How should short selling account for carbon? Does selling short impact cost of capital or engagement ? My friend Jason Mitchell discusses various views and in particular how regulators have started to think about carbon accounting with hedge funds.
We started talking about this in a podcast a while ago (link end), and you can now read some collected thoughts in the paper which is now publicly available.
Summary:
- Sustainable finance regulation has largely overlooked alternatives, particularly hedge funds, given the greater complexity of strategies and asset classes. However, regulators are now expanding their scope to recognize the role that hedge funds can play in #sustainable finance.
- The role of short selling in sustainable finance, especially in a net zero context, has been increasingly discussed and debated among regulators, market participants, investor initiatives, investor trade organizations, and #ESG data providers. There is a concern that hedge funds may, intentionally or unintentionally, employ short selling to misrepresent their real-world impact, which is distinct from exposure to financial risk.
- Short selling can affect the cost of capital and engagement as channels of influence on corporate behavior. However, there are nuances that should be considered, namely the efficacy of short selling among different asset classes to affect the cost of capital, the time-varying aspect of short selling, and the limitations that short sellers face when engaging corporates.
- UK, US, and EU regulators have each signaled their leaning in different manners. The EU, as the regulator with the most mature regulatory framework, appears to establish a compromise that balances safeguards against greenwashing with the mechanics of portfolio management and reporting.
FCA has published a collection of ESG/sustainability thought pieces
Recommended ESG reading. FCA has published a collection of ESG/sustainability thought pieces. I’ve had a first read today. You are unlikely to agree with all the pieces, but they argue for nuanced views and hit right at the tip of cutting edge debates in this area. So, I am going to suggest this is recommended reading for all those interested in ESG, sustainability issues, long-term investing and governance thinking overall. As part of a FCA consultation. Articles are:
Taking a holistic and purpose-led approach to net zero (Tayler, Aviva)
Using pay to create accountability for ESG goals (Gosling, LBS)
Transitioning to net zero: increasing investor confidence in corporate carbon Commitments (LSE research)
Adding purpose to principles and products (Eccles, Oxford)
How to build an effective culture to support climate and sustainability-related objectives in the financial sector (Deloitte)
Board-level governance of climate-related matters (Chapter Zero)
How a Chief Sustainability Officer can most effectively support a firm in achieving its climate and sustainability-related objectives (Martindale, Cardano)
Governing climate transition implementation at banks (Mavraki)
Effective governance of investor stewardship to support net zero: a practitioner’s view (Chow, ICGN)
Preventing greenwashing: time to stop marking our own homework (Thompson, FCBI)
Downloadable here and link to splash page here.
George Serafeim podcast transcript, Citywire with Algy Hall | Fix the Future
I made a transcript of the George Serafeim and Algy Hall (Citywire) podcast on ESG. Algy doesn’t challenge George on the push back on one of his key co-authored papers: Corporate Sustainability: First Evidence on Materiality (a summary commentary on the critique with links to it here - the comments are from noted statistician Andrew Gelman, but the orginal critique is from Luca Berchicci and Andy King). This was for many years a well quoted piece of evidence for ESG materiality. The case from academic papers is now more mixed with some of the strongest evidence (IMHO) remaining from the Alex Edmans employee satisfaction work and related work on “human capital” (a term that many non-accountants don’t like!), Caroline Flammer’s work on incentives, long-term, and CSR/ESG (using regression discontinuity design) and some of the work on material transparency.
Still, George is a leading business school voice on ESG/Sustainability and his comments on “Purpose and Profit” and the extra-financial factors that can drive business are useful to know.
(While I podcast myself, I find it much quicker to read transcripts more than listen when I’m going through a lot of work).
Podcast available at link here and below:
Fix The Future Show: ‘ESG was Never Meant to Save The World.’
George "There is a misperception about what ESG is as a management concept, as a governance concept, as an investment concept in business. ESG, at least in my mind, was never meant that it would save the world."
Algy (00:17):
That was George Serafeim, the Charles M. Williams Professor of Business Administration at Harvard Business School, who I'm talking to on this month's Fix The Future Show; the podcast where we explore ideas about how investors can do good in the world while making good money. I'm Algy Hall, the investment editor of Citywire: Fix the Future. Over the last decade, George has been a pioneer in developing the common sense ideas that underpin ESG. He has also been involved with much of the most influential research in the field and continues to push the subject forward including through his work on impact weighted accounts which we'll hear more about later. He's also the author of the recently released book, “Purpose and Profit: How Business Can Lift Up the World.” It's a book I can highly recommend. Hello, George.
George (01:10):
Hello. It's a great pleasure to be here with you.
Algy (01:12):
It's a great pleasure to have you here. I've been a huge fan of your work for many years.
George (01:19):
Thank you.
Algy (01:20):
Well, thank you, I should say. I thought a good place to start was just with your interest in transparency and where that came from in terms of your work. It seems to be a common theme which runs through everything really; this ability just to provide transparency on what's actually going on in companies.
George (01:46):
Yes. For me, that idea is an extremely important one. I like to take people back on the journey that we have traveled over the last hundred years. So if you think about it, the world that we have created, the economic system that we have created, and the society that we have created, a hundred years ago we didn't even have some basic financial reporting and control systems in markets. So if you wanted to get information about the profitability, the sales of a company and so forth, you would be getting very little information, if any information. So things that we take for granted right now were just not there a hundred years ago and a few decades ago in most markets actually around the world. Over time, what we decided as a society is that in order to have accountability over the management of financial resources inside that organization, it would be a good idea to create transparency and to have consistent comparable accounting standards. Then all the mechanisms around the production of accounting numbers, such as, for example, auditing of those, analysis of those and so forth in order to create an accountability structure that then what are the effects of that? Well, it can lead to better resource allocation, decisions, and management of those resources.
If you take that paradigm and apply to what is happening right now in terms of sustainability, you can ask the question, "What are those resources that then we're interested in to understand the efficient and effective management of those?" I think the world has changed and now more and more of the competitors of organizations depend on the management of human capital, intellectual capital, social capital, natural capital, and so forth. So I think we're asking the same basic question which is, "How can we create an accountability structure and a governance structure around the proper management of those resources?" And what I always say is that without transparency, you're not going to get there. It's not a sufficient mechanism, but it's a necessary mechanism for us to be able to get to that accountability structure.
Algy (04:15):
It's the kind of first step on the journey, but vital to get on that journey. I'm going to say you've been at this a long time, but actually it's probably only just over a decade you've really been devoting yourself to this. In terms getting that message across and getting people to understand that idea that there are things which just aren't being measured which are really important to investment, and ESG can do that, or non-financial metrics can do that or play a role in it. How has that evolved from not being listened to early on to suddenly the huge interests that we saw kind of from around 2019, I guess? That's what it felt like to me.
George (05:07):
I think there is a very interesting reframing perspective that I think has happened and it's happening and will continue happening. So I think if you say-- And I have been saying that for a very long time, Algy. Which is if you actually say to a lot of people, "Should you care about ESG issues and sustainability issues and so forth?" Some people might say yes, some people might say no because they have their own interpretation of what that means. So I think you need to make it to people very, very specific. I will give you a very simple example of that. How much money firms are spending on actually hiring, retaining, and growing human capital inside the organizations? Then when you ask that question and you say, "How much actually do we know about how effective that process actually is other than getting one financial statement item in the income statement which says how much money you have spent on this?" But then when you look at it you say, "Well, actually there are organizations--" When you're actually observing what's happening inside organizations-- “There are organizations that are spending an enormous amount of resources to actually screen and hire the right type of people inside organizations. They spend an enormous amount of resources that are spending to actually grow people internally and promote people internally inside the organization.”
Now, there are other organizations that are following a very different model and a very different strategy which is they primarily hire externally, especially for more senior positions. As a result, they're much less likely to internally promote people. Now, these are two different models. This is a fundamental aspect of what I would say ESG under the S which is the development of human capital inside organizations. It has tremendous implications we're finding in our research in terms of the future financial performance of organizations because it relates to the ability to be productive inside organizations, to be innovative inside organizations, and the cost structure of inside organizations. But when you put it in this context where you say, "Actually, how do you create value? How do you drive performance? How do you get the necessary talent side organization and how the organizations have different models that have fundamental implications for how much you are paying for the talent? It has fundamental implications for employee turnover, for ability to create a strong culture and alignment inside organizations and drive productivity innovation." That is actually something super important. You can actually ask the question, "Do we have the data to do this analysis?" Again, the answer goes back and says, "No, most organizations actually don't provide."
So for example, what we have been doing, we have been using big data and machine learning and artificial intelligence to construct very large data sets that allows us to understand the internal promotion versus external hiring patterns across thousands of organizations. Now, I can apply the same exact topic to, for example, decarbonization. Do you actually know apart from the high level statement of two organizations saying, "We'll get to net zero?" Okay, that is a good intention and a very aspirational intention. But do you have actually good information about how effective and productive those organizations are at actually navigating that journey? How much is coming from energy efficiency? How much is coming from energy substitution? How much is coming from circularity? How much all of those things are costing and which ones are actually leading to product innovation that might lead to revenue growth by greening your products, for example, and green product innovation?
The answer, I guess, is that we have very little information about this. So we are in the early stages of understanding those things. But I think when you're actually reframing them around how they're actually affecting risk and growth inside organizations, and future revenues, and costs inside organizations which goes to the idea of how those issues are becoming financially material and how those issues are likely to have different strategic relevance across different industries, geographic context, and firm specific strategies, then people are actually starting to develop an analytical model of how those issues are actually relevant for the competitive organizations.
Algy (09:56):
It is fascinating because there's just so much we don't see from the accounts. Investors understanding of capital seems to be developing massively with this realization that so much is intangible. Also, which goes hand in hand with the fact that tangible assets don't have the same relevance anymore, I guess. I suppose just in terms of them talking about materiality, I think one is fair to describe it is a kind of landmark piece of research which you were responsible for two colleagues. Look to that issue in, I think 2016, on the materiality of ESG and just that question of, "If people are doing the stuff that matters, does it matter to their share price and does it matter to their performance in the business?" This sounds from what you're saying you are doing now, that idea seems to be in a real genesis in terms of your work.
George (11:05):
Yeah. This is an important idea for several reasons. The first one is that organizations cannot do everything. I always like to say that because it's that much that you can actually do inside organizations. You cannot spread your organization very thin trying to actually satisfy everybody. So what we say is that the classic old return on management is a very, very important idea which is you really need to actually allocate management attention to the most critical issues that the organization is facing. So for example, if you are a mining firm, you really need to pay attention on health and safety inside the mines and community relations around the mines that are fundamentally giving you the ability and the license to operate. So as a result, for example, if you're running a gold mine, waste issues that are huge actually around mines are also very, very critical.
If you are actually running a pharmaceutical firm, for example, access to health and access to innovation and how you are thinking about access issues are becoming very, very important. If you are running basically very high carbon emitting industrial and manufacturing processes and so forth, those issues are becoming very, very important with increasing basically carbon regulation, awareness in society, customers demanding lower carbon products to satisfy their own aspirations to lower the carbon footprint and so forth. So there is actually a systematic process through which you can go and say, "Hey, what is it really that is likely to matter here and why?" I think that is also an important question. Is it that regulations are changing and the environment as a result is changing? For example, you can look at it and you can say, "Okay, I'm running or I'm investing in a steel or a cement manufacturer and now there might be an EU carbon border adjustment mechanism." What are the implications for that because of that change in regulation? Or you might have actually export, for example, to the United States and now you have the inflation reduction act for battery manufacturing or for ingredients that go into batteries. Well, obviously that is actually changing the competitiveness of your product. So regulatory changes is one of them.
The other one is legal changes that might be happening. Increasing litigation, for example, in the context of climate change and carbon. That is another mechanism. Of course, changes in the competitive environment and new entrants that might be competing in the industry. So if you are actually, for example, Volkswagen or if you are General Motors and now you're competing in China with BYD and Nio and you're competing globally with Tesla and so forth, that is actually changing the competitive landscape for you and of course changes in buyer's requirements. So if you're actually a supplier in large consumer goods companies or in large retailers such as Walmart or Tesco and Sainsbury and so forth, well, actually you need to comply with your buyer's requirements. So that is actually becoming a core competitive issue. So it goes back to really trying to understand how the world around us is changing because of changes in regulatory mechanism in terms of product markets, labor markets, capital markets, and so forth. Then tighten that back and saying, "How is the organization likely to respond? And critically from that perspective how the organization can develop new processes in order to be able to innovate?" I think that is also an important point because many times we tend to view the world in a static way and we say, "Oh, I will try to do that but it's so expensive."
I like to say that the best organizations view the world in a dynamic perspective, meaning that what is costly today might not be costly tomorrow. And you're observing that, for example, in many markets around the world. So for example, we have brought the cost of batteries very, very significantly down. So everybody that 10 years ago would have said, "Look, I wish I could develop, for example, electromobility but the batteries are just so high.” Then you had different organizations that had a very different attitude to that. They saw that actually as an opportunity. Instead of saying, "The battery cost is so high, I just can't develop that," they said something very different which was, “Actually because the battery cost is high, I will bring it down and because I can bring it down, I will wait."
Algy (16:13):
There's a story which I think you have right on the front of your book “Profit and Purpose” actually, which is about-- I think it's Daimler; an executive from Daimler kind of essentially mocking Tesla. I thought that story captured so well some of the things you were touching on there. One is that static thinking which I think is the outsider, is investors. That's one of those things investors fight against because things are as they are until they're not. But also, it strapped me as kind of telling a story about the way we understand risk and idiosyncratic risk which is a lot of what you are talking about. It's just very hard to actually imagine a world where certain changes have happened.
