the main ways that we make a difference in the real world. 

If we don't have the information to base our engagements on, then we are not going to be able to do that as effectively; whether you are deep fundamental active manager like myself, or a large tilted quantitative or passive manager. So I think it is really important and I think it's going to be increasingly important to have that baseline level of disclosure. Then actually, this is where whether you're a market leaning person or a policy regulation leaning person, the markets can do their job when they have their information of which there is a consensus agreement on that. Now, some would say, "Yes, material you're meant to have this information." But you can tell for market practitioners, we don't have this information.

So therefore I think it would be an important disclosure to do. This is where it's closing a loop on the fact that I think in the future-- already today but definitely in the future, this active ownership stewardship piece is going to be increasingly important. And to the type of asset owners that I speak to in the institutional land, that's already important now and growing. But I think the person in the street, the woman in the street is increasingly interested in how their money is being managed in this fashion as well. So I think this is likely to be a long term trend.

Matt (43:17):

I would agree. I think we're also in a very interesting kind of nascent stage of, "Well, what does that mean when you say ESG, versus an ESG fund, or sustainable fund, or sustainable investing?" I think the moment we're in now there's a lot of greenwashing out there; whether it's for products or whether it's for companies reporting. I think a lot of it gets back to just education-- not just for us in our world, but for the consumer, or for the regulator, or for the company. What does it mean to be 'green or sustainable?' We're still working around that language of what that means from the woman on the street who wants to buy a fund that does well by doing good. “Okay. But how do you do that? You can't just buy something that is labeled green.” The CFA Institute put out standards on sustainable or ESG labeling for funds that came out last year. The SFDR in Europe is doing the same. 

So I think if we're having this conversation five years from now, there'll be a much better understanding-- not just in our industry, but from the person on the street, from the policymaker, from issuers, corporates. There's more agreement about when we say sustainability or we say ESG and what that means because there will be the standards from the EU, or the SEC, or the ISSB, or it will have been baked into policy for X number of years. So I think ESG and sustainability is a cultural change in our industry, but also beyond that in society. That's going to be a messy proposition in some cases.

Ben (45:00):

Yeah. So I would make an analogy with actually typical financial rhetoric. So you've always had a problem with corporate puff. Everyone wants to put their best foot forward, and sometimes you overstate that and that's why you have advertising standards because sometimes it's such an overstatement that you need to retract it. I do think that institutional owners in some ways should know better. They should be able to know whether something's going dark brown to light brown, whether that's good, whether they could go dark brown to light green, and not necessarily need a taxonomy for them to sophisticatedly figure that out. I think on the retail or the person in the street, there is a lot more need for that. But if you think about it, what does it mean to say if you are a value investor? Is Warren Buffett a value investor?

Does that mean if you're a value investor you never buy anything which is overvalued? Does that mean you never buy anything which is below a PE of a certain type or a certain thing? If you are a sustainability investor, does that mean does anyone ever want to buy anything which is unsustainable? Does anyone ever want to buy anything which is overvalued, if you take the counterfactuals of those terms? So I do think we need a lot more. But I think there needs to be a sophisticated in the judgment. That actually goes back to your earlier question on the data. So I think we need a lot more disclosure and I think standardization will help. But actually, data in itself is also not going to solve the problem. I sometimes worry a little bit that you have some people saying, "We'll have all of this data and our problem will be solved."

Well actually, there's a twofold thing to that because you still need analysis of the data. Actually, sometimes the lack of data doesn't stop you from knowing what the correct thing of what you should do is. So on the one hand, you also don't want to let a lack of data stop having good strategies and creating value; so you don't want to wait sometimes for that data to come through. And on the other hand, a lot of the data might be contested. Particularly if you look at the scenario analysis or the things like that. We'll still need analysis, right? So you don't want to sort of say, "We have all of this data. ISSB has done its job. The regulators have done its job and we have it." That's a little bit like saying, "Well, now I know the return on equity is 8.4%. Great. Job done." Well, what has that told you? Even if I tell you my carbon scopes and even if that's audited to some degree, the fact that I've got 30 tons per million carbon intensity, what does that tell you? Where am I going? What does that mean? What's your scope three? How does that work in your strategy? Where are you in the world? Data is only a piece of the problem. It's a really important piece and I think we do need to work on that. So I don't want to take away from any of that. But if you think that is definitively the end of the journey, then we're also going to be in trouble.

