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“With the Patience Premium, it’s not just “doing right” or “feeling good.” All of these indicators are tested in detail based upon what they contribute to investment performance, and it turns out that the focus on sustainability is an important part of that. “
Matarin Capital Management recently announced the launch of two long-term investment indexes: The Matarin Global Long-Term Index, and the Matarin International ex-North America Long-Term Index. The Long-Term Indices are designed to allow investors to capture a “Patience Premium” for long-term investing in the stock markets, which integrates a focus on ESG (environmental, social, and governance) factors. We explore the approach at Matarin below, with Co-Founder Nili Gilbert. Tim Nixon, Managing Editor, Thomson Reuters Sustainability.
Tim: Please tell us a bit about Matarin.
Nili: Matarin is a women-owned asset management firm, managing about $1.4 billion in the stock markets on behalf of institutional clients. We co-founded the firm in 2010 based upon our shared desire to live and work with high integrity, to be true stewards of our clients’ capital, and to contribute useful thought leadership in the capital markets.
Tim: Are you doing any ESG integration at Matarin?
Nili: At Matarin, we are financial-first investors, which means that we focus on sustainable investment in areas where we believe that it can improve our performance. For us, this means integrating ESG in forecasting stock returns, in mitigating risk, in proxy voting, and importantly in terms of Matarin’s own social impact as a firm. We also implement negative screens based upon client preference.
We are now launching a new Global Long-Term Investment Index that will be calculated by S&P, that is focused on holding stocks that are expected to offer investors a “Patience Premium” for being long-term investors. ESG is important among the considerations that we take into account when calculating Patience Premium scores.
Tim: Why are you launching a new index into a crowded field?
Nili: The amount of assets invested in traditional passive market-cap weighted index funds has exploded in recent years. We believe that this trend, in excess, is negative for the capital markets, and relatedly for all of the outcomes that the capital markets affect around the world. When money is invested in a stock “passively” without regard to any of a company’s fundamental financial or nonfinancial attributes, it can lead to mispricing. In cap-weighted indexes, companies are just being rewarded for their size, not for anything that they are doing in their businesses or in the world. This has the negative effect of causing the stock markets to become more inefficient, and less likely to reward the kinds of attributes that investors should truly care about, or to deliver the most attractive long-term returns.
At Matarin, we came to believe that we could build a better index.
Tim: What is novel about it?
Nili: A number of indexes have been put into the market in recent years that evaluate stocks based upon new kinds of indicators – looking beyond just market cap. Several of these have been focused on ESG. With the Patience Premium, we worked intensively to identify stock selection factors that we believed would improve returns, including all of the features that we have designed in ESG space, though our partnership with Sustainalytics. With the Patience Premium, it’s not just “doing right” or “feeling good.” All of these indicators are tested in detail based upon what they contribute to investment performance, and it turns out that the focus on sustainability is an important part of that.
Tim: Who are your partners?
Nili: S&P is our most important partner. In the design of the custom indices methodologies, Matarin’s investment team engaged directly with S&P Dow Jones Indices’ (“SPDJI”) research and development team. This is the first time that SPDJI’s R&D team has ever collaborated with an outside firm on the research and development of a custom index methodology, so the partnership is somewhat historic and we are honored to be a part of it. SPDJI’s custom indexing team will also be administering and calculating the indices on an ongoing basis. Both sides have brought very unique contributions to this process, and we believe that this diversity of thought has yielded great results.
When it comes to ESG research, Matarin partnered with Sustainalytics for the creation of some proprietary factors. Not only on data for the “Progress Towards Sustainability” indicators that are part of the Patience Premium score, but also on the identification and exclusion of the “Worst In Class” ESG controversy stocks.
Tim: How will you measure the financial success of your index?
Nili: The Global Long-Term Index is designed with the expectation of outperforming the common large cap developed markets indexes such as the S&P Broad Markets Developed Markets Large Cap Index or MSCI World, with low tracking error. Performance should be evaluated over the course of a business cycle.
Tim: How will you measure the sustainable-impact success of your index?
Nili: The question of how to have sustainable impact from investments in the stock markets is both complicated and important. Simply refusing to buy the stock of a company whose practices we would like to change may not be the way to have a maximum impact on a company, depending on the company’s financial situation. In many cases it may be more effective to own the stock and engage, if proxy voting among like-minded investors has the potential for influence.
We are also thinking about what it would take to help support a market-wide paradigm shift towards more sustainable practices. We believe that there are opportunities to change the conventional wisdom about what a successful investment would look like – so that it becomes common practice to look at longer-term factors, including sustainability. We hope that the Patience Premium can be a part of that paradigm shift.
Tim: Do you have specific SDG-aligned goals which are more important than others?
At Matarin, as a women-owned firm, we hope that our daily work is contributing to Goal #5, “Achieve gender equality and empower all women and girls.” Michelle Obama inspires us when she says that it’s hard for young women and people of color to dream of a professional future that they can’t see evidence of out in the real world. So, we feel it’s important for prominent firms run by diverse teams to be rising in our industry, and we work hard in the hopes that Matarin will be one of them. We also believe that having more diversity in control of capital throughout the markets will allow the markets to more efficiently reflect all of our shared societal values, perspectives, and objectives.