George (17:04):
Yes. It's human nature I would call it. So it's almost like it's hard for us to imagine things before they happen, and then once they happen, we cannot imagine in the world that those didn't exist. You think about it, it's this kind of conundrum that we face as humans where actually, if I would tell you that we would have a world where we wouldn't even have basic financial information for organizations around the world, you would say, "George, this is impossible. This just cannot happen." I can tell you that before, for example, the Securities Exchange Act in 1933 and 34 and so forth, people actually pushed back against that idea that we would have accounting standards and financial reporting. They said, “This is never going to happen because every organization is very unique. You cannot do that and so forth.” So it's this weird thing that we cannot imagine the world before we experience it in most cases. But once we experience it, we cannot imagine the world without it. The same thing, a classic example of that is also the iPhone. Before the iPhone came actually, so much in the telecommunication space, so much thinking was about how you will just be putting basically a phone right next to your ear. And once they came up with this giant screen on the phone, people were confused. They were like, "Why would I want the giant screen to be next to my ear?" Obviously, the innovators at Apple said, "You're actually missing the point."
Algy (19:01):
Yeah. Then we all got the point.
George (19:03):
Exactly.
Algy (19:06):
I suppose in terms of what you are saying, I was just wondering how much-- This year, obviously there's been a lot of backlash, if that's the right words to describe it, against ESG as an idea. I was wondering how much of that is kind of to do with people not really understanding the scope of it and also just seeing things as they are at the moment where the old price has gone up a lot and a lot of those stocks have performed very well, and suddenly that's smart and ESG is dumb. Also, maybe the perception is that ESG has been marketed as having a moral high ground which perhaps is not quite how it should be thought of in terms of it's beyond risk and opportunity.
George (19:58):
It's a really good question and I think it deserves almost a decomposition to the various themes. The reason why I'm saying that is because there are different layers here that need to be analyzed. The first one is that sometimes it's because there is a misperception about what ESG is as a management concept, as a governance concept, as an investment concept in business. And ESG, at least in my mind, was never meant that it would save the world. There are several people that think that, "Oh, this is a mechanism or it has been advertised as a mechanism. That it will save the world. That it will solve basically poverty and inequality and climate change and waters, cars, and so forth." And it cannot do that. It wasn't meant to do that. It is a framework through which organizations are trying to measure, analyze, drive performance, and communicate key performance indicators that are actually relevant for them. Why? Again, because of going back to what we're saying about how the world is changing, and that's it. So I think there is sometimes a misalignment of expectations compared to the people that see it as a save the world type of tool which is not what this is.
I think the second one has to do with the fact that because ESG has become more important in how organizations are being managed and governed, it has started having more real implications. It starts to have more [meat]. A couple of years ago we published a paper where we looked at the stock market reaction to the passage of the non-financial reporting directive in the EU. One of the things that we found was this very interesting result that in the announcement of the regulation, the stock prices of companies that tended to have both good disclosure and good underlying performance or key performance indicators on ESG issues, in general, they show a small stock price increase in short term, and the organization that had poor disclosure and relatively poor expectations of bad performance on those key performance indicators, they show a negative stock price reaction on those.
The reason why I'm mentioning that is because for me, that paper is a perfect illustration of the point that not every organization will win from this as ESG is becoming more important. There are going to be some organizations that will experience an increase in their competitiveness and some organizations that will experience a decrease in their competitiveness. You would expect that naturally as these issues are becoming more important, the organizations that will see that as the threat to their identity, to their competitiveness and so forth, they will push back. So there is a natural pushback that is happening because of the underlying competitiveness that is happening there.
I think the third reason why it is normal to expect that is because basically sometimes it's misapplied as a concept what it is. And as a result, because there are bad or suboptimal applications of it, people are experiencing not the intended outcomes that they had expected either in terms of the impact that it might be generating or because it actually doesn't create value, it doesn't reduce risk, it doesn't open up new opportunities for innovation and so forth. So people are looking back and they say, "Oh, as a result, it didn't deliver on its promise." I always like to say that because there is a big difference and a big distinction between strategy development versus strategy implementation. I always say that. Every organization now that I know of has an ESG plan. But that doesn't mean that the plan is a good plan or that the plan is going to be implemented the right way. I think it's in that step of implementation where you observe many organizations actually failing. They cannot get the type of cultural transformation that is needed to really drive performance. They cannot get the incentives to be aligned. They cannot credibly communicate what they're doing.
As a result, all kinds of bad outcomes are happening which is happening also in any strategy that they're trying to implement. Not all mergers and acquisitions work. A lot of R&D that organizations is doing is failing. A lot of capital expenditures are going to zero. There are a lot of things that are successes and a lot of things that are failures. I think when you're decomposing ESG to the types of things that you are trying to drive basically; decarbonization versus human capital related issues versus product safety related issues versus supply chain related issues, you would naturally expect to see some successes but also some failures. And really, that's what I'm trying to emphasize in the book as well; that it is not all good and great. It's actually a lot, especially for organizations that are trying to do ambitious things with their products and services, there is a lot of failure and a lot of experimentation as well.
Algy (26:16):
Yeah. In your book you make that point, you really kind of drive that home that this isn't a magic wand. I'd like to come back to that actually. Also, just in terms of when you were talking about competitiveness because one of the things which I-- I love numbers. I've just got a natural affinity for anything you can quantify.
George (26:43):
Me too. Anything that makes [ ]
Algy (26:45):
I can tell from your work, obviously. It is the impact way to the accounts that I wanted to talk about because you talked about the underlying competitiveness of businesses seen through this prism of what are the real risks and real rewards. The impact way to the accounts try to put the external benefits companies have and also the kind of free ride, the external costs that they enjoy back into the accounts.
George (27:21):
We started this project about three years ago and we incubated it as a research project here at Harvard Business School in collaboration with many external partners because we were trying to understand how we can actually think about a holistic performance measurement and evaluation system inside organizations that doesn't only reflect right now, the financial performance of the organization in terms of the profit that is generated based on a transaction based system of double entry bookkeeping of resources going in and going out inside the organization and so forth. But actually reflecting and asking the question that if both the positive but also the negative impacts that organizations are having, if they were quantified and they were valued, what would that performance of the organization look like? For me, that journey of measuring impact and valuing impact that then can be reflected in pounds and in dollars and in yen and in euros and so forth, is a fascinating journey.
For me, it has revealed several key insights. The first one is how different actually your evaluation system might look like when you're measuring inputs versus when you're measuring outcomes. And because in the impact way the account system we're actually concentrating on measuring outcomes, meaning not the intentions and the targets and the efforts that you're pursuing, but what are the actual impacts and outcomes that you're achieving? We're getting at a very, very different assessment of which organizations are leading and which organizations are lagging. And because in the ESG space we have been measuring to a large extent what I would call inputs, meaning policies and principles and disclosures and targets and investments that we make and so forth, and much less the outcomes and the impacts that we're achieving, then you actually find that sometimes what we celebrate as leaders might not be actually leaders in terms of outcomes. Some other organizations that are really actually delivering much better impacts and much better outcomes wouldn't necessarily be the ones that you would find them being the most highly ranked in ESG evaluation systems. I think that is a very, very important distinction.
The second one is that I think for me, sitting here at Harvard Business School, I have always been trying to think about ways that you can actually engage with business managers and leaders in business in a way that they can associate with that and they can actually start getting their arms around some of those issues. Always a challenge has been that if you tell a leader, "Hey, you're consuming 300,000 cubic meters of water or you're having basically 0.002 carbon intensity or like a hundred times of that. Or if you say lost time injury rate of 005 and all of those things, it's just hard to grapple with." So the question is how can we actually translate things in a way that it is easier to actually embed in business planning? Because if you want people to actually make improvements in a real way, you need to actually translate and create a management system that allows for people to understand what are the consequences of action and what are the consequences of inaction? And as a result for us being able to say, "What would it mean if you had a hundred dollars or a $50 carbon tax or carbon border adjustment mechanism in your business, and how much of that would be your profit? How might your profit look like in a carbon adjusted earnings per share system or in a safety adjusted carbon per share system? Or if you're a consumer’s good company, in a shelf and wellbeing adjusted earnings per share system."
That actually translates very, very interesting insights. When you actually look at some organizations and you say, "25% of your EBITDA might be wiped out by this." But there are other organizations that are having tremendous positive impacts, actually. One of the things that also illustrated that whole analysis was how big is the difference between the strategies that different organizations are having? For example, when we analyze consumer goods companies and we said, "Okay, if we take the six basic ingredients that are affecting human life basically from a health perspective when you're consuming those products, such as, for example, fat that you might be consuming but also whole grains and so forth. There is tremendous difference actually across consumer good companies in terms of how much sugar they're selling versus how much whole grains they're selling.”
Those are having vastly different consequences on people in terms of cardiovascular disease, diabetes, obesity, and so forth. So when you're asking that question and you're saying-- Well, actually, again, going back and saying, "How is that important to me?" Well, if consumer preferences are changing, how the different organizations might be coping with this? If regulations might change, were they're actually forcing you to make those impacts more visible in your product labeling? Or if you might have a soda tax, for example, as it has been introduced in multiple jurisdictions around the world and so forth, how is that going to actually affect you? So for us, that whole journey has illustrated the value of measuring outcomes, the value of translating those outcomes into something that can be compared with existing financial measures that managers understand, and then the idea that it really actually illustrates the fact that within industries, there are very significant differences in the strategies that different organizations have adopted.
Algy (34:24):
Also, in terms of talking about consequences and the measures like the adjusted EPS and things like that. How much of that is something that an investor could use as a real basis for investing or is it more just to show actually what these companies are doing and less of a practical tool?
George (34:49):
This is my expectation that actually five to 10 years from now, this is what actually investors interested in applying some type of ESG analysis are going to be doing. They're actually going to be using a research and data infrastructure that looks into outcomes, that looks into the value of outcomes, and then is actually modeling the internalization process of those outcomes into basically growth, risk, future revenues, and costs. Because it is a more, I would say, robust and systematic process and scientific process of actually looking at what the actual outcomes are and asking what is actually really important and what is less important from the perspective of what's the value of those outcomes. So I expect that this will happen moving forward. The reason why I'm giving a timeframe is because it is a very challenging process. It is not easy. There are elements of that analysis that are easier to be done such as, for example, in our environmental impact pillar. I would say that it is easier to be done. It doesn't mean that it's easy, but it's much easier to be done relative to, for example, assessing product level of impact which is like the impacts that you're having on the actual customer and the consumer and so forth.
The reason for that is because those product impacts tend to be highly idiosyncratic. That's why in the impact way that accounts as well, we worked on a very industry specific pillar because you can ask the question. You can say, “How is a credit card, for example, affecting the consumers?” Well, it's fundamentally different than a car or a box of cereals as you can imagine. So these are very, very different dimensions that you're evaluating and you're constructing impact pathways and evaluation of those relative to something that is broadly standardizable and applicable, such as, for example, the measurement of nitrous oxide and sulfur oxide and water scarcity and carbon emissions and so forth that, of course, will differ dramatically across industries in terms of the magnitude. But the measurement of that KPI is exactly the same measurement of the KPI and then the valuation of it depends on the parameters that you might use.
Algy (37:25):
I suppose I kind of think of this and it sounds slightly like ESG 2.0 thing in a way. I was wondering if it did achieve that-- come into the consciousness of investors like that. Do you think it's possible that it could become a basis of regulation? When I was doing economics way back in school the externalities were one of those big things which people talked about but never thought to quantify really. Does it potentially have quite wide societal implications?
George (38:06):
I would think so that in the future as the state of those measurements improve over time, we might see actually more and more standardization and the development of specific guidelines and methodologies and even potentially disclosure regulations around what those might be. And again, I think different measurements have different attributes and they have different levels of difficulty. So I wouldn't be surprised if the first application of this will be something around the environmental domain where the state of the measurement is not perfect by any means, but it's certainly more advanced relative to other states of development. As a result you could actually do those types of calculations where somebody would say, "Well, if you would apply a certain price on carbon and a certain price on nitrous oxide and several other particulate matters and so forth, how would your profit looks like if you were actually doing that?” Much like many companies already do when they apply some type of shadow cost on the price of carbon in order to guide some of their capital budgeting process. I think it's a similar idea and we see that idea that is increasingly being used as a management tool, as a governance tool, and I think it can also be used as a transparency tool for everybody to have a common view of the underlying outcomes and how material those might be in different organizations.
Algy (39:58):
Yeah, I think it's absolutely fascinating. I suppose if we can kind of circle back. Another thing that I really wanted to talk to you about is your view on purpose. So your book is called,
“Purpose and Profit.” One of the things you kind of set out how you can have an ESG policy rolling out through an organization which creates purpose, but purpose meaning a kind of innovative culture which kind of actually is responsive and dynamic unlike the German car maker who said, "Yeah. Well, electric cars, whatever." I thought it was a really interesting argument.
George (40:44):
It actually sounds funny right now when you actually say that sentence.
Algy (40:52):
Yeah. So if you could just explain this idea that actually this idea of purpose is very central to all these things you've been researching for so long.