Matt (48:05):

Yeah. It's what we've been talking about so far. That data that we will be getting in some better way over the next three to five years has to be coupled with the education we're talking about, with solid analysis. Data with no analysis is useless and analysis with no data is useless. They go together.

Ben (48:29):

Exactly. And actually the analogy might be that we're going to need private actors and we are going to need government policy. You can't have one without the other. I think you can be working on them separately, but you want both tools. And actually you'll also want non-government actors as well; NGOs and the like. Traditionally, the classical model has been governments, NGOs, private actors, and they each have domain expertise and they also coin sect. They're all looking about creating long-term value or long-term wealth; however you want to define it. I think that still holds. Each is going to have to play its part in being part of the solution and not part of the problem. Companies will not be able to act without supportive government policy and NGO and the like. Government policy itself is also not going to get you there without corporate actors also playing their part.

Matt (49:20):

Agreed. All right. Well, we've gone through everything in the Ben Yeoh Renaissance ESG Renaissance Man Portfolio except Ben Yeoh Playwright. Can you tell us a little bit about how being a playwright intersects with the ESG world and a little bit about your journey there?

Ben (49:40):

Sure. So I was really interested in theater all the way from school as a teenager, high school, and then did more theater work at Cambridge; although that wasn't part of my degree. And then at Harvard as part of the liberal arts training, did a lot more training in terms of dramaturgy, writing poetry and the like. I guess part of my own personal theory of change is that stories and arts and culture really matter. They matter because for instance, the stories we told ourselves around slavery, the stories we told ourselves around women's rights were absolutely key for those social change movements. If you think about the things that humans value, yes, there are a lot of tangible things like having enough to eat and things like that. But there are also things that we do for instance, in our leisure, in arts, and in culture.

In some ways, those are the very things that we try and defend when we're looking about growing the wealth of a nation. In some ways, those are the things which are very hard and are often not put into GDP but are really important to us. So I've been intersectional in having that, that I feel driving that type of change is important. It's also important in terms of equity. We have a feeling of the voices that are not heard. Yes, that's true in terms of diversity inclusion amongst our sector generally. But it's also true that the stories that we tell ourselves. For instance, today, depending on how you define it, anywhere between 10 to 20% of the world has some form of disability. They are not how you'd view a typical person.

We need to hear about the equity there, their stories, what makes them human. I think that's a really important part of what makes investors real in the real world. In terms of my latest work in terms of this, I host my own personal podcast around some of these type of things; around arts and culture as well as in investing. I recently done a line of work which we call performance lectures, which you kind of cross a little bit of lecture and data with story and art and things like that. So I've done one around the topic of death; how we die today versus two or 300 years ago? What are our actual major causes of death? Then some of the causal things we might think of that we do or don't die from like, "Do we really die from grief?" 

300 years ago people said that you did die from grief. Do we die from grief today? And things like that. I've also actually done one thinking around sustainability and climate. Again, trying to put all of these things together about what we might do both on systems and a personal level for all of the intersectional entity on that. That's part of the wider work I feel in terms of being impactful. Talking about what we do, how we can have better ideas, and being pluralist about getting people in the room who want to point in the same direction. We want human beings to be wealthier and better, living longer and having all of these things. But what are the actual changes that we can happen to do that? I think arts and culture is a really important part of that.