As we contribute our best thinking on ideas such as cognitive diversity and the Patience Premium, which we believe would be beneficial for the markets and all of the systems which the markets touch, we hope that this will add to Sustainable Development Goal #8, “Promote sustained, inclusive and sustainable economic growth,” as well.
Finally, the Patience Premium initiative is born of an objective to identify the ideas that can bring more private sector actors to the table in achieving the Global Goals. And we’ve benefitted from putting our heads together not only with other businesses, but also with intergovernmental organizations, academics, and think tanks in honing the Patience Premium idea. In this sense, we are inspired greatly by Goal #17, “Strengthening global partnerships for sustainable development.”
Tim: How does the “patience premium” align with the increasing urgency in addressing challenges like climate change?
Nili: Climate change is both an urgent and a long-term problem, just like many of the other environmental and social hurdles that we face. At Matarin, we see issues not only in terms of scarcity of time to respond to these hurdles, but also in terms of scarcity of socio-political will, and importantly scarcity of the capital that will be required to make a difference.
We believe that increasing the focus on our long-term goals, will motivate key actors to respond in the near term. If we focus seriously on what our long-term objectives are, it should become obvious that there are some actions that need to be taken today in order to live into that future.
By way of example, one of the 4 factors that make up the Patience Premium score rewards companies for making “Progress Towards Sustainability.” This focuses on companies that are taking present action to improve over the long-term.
Tim: What could be next if this index is a success?
Nili: At Matarin our immediate goal, of course, is ensuring the success of the index as it launches and making sure to really ‘stick the landing’ with it.
We’d be thrilled if the existence of the Global Long-Term Index and the Patience Premium initiative were to not only inspire investors to think differently about how they are managing their portfolios, but also inspire corporate boards and management teams to think and act with more of a long-term focus.
“It doesn’t take dramatically more man power, or more resources to think like a system and/or develop a programmatic approach, it just takes smarter action.”
Kate Wolfenden is a leader across many different organizations dedicated to a more sustainable world. Her theory of positive change is built on a concept of “connectedness”, which at its heart is about bringing wisdom, empathy and communication to the many silos of heroic activity underway to help make our world a better place. She is an innovator at heart, and we sat down with her to understand her approach. Tim Nixon, Managing Editor, Thomson Reuters Sustainability.
Tim: How would you describe the state of innovation to help meet the Paris Accord 2 degree goals?
Kate: I would say, making progress, but we need focus.
We all know that the next 11 years are some of the most critical humanity has ever faced; that we are transgressing several environmental tipping points far faster than we collectively envisaged and that we are struggling to apply the breaks.
We also all know there is no doubt that innovation is central to the solution.
However, to be the elephant in the room here, from my perspective, it’s not that there isn’t enough innovation in the world – there is probably too much, it’s just not scaling at the rate and the pace we need it to.
Similarly, its’ not that there isn’t enough money in the world to scale it, it’s that, very often, there is not enough of a risk mitigated pipeline to invest in and/or the means to enable multiple stakeholders groups to agree on what most scalable and sustainable solutions are to focus on in order to leverage the right amount of funds from the best sources to get the scale and momentum we need.
All this is contributing to a slow-down in progress. We can sometimes become romanticized about the amount of money and corporate attention being channelled into climate action and the SDGs, but without focus we will fail.
That being said, the good news is, we have some good building blocks.
Tim: How do we organize for more efficient impact in the short time remaining to do something on climate mitigation?
Kate: One thing through all of this is clear to me – unless we are talking about the C-suites of the top carbon emitters or the Gen Z’s, the world may have enough leaders. What I don’t think it has enough of yet, is connectors.
People who are motivated by collective good and prepared to be the glue between the walls and the grease on the wheels, not just within organizations but between them.
This is perhaps best illustrated in the tireless work of the development of the Paris Climate Accord. Albeit not perfect, it, together with the SDGs, are ‘many-handedly’ two of the greatest achievements for humanity’s plight to tackle climate change and live in a sustainable world. Leaders might have signed the papers, but it was the unsung glue and grease who enabled the political will. Now imagine if we could garner the same amount of interlocutors and impetus in investment and industry, who felt the same commitment to translate these goals into actionable and investable strategies, too.
Tim: Where is there the most promise?
Kate: I have two things here.
Programmatic approaches. From some of the institutional players, I see great promise in clever public, private and concessional finance blends – e.g. CIF investment fund and/or the systematic approach the World Bank is aiming to make on developing country by country investment strategies into which bottom up financial flows can plug in to. From an emerging trend perspective, I see great promise in new private sector investments models, like the one set up by Innovator Capital. This new global green investment bank was announced alongside the 8th Secretary General of the United Nations, Ban Ki Moon, with a cornerstone investment of $1b pledged from the Investment Association of China and a further living trust commitment by the largest solar developer in the world, Sky Power, working up to c. $50m investment annually. The model developed here is working on fast transaction rate, early stage tech deals – providing investment as a service to action on climate and the SDGs. Several international sovereign and state funds are now being engaged to join the fund, which will be underpinned by an integrated SDG and NDC aligned investment strategy and provided as a means to support nations to deliver on their global commitments. Perhaps most interesting between these two trends, is the opportunity to connect these new pools of private sector capital with the other public, private and concessional funds and approaches mentioned above.