George (41:10):
It's a central idea in my mind. The reason why I'm saying that is because I have been observing over the years more and more of my own students actually asking the question, "How can I actually find meaning in my work? How can I actually contribute and have impact from a personal perspective? Then how can I match that in a job role in an organization that is empowering me to do that, where I have actually the agency, the align incentives and the clarity about how I can contribute? That purpose can be very idiosyncratic. So your purpose might be very different than mine and my aspirations and so forth. I always like to say that it doesn't need to be that we all care about solving a really big problem and so forth.
It might mean that, “Hey, you're really passionate about building artificial intelligence mechanism that actually provides better information to consumers when they actually go to the grocery store, whatever that might be.” You're saying, "I would like to make that more broadly accessible, easier to use, less costly." Or somebody else might be super excited about going to an entertainment and media company and producing shows that really delight customers and produce happiness; the ephemeral happiness that we all live. But I think what that purpose does which is critically important is it actually allows you to drive alignment inside the organization, a shared set of beliefs about the organization that are likely to make employees more productive and potentially more innovative if that increases the level of trust inside organization. As a result, sharing information, collaborating inside organization, the reason why that is important in the context of some of the ESG related topics, and in general, some of the big challenges that the world is facing, for example, the sustainable development goal and so forth, is because many of those strategies; business models and so forth, are not easy to execute. They actually require very high levels of commitment from their organization.
As a result, it's much more likely that we will build many climate solutions organizations around the world if those organizations and those solutions are going to be led by purpose-driven organizations where employees are more committed to it. They work very hard, they really want to solve that problem, and as a result they exhibit higher levels of productivity, higher levels of innovation and so forth because it's not easy to be done. So that's where, for me, this idea of purpose connects to some of the big challenges that the world is facing, that they tend to be codified in some of the dimensions of the ESG and why those two pieces are connecting to each other. We wrote a piece for the American Economic Association several years ago around corporate purpose and climate change where we made that point that because it's actually a hard problem to solve, you need purpose-driven organizations that are more likely to take the kinds of risk, experimentation, and introduce disruptive innovations, but also to exhibit the higher levels of productivity innovation that are able to bring some of those solutions to the market and commercialize those solutions and make them broadly applicable.
Algy (45:25):
I think it's a great message actually. Also, last month we spoke to, Dan Ariely who's behavioral psychologist. Your views on purpose kind of tallied so much with what he has found from the field of psychology and he is now working on to translate into a way of understanding companies. Yeah, the human capital is-- especially in terms of the hierarchy of intangibles, really key I suppose is maybe a message we can take from it.
George (46:03):
Yes. Very, very, very important.
Algy (46:06):
But George, it's been an absolute pleasure to have you on and thanks so much for sparing the time to talk.
George (46:13):
Thank you very much for having me. It was a great pleasure to connect and have this conversation.
Algy (46:18)
Thank you.
Jérôme Tagger: sustainability, ESG as a negotiation, impact, investing | Podcast
Jérôme Tagger is CEO of Preventable Surprises. Jérôme is a thinker on long term ESG trends (a catch-all phrase for extra-financial environment, social and governance) and systemic risks. He was a Director at the Global Impact Investing Network, the founding COO of the UN-backed Principles for Responsible Investment, Head of Research at Eurosif and Chief Revenue Officer at ImpactAlpha. He co-hosts a podcast with Alison Taylor, the Breaking Fever.
We chat about the differing roles of companies, civil society and government. What Jérôme thinks about the most important levers and theories of change.
Why ESG could be thought of as a form of negotiation.
Whether we have an idea on what the neglected issues or under rated ESG challenges are.
What you should be thinking of as the chief exec of a think tank start-up. How we should think about building institutional capital. The importance of relationships and “social capital”.
Whether we should consider “less democracy, technocractics rather than democratic decision making.
What Jérôme thinks about billionaire philanthropy.
What Jérôme is hearing about views on regulation on greenwashing and, in particular, on SFDR (Sustainable Finance Disclosure Regulation, EU).
“...I haven't talked to a single person whether on the finance side, on the NGO side, civil society or otherwise that is happy with this regulation.”
Jérôme ends with advice and current projects.
Podcast available wherever you get podcasts, or below.
PODCAST INFO
Apple Podcasts: https://apple.co/3gJTSuo
Spotify: https://sptfy.com/benyeoh
Anchor: https://anchor.fm/benjamin-yeoh
Transcript below.
Jérôme Tagger in conversation with Ben Yeoh (lightly edited only)
Ben
Hey everyone, I'm super pleased to be speaking to Jerome Tagger. Jerome's the Chief exec of Preventable Surprises and is really an expert in all things sustainable and environmental social governance (ESG). Jerome, welcome.
Jerome (01:18):
Thanks so much for having me, Ben. I'm very honored to be here and also a bit intimidated because you always have these really cool guests and they have a lot of interesting things to say. I mostly have questions, so fire away.
Ben (01:32):
Well, you are right up there with them. So, I guess over the years there's been this model of having government, having companies, having civil society, NGOs, and there's a sort of, "Yeah, companies have their own role and responsibilities. Government obviously for that has civil society as well." But there seems to have been maybe a blurring of those boundaries about what should be responsible or not, whether government's getting log jammed, companies may be taking more responsibility, activists and things. How do you feel that framework maybe holds up? And with your work on civil society and companies, do you think maybe we should be reforming some of those boundaries about what we should be responsible for more in the future?
Jerome (02:24):
Well, that's exactly what I'm trying to figure out. So as I said, I come with questions. I think the context for all this is the history of the last 30 years and then obviously every piece of history before. But we're in the kind of like neoliberal post-communist world. We're in a globalized society, we are in a digitize society and that means a number of things. It means that governments have a much harder time doing their work. They have a harder time doing it because things are going much faster. In fact, if you look at the last 5, 6, 7 years, maybe even going back to the great financial crisis or maybe even going back to 9/11, what governments are doing is largely being reactive. A lot of it is being reactive and a lot of it is also reacting to public opinion and whatever is happening in society. You could argue it's the same with companies. So that's one thing.
In the context of globalization, you also increasingly have things that fall between the cracks of what would be jurisdictional boundaries and that's typical of global issues like climate change. There's no single person or entity that can regulate climate change. It's also exemplified by all the scrutiny on supply chains. Suddenly, a societal concern like
labor status, labor rights which could be negotiated between a labor group and the governments and corporations or business representatives and so on in one place, don't necessarily have the scope to do anymore because the workers are somewhere else. Sometimes a lot of people are unhappy about actually the workers being somewhere else, either because it means jobs have been displaced or because other forms of I suppose expectations and interactions about how society works.
But the bottom line is, those questions about labor relations become globalized and they also end up falling between jurisdictional and cracks. I'm using a very simplified model here. But to say, "Look, when we expect-- I think our mental models, we expect governments to do one thing and others to do other thing and it isn't working that way." One of the reasons is that governments aren't really in the position to do the work that they used to be doing. And in fact, I believe that a lot of the populist backlash that we've experienced left and right in the western world over the past 15 years or so, but sometimes more, has got to do with this as well. It's people trying to reclaim a sense of control. I would say largely it fails, but I think that's a dynamic that's happening. Sense of loss of control generally by the general population and appetite for more control.
So the power balances, power hierarchies, whatever you want to call it, that's all shifting. You've got companies and sectors that have significant influence over the course of environmental degradation or progress for that matter, and social relations. It could be entire sectors. Typically, we talk about oil and gas. It could be large global employers. It could be tech companies which is now the new villain and that just raises questions. I really don't think there's any easy answers to any of this so I don't come with a recipe of solutions. But I do believe that it does create a space for the questions, for the interrogation and for advocacy because if you care about stuff, whatever it is that you care about, and you're looking for a way to advance the supporter, the cause-- and by the way, the cause could be financial markets that work for all. It doesn't have to be about a specific population group or anything. Then you've got to ask what the levers are in this complex system. How do they work? How do they interact? Who's got leverage or who's got power over what? What are their incentives? What motivates them and what would bring them to change their behavior?
Ben (07:37):
Sure. So I guess that brings into the question of theories of change. Where have you
got the levers and mechanisms? So I guess there's one set of advocates who argue companies should stay in their box, maybe do some extra financial, focus on the profit, and particularly on the climate lever, leave that to policy and government but should probably advocate for it. But companies can't do that much. And if they do too much or too much signaling which isn't actually that effective, you slow down government. But as you alluded to, others would argue government, particularly globally, there's a lot of conflicts of interest. Got global south, global north, don't always have political backing. There's a lot of things. It's kind of obvious that government has not produced the kind of actions or regulations that we would want. Well, in which case then it's the other groups. NGOs and companies will have to step up if you want to do something.
So I'm interested in where you think those mechanisms could be or whether we have to do a little bit of both. And perhaps on top of that, you could say that actually within markets often fits into people who have an advocacy divestment theory of change. Let's put pressure on companies. Maybe that changes cost of capital arguably, but maybe that puts social political pressure. And those who have an engagement theory of change saying, "Well, governments will do what they do. We can try and do something, but we haven't had a very good track record there so far. So let's get companies to tilt their business models to the extent that they can; maybe radically, maybe less radically. Let's use forceful stewardship and those." So I'd be interested, do you think those are two possible levers? We should do them both? Do you have any views on either and on that top level of how fair or unfair is it to say what companies should do given where governments have got to?
Jerome (09:39):
Well, that's another tricky one because I don't have any simple answer but I do have thoughts. One of them is that first of all, I don't think there's any sort of one size fits all. In your question you talked about the conflicts of interest. That's one big piece of it, but there's a gazillion conflicts of interest that we're dealing with. I think the risk in this conversation is always that we become a bit solipsistic and thinking that there is a government abstraction and a civil society abstraction and a business abstraction. But they're not homogeneous groups, obviously. There's lots of different governments and lots of different civil society groups and lots of different businesses. They all have different interests and they have their own internal conflicts and so on. So absolutely, no one size fits all.
Second, I think of this field-- and I'll use ESG as a shortcut. Everybody imprints their own thing on what ESG means, but I will use ESG as a shortcut. I think of ESG as a
negotiation. Some people will say it's a set of issues. Some people say it's a set of processes. Some people say it's materiality which I view as taking a site. But to me it's a negotiation and it's a very complex negotiation between a very amorphous set of actors that fall in these categories about an amorphous set of issues, but which is fundamentally about trying to find how these environmental societal issues can evolve with some agency and intention in society as opposed to the opposite fallback which is, “Let markets do their work and let's see what happens and be more prone to just watching the accidents of history.”
So in many ways by saying that, it's kind of a left wing view of the world even though I wouldn't call myself a left-wing person. But if you're trying to think about any of these issues proactively, then you have to think about these questions. That's absolutely not the question you asked in the first place. I got a bit sidetracked. But I think my point is that always requires some level of analysis. What's your context? What is the geography? What is the economy of the challenge you're trying to address? What are the actors? How concentrated are the actors, for example, if it's an economic sector? What happens on the business side? What happens on the policy side and how do they interact? We've done a whole bunch of work. I'll use this as an example at Preventable Surprises on lobbying with the idea that if you were an investor looking at ESG questions and you were only looking at the behavior of individual companies or sectors, and you were ignoring what was happening in terms of the interaction between those businesses or those sectors and regulators, then you're just not looking at the whole picture. That I think is one manifestation of a bigger question which is what happens at the micro level and what happens at the macro level? Typically at the micro level, it's companies doing stuff; investors doing deals and things, and at the macro level, we think about it as regulators and maybe sovereign debt and that sort of things. Anyway, we're trying to resolve the interaction between the two.
Ben (13:49):
I like that analogy. I haven't heard of ESG as a negotiation. I'm interested that maybe there's some cause for the fact that ESG (Environmental social governance) is almost no longer a useful term. It's a little bit like woke. It's being politicized and actually it no longer refers to what it's meant to refer to. And to your point actually, no one was initially quite sure what it refers to either when one person says that they might not mean the same thing. Reflecting what you said, I almost think it's another word for the debates we have around progress, whether actually you're left or right. Whether you want progress to be unfettered markets and innovation and techno optimism's going to save the world, or whether you are the other side and you want degrowth and regulation and that's going to save the world. They're the two extremes, right? Most people are somewhere
in the middle of the two and you've got elements of degrowth and not wanting to do food waste. And you've obviously got elements of innovation because we're going to need a lot of that for change. So I'd be interested in whether you think when we think about how it evolves, whether that is a useful term at all and how do you think this negotiation is going to go?
Jerome (15:02):
Let me clarify on this negotiation. I think it's a very skewed and imbalanced negotiation because it's not a negotiation between equal parties, finite actors and not everybody is negotiating in good faith. But I would call it the gray area. And then some of it gets pulled into what becomes materiality or compliance or regulation. It's the subject matter that gets negotiated on all the time. So we get into these questions about label as you say. “Well, then ESG has become a certain generally accepted practice or set of things and reporting standards focus on materiality.” And God knows, I hate all these words so forgive me for using them especially if this is not your area of interest or expertise in talking to the listeners.
But my point is it does not take the questions away. You could say ESG is something else or it's been... Okay, it's no longer negotiated. It's been captured by a certain set of actors in this conversation. It doesn't take anything away from the questions about, "Well then, what's happening at the intersection of business and finance and society that has so much influence on environmental and social outcomes?" It doesn't take anything away from the question of, "How do businesses and investors understand systemic challenges and risks such as climate change?" It doesn't take anything away from the question of, "Do they know what influence they have on them and do they know how to mitigate them?" So many ways, I don't really care about what happens with the label ESG, whether it stays or goes. Maybe it will be replaced by something fancier.