Matt (52:54):

I couldn't agree more. I called this podcast The Sustainability Story for a reason. Because I think of myself as a storyteller. I love stories. I've always loved stories my whole life. And I think it's an underappreciated part of really any endeavor you're involved in. We are the stories that we tell ourselves. We tell ourselves the stories of our tribe, whatever that is; our nation, whatever that is; our sports teams we follow, whatever that is. You think about if you're a Yankees fan or a Chelsea fan. All the stories you talk about of what that means going back all those years. And really anything in your life, and the personal relationship you have, all the stories you have, when you get together with friends you haven't seen for five years, you come and you recount the stories that give that friendship meaning. It's not different whether you're talking about a market or investing. There are stories behind all these companies. They're not just numbers on a spreadsheet.

Ben (54:01):

Exactly agree. Had we told ourselves different stories, we would not be at war today. The stories that have gone into some of these things are being uniquely influential-- and that's been throughout the whole of human history, not just now. That's why I think it's critically important. If you look at these, talking about some of the major causes of death in our lifetime, we call them the full horseman of apocalypse for a reason. So once you've got around death, we've had pandemics, we've had famine and we've had war. These are not human inevitabilities. Depending on the stories we tell ourselves, how we work together, and what we're going to do in the future will really depend on the course of human trajectory about what we do. I think stories and ideas will be extremely important in the future to come.

Matt (54:53):

I think that's a great way to end things. But before we let you go and before we let our listeners go, what are you reading? What are you listening to? What are you watching that you think our listeners might be interested in to kind of help them dig deeper on some of these topics, or something unrelated to what we've talked about that you think you want to share with them?

Ben (55:13):

Sure. So I read an awful lot. I read a lot of books at the same time. I also don't always finish books nowadays. That's one of the changes for me versus 20 years ago. Sometimes you get the key idea or it's flabby. I don't think you have to finish all books. Having said all of that, I am currently reading Lydia Davis. She is an exceptional American short fiction writer and also essayist. Some of her short stories are only a paragraph long, and she has really put the whole form of stories and storytelling on another level in terms of what she's done. So interesting form as well as interesting stories. 

In terms of theater, I'm actually rereading. I actually have hundreds of plays sitting in my home library, but I'm rereading Ionesco's “Rhinoceros.” This is an absurdist story where essentially everyone turns into rhinos. This is really interesting because it's a sort of commentary on mass delusions or delusions, but depending on which side of the fence you are on, you can actually often apply it to either side of the fence. It's a really beautiful universal story because often you think the person who disagrees with you is having the mass delusion. So I think it's even greater than where it is. So people talk about Ionesco's “Rhinoceros” and they use it in their favor. Then I can think, "Well, people would've thought that earlier--" Like our earlier conversation on slavery. I think before it happened, people would've thought you are really deluded to ever think that we wouldn't have slaves. And now today, we would think you're deluded the other way around. So it's got great resonance in an absurdist manner.

Then in terms of economics, I'm also rereading Albert Hirschman's “Voice Exit and Loyalty.” He was an amazing economic and political economic thinker. I reread this quite a lot because Voice Exit Loyalty talks about the difficulties of essentially whether you engage or whether you divest; not just in terms of investments, but every decision you might have in your life. Where you work, how you might view your relationships, and all of those things. You've always got this choice. Let's say in the relationship-- Say it's a friendship and for whatever reason you haven't spoken or you've had a disagreement. Do you put the work in it and try and change it for the better? Or do you walk away and say, "This is no longer for me." Those are always your two choices. Do you use your voice or do you exit? It's actually a thin book and it's been very influential in people's thinking. He writes really well about it.

Then my last one that I've almost finished reading-- so I'm going to finish the whole book and I really recommend. It's called “Letters To My Weird Sisters” by Joanne Limburg. She is autistic and she talks about historical female figures who have some of the traits that you might think about in terms of autism. But it's really intersectional about thinking about female figures, thinking about otherness, different ways of thinking, inclusiveness, and what it really means to be human today. It is extremely erudite and has really changed my thinking at least, opened my eyes to thinking about through both the gender lens, but through an otherness lens and then through history about what it means to be human. So that's another book I would recommend to change your mind about something.

Matt (58:39):

Great. Ben, as always, it's great to talk to you. Thanks for the conversation. I hope to see soon.