Increased transparency. It kind of blows my mind that just 25 of the biggest companies in the world are responsible for c. 15% of global emissions – as you say, Tim, these companies represent the difference between catastrophic climate change and our chance of being able to stay within a 2 degree world. And yet, some of them aren’t even reporting what they intend to do over the next 10 years to prevent that. We as citizens, investors and consumers are collectively enabling the silence, when we could instead be enabling the transition. Luckily there is some excellent ground work going on in this realm, and of particular importance the Transparency Initiative for Climate Leadership work emerging from Thomson Reuters and its partners. Not only is the data they are crunching providing clear evidence that the worlds’ biggest super emitters who are decarbonising, are in the majority of cases outperforming their peers financially, but they are also exploring hosting an annual summit to engage this community in shared learnings and unique market and finance enabling support mechanisms to support decarbonisation activities. This really excites me and I look forward to talking more about it soon.
Tim: Where is there false promise?
Kate: Wherever there are silos. It doesn’t take dramatically more man power, or more resources to think like a system and/or develop a programmatic approach, it just takes smarter action.
Tim: Is relevant innovation just technological, or are there other types which may matter most?
Kate: No, I don’t think it’s purely a technological challenge at all.
Project Drawdown is a great example of the breadth of solutions required. They list the No 1 most impactful solution is in fact a technology, but not a ground breaking one and fast following at No 6 is educating women and girls.
There is little doubt now that to come within a chance of reaching our 1.5/ 2 degree goals, Technology must play a critical role (i.e CCU/CSU delineated in the IPCC 1.5 degree report) but it won’t be the silver bullet.
Each company, industry, city or country will or should have its own decarbonisation roadmap and in all cases it will take a combination of approaches – new systems, increases in efficiencies, step changing technologies, governance reviews, shifts in ownership and financing, consumer education and more, and a whole heap of CCU/CCS on top to create a sustainable trajectory.
One innovation that particularly impresses me at the moment is coming from Estari Group and is an innovation in finance. The ‘S Bond’ initiative, is, in my humble opinion, a remarkably clever and pragmatic way to systematically crack open the otherwise sluggish transition of the $100tr vanilla corporate bond market to incrementally more sustainable investments over time.
With in-market evidence that sustainability performance reduced cost of capital mechanisms already exist (Solvay and Danone as two examples), the focus is not to prove this is possible – It is fine tune it, standardise it and wholesale it for the bond market. Focusing on the next 13.5% on the adoption of innovation curve, this represents a circa $10tn opportunity in the coming years. This work is also very complimentary to the earlier thinking from Latham & Watkins on Green Striping, so we look forward to seeing how the two can dovetail.
Tim: Who should we be trying to empower to catalyse meaningful action on climate?
Kate: A great many. But of the under-represented, I would say three groups:
Women, or indeed anyone demonstrating more feminine and collaborative approaches to leadership
Gen z, perhaps earlier than society would deem them acceptable or capable of influence
Tim: At the beginning of your day, what gives you hope in humanities ability to solve the climate crisis?
Day to day? I would say, relationships.
No innovation or investment of technology has come into being without the relationships that made it happen. No strategy, treaty or global agreement has either. Relationships, built on respect during difficult conversations, empathy, understanding and well earned trust, give me hope.
In the bigger picture, though – and perhaps somewhat paradoxically – I find hope in the human condition.
As a collective society, it could actually be our biggest weaknesses that will be our greatest strengths.
Eventually we will all personally start to feel the sting of the damage we are doing to our world and the emotional and spiritual stability of the humans that live within it.
When enough people personally feel this, change will happen.
About Kate: Kate is Co-Founder and Non-Executive Director of Project X and sees herself one of a collection of individuals required to become the glue and the grease on the wheels of collective climate action.
People of the desert and people of the Arctic could not be more different, and yet, they are both united by an innate awareness that one cannot survive tough environments unless we rely on others and others rely on us.
We treat our terrains and climates with humility, and we have worked with our natural resources and environments to develop our countries and communities. Furthermore, we have endeavored to ensure our national agendas are founded on a bedrock of sound, sustainable policies.
However, in today’s world, countries can ill-afford to operate in isolation, as the global economy is connecting civilizations and cultures in an unprecedented and inextricable manner. We simply cannot ignore the external changes and events to our planet and people, and must have the courage to take a long, hard look at ourselves and our legacy.
For example, our world still has 783 million people in poverty. On the one hand, there is more food on the planet than at any point in human history and on the other hand, hunger is on the rise – with 821 million people reported by the United Nations as under-nourished in 2018. And the urgent need to address global warming whilst working toward achieving the UN’s Sustainable Development Goals (SDGs) has never been greater.
Global challenges related to climate change, poverty, inequality, energy, water, food security and health are accelerating the need for all of us to work together to find sustainable solutions.
To this end, the leaders of the United Arab Emirates, much like their counterparts in the Nordic countries, have always recognized that the most sustainable solutions emerge through a process of cooperation. Historically, the UAE has demonstrated extraordinary stewardship to support global humanitarian causes through agencies such as the Abu Dhabi Fund for Development, which is a foreign aid agency that provides concessionary loans to fund economic and social development projects.
More recently, many of us are familiar with initiatives such as the Zayed Sustainability Prize (formerly Zayed Future Energy Prize), which I have been privileged to have chaired since 2011. In my capacity as chairman of the Prize, I have worked with several Emiratis leaders, who are committed to identifying ways and means to address our collective challenges.