There's the whole ESG and impact conversation. There's another ESG and regeneration conversation and I'm sure other things will pop up. I personally find that arguing about the words is not the best use of my time because I don't have many ideas to suggest. But fundamentally, we are going through a clarification phase because of the political. People saying or the Republican state treasurer saying, "This ESG thing is a political ploy" which by the way I disagree with on the sense that I think it's financial markets are a political ploy. ESG is just one manifestation of it. Then you've got the whole compliance greenwashing question and all of that is kind of filtering and clarifying some stuff in the negotiation. How we come out of this I don't know. I don't think
anything of this will become easier. I don't think any of these questions will become easier.
Ben (18:04):
And that's because markets finance if you think about it on a high level, is an expression of humanity, right? It's a social political question. I always say the parrots don't care about financial markets per se. So ESG is a manifestation of that, or regulation, or any of these financial markets. I'm interested then kind of within that. What do you think is perhaps most neglected in terms of this intersectional, or the questions you think are most interesting and perhaps are not paid so much attention because climate is up there, but it's very well contested? Within Preventable Surprises I'm always interested, and I think some of your colleagues and yourself have talked about willful blindness. I'm not sure the term is necessarily willful. There's sort of things around it. I was intrigued. I think there's been some work on antibiotic resistance.
I feel that that might be part neglected. People know about it, but given the impact it could be and one can see it so you could say, "Is the world being willfully blind or not?" I think interestingly being prepared for the next pandemic even though we're arguably still in this one is remarkably-- given that we're still in one, there's this kind of remarkable blind spot on that. Then there are some of these other things like social issues and things. I wonder how global or geographic they are. But I'd be interested, what do you think are either most neglected or the questions you think are quite interesting to discuss? Maybe some of them we don't have answers. But for instance, on pandemic preparedness are very simple answers. We need a little bit more money and organizations who could do it. So it's kind of a relatively simple one. Politics are pretty tough. But yeah, neglected questions or interesting ones around this.
Jerome (19:56):
Well, I think-- and this is not a cop out, but I think to start it's important to recognize that we don't necessarily know what the issues are. I would say reasonably that four years ago very few people in the ESG world thought about pandemics as an issue, where you could argue that if you were paying attention and listening to Bill Gates' podcast and writings-- I don't, so I missed it-- you would've known about it. Or if you were focused on geopolitics in Eastern and Central Europe, you would've seen the invasion of Ukraine coming and all the consequences of this in terms of food crisis, in terms of energy crisis and so on. So to me, one of the big things about this whole space and this whole interrogation is that it's not just about figuring out a list of issues, which is again why I also don't think that ESG issues entirely captures the thing because you don't go to like a MSCI or type website and get a list of issues and then go take boxes. It's dealing with
unknowns, uncertainties. Some of them you can have in the risk model and some of them you can't because they're the unknown unknowns. But I think that's a big part of it.
Now, in terms of specifics-- So climate's always been the golden child of ESG probably because of some level of global consciousness and it's a global challenge and it's at a big political stage. Also, it feels relatively easy to consider in terms of inputs and outputs and the sector's concern. When we look at the energy sector, we look at oil and gas, fossil fuels, we think we can establish a list of companies and we can see where the demand is and so on. By the way, our knowledge of this evolves. It's not that simple. And then there's methane and whatnot. I don't want to oversimplify it, but ultimately you can do a measure of GHG (Greenhouse gas emissions) and feel like you've got some level of understanding or control over the issue. All the others are more complex. So I feel like the opposite end, anything related to human rights is always the abandoned child in the family. Way too easy to sweep under the carpets, extremely challenging to deal with. Again, going back to the supply chains and jurisdictions or sometimes geopolitical context where you have very little leverage. One of my concerns with this is that companies and investors tend to focus on the headlines, tend to be reactive, tend to say, "Oh, dang, now we need to do something about DEI. DEI is super important." And then maybe nothing happens.
One of those issues that we've been really interested in is the fate of migrants. One reason that it is interesting-- I mean, there's a gazillion reasons why it's interesting. First and foremost, because they're human beings. We're talking about there should be enough reason. But also because migration is a huge political contentious issue. There is growing movement of people. A lot of it is now also linked to the manifestations of climate change. I think the UN estimates that a billion people will be on the move by 2050. So in some ways it's a symptom and then a manifestation of all sorts of instabilities; climates and then sometimes political upheavals, economic ones and then in host countries.
You can't open a newspaper without having some story about people in the Mediterranean. You see people crossing the channel, people at the southern border of the US, people in indefinite detention somewhere offshore Australia. I'm just talking about the western examples here but there's a range also in Asia and elsewhere. The treatment of migrants is increasingly privatized. It includes in Europe and the UK and in the US and elsewhere. You've got a number of companies that are involved in this; in logistics and advisory roles and detention and in technology and this whole gray space here about how these humans are handled. Sometimes very conflicting business
models that encourage organization focus on the detention of migrants. So actually trying to detain as many people as possible because that is their business incentive and very little oversight and a range of human rights violations and link that to... I think sometimes maybe that's kind of a training ground in the technologies for humanity at large. I could blabber on about this but I think that's a big one. And generally stability of institutions and democracy and that's very true in the US, but I feel it's increasingly true elsewhere in countries that have had the joy of being under democratic rule for them.
Ben (26:30):
Yeah. I think I agree that that issue of-- and particularly when you go into human rights you're talking lots of places in Africa, you're talking lots of places in China. Very complicated to deal with. I think that's one reason investors skate over it because they feel that they actually don't-- They don't have any answer. They could try and engage, but they don't really know even what the questions to ask are. I think also you make a really good point on what I would call to use kind of accounting to the institutional capital because it does decay over time, maybe like everything. I don't know whether that's entropy or humans. You either need to rebuild and refresh them, or you need new institutions or new arms of old institutions to help either compete against the old ones or create new ways of thinking.
So actually, I'm quite interested in the chief exec of a kind of startup think tank to some degree which is a new institution. How have you found that journey? And I guess you helped startup UNPRI, which is the Principles of Responsible Investment, which is now a large organization but started from startup. So in a way you've had at least two sort of startups. I know you've come into Preventable Surprises not as founder, but a little bit later on. Perhaps some reflections on building a startup or new institutions. Has that helped? Has that given you a vision of like, "Wow, how hard it is to sometimes heard cats and things within institutional and people?" I guess other people out there-- I speak to some people who kind of think, "Oh, maybe I should jump into the world of think tank or maybe I should start up my own." People always go, "Oh, there's a hole there." I kind of nudge them that, "Well, if that's what you're feeling, maybe you should do it." But there's kind of this fear of doing it because it's challenging and new. But yeah, have you learned anything either from your old days of startups being chief operating officer, now, Chief exec?
Jerome (28:40):
Ben, all your questions I feel like you're in my brain. Some of the things that keep me awake at night and asleep during the day. By the way on institutions, just going back on this and also to this question of shifting powers and of the increasing role that we ask
investors and companies to play on the environmental and social issues. I think we also have to put that in the context of democratic decay and that sometimes asking these companies and investors to effectively have more influence is not really that good for democracy. So it's a balancing exercise. Now to your question about startups, about starting new institutions. So I think part of this is specific to this field. Part of this is about who we are as individuals.
As a person, I also talk to people all the time who are either interested in startups or in ESG or something. I rarely fully shake up the impression that there's a feeling that the grass is greener somewhere. I encourage people to proceed with caution because at the end of the day, the grass is not that much greener. It's just a green that fits you. So when we say the grass is greener I think it reflects two questions. One is that people need a sense of purpose and they want a sense of influence. To people who want a sense of purpose I tell them, "Please become a nurse, a teacher, a doctor, join the police, join the military-- I'm probably forgetting a million things. Volunteer." You can do a lot of really important things and some of the most important jobs-- What would we call them during the pandemic? The frontline workers?
Ben (31:03):
Key workers.
Jerome (31:03):
Key workers. So yeah, but they are. Turns out they are. So for people who are looking for purpose, look at this. For people who are looking for influence or really a sense of agency on things-- Well, there's very different ways to have agency on things where it fits... You can have agency as a regulator, you can have agency as the CEO of a big company or as an executive somewhere. You can have agency over your community, over your family. Again, pick your battle. Where it might be sort of tickling, the whole startup thing, is in a sense of freedom. "I don't want to have clients anymore. I don't want to have a boss anymore. I don't want to have something." And some of this is true. I delight in nothing more than no one else having control over my time; in my work dedicated time. So that's a great joy. But you still got to interact with other people. Your existence as a startup, as a think tank is based on, "Well, do people trust you? Do they respond to what you're offering? Do they engage with you?" So it's not like I'm going out in the world just saying whatever goes from my head. Although clearly today I am. It's still a job of crafting thoughts and ideas and articulating them and finding ways to communicate them in a space that will be responsive. And yes, it's hard. It's hard in a
sort of economic stability, visibility standpoint. So got to be ready to have that battle.
Now, on building institutions in the field of ESG in general. I mean, I started in it at a time when it was just emerging. So yes, it didn't really have institutions. I think you try things, you do things. Institutions emerge because people want a space to congregate, to gather. They want a space for thought leadership, they want all sorts of things. So that's how things like the PRI emerge. Preventable Surprises in a number of ways created as a-- Counterweights would make it sound too weighty for what we actually are, but for a different voice. So rather than the structured institutions with signatories or members who are trying to reflect the views of an aggregate number of other institutions, whether they're financial or the United Nations or otherwise, we want to be the nimble ones. We want to be the people who said, "Well, we're not dependent on this to express perspectives and offer ideas and things that are relevant to this field."
That may speak to perhaps more ambitious participants, but eventually create a space to discuss ideas that is more open, that is more candid, that larger institutions cannot have. I don't have grand ambitions about growing Preventable Surprises. I call it a re-startup. Yes, it existed before me. I have infinite gratefulness to Raj Thamotheram who founded it and all the people that have been part of the journey. But in many ways it was a relaunch. I want to stay nimble, and to do that I can't grow it and I don't want to grow it. I'd be happy to have a few more people obviously. But I don't want to get into a position where I'm dependent on other people's point of view. You always have some relationship in the funders and other things and also having people depend on me for their livelihood.
Ben (35:30):
Sure. Is it that question of being agile, quick decisions, less bureaucracy, or is there something other special about being small and this other voice which you think is perhaps a unique attribute which you'd want to keep? Or is it these kind of structural social political things? I sense there's something maybe a little bit more that's almost foundational. You need-- I kind of describe it as you need small boats and large boats when you're in a flotilla and if you have just one kind, you're just not as good.
Jerome (36:04):
Yes, I agree. I think that maybe in that sense when I use the counterweight analogy it was inaccurate because it takes a variety of actors. In many ways we can exist because
these larger things exist. I'd like to say we are relationships more than anything else and that includes institutional relationships. I think quite idiosyncratically our little boats is able to exist because the big boats know that we exist. Because we've worked there, because we've lived there, because we have the relationships with all the people in the big boats. I think there's lots of people in small boats who would love to have the sort of attention that we get and there's a real inclusiveness question about how all these institutions interact. But yes, we're part of an ecosystem for sure.
Ben (37:17):
That's interesting. I reflect that the importance of that essentially human connection, institutions… Yes, we have processes and ideas and mission statements but they're made by people. Therefore institutional to institutional relationships are also made by people. And where people have been or obviously the history of where that comes from, I hadn't thought about it like that. That there is in building institutions, potentially building relationships is one of the very underrated features. It's obvious on the one hand, but actually you have to put a lot of work into it particularly on that. I was also thinking about your earlier comment. There's one idea about actually maybe the world or certain countries need 10% less democracy. This idea that you need it, but actually we are log jammed with consultations which don't go anywhere because they're 51/49% consultations or even they're 60/40.
You actually kind of know. People know without them and therefore you can't make decisions. I was wondering what you think about that. I'm quite keen on having participatory forums. So I like this concept of open space, even climate assemblies, juries, some of the things which has happened in Taiwan. But actually, I also think that then you do leave it to technocrat. So you get a better source of information, proper participation that happens across many domains, but then you let policy makers actually craft given that information with perhaps less democracy. But there is a balance. I'm not sure, but it seems to be that some of our governance processes at least as they are today, don't seem to quite fit what people in general want. But we haven't manage to square that. Obviously this is one of those that has no answer, right? Governance mechanism, we had a better one in that we'd probably put it in. Arrow's theorem suggests there isn't any perfect way of doing it, but it seems even less perfect today than where we were. I wonder whether actually we need some rebalance between on the one hand more participation which is a form of democracy but you don't necessarily have the binding vote, and then allowing essentially expert policy makers which seem to have got downgraded in people's thoughts, but to my mind are actually even more important today-- the genuine ones-- there's a question around that. So 10% less democracy or 10% more democracy?
Jerome (39:48):
First of all, it really depends where. I think the conversation about democracy in the US or France or Germany or the UK or Taiwan or Japan is pretty idiosyncratic. You have different institutions, you have different societal expectations. You may or may not have a monarch. You may or may not have a constitution. I'm also generally drawn to those participatory models. I think the risk that you described of those, I guess technocratization of decision making exists, but at the same time it's kind of already there; the techno structure. We certainly see it in the EU with the commission and otherwise. I also worry-- and this goes back to my earlier points about, "Why we should worry about all this," that the participation can be skewed. What sort of interests are in play? Who is really participating at the table? What sort of underhand influence in lobbying takes place by a range of institutions around it? So I think it's good, but it's insufficient per se. I think each country in this case in their own institutions and with their own people have got to figure out this balance between the balance of powers, between industry and finance and technology and society and other interests. So that's my non-answer answer.
Ben (41:44):
Was a very good one. In the US I think there's a bit of a debate as well on-- I'm going to call it billionaire philanthropy, but this is a sort of NGO blob, I guess. Do you think we should have more, we should have less? Are they doing the right thing? Is this a problem because it got into the gap of where government hasn't been able to go? Actually, from that view then maybe they're imperfect, but they're going into that gap. I guess it does matter geographically as well because there seem to be more US billionaire philanthropists than any other form of billionaire philanthropists although there are some in Asia and Europe and around. But there's been in the same way that so much in the US has contested this kind of pushback. Like you mentioned earlier, Bill Gates you could argue was a visionary in terms of pandemic. If you're paying attention, done a lot in global development. We have a newer wave actually with a movement called effective altruism to some extent. So I'm interested in what you think about the philanthropy space and whether we should have less billionaire philanthropies or more, or is it about right?
Jerome (43:00):
I think it depends what they're doing. On the one hand we shouldn't overstate the power of philanthropy. Bill Gates, I remember reading a piece like an interview of his in the
Wall Street Journal some years ago reflecting on his experience trying to change American education which I think was his kind of first interest. "We're going to do stuff about education and we're going to pour billions into it." After a few years-- and I maybe poorly paraphrasing and maybe mistakenly paraphrasing, so it's my impression of the conversation. Bill if you're listening, I apologize. I'm not getting any money from the Gates Foundation. I don't think I'm on the radar. But he said, "Oh, I realized that we're a drop in the ocean." The amount of money that goes into philanthropy is in the hundreds of billions. It's nothing compared to the scale of financial markets to begin with. I think the political influence of billionaires in the US, of wealthy people or parts of wealth in general, particularly in the context in where essentially the private finance of political campaigns has become the norm-- Just the whole idea that the presidential campaign could cost like a billion dollars to me is so absurd.
I mean, there is something about the scale of the country and everything but it always shocks me. That is more of a question to me. I think we pay way too much attention to billionaires, whether they're Donald Trump or Elon Musk-- and maybe that's a sort of social media effect and the sort of intersection of narcissism and social media and desire for leadership, I don't know. I'd love to read some analysis on this. But Elon Musk is just a dude, right? Some argue he's a very privileged dude and all of this. That's true. He has created some interesting businesses and in others and he's probably lunatic and whatnot. Why are we paying so much attention to everything that Elon Musk tweets? In some ways I shouldn't even be talking about him right now because I'm giving him attention. Some of it's interesting, some of it's not interesting. Why is it constant headlines? Why are we obsessed with this? So one way to decrease the influence of billionaires is to pay less attention to billionaires. Again, that's my non-answer to your question. But I've met billionaires that I liked. I've met two billionaires in my life. One I liked and one I didn't like.
Ben (46:14):
50/50. Well, that leads me to reflect that it's potentially part of the human condition with social animals. There's something about-- and you can say the social media and things. You've got some hundred million followers. There's something like humans like to pay attention to things other humans do because of this social animal background that we have which leads me to think that there's always a part of me which is disappointed that this blob of ESG can say nothing about art, can really doesn't say very much about humanities. And I think maybe this is the problem, is it does barely say something about human rights. I mean, it does in principle. It says everything about it. But as you've alluded to, in practice within financial markets it's very tough. You get at the margin some extreme embargoes or things like that.
But in the messy middle where we know kind of life goes on, essentially the blob of ESG is silent. I extend that to being it's silent over art and humanities in general. And really therefore, financial growth is overly important. GDP seems to correlate with all of the other things that we think are important like happiness and life and health and education. But then when you get down to it, the kind of things that we seem to really say these are what make us human; dance, poetry, drama, narratives, maybe the blob that social media why we pay attention to billionaires. That core of when people ask, that is really important to not everyone in different flavors of it. And maybe that's the case because we're going to be segmented and we've potentially segmented financial markets in that way. Humanities answer for doing that.
But it seems to-- In some ways I was discussing with people they kind of argue, "Well, maybe does that make us less?" I don't see any reconcile so this is my non-question to your non-answers. But I'd be interested in do you think the power of broadly the arts of humanities have anything to say on financial markets, the blob of ESG or vice versa? And could we do with something more on a systematic level which has more reflection? It goes into, "Do we study enough humanities in universities? Is that the right way of studying it? Why can we not all be more artists at the same time?" I don't know. But anyway, ESG seems to have a lacuna over arts. That makes me sad. I'm not sure if it's a mistake. I feel it might be a mistake. What do you think?
Jerome (49:05):
Lots of things. The starting point we're talking about Elon Musk or billionaires and so on. And all of these things, you're right, they speak so much to some mental models or expectations about how society works. The alpha male followers whatever thing. If we want to be thinking about... Sorry, I'm looking for my words because I'm slightly outside of my comfort zone in terms of things that I may or may not have said before. But I think that's something that's shifting. Those models, the traditional male dominated society that's dramatically shifting that's shown by numbers in terms of who finishes superior education and performance in school. It's shown in who gets jobs and everything. The presence of women in the formal workforce in a range of countries and so on and so forth, that's a huge deep shift that the ESG world is not quite paying enough attention to. And I think this links to culture, this links to how society works, how society is evolving. It's a big deal. In many ways companies pay more attention to it because it's the clients but not always that well, and they don't pay particularly well attention to it in terms of the workforce and so on and so forth.
Maybe I should summarize what I've been blabbering about for the last two minutes about saying, yes, there are deep questions. Gender is one of them and we should be spending much more time on it. Humanities-- First of all, I'm finding that a lot of people that work in ESG are interesting. Part of the reason I've stuck in this field for 20 years is that I keep running into interesting people from different backgrounds and other things. ESG is an endless field. You can have expertise in a range of issues. You can have expertise in a range of asset classes. You can have expertise in a range of industries. Nobody's got that and nobody should pretend to have that. No one should pretend to have a system that captures all of that by the way. That's a big part of it. So I do find people who have this varied set of interest and that naturally gravitates to these questions. They're probably more curious about how the world works. "Can you engineer that?" I mean, I'm generally a big fan of people getting broader, generalized education in humanities and in societal issues and just knowing stuff. Certain faith in road to understanding of things. But it's clearly not enough.
Ben (52:45):
Sure. My last three questions then coming up for time. So one was referring back to the comment you made earlier about the levers that we can pull. I'm interested in what do you think are the few, maybe two or three levers that we should be most looking to pull; either maybe those which are underrated or those which are maybe obvious but we think we should be pulling more. And maybe you could think about that in the context of potentially policy levers. Are there one or two policies that you think, "Oh, we do this and this is a potentially important lever, whether that's carbon tax or innovation or regulational standards? Or are there some levers within the civil society company interaction where you think, "This is where we should be focused or this is where we need more attention." If we think about the levers of the world or the levers that you are interested in pulling yourself, what would you highlight?
Jerome (53:49):
So one that comes to mind is lobbying and in part because we've talked about it and we've done some work on this. But the fact that a lot of the outcomes and lack of regulation around some of these issues, sometimes in spite of and quite often in spite of general popular support happens in closed door negotiations is worrying. I'm not an idealistic about, "We're all nice and we are all making decisions.” And, yes, the sausage is dirty and you don't want to look at how the sausage is made except at the moment the sausage is very dirty. We could use a bit of cleaning. That's one answer. Another thing that I've been thinking about-- and this is more a question than a statement. But
I'm looking at how much regulators are struggling to address greenwashing and all these questions about what is sustainable finance and what is responsible investments and so on.
I think there's two reasons for it. One is the general focus on transparency and disclosure. I think as an industry we spend way too much time on transparency and disclosure and in some ways let the regulators do what they're going to do and then continue the discussion. That's a whole other conversation. But the other thing it seems to me is that it's kind of odds that we are putting so much focus on trying to regulate sustainable finance and so little focus on regulating unsustainable finance because it seems to me that we have a much better understanding about what is unsustainable in terms of markets, practice or mechanisms or emergent phenomena. Then we do about what is sustainable.
Ben (55:55):
That's a very good observation. I haven't heard it express that way. My immediate reflection is that you are correct. That actually we could do with better standard financial regulation and let the markets try and figure out what is sustainable or not. Let sophisticated practitioners still work it out, which we're still working it out. We have an idea of what causes bank runs. We have an idea of what isn't very good finance. In some ways, some parts of what I like to call high finance could do with stricter regulation or certainly more oversight. And what I call the frontier parts where we don't have a consensus on it still like, “What is ESG? What is sustainable?” No consensus on some of the-- Some there are, but some are not. So if the experts don't really understand it I'm not sure how the regulators would understand it which actually means that I'm going to ask one extra question. This is maybe a bit more technical then.
But do you have a view on EU taxonomy or SFDR which are these sustainable finance regulations coming through? Because there is a strand of thought which is that they're not really doing that much. This maybe alludes to your fact that transparency gets you so far but extra transparency is not adding anymore. You get the sense that people are flailing around to try and do something. Maybe this is back to the 10% less democracy thing but it's not really doing anything on the practitioner level. There's just a burdensome of regulation which if it was good regulation, say on the ozone layer, you'd want it. But when you look back and go, "Well, what is this really doing? Do we really understand it?" You kind of go, "Well, it's not adding anything." I don't know if you have a particular view on particularly taxonomy or that or any of the other regulations coming in.
Jerome (57:41):
So I haven't talked to a single person whether on the finance side, on the NGO side, civil society or otherwise that is happy with this regulation.
Ben (57:51):
They managed to upset everyone.
Jerome (57:53):
No, it is interesting. It's capturing attention. I've had conversations about some elements that may be interesting in terms of over time getting financial institutions to publish things around their externalities; negative externalities and so on. So yes, maybe that's interesting especially because it's kind of a way to everything else that is focused on materiality. And again, I apologize for using all these annoying words. Other than this my sense is that the taxonomy is a cultural misunderstanding in a number of ways. Part of it is bureaucrats and equity markets. Part of it is European thinking and Anglo-Saxon models. But part of it is also fundamentally, trying to codify things that are changing a lot. So with the taxonomy they said, "Yeah, we'll revise it and so on." But it just seems like an absurd exercise and what that is by definition will be too slow.
Ben (59:15):
In a way that's the issue with all regulation, that even the very best is only up to date in that moment in time and then it ossifies. Some parts of the world ossification doesn't matter so much because it's slow and that part of the world is not changing so much. So maybe regulation if it can do that in a part of the world or the system which is changing very fast and or there isn't actually any consensus to begin with. Then when you ossify or you put in rules which may not reflect what people think and then it's useless a year later, I can see that definitely as criticisms. So last question, two part question. What are current projects that you are working on or things and thoughts for the long term? Second part is do you have any advice for listeners out there, perhaps young people who want to make an impact or people in the field about what they should look at or potentially any life advice you want to share about arts or your career or your journey so far? So current projects and any life advice?
Jerome (01:00:32):
I'm trying not to be trite with the life advice.
Current projects, we're working currently on reproductive health. It's a topic that affects us all. It has been particularly in the political spotlight in the US post the Supreme Court decision to pull back on federal productive rights. People tend to think of this as something that happens in the US, but stuff that happens in the US is a way of crossing the ponds more often than we'd like. Sure there's very different views around this globally so I'm not taking a political stance on it as much as saying, “Here's a fundamental health issue and a health question that is not on the ESG radar because it's awkward. Ooh, its swimming. Ooh, it's like political,” all of that stuff. So that's one.
The other project that we are working on at the moment-- We're doing this with support of a foundation called Direct Action for Women Now. And then we're working with the support of another foundation called the CO2 foundation with a really interesting project about bringing together climate activist and social scientists on the finance side, but to try to figure out why is climate action so slow? Why is climate finance moving so slow? Is there anything about human dynamics, behavior and the soul that we can look into that would make us better at our jobs? So that's a project we also have going on.
So the trite life advice is be yourself. I mean, that's one. I've never been happier than when I didn't give a damn about what other people thought of me. Even though I say this, I worry about what people think about me all the time. But in a way where you sort of overcome that and say, "What is it that I can be in this world?" Focus on relationships. To me that is so important in the world that increasingly now is so fragmented and so focused on individuals. I really value relationships. I think we exist because there's a world around us. It's that simple. Make the mistakes you can afford, but make them all.
Ben (01:03:30):
Great. Well, that's a very good note to end on. So Jerome, thank you very much.
Jerome (01:03:36):
Thanks for having me, Ben. So happy.
Alex Edmans: End of ESG, or, ESG as important intangibles but not special versus other important intangibles
Alex Edmans argues: ESG is both extremely important and nothing special. It's extremely important because it's critical to long-term value, and thus any practitioner or academic should take it seriously, not just those with "ESG" in their job title or list of research interests.
It's nothing special since it's no better or worse than other intangible assets that drive long-term value and create positive externalities, such as management quality, corporate culture, and innovative capability. The following implications follow:
1. Companies shouldn't be praised more for improving their ESG performance than these other intangibles; investor engagement on ESG factors shouldn't be put on a pedestal compared to engagement on other value drivers. We want great companies, not just companies that are great at ESG.
2. Investors who greenwash are correctly being held to account. But so should other investors who fail to walk the talk, such as actively-managed funds that closet index or systematically underperform. Clients of non-ESG funds deserve the same protection as clients of ESG funds.