I have also been privileged to witness the positive impact the Prize has had across communities around the world. To date, the Prize has awarded 76 winners and has impacted 318 million lives through the winners’ sustainability solutions. It has also offset 1.3 billion tons of carbon emissions, powered 50 million homes with renewable energy, provided 8.5 million people with access to clean, affordable potable water, reached 25 million school-aged children with solar lighting, created 400,000 jobs and upskilled 10 million people.
As it focuses on identifying and championing gamechangers that are offering sustainable solutions across the categories of Health, Energy, Water and Food, the Prize is truly aligned with the UN’s SDGs and UAE National Agenda. It is also unique in its ability to reach out to global high schools – the wellspring of our future leaders and changemakers – by honoring six high schools from around the world.
At the 2019 awards ceremony, the finalists and winners of the Prize offered glimpses of hope and optimism – through their stories and successes. As I watched the UAE’s His Highness Sheikh Mohammed bin Zayed Al Nahyan, embrace a young high school student from Ghana – I witnessed a poignant moment. It was a moment that encapsulated the growing commitment of the UAE’s leadership towards effective, innovative and inspirational solutions, and a moment that embodied a spirit of enterprise, passion and tolerance – which the UAE is celebrating through 2019.
The UAE understands that collaboration and cooperation are imperative to achieving sustainable solutions. By coming together as one united world, our collective ideas, imagination and innovation can coalesce to meet the global goals. We owe it to our current planet and its people, as well as to our future generations.
“The well-known drivers known to influence access to safe drinking water — deforestation, poor crop and soil management, overgrazing, disturbing the water cycle, discharges and industrial activities – are not telling the full story.”
In this important piece on access to clean drinking water, we are reminded of the progress we are making, and of new challenges emerging. These challenges may increase given current trends with climate and land use, something which is material to the health, economic and security risk of an ever smaller planet. Tim Nixon, Managing Editor, Thomson Reuters Sustainability.
I have good and bad news. The good news. Everyone, all 8.6 billion of us, are expected to have access to clean drinking water at a walking distance of no more than 15 minutes from our homes by 2030. It sounds like a tall order when one 1 in every 5 people lacks access to clean and safe water today. But this goal is achievable if recent global trends on access to clean drinking water continue. The bad news. To sustain that achievement through to 2050 and beyond, bolder action is still needed in at least two areas.
First, obstacles to safe water access must be overcome together. For instance, actions to tap fresh water to supply areas where it is scarce must go hand-in-hand with measures to keep the land healthy. Only then will we provide surface and ground water long into the future. Second, identify and act on the obstacles impeding access to safe water that were uncovered in a recent assessment.
Three key obstacles are known to hinder access to safe potable water for 1.2 billion people globally. First, the physical absence of a fresh water source. Second, inadequate infrastructure to supply the water. A third emerging challenge is the ever-increasing pressure on fresh water reserves above and below ground due to increased demand and the Earth’s warming, both resulting from the combined effects of poor land management and climate change.
A recent assessment using data from countries to examine global trends in the proportion of the population with access to potable water yielded interesting results. The well-known drivers known to influence access to safe drinking water — deforestation, poor crop and soil management, overgrazing, disturbing the water cycle, discharges and industrial activities – are not telling the full story.
Access to safe drinking water increased among rural populations in all developing regions of the world. Even with population growth, over half of the rural population in the 121 primarily developing countries that submitted the reports now has access to safe drinking water. By contrast, the proportion of the urban population with access to safe drinking water declined, in part due to much higher rates of demographic change in urban areas. Many of these new drivers reflect urbanization trends and far more complex – and interdependent— rural-urban linkages than in the past.
Certainly, the success achieved in rural areas underlines the effectiveness of the past strategy of integrated water management. We must continue with it. But an evolution in the drivers that facilitate or hinder access to safe drinking water is a red flag. It points to potential new obstacles that may require urgent action in order to meet the 2030 target or to sustain that achievement afterwards.
A more in-depth analysis of these drivers and their interaction with water and land management systems is necessary both to better understand the threats they pose and to identify opportunities for improved government response so no one is left behind. Action on these gaps will pre-empt the unintended consequences of policy failure, including increased insecurity and forced migration.
“Leaving no one behind” means investments in rural and urban areas must, at once, build resilience in rural systems and ensure access to safe drinking water in the urban areas keeps pace with urban growth. It means all future analyses on safe water access are seen through a sharper lens to ensure any social-economic inequalities are unmasked.
Leaving no one behind must mean also universal access to safe drinking water is guaranteed for future generations. The analysis suggests that the corrective measures in place today are inadequate, given the rapidly diminishing surface and ground fresh water sources, such as ice caps, acquifers and lakes, worldwide, due to climate change. Without adjustments in response to these trends, we could achieve the 2030 goal of universal access to safe water only to run out of fresh water sources for the long-term.
World Water Day and World Meteorological Day take place back-to-back this week. Take a moment to celebrate the progress we have made together to improve universal access to safe drinking water in rural areas worldwide. Then commit to at least one concrete action that will either save fresh water or support its provision to someone without it today or for future generations. Let us never lose sight of the threats ahead and do all we can to keep the land that replenishes our surface and ground water sources in perfect health.