3. Practitioners shouldn’t rush to do something special for ESG factors that they wouldn’t for other drivers of value, such as demand that every company tie executive pay to them, force a firm to report them even if not relevant for its particular business, or reduce complex intangibles to simple quantitative metrics.
4. Many of the controversies surrounding ESG become moot when we view it as a set of long-term value factors. It’s no surprise that ESG ratings aren’t perfectly correlated, because it’s legitimate to have different views on the quality of a company’s intangibles. We don’t need to get into angry fights between ESG believers and deniers, nor politicize the issues, because reasonable people can disagree on how relevant a characteristic is for a company’s long-term success.
Paper here (2022): https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4221990
Sophie Purdom: Climate Tech investing, brown spinning, venture, sustainability | Podcast
Sophie Purdom co-writes a climate and innovation newsletter read by tens of thousands, ClimateTech VC. Sophie has worked in start ups as an operator. She is a venture capitalist investor. She has written widely on sustainable investing.
We speak on how Sophie came to climate tech investing, the importance of knocking on doors and being helpful.
What Sophie learned working for local government (Providence) and how climate has always been her through line into investing.
We discuss what areas of climate tech are over-invested in and under-invested in, and why she’s interested in the climate-industrial-tech area.
We chat about investment philosophy, the VC geography and gender lens and how she seeds the landscape on access to capital at the seed and pre-seed stage.
Sophie explains the concept of “brown spinning” and the pros/cons of taking assets private or selling brown assets to less responsible entities.
“This concept is what we would call brown spinning. So taking publicly held brown or underperforming - from a climate perspective - assets private in order to hypothetically avoid rigorous accounting and operate with capital providers that are less ESG inclined. Fascinating topic. One of the many downsides to divestment: if there's a will then money will often find a way to finance these things.
One positive example in the case of reversing brown spinning s is AGL in Australia. One of the largest energy giants out there and billionaire, Atlassian co-founder Mike Cannon-Brookes playing the activist investor role as an individual, coming in and buying up more and more percentage ownership in this business in an effort to strongly nudge activists, push them towards greener practices and he succeeded in getting that board vote and changing the outcomes of that business. So that's one very rare splashed all over the front page of the media example of how there's a way of green spinning these private brown assets potentially back to good. But to be fair, the majority of the stories that should be told unfortunately go in the other direction.
One that caught my eye …Another billionaire, Harold Hamm is trying to take the shale (gas) Company that he founded - Continental Resources - private. He owns (already) about 83% of this oil and gas US based company. The idea is take the company private because the public market investors are skeptical of plowing money into a non-ESG aligned (strategy). He thinks he can get a better return or cheaper capital in the private market - the quintessential brown spinning concept. I'm concerned about it. I'm not exactly sure what you do here other than you can't go too hard or too fast on ESG reporting requirements without bringing folks along on the management train and leave them out because the worst case scenario is they hop off of the reporting requirements and go operate in the dark.”
We play over-rated, under-rated on: Lifting Weights, Carbon tax, Green New Deal,Tesla
Carbon offsets, Nuclear Power, Carbon removal and the woolly mammoth.
We finish on Sophie’s current projects and her career and life advice.
Check out Sophie’s newsletter here. And her Linkedin is here.
Available wherever you get podcasts, or below. Video with captions on YouTube, or above. Transcript below.
PODCAST INFO
Apple Podcasts: https://apple.co/3gJTSuo
Spotify: https://sptfy.com/benyeoh
Anchor: https://anchor.fm/benjamin-yeoh
Transcript (only lightly edited)
Hey everybody. I'm super excited to be speaking to Sophie Purdom. Sophie co-writes the climate and innovation newsletter read by tens of thousands of people; Climate Tech VC. You should subscribe. She is a venture capitalist investor. She worked in startups as an operator. I first met Sophie in person as she was showing me around her Agtech startup near Boston. She's all around brilliant. Sophie, welcome.
Sophie (01:04):
Such a kind introduction. Thank you. I feel the same.
Ben (01:09):
Great. So how do you think you view your origin story? You are currently in VC, you've come into climate impact investing, but how did you get there and what attracted you to this area rather than any other part of the climate ecosystem?
Sophie (01:26):
Great question. I think for me it has always been climate through and through as opposed to maybe some functional specific areas of expertise like investing, or consulting, or being an entrepreneur. It has been this theme that has cut through all of the different threads I've been lucky enough to be a part of and explore. So to make that tactical and practical, I feel as if I've been rewarded every time I've helped others succeed within climate; whether that's saving enough money to hire new teachers through an energy reduction program, or making the Rhode Island government look good from a resiliency type of piece of legislation, to helping set up an ESG fund at endowment, and now to helping support climate founders at the earliest stages of their company formation. I am lucky to get the impact itch and be able to scratch that, but really it's also self-reinforcing in some ways.
I'm receiving praise, I'm granted opportunity, and I'm given a bigger stage to work on over and over again. So to me, climate's been a career accelerant at the same time as being an impact lover for me that I care about personally. I don't feel like people necessarily talk about that as much. We're all people and all of these external factors and signals really do very much play into our day to day decision making. I think it's only fair to say that I've benefited in large part because people reward me for also working on climate. So I'm hardly an entirely do goody savior. It's been self-reinforcing as well.
Ben (03:31):
Importance of incentives. Do you think growing up in Acton, Massachusetts kind of particularly teach you anything? I guess you helped out with your family business to some extent so you had the sustainability thread and climate thread. But you also had a little bit of business experience and I guess being in Massachusetts is something which is kind of helpful as well.
Sophie (03:56):
I mean, certainly. I moved from rural England through to great school systems in suburban Massachusetts and was lucky to go through that system from day zero with amazing public school teachers and a bunch of resources as a kid. It also allowed for more interaction with nature and maybe silly little things. For example, one day a teacher was devastated because they had hit an animal on the road and didn't know what to do with it and probably should have left it there for the highway people to clean up. But instead, they chucked it in the back of their pickup truck and brought it to the school where I was doing some overtime stuff with our amazing environmental science teacher. We jumped into action and we were like, "Wouldn't this be so interesting if we preserved the skeleton of this-- I think it was a raccoon or something-- using dermestid beetles?"
So we rigged it up, dealt with the animal, then put the beetles in this container and put it under an air hood and left it for a couple of weeks. Came back and low and behold there was a perfect skeleton of this raccoon. I definitely didn't tell any of my friends that I was doing this in a back room until the project was done and then somehow made it a cool thing. We ended up preserving a whole bunch of different animals that way, including our largest one, a deer, which we had to get police approval for so that we weren't seen as preparing to be serial killers or whatnot. Silly little story of like find different ways where your environment impacts you. I just feel very grateful that there were folks around me that were encouraging me to do bets like using dermestid beetles to preserve roadkill. There are manifold examples like that.
Ben (06:05):
I've heard crazier, but maybe not that much crazier in terms of high school projects. You were at the Providence office doing sustainability stuff so I guess that's kind of local state government. Did that also teach you something about sort of that part regulators what the state can do or anything, or was that more passing?
Sophie (06:28):
Yeah, no doubt. So I was lucky to have this experience with finding folks in my hometown ecosystem that were encouraging of my environmental pursuits. Sure, the dermestid beetle thing, but then it actually became more serious when we did this large energy reduction program and we saved enough money to hire two new teachers. That meant we were then able to hire an energy czar for the school district and then help pass some legislation to allow for that hiring line item budget across the Massachusetts school system. So I had a taste going right into college of how legislation and policy impacts climate at home or in schools and knew I wanted to do more. So instead of kind of sticking with campus things, I went straight downtown. Providence is a tiny place. It turns out if you just show up enough and knock on the door and make yourself helpful then you can get through the door most of the time. That was my experience with the office of sustainability and another amazing woman that was game and was open for a climate go getter to hustle. She's now in charge of large parts of the Nature Conservancy and has a really inspirational career.
So we got started working on things like recycling programs, municipal waste management, collection of different light bulbs, and the dirty behind the scenes impactful things from the municipal perspective. That allowed me to be involved in the conversation when the resilient Rhode Island act was set up many years ago at this point, which is the first time that there was really business intersecting with climate legislation. Rhode Island being the ocean state, that meant mostly related to sea level rise and resiliency planning and what that meant for small and mid-size business owners. My job was to go communicate some of this to the businesses. Maybe case in point of over and over again, I keep circling back to this piece about communicating climate from a business and bottom line perspective. So it's cool to retrospectively look back and find that thread running through everything.
Ben (08:52):
That sounds great. Great advice as well. “Just knock on doors and be helpful.” It seems like quite a good thing to do. So fast forward slightly to today. You're doing investment now; venture capital investment and commenting about it. Where do you think we might be underinvested, apart from obviously all of climate tech, but any other particular where we are underinvested? And maybe relatively, is there anywhere that you think conversely we might be a bit overinvested as in actually we think we should focus a little bit more there, or this is where you think innovation's really needed?
Sophie (09:25):
Yeah. Spot on. So we track all of this in quite some detail at Climate tech VC. So at Climate Tech VC which folks see as a newsletter, but on the back end is really a data and insights platform, we track all of the deal activity mostly in the venture capital. So early equity space and do it very bottoms up. So look at the companies and categorize those as what industry or space-- We have 200 or so subindustry verticals-- and where's the capital flowing. And so then we can compare that against where are the greenhouse gases are coming from? To me, that's the way that you would calculate the gap. I'm curious if this resonates with you, Ben. Quite definitively, there's an abundance of capital flowing into Electric Vehicle Original Equipment Manufacturer; EVOEMs. That spike probably happened 18 to 12 months ago kind of beginning of pandemic times when there was a Russian of ESG capital looking for places to park it.
I like to say the Tesla elevator effect or escalator effect. Tesla's kind of the one and golden breakout child of ESG/ climate and big financial returns. So everyone's like, "All right, let's go find the next Tesla." And so then you have Rivian being heavily financed and then it's like, "All right, what's the next Rivian?" Then you go down and down the stack. Anyway, can help quantify some of that. But definitely abundance there versus the other side where massive amount of global emissions come from with lots of really complex chemical and physical infrastructural changes that need to happen, which to me screams of great way of making money, but is underinvested and would be the industrial category kind of like writ large. That's everything from novel chemical processes, to manufacturing, to cement, steel; you name it. We see that as the biggest gap relative to emissions.
I'll also toss one other segment out there which doesn't quite show up on that emissions comparison graph, but that's because it should be in the negative emissions category which is all things CDR or carbon dioxide removal. It has been a hot investing space for about the past six months or so, but before that it was trivial and really underweighted. It's still seen as relatively catalytic. So we have lots of semi philanthropic organizations that are helping to see this and novel mechanisms like advanced market commitments coming in by the likes of Stripe and the Frontier fund. So I'd point that one out as well. And then of course, many thoughts on, "Where are the Frontier next most interesting areas to invest?"
Ben (12:27):
Sure. Yeah, I agree. I think that Tesla effect has put a lot of capital in that as in fast followers, or maybe not even that fast followers. I also agree in the places that you think are underinvested. Obviously, you had that Stripe led in fact very well covered by Climate Tech VC with Nan's work. I think I agree with that too. I would maybe put a little extra category on the land use clump which obviously is not so directly VC relatable, which is maybe one of the reasons why it's perhaps a little bit under in terms of that. But I think I broadly agree.
Then within that industrial complex, are there any particular areas you are also most excited about or maybe some companies on things that you've seen? Because like you say, there's hydrogen power this, or steel and cement. There are circular ways of thinking about concrete. There's heating and cooling, industrial gases. I know you've covered some of them. I don't need all of it. But is there anything where you go, "That seems super exciting?" Even if it might not be the kind of 80% win, it's the 1 or 2% there that you really favor.
Sophie (13:42):
Yeah. In the industrial category to kind of tighten the definition that I said previously that would be stuff like process heat and fuels, iron and steel, cement chemicals, even robotics manufacturing, and then importantly metals and mining. So many companies to tip a hat to. But maybe one would be for example, Solugen, which if folks are interested we did a really fun profile with the founders of that. As we like to say, Gigacorn Company, meaning they have reached a private billion dollar plus valuation and have giant climate impact; hence the giga unicorn piece. Just kind of like unlimited applications and impact potential there to entirely decarbonize and often make it into a carbon negative process what would otherwise be splitting a lot of dirty fossil fuel based chemical processes. So that's a fun one.
There's a lot of decarbonizing cement place that’s out there. There's a couple in the steel space. I think what we're seeing is these are capital intensive businesses to get off of the ground. They have a lot of enthusiasm often out of the gates where super smart founders, super smart team will kind of cruise to pilot scale altitude and then recognize that venture and often private equity is not the right way to finance these first of a kind massive pilots; which are on the order of sometimes like half a billion or up to a billion dollars’ worth of steel in the ground to create a new forge or a new cement refinery.
This is an observation. The department of energy loan program office, for example, Stateside has been hyperactive over the past few years behind the scenes because things take a long time to run through; getting the pools of capital necessary at the LPO through to running the diligence processes. We're now starting to see some of these kind of key stone loans deploy out into climate tech companies. For example, monolith materials which makes a kind of carbon negative carbon black product which goes into everything from tires to inks and historically is coming straight out of petrochemicals. They're able to make that with renewable hydrogen and they just received a billion dollar loan from LPO. So ample opportunity from the tech novel technologies perspective. Good space for VCs to deploy into early with the recognition that the capital stack will be made up with different players. Some of whom, at least Stateside, seem to be leaning more towards government players.