Ibrahim Thiaw is Executive Secretary of the United Nations Convention to Combat Desertification and Under-Secretary-General of the United Nations
As wealth accumulates in the upper echelons of our global economy, there are growing pockets of private equity investors who are seeking to deploy their capital for both returns and good. In this piece with Jean Baptiste Oldenhove, CEO of Estari Group, we hear from one of these visionary investors. Perhaps there is some mix of super-wealth, investment opportunity, innovation and sustainable development which can move the needle on many of our most pressing concerns. Tim Nixon, Managing Editor, Thomson Reuters Sustainability.
Tim: Does the lack of progress on climate create new urgency for private equity investors?
Jean Baptiste: There is no question about this. We all need to do our part, including investors. Of course, the fiduciary duty of a private equity investor is to deliver financial performance. At Estari Group, we believe that we are able to deploy private equity to deliver financial performance AND at the same time make a contribution to climate change.
Obviously important in itself, climate change is not the reason why private equity investors need to act quickly. The sense of urgency comes from three distinct stakeholder groups. The first is investment talent. Talent from generation Y and Z will no longer join the firms that don’t act on climate change. Secondly, limited partners in particular foundations, family offices and endowment funds that integrate sharper climate change considerations into their investment decision process are becoming much more discerning. Finally, consumers themselves are acutely aware of the climate crisis and are increasingly making consumer choices that will ultimately impact the portfolio companies of private equity investors.
Tim: How can private equity create an impact which may be different from other investors?
Jean Baptiste: Over the centuries, fundamental changes and disruptive innovations have been supported first and foremost by private capital. The reasons for that are both that private capital can take higher risk than more established retail/corporate type of capital and that private capital can be more patient to see returns on investment.
Within private capital, there is a smaller but very powerful group which is private capital owned and managed by single individuals or families. The source of that wealth comes invariably from the long-term vision of highly successful entrepreneurs who have created foundations and family offices, now nurtured and governed by family members. This group of investors is, in fact, a hyper catalyst of change.
Tim: Do private equity investors have a unique view on emerging innovation?
Jean Baptiste: Yes, they do. Private equity organisations are built around nimble and lean teams. These teams include top talent. The combination of top talent and agility is ideal to identify and pursue innovative companies. On top of this, private equity investors are super connected throughout the economy and can read and act on future trends (M&A, consumer trends, venture-backed emerging technologies, etc.) ahead of the curve.
Tim: How much do concessions on returns factor into achieving these climate goals?
Jean Baptiste: The idea that investing in businesses and projects positive for our planet requires concessions on return is a misconception. A 2019 study by Bain & Company of over 450 private equity deals in Asia over the last 5 years indicates that median multiple on invested capital was 3.4 for deals with social and environmental impact, compared with 2.5 for other deals. Bain also observed lower variability in returns for these deals.
What drives return in private equity is talent. Top investment talent has not yet been attracted to “sustainable” private equity but this is changing fast, and Estari Group is part of that change.
The other source of above normal return will come from the co-operation between intelligent capital sources (public, private and institutional) to aggregate massive resources behind the technologies and projects that are “system changers” but have not yet hit the right capacity and affordable price points.
What is really exciting is that investing with a view to ultimately positively impact climate change in fact creates a unique opportunity for financial performance over the coming decades. Why is this? Just think that we will be able to help move massive amounts of capital from an old, carbon intensive economy into a newer more efficient economy. It is unprecedented in magnitude and will be bigger in creation than the 2 decades 1860 and 1870 that witnessed the highest rate of fortune creation in the history of humanity (among the 75 richest people of all time, 14 are Americans born between 1831 and 1840 and who could perceive and seize the opportunity of these 2 decades where railways expanded and an industrial revolution took place).
Tim: What would further accelerate the rate of investment by private equity investors?
Jean Baptiste: On top of the pressure from future investment talent and limited partners, what would increase the rate of investment would be an increase in returns from investing into a low carbon economy and/or transforming current portfolio companies towards more sustainable practices.
One way to increase the return is through public authorities. Public subsidies have been a major accelerator of adoption of innovation. Germany and its generous Energiewende launched in 2010 kicked off a revolution in the adoption of the solar PV technology, which was quickly followed by Japan, the US and China (9 GW installed globally at the end of 2009, 637 GW expected at the end of 2019).
In time, market forces will be unleashed that will drive the change that we would all like to see. For example, the return of private equity funds going after deals in consumer goods (such as KKR’s flagship 2018 purchase of Unilever’s Spreads) will be much stronger if the business integrates strong underlying consumer trends such as plant based ingredients and sustainable packaging (effect on top line, potentially bottom line and on multiple).
Tim: Is there a way to accelerate this market force with “current portfolio companies”?
Jean Baptiste: As in any change, increasing trust in data available and educating the key stakeholders (public and investment community) would go a long way to help accelerate the change. There are interesting initiatives aimed at integrating non-financial data to sharpen investment processes, most of them proprietary initiatives by major institutions such as Schroders, Pimco or MSCI to mention a few.
Estari believes in the power of open innovation and we have defined an initiative on the integration of non-financial data in plain vanilla corporate bonds. The initiative is gaining a lot of traction and supported by a consortium of partners. It aims at identifying technology innovation and teams that can deliver the data analytics required to move an important part of this $100 trillion of capital towards sustainability.
Tim: Does it make sense for a private equity investor in any instance to invest in a carbon intensive business?
Jean Baptiste: While short term gains can still be realised, the ones which will be caught with a carbon intensive portfolio might be forced to keep it forever on their books (creating a first example of private equity carbon sequestration…).