Ben (16:50):
Sure. And I guess that's because a lot of VC in the mini half generation before-- going back 10 years, was kind of capital light software type ideas and climate tech, deep tech is perhaps a little bit different in capital structure and everything. I wondered whether you wanted to maybe highlight how you see your kind of primary capital impact investing that you do now and differentiate it from how you see so-called ESG working now. I think ESG has become a somewhat overused word. Perhaps even slightly meaningless because it's become politicized and it's entered the culture, work wars as I like to call them, which maybe thankfully the terms impact or VC investing hasn't done. But arguably, impact investing albeit with small amounts of capital has always been trying to be more impactful or make more of a real world difference.
Sophie (17:48):
Yeah. I get asked this quite a lot these days with Musk putting ESG into the news.
Ben (17:58):
Yeah. Peter Thiel as well. I think maybe even more from a libertarian political perspective, at least.
Sophie (18:05):
No doubt. They're doing a masterful job unfortunately for the ESG space. Although in some ways it kind of deserves it with allowing the ESG myth to continue for so long that there is a narrative disconnect for the Mosque of the world to angrily tweet out against. We can dig into that in a minute. I'd say my one sentence response to all of this is ESG is not impact. We should talk about this because you might have a different perspective here, but from the point of view of what I invest in which is high growth technology businesses that have a climate positive impact because that then drives superior returns and opens up novel markets. What we would be measuring or pushed to measure would be the future carbon impact of these nascent technologies coming to scale.
That's usually in terms of greenhouse gases avoided, or produced, or straight up removed which is very different from ESG reporting, which to my understanding is much more closer to corporate governance and improving the performance of the company through decision making, hiring, pricing, and all sorts of things like that. My concern with the ESG downturn or myth perpetuating is that it will knock out right from the start this new space of climate impact reporting which looks a lot more like forecasting the impacts of these novel technologies on greenhouse gases. That's really just getting started and it's super tricky space. It's getting tied up unfortunately at the moment with ESG reporting.
Ben (20:10):
That's quite interesting. I agree ESG is not impact, and maybe we can talk about divestment or engagement. Also the difference between public and private markets which is an intersectional problem. But that's quite interesting about how you've noted. So for listeners, I guess in US or US SEC has got climate reporting regulations coming out and some people are saying, "Well, that's overstepping the mark because it's not environmental." Other people are saying, "This is material for investors." And actually because it is a physical thing or at least part of it is, let's concentrate on the carbon emissions piece that could fall under an impact idea as to what you're saying, as opposed to purely either a policy led or an extra financial led thing from an ESG idea. Therefore as you point, it's actually at this convergence of all of these both ideological and policy debates.
So I agree that it is getting caught up. To your point, it's also quite early. There isn't a consensus quite for instance on how to do some aspects of carbon accounting or yet alone, natural capital and all of these things. It would be a shame if that was slowed down because it got caught up in politics. However, I do wonder whether it was inevitably going to get caught up in politics because there are such big stakes involved; both from corporates and policy makers and people, as well as large amounts of money. So I think that is interesting.
If you had one policy choice that you could implement, what would you go for? Maybe you’re a SEC or even better, you're sort of some benign dictator of the United States. You could be the benign dictator of the world if you want this to be a global policy, but maybe we could start with the US. Is there anything that you would do from a policy perspective that you think would really help?
Sophie (22:20):
I mean, is putting a global price on carbon on the table? If so, that's probably where I would shake my magic wand. That's the low hanging fruit kind of answer here. I don't think this would necessarily be at the top of my stack ramp ranked genie in a bottle opportunities. But one that I've been thinking a lot about is what's the role of whether it's governments or other players in getting pretty heavily involved in the carbon markets in more force? Whether that's like standard setting or verification or maybe even certification. I go back and forth on whether that would be helpful or not, but it's pretty evident that it really should not be like a for profit type of player that's managing all of this. There's room for improvement particularly in terms of speed of bringing new standards on board, helping manage the integration of the voluntary and the compliance market; like supply and demand in some ways, helping pull countries into these markets alongside the corporates and individuals that have been leading the way for some time. So those are more topics about an area that it would be interesting to pull national or global policy into in more force and more specificity.
Ben (23:56):
Do you worry about private companies going public and being subject to more tick box ESG, or the other way around where you have maybe brown companies or brown companies going light brown but there's a lot of pressure? So they actually go private, but to owners who you would argue are less responsible owners. I guess the other way we see this is you sometimes get public companies who sell assets privately; brown assets. You can see the players that they've sold them to and now we've actually got a track record of some of them. They've sold them to less responsible players. You either get methane flaring things, or they're run less badly, or obviously there's the kind of the S and ESG. So workers are treated badly as well as all of that. Or do you think that's a kind of overstated risk or not?
Sophie (24:48):
No. Very much not. I think it's understated. This concept is what we would call brown spinning. So taking publicly held brown or underperforming from a climate perspective assets private in order to hypothetically avoid rigorous accounting and operate with capital providers that are less ESG inclined. Fascinating topic. One of the many downsides I suppose to divestment in case in point that like, if there's a will then money will often find a way to finance these things. Maybe one positive example in the case of reversing brown spinning in some ways is AGL in Australia. One of the largest energy giants out there and billionaire, Atlassian co-founder Mike Cannon-Brookes playing the activist investor role as an individual, coming in and buying up more and more percentage ownership in this business in an effort to strongly nudge activists, push them towards greener practices and he succeeded in getting that board vote and changing the outcomes of that business. So that's one very rare splashed all over the front page of the media example of how there's a way of green spinning these private brown assets potentially back to good. But to be fair, the majority of the stories that should be told unfortunately go in the other direction.
One that caught my eye just yesterday and I'm sure we'll probably be hearing more about or maybe we won't. That's a story in and of itself. Another billionaire, Harold Hamm is trying to take the Shale Company that he founded. So Continental Resources private own about 83% of this oil and gas US based company. The idea is take the company private because the public market investors are so skeptical of plowing money into non ESG aligned means that he thinks he can get a better return or cheaper capital in the private market. So just like quintessential brown spinning concept. I'm concerned about it. I'm not exactly sure what you do here other than you can't go too hard or too fast on ESG reporting requirements without bringing folks along on the management train and leave them out because the worst case scenario is they hop off of the reporting requirements and go operate in the dark.
Ben (27:52):
Yeah, that's a really good point. You've just made me reflect that what they both have in common is to do with the owner. Obviously in public markets you'll tend to be more atomized, smaller holdings, then you've got large owners and it depends what the owner wants to do. So you have an activist owner; whether you're going to call it impact activist or ESG activist. But the owner has a view of where those assets should go and therefore that's one of the lenses. Obviously, it's kind of neutral is the thing, but you can obviously do more or different things in private markets than public and then it depends what the owner wants to do. So I think that's quite interesting reflection.
So do you think you have now an investment philosophy that holds together what you've done after reporting on this so much and what would it be? Maybe you can or I can add onto that. Do you have already a kind of biggest investment mistake or opposite side biggest investment learning that you'd already have which has shaped or come out of your investment philosophy?
Sophie (28:55):
This is all emergent and I think that makes it really fun. But I'm game to share where I'm coming from. There's no grant thesis other than it's always been performing well when it comes to climate consideration. So mostly on like greenhouse gas performance, if you have to really drill down into, it will drive out performance. That's always been the nut that I'm going off for years and years at this point, and now happen to be doing that at the earliest stages of these private high growth tech company startups. For me, I think we oddly under weighted the value that can be driven from just very clever distribution models and just go to market strategies for these climate technology businesses which feels anti-climactic in some ways and counterintuitive because that's how all good businesses are built as was beat into my head at Bain.
But I think in climate, we've been looking for a silver bullet type of solution of the technology will lead the way, or win all, or drive home all of the returns. The counter side to that is the team is so wonderful and great. It is kind of the easy pre-seed venture cop out answer. I've increasingly been looking more and more at distribution models which means practically, "What manufacturing partners are you working with and how do you think intensely about your supply chain being resilient and often short and often near short? How do you think about the full life cycle of all of your inputs?" So basically being efficient and not getting caught up in needing to spend more for the end of life use of your product or how do you put the manufacturing as close to the point of use as possible.
So maybe to make this a little bit more concrete, I helped start a company called Kula Bio. That's how we first connected or got closer. Kula is a quintessential deep tech business in that it's got a magical microbe and this microbe can live for a long time because we energize it and therefore make a lot of ammonia, which is of course a beneficial fertilizer major input in most of Ag. Ammonia fertilizer alternatively is traditionally made through the Haber Bosch process which is really fossil fuel intensive and polluting. They have to make it in these mega factories and then ship it all over the world. It has long lag times and that supply chain can get severely disrupted. We're seeing that now with massive spikes in fertilizer prices.
So I think investors and folks got excited about Kula because of the magical microbe, if you will. Whereas my experience was the magic of Kula which was the fact that we could distribute efficiently. We could do it in small batches. We could do it in real time and get it in the hands of farmers right away on the farms. We could stabilize our prices. We had a better go-to market strategy working often hand in hand with some of the existing suppliers but at better prices with better margins. The magic seems to be the go-to market hinged on the breakthrough technology. So that's my little tiny hill that I'm standing on for the month. But come back next month. I'm sure it'll be another one.
Ben (32:50):
Well, that sounds great. I think that sounds like you are a great investor and going to continue to be one. I was interested in this VC in the US. Maybe a couple of slightly adjacent questions. I'm kind of interested in the gender lens through the whole VC industry because it strikes me as being very boy heavy, not necessarily in a healthy way. It's kind of interesting I'm picking up because I'm not really that close to it. Either in the UK, there's a much smaller UK scene, but particularly in the US. I'd be interested in your reflections on how much of a challenge this is; whether it's overstated, understated and how it is. And maybe slightly intersectional with that is traditionally there has been a very strong West Coast scene and now more recently, perhaps more diffuse in climate I've picked up there's a kind of Miami scene which might be a bit more crypto. There's a kind of New York scene and there's a New York to Boston one.
Is there anything geographic there or they're kind of two things but they may be separate. So I'm interested in your geographic reflections because you are more of an East Coast gal that grew up there and actually your hub for your VC is New York. And then whether my reflection's just being on the outside for the fact that there seem to be fewer female VCs, although coming through your cohorts doing great things and is that an issue?
Sophie (34:14):
You're totally right. Representationally, there are too few women and there's too much kind of waiting of venture dollars and people on traditionally the West Coast-- now both coasts. You can cut these diversity or geographic or representation kind of metrics in all sorts of ways. The story unfortunately isn't a surprising one. It's often the older white guys from San Francisco that own the dollars. If you click further into that, often they own the decision rights at the major firms from which new firms tend to spin out of. So there's more women in VC year over year, a couple quarters kind of notwithstanding that trend. But important things to look at are who the general partners are and who are starting new firms, and therefore get to set cultural decisions and parameters and recruiting at the new shop.
So I'm inspired to be amongst a cohort of emerging managers that are increasingly diverse in representation and thought. But we have a massive way to go. Not to make this a pity party, because I think I've actually had... I don't tend to spend too much time worrying or overthinking this because it kind of is what it is. Also, I've been really lucky to have a bunch of inspirational figures that have certainly tucked me under their wings and they're male and female alike. They represent all sorts of different perspectives. The main thing for me has been anchor in excellence and be additive always to the ecosystem. So don't assume that just because I'm here I should get to play. I'm still a little uncomfortable with the title of venture capitalists.
It sounds like a really privileged position to be in. I want to make sure that everything that I do is additional and necessary and really high quality. I'm here to support the founders who are making a climate impact for all of us. I was one of those people not too long ago myself, and I thought really hard about why don't I go do that again? For me, the way my brain works and the way that I enjoy spending my time, I like to connect a lot of the dots together and project where we're going and advise and help rather than being the owner of a single data point on the board. I have tried to earn that position for the past two and a half years with my team at Climate Tech VC. Add and just pour a ton of resources and everything we can back into the ecosystem in the form of all of this data and insights and perspective and kind of interconnected nature of spreading the conversations that we're lucky enough to get to have with folks to the public.
One other thought on how this is changing and how I'm lucky to be in this particular market environment. When we started CTVC, it was the start and the height of the stress of the pandemic and that meant everybody was at home for the first time. Calendars had kind of been thrown out of the window for the first time in a long time. It wasn't expected that you showed up in the geography of the person that you were hoping to chat with and that's just straight up luck for us. We were writing a newsletter, people were spending more time in their inbox, they were curious, they were thinking different thoughts, and were open to different perspectives. We could just holler on the phone at these amazing change makers. So we made the most of that and we accelerated really quickly as a result of that particular point in time in the market.
And now of course, that's changing again and maybe folks are retrenching geographically or standing out their inbox or going back to some old ways of working. I'm very conscious that I got a chance to springboard from that point in time to the perspective I'm in now. It's not even like paying it forward kind of thing. It's understanding that I will always take really seriously the perspective of folks that maybe are-- from an age perspective, in a cohort a couple years after me. So I spend a ton of my time chatting with and putting in and connecting with these folks. They're an integral part of CTVC; the newsletter. I'm one of the oldest people on the team actually. We just don't remind anybody of that. I think they think we're all like 65 and sitting in our mansions writing this on a typewriter or something. But diversity, distribution, point in time, I'm grateful and lucky and all of this stuff really impacts my perspective.