This said, the businesses that are carbon intensive but beginning to change offer potential for high value creation. I am particularly intrigued by the transparency initiative led by Thomson Reuters on the largest carbon emitters and the identification of the “risers”.
Tim: What led you to found Estari in 2018?
Jean Baptiste: 10 years ago, I received the chance to create and lead a large principal investment strategy for a single family that is today one of the few global investment platform in clean energy, agriculture or sustainable fashion.
Estari was born in 2018 out of a deeply held belief that the next decade would be about re-centering the economy to serve people. Estari is a cause – a movement to bring investment talent, leading corporates, innovators and intelligent capital together to allow tomorrow’s economy to come to life.
Tim: What gaps in the private equity market are you trying to fill?
Jean Baptiste: On one hand, the private equity industry of today is a model which is too costly to deploy the amounts required to address the current planet issues and to create tomorrow’s economy. On the other hand, there is a growing willingness for capital to be deployed towards that new economy (an estimated $15 trillion of wealth that will be passed to the next generation in the next 5 years). Estari’s conclusion is that there is a need for a leaner and different PE model, allowing the capital to flow with less friction towards innovation and change. And that the key for this model to be successful will be to attract top investment talent of the next generations (Y and Z to come).
Tim: What are you most excited about in your next career step?
Jean Baptiste: The change we will bring as a group over the next decade. The people we will meet along the way. And the value that we will create together.
 Risers are entities committed to a transformative vision but that have not yet demonstrated progress on execution (Constellation’s Climate Impact Maturity Curve, see https://www.constellationresearch.com)
 As per Warren Buffet (here) “My calculation, admittedly very rough, is that the search by the elite for superior investment advice has caused it, in aggregate, to waste more than $100 billion over the past decade.”
In this piece from two leaders at the United Nations, we hear an urgent appeal for the right data to help policymakers understand and manage the growing challenges facing the planet. As we recently documented in our report on the top emitters of greenhouse gas, we simply don’t have enough data on their emissions trends and plans for the future to even know where we are headed with our climate. We are flying blind on the biggest challenges facing humanity. Timothy Nixon, Managing Editor, Thomson Reuters Sustainability.
The case for a digital ecosystem for the environment. Now is the time – a pivotal moment in environmental history.
Working in the environmental field and on natural resource management, often puts us in a position where we are making decisions and investing financial and human resources –based on assumptions, anecdotal evidence or patchy data. Based on a recent UN Environment report, 68% of the 93 indicators covering the environmental dimensions of sustainable development cannot be measured due to a lack of data. Humanity finally has at our finger tips a combination of global environmental data, technologies and data science techniques that have the potential to create insights which can underpin a sustainable future and a massive transformation in our relationship to the planet. These include satellites and drones, cloud computing, artificial intelligence, the internet of things, block chain and a range of open source software and mobile phone applications.
The scientific community has concluded that we have about a decade left to fundamentally change the way we consume natural resources and protect the environment. We believe that if we create a digital ecosystem for the environment then people will be able to use data and insights to make better natural resource governance decisions, target our investments and change consumption and production patterns. This has the potential to transform our social, political and economic systems to achieve sustainable development. The challenge is no longer out there in some distant future – it is happening on our watch – in our lifetime. It is essential that we take action and that we are able to track the impacts of our action in real time in order ensure that we can correct course when needed.
Now is the time to re-imagine and supercharge environmental governance and public-private partnerships by using big data, frontier technologies and data analytics to target our action and investments. Our vision, is to bring together partners to generate environmental insights that can be used to protect our planet, our prosperity and our global peace. Solutions must be geared to work at a scale, pace and level of incentives that matches the social, economic and technological forces that are leading to environmental decline.
UN Environment has been working with companies, academics, member states and civil society actors through the UN Science Policy Business Forum to envision what a global digital ecosystem for the environment might look like. We had the opportunity to participate in the process and co-author a first flagship discussion paper which was adopted in March 2019 in the margins of the 4th UN Environmental Assembly. For the discussion paper to be transformed into a global road map by 2020, it will require coordinated global action, leadership and trust amongst public and private partners.
Why do we need data?
We cannot manage what we cannot measure. We need to understand if we are on track, as well as assess different trade-offs and model policy options. To do this, we need to identify what information is already available, how we can fill information gaps, and stimulate additional data collection by governments, companies, academics and citizens – we need to ensure we have the right information for the right decision.
New data streams and technologies such as open data cubes are offering high resolution spatial data over time to monitor environmental change. It is critically important to not only map negative trends, but also determine where investments are needed in mitigation, management or restoration to fundamentally change those trend lines. We also need data on supply chains, natural capital stocks and carbon intensity to inform financial markets and investors about environmental risks and opportunities linked to companies and their products and services. There is a major transparency benefit to be gained in terms of understanding which companies are contributing to planetary solutions and sustainability and which are not, for example through using blockchain.
How do we engage people and companies?
Using data science, artificial intelligence and machine learning, to increasingly nudge consumers has the potential to change behavior. There are already examples of finding innovative ways to gamify and reward green and low carbon consumption using fintech and mobile apps.