Ben (39:23):
You could definitely see it in your newsletter as a public good or the roots as a kind of public good is like let's spread this out, which I think comes across as very genuine and authentic and really valuable. Do I take even 2% credit because I'm sure I suggested, "Hey, have you tried this newsletter thing in pandemic?" It's kind of more offhand, obviously. It's actually all you guys. But did that just come about because it was more time in the inbox you're having speaking to these people and you thought, "Yeah, let's put it together. Everyone's going on to Substack. Let's do it?"
Sophie (39:57):
You're right. You're an inspiration. It wasn't even my idea. Entirely, the first couple posts were done by my co-founder, Kimberly Zou who was fresh out of undergrad working at a bank and wanted to do something about climate. So she set up the website Climate Tech VC, wrote a couple posts with I think five deals of the week that she had just found online. Then our mutual friend, Cary Krosinsky who's a complete prolific polymath ESG teacher, writer, professor, connected guy, who I happen to have the privilege of writing a book with. Cary loves to connect up and coming students with people in the field and he had connected me with Kim and we hit it off. She was told that she wasn't able to publish under her name because that would be a conflict of interest with the bank that she was at. So we popped my name on there, which if you know anything about me, I take that seriously and I like to do things well when my name is involved.
So low and behold, off to the races. It was just a marriage from Cary introducing me to Kim completely blind. What a delight and pretty insane to think that a random connection would then become kind of my closest business collaborator. We've gone way further than Cary could have ever imagined, although he does like to take credit on LinkedIn appropriately for being the matchmaker here.
Ben (41:37):
Yeah. He should have taken a commission. That's probably what he's thinking. "Oh damn it. The planet's going to be great but I'm not going to see those billions." Well, maybe we do a short section on a kind of underrated, overrated. So I just flash some things out, you can make a comment, or you can pass, or be neutral. It's not meant to catch you out or anything.
So underrated, overrated, lifting weights?
Sophie (42:11):
Underrated for sure. Huge part of my lifestyle actually. I used to be a cardio queen. Now very much into weights. It has helped my scoliosis and it's a very fun way to hang out with my life partner who is also busy all day on Zoom. We go to the gym together and we lift weights and talk about our day between sets. Too much detail, most likely, but massively underrated.
Ben (42:37):
Great. A carbon tax or maybe a carbon price; tax or price?
Sophie (42:45):
To me, underrated. But it means so many different things to different people. So probably reasonably rated though it should be done.
Ben (43:00):
That's fair enough. The concept of a green new deal, although I guess this does mean different things to different people as well. But overall green new deal?
Sophie (43:08):
Same point as the carbon tax. It has to be done. Taxes and green new deal, all weird wording for stuff that just makes and saves a ton of money and is a clever and necessary policy implementation.
Ben (43:24):
Tesla as a company?
Sophie (43:28):
Probably overrated at this point.
Ben (43:31):
Yeah. Carbon offsets?
Sophie (43:35):
Overrated. I think it's all about carbon removals.
Ben (43:40):
Very good. Ideas of de-growth?
Sophie (43:46):
Underrated. I wouldn't even know where to begin with that one.
Ben (43:50):
Well, I guess de-growth is the idea that we are doing too much over consumption. But I guess some of the economists or thinkers associated with that how quite draconian, or at least for people not on the de-growth side of thinking about that. It's still in debate.
Sophie (44:10):
Interesting. I do not think that we need to turn down the thermostat and put on a bunch of sweaters and mittens at home in order to solve climate change. I think I'm much more of a techno optimist in that regard. So, do more with less I can get behind so long as that's stuff that the consumer doesn't see or touch. It's more implemented upstream.
Ben (44:33):
Yeah. Nuclear power?
Sophie (44:36):
Underrated.
Ben (44:37):
Is this all nuclear power, or mini nukes, or advancing nukes or just the concept in general?
Sophie (44:44):
I guess I mostly just mean fusion as a concept. There probably are no silver bullets, but if there's one or two I would load that up in my climate gun.
Ben (44:58):
Very good. You already commented on this which was carbon removal. That was my next one. So that's underrated for you, right?
Sophie (45:05):
Underrated for me for sure. In terms of literal pricing, I think it's literally underpriced at the moment. Then massive area of innovation and research and talent flowing into it. We haven't even touched stuff like ocean carbon removal or all sorts of other ones like heat. The list goes on and on. Why on earth would you purchase an offset when you could purchase a removal? It's just like we're talking on entirely different permanence timelines here.
Ben (45:38):
You didn't call it Pete tech, did you? You called it bog tech. That was the thinking I picked up. That has to be an industry, right? We have to make that industry. That has to be multibillion industry.
Sophie (45:49):
Indeed. We love a good pun. I think we said something like Peaky blinders because I was deep in the Peaky blinders Rabbit Hole on Netflix at that point. So yeah, there are lots of good pun to go around
Ben (46:00):
The SEC thing, was there something about them dropping something? That was another good one.
Sophie (46:05):
Drops it like it's hot?
Ben (46:07):
Yeah. Hot potato. Something like that.
Sophie (46:09):
Like MACCing on the Marginal Abatement Cost Curves. I write these titles at 2:00 AM on a Sunday night so that's the vibe.
Ben (46:19):
Very good. The last one on this, the woolly Mammoth?
Sophie (46:24):
Overrated. I know where he's going with that. This is like George Church's new CRISPR type of play. Underrated would be the elephants that exist today and basically do the same thing that the woolly mammoths do, just in Africa instead of up in Russia.
Ben (46:43):
So you're not all the way as a crazy techno optimist on that. I watched a documentary with him actually and Stewart Brand. I hadn't appreciated the complexities and the to and fro from it which were kind of quite interesting. But I can see woolly mammoth overrated. Would you like to sketch out some current projects and things you are thinking about? I guess you are mostly at seed and pre-seed for what you are looking at because if you read on social media or even the news today, there's a lot of talk about a lot of venture capital being mostly frozen but particularly slightly higher up the chains. So called series A B C D, and obviously IPOs and public markets you can see as far as that. But it's interesting on what you look at, whether you feel the same at seed or pre-seed either in terms of what you're seeing, or maybe how you think about valuation and just current thoughts for this year and into the future.
Sophie (47:45):
This is all shifting day to day, week to week right now. What I see at this mid-June point in time is not a slowdown in the pre-seed and seed markets particularly for the top 50% or so founders and ideas. It's basically no difference. There are fewer individual angels in the market because people are looking at their personal portfolios and kind of tightening the belt. However, I think that the lack of slowdown in climate at the earliest stages is coming from just the enormous amount of dry powder that's been piled up over the last 18 months or so of new and maybe second time climate funds that have been raised. We also track this at the newsletter and there are some cool graphics that we're going to update with our new mid-year report coming out in a couple of weeks.
But last year we tracked 64 new climate funds that were raised. Over half of which are just entirely new institutions. That trend continued. There has been more new institutions coming into market. It's billions and billions of dollars’ worth of climate dry powder that has not been deployed yet and has a really specific mandate to go after some of these new innovations. So I think that's the delay that we're seeing right now in the climate early market still being quite strong. Valuations have re-corrected at least 30% or so. I think that's frankly healthy. Maybe folks can come and poke me after or something if they hear that and they disagree. But it was getting pretty frothy. I think there has been a bit of a sigh of relief in that regard. It's kind of loony to do a super short diligence timeline on the order of like 24 or 48 hours when it comes to these deep tech companies. You simply cannot know everything material that you would need to know in that time period. Founders should be looking for long-term partners to understand their business.
So I think it's good and healthy for everybody. I'm not suggesting we cool off all the way to put all of the power in the hands of investors, but a bit of a re-correction there is good. If you visualize a snake or something that eats a mouse and then it goes through the body of the snake and there's kind of a lump-- I see climate in terms of like there was a small mouse that was eaten at some point and those companies are in a cohort that are now at the kind of like series ‘B’ plus stage. There's not that many of them, but they're relatively large and they're performing relatively well. Then there's like a capybara that was eaten. That's a giant lump that came a little bit shortly thereafter. That's like this main cohort of climate companies that are now around the series ‘A’ type of stage. Bigger, really diversified, and frankly not all of them are performing particularly well. And so the reckoning is going to come for those folks when they're trying to raise series ‘A’ capital on limited progress.
Unfortunately, we're seeing that play out already in terms of layoffs of 30 plus percent of some of these companies staff; the non-technical folks. It's a tough time to be a generalist out there and a lot of bridge rounds are happening. I think that talent will be fine because they're going to get snapped up from these earlier stage companies that maybe have a better story to tell and are getting backed by stronger investors. Lots of thoughts. It's all re-correcting and happening, but I don't think it's time to run away. I actually think it's as good a time as ever to be a climate investor and to be a strong founder. You're still in a good spot.
Ben (51:55):
Great. And current projects, obviously newsletter and being a VC. Anything else you wanted to add to that?
Sophie (52:01):
Those are the two main things and hopefully always will be. We're also starting a new business off the side of CTVC the newsletter which is an insights platform. CB Insights crossed with a PitchBook selling market level information into governments and big asset owners. So stay tuned for more there. Then besides the insights business, the newsletter, the fund, have to round it all out with playing a lot of handball or wall ball on the streets of New York. It's summertime and that's my absolute favorite thing to do.
Ben (52:33):
Great. So between weights and handball I'm feeling really unfit. Last question. Do you have any advice and thoughts for people? Either life, career advice, being someone in their twenties, or maybe people who want to make an impact in climate? Any thinking about that or any final thoughts you have for us?
Sophie (52:56):
A hundred percent. There's a space for everybody in climate and that can't really be overstated. So whether it's a functional area that you're an expert in, or if you're coming new into the market and you're excited about any particular topics or themes or approaches or mission driven concepts that get you excited, just find the thing that works for you and run with that because odds are that will change and that's totally okay. I found the biggest solve for climate burn would be guess just getting started, working, contributing, and being a part of the community. That can be part-time, that can be remotely, and that can be digitally across all of these amazing slack communities that are increasingly moving IRL.
I think the best possible one is to jump in with both feet and start working on climate full time. So tons of startups that are still hiring, tons of later stage companies, lots of funds, research entities, you name it. If there's nothing out there, then go create it, and turns out starting a newsletter can help you get there. Very happy to chat with folks and beyond thrilled for this new cohort of climate first folks that maybe are coming out of studies at the moment who have always known that climate is a topic that's going to impact them for the rest of their lives. Looking forward to building this industry together.
Ben (54:30):
That sounds excellent. Brings me around to your original thought which is knock on doors and be helpful. You can do something.
Sophie (54:37):
Indeed. Everyone has something to bring to the table. So help them help you, and then we all help the planet together.
Ben (54:44):
Sophie, thank you very much.
Sophie (54:47):
Thank you. Total pleasure. Very much fun. Looking forward to more.
Ben (54:52):
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Ben Yeoh: CFA Institute Podcast, ESG, investing, progress | Matt Orsagh
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.
Listen to my personal podcast, Ben Yeoh Chats
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.
The US SEC has proposed two ESG rules for asset managers.
The US SEC has proposed two ESG rules for asset managers. (1) Names Rule would require funds that use ESG terms in their names to follow ESG strategies. (2) ESG Strategy Disclosures would require funds that follow ESG strategies to make certain disclosures.
Names Rule
■ This would require a fund to invest 80% of its assets in ESG if it uses ESG terms in its name. The proposal would bar the use of ESG terminology in a funds name if the fund only considers ESG as "one of many factors" in investment decisions.
ESG Strategy Disclosures
■ This would require funds that have an ESG strategy to provide details in their prospectus of how they consider ESG factors when selecting investments. There are 3 “tiers/layers”. (1) “Integration” (2) “ESG-focused” (3) Impact.
There would be lesser requirements for “integration” funds than for “ESG-focused” funds. There also would be greenhouse gas emission disclosures for funds that have a climate change focus.
An “ESG-Focused Fund” would mean a fund that focuses on one or more ESG factors by using them as a significant or main consideration (1) in selecting investments or (2) in its engagement strategy with the companies in which it invests.
On Impact, the main disclosure will be “an overview of the impact(s) the fund is seeking to achieve, and how the fund is seeking to achieve the impact(s). The overview must include (i) how the fund measures progress toward the specific impact, including the key performance indicators the fund analyzes, (ii) the time horizon the fund uses to analyze progress, and (iii) the relationship between the impact the fund is seeking to achieve and financial return(s)” But also the “impact objectives” will need to be disclosed upfront along with return objectives.
Of note, there is one dissenting commissioner. SEC Commissioner Hester Pierce objected to the Names Rule proposal because she said the 80% investment requirement is too subjective given ambiguity about what constitutes an ESG investment. The better approach is to focus less on the name and more on the disclosures describing the investment strategies. She also objected to the ESG proposal as the SEC already has the power to police asset managers who mislead investors about their ESG efforts. She also complained that the SEC fails to define ESG, which means the proposal will not work because the terms are too broad and it will be nearly impossible to have consistent disclosures among funds.
Comments open for 60 days. Link to proposals below:
List page for SEC rules: https://www.sec.gov/rules/proposed.shtml
Direct links to pdfs of proposals:
Proposing Release: Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices (sec.gov)
https://www.sec.gov/rules/proposed/2022/33-11068.pdf
https://www.sec.gov/rules/proposed/2022/33-11067.pdf
Links to statements, including Hester Peirce's objections:
https://www.sec.gov/news/speeches-statements
https://www.sec.gov/news/statement/peirce-statement-esg-052522