Social media has an increasing level of power and influence on attitudes, perceptions and political outcomes, but we need more aggressive strategies to ensure that messages about the environment are based on science and facts and are not “fake news”. How can social media be leveraged in a more strategic way to direct citizen action towards sustainability? How can people be mobilized to collect data on ecosystems, biodiversity and the state of our environment using crowdsourcing and citizen science? How can we get people living in cities to understand the value and beauty of the natural world in order to take action to protect it? A digital ecosystem for the environment must deliver data and insights in a way that is accessible, open and analyzed in a way that links to policy, markets, consumer behavior and social media.
What are the risks?
In the rush to access data, we should consider the motivation of companies that hold data, their underlying business models and their potential intentions to create software dependency. Currently, much of the big data and technological advancements are held by a handful of companies. This not only creates imbalance in terms of who has access to use data to make decisions, influence markets and determine investments, but it also creates concerns in terms of privacy. As we go forward in partnerships with technology companies, we need to keep the adage in mind that there is no such thing as a free lunch. The same is true in new partnerships with the largest global industrial and energy firms, where transparency and transformation is crucial to achieving our goals for sustainable development. We need to understand where motivations overlap, and where they conflict, and when partnerships are appropriate.
It is important to also take a step back and ask how this wealth of data and potential power will be governed. If information is power, then those who control access to information and processing capacity hold more power than other stakeholders. It is likely that few nations realize how much potential leveraging this data and processing power will give companies over their economies. It is critical that all countries build their capacity to engage in this new digital economy to avoid the massive risks and asymmetries that could follow if they do not.
As we take forward a vision for building a global digital ecosystem of environmental data, algorithms and insights, three key risks need to be mitigated. First, we need to empower governments and people to be able to understand and use data and to hold the holders of data accountable, as opposed to having data held mostly by a few companies in a few countries. Second, we need mechanisms to ensure the quality and openness of data and algorithms to ensure public trust. Finally, frameworks to protect individual privacy, data security and intellectual property are fundamental.
One of the largest governance challenges to address is that national and international regulatory processes move on different timelines compared to technological innovation. As a result, new forms of agile governance are needed. Countries should agree on a basic set of international norms and values that can guide the development of the technology sector and that can help to ensure it contributes positively to global public goods. A new social contract is also needed between the private and public sectors – where the cost of doing business and the social license to operate is predicated on a basic level of sharing derived data products where they can contribute to a global public good.
How do we get there?
The difference between utopian and distopian environmental outcomes from frontier technologies is in our hands. The future is what we make it. The following form a foundation for pursuing a digital ecosystem for the environment and for achieving sustainable development.
– Citizens must be engaged and empowered to use data and information to improve their own lives, communities and environment.
– Countries must create a culture of data use, innovation and data governance for national ecosystems.
– We need public-private partnerships in order to which can leverage private sector expertise in data science, cloud computing and artificial intelligence and promote data sharing.
– The UN should take a leadership role and make a longer-term investment developing and implementing a vision for developing a global digital ecosystem for the environment, including new and innovative partnerships will all key actors. The international community has an important choice to make in how these technologies are used to save lives and livelihoods, respect human rights and protect the planet. Ultimately, the environmental revolution that must be catalyzed by frontier technologies is equally about a revolution in environmental transparency – which actors are leading the way towards a sustainable future, and which continue to adopt practices that undermine life on earth. We as a global community have the power to hold governments and companies accountable and to ensure that leaders create change. With the right data to make crucial decisions in the decade ahead, we can all be on the right side of human history.
“Looking at the region as a whole, it’s not just about clean energy. It’s about a different way of operating, a different normal, and that’s why our business model and commitment as an organization has dovetailed so well with the economic and social transformation of this region.”
In this piece with Sabrin Rahman, Regional Head of Sustainability, HSBC MENAT, we hear about the growth opportunity in green banking, and the key impediments which, if removed, can accelerate the transition to a world envisioned by the Paris Accord. Tim Nixon, Managing Editor of Sustainability at Thomson Reuters.
Tim: How does the movement towards decarbonisation help HSBC in the Middle East region?
Sabrin: Banks are the main intermediary between businesses, governments, investors and the public and as such, we have a responsibility to direct the flow of capital and help manage the transition to a low carbon society.
In this region, there is a strong mix of government and private sector perspectives which allows for more creative thinking towards potential solutions around decarbonisation. Through our roots in the region and collaborations that promote the exchange of knowledge between large institutions and SMEs, we are very well placed to steer the movement towards decarbonisation.
Tim: What kind of finance qualifies for hitting your $100 billion sustainable finance target by 2025?
Sabrin: The $100bn commitment will support the development of sustainable capital markets by promoting sustainable investment products for our customers – namely in retail banking and private banking – and by helping to manage risk for our customers who are making the low carbon transition.
We are a leading bank for green, social and sustainability bond issuance globally. We have continued to drive market expansion with inaugural green bond issuances and product innovation, including the first sovereign green Sukuk (Republic of Indonesia) and first ever ‘transition bond’ (Capco). In 2018 alone, we provided nearly USD20bn of sustainable finance through access to capital markets, advisory, direct lending and investments.
Tim: How important are concessions on the cost of borrowing to achieving your goal?
Sabrin: Globally, we are on track to achieve our sustainable finance goals much faster than anticipated. We have at times used certain concessions, such as preferential lending terms for green loans, but the key impetus for concessions has been to signal to the market and our clients our commitment to sustainable business practices, and help foster sustainable investments. In our key markets, our ‘green’ labelled products and services are today a well-established part of HSBC’s core business and the market does not need concessions from us to act.
Tim: What would accelerate the rate of investment in sustainable finance?
Sabrin: Everyone has a role to play. First, policy makers in the region should look towards increasing sustainability standards and regulations to help develop the market conditions for sustainable investments by the private sector. This can include everything from a price on carbon and removing energy subsidies, to targeted regulatory changes in sectors such as waste management, transport and logistics. Without policy support, the Middle East region risks falling behind in managing the transition to a low carbon, sustainable future, since the market imperatives for inducing private sector investments is low.
Second, both public and private sector companies and organizations in the region need to increase their awareness of global industry best practices, and begin investing in sustainable initiatives in their respective industries. They should not simply wait for policy and regulatory changes, which can be slow. If they do not act now, they risk falling behind their international peers on efficiency and competitiveness over time.
Third, Banks in the region need to meet the financing needs of sectors willing to invest in sustainability. Even now, many regional banks do not have the risk appetite to finance sustainable investment needs of their clients, and one of the key reasons is a lack of awareness and experience in sustainable finance. Financial institutions in this region need to do more to develop the right banking products and solutions to address the sustainable investment needs of their clients.
Tim: How has HSBC made its own lending portfolio more focused on sustainable impact? Any divestment?
Sabrin: We have an internal taskforce of cross business colleagues who work with our risk department to understand what our solution is to high-carbon sectors, to understand emissions per region, to clarify exposure. Understanding our client base and our exposure is the first step in addressing our decarbonisation and our direct impact, and this is ongoing.
The aim is to plan a meaningful transition away from carbon dependent practices for our customers by investment in new production, reducing dependencies on existing practices, or restructuring financial models to rebalance away from carbon dependent industries.
We’re committed to working with government entities to build up the concept and practice of sustainable finance and to promote discussion across sectors. At the 2019 World Future Energy Summit, we became a co-founding signatory of the Abu Dhabi Sustainable Finance Declaration, which advocates sustainable finance and investments and to foster positive, economic, social and environmental impacts for the long-term well-being of the UAE’s economy.
Tim: Does it make sense for a climate impact investor to invest in a carbon intensive business which is decarbonising in line with the Paris Accord targets?
Sabrin: Yes it can make sense. To meet the decarbonising targets set in the Paris Agreement, every industry and sector will need to change. For climate impact investors, some of the most attractive (and obvious) investment priorities will be ‘deep green’ industries such as renewable energy and recycling, and clear no-go businesses like coal and tar sands. Yet there are many carbon intensive sectors that are vital for the functioning of the modern global economy, such as chemicals, aluminum and cement to name a few, which need financial support to become more efficient, and develop more efficient products. To meet the Paris Accord targets, these sectors must also be supported.
Tim: What is one of the most exciting opportunities for HSBC’s sustainability initiative in the Middle East?
Sabrin: We have one of the youngest populations in the world here in the Middle East. Almost 50 per cent of the population are under 30. It’s incredibly exciting and it makes us future looking. We need to have more progressive ideas that are future proof and serve the needs of a very young population.
Looking at the region as a whole, it’s not just about clean energy. It’s about a different way of operating, a different normal, and that’s why our business model and commitment as an organization has dovetailed so well with the economic and social transformation of this region.
“The American people hold a deep reservoir of hard work, good ideas, and common decency. Redefining work can unleash that potential in ways that improve the lives of everyone.”
This vision of work in the future from Faye Park, President of U.S. PIRG, provides us important food for thought on how to reward critical labor as automation and technology displace traditional employment roles in our economy. Tim Nixon, Managing Editor, Thomson Reuters Sustainability.
Most of us flick our wrist and turn on the water without a second thought. But for most of human history, accessing clean water required a lot of work. To our ancestors (and far too many people around the world still), who needed to fetch water from rivers or wells, water flowing from a tap would be a miracle.
Improved technology allows us to satisfy basic human needs with decreasing amounts of labor.
As technology progresses at exponentially faster rates, we need to reassess what we will do as we can meet more human needs with less work. Fewer people will have traditional jobs to do, yet if we plan smartly, we have the opportunity for a higher quality of life.
Current public policies encourage job creation, whether or not those jobs actually serve to benefit society. As people have for centuries, we tend to value people, financially and socially, in large part due to the jobs they do. When we required enormous toil to meet any human need, this focus had a certain logic. However, that’s no longer as true today.
Thanks to the ingenuity of previous generations, we can now produce more than ever with the effort of fewer people. And things are accelerating rapidly – about half of all the activities that people are paid to perform today could be automated with current technology, with advances in artificial intelligence likely to replace even more human labor in the future.
Freedom from toil should be good news. But automation sounds like doom to workers who could be displaced by technology. The cloud of uncertainty hangs over not just truck drivers, but accountants, lawyers and a host of other professionals whose economic security and social standing are often determined by how much they produce at their job. A majority of Americans find technological progress threatening.
To improve the wellbeing of everyone as technology advances, it is time to redefine work, including by valuing the kinds of work that the market currently does not.
Work can be a source of meaning, purpose, and dignity, but it can just as often be a source of alienation. Many people spend 40+ hours per week on one job, which may or may not have much value to society, while the work that gives their lives meaning is the hours of volunteer work or passions pursued during their unpaid time.
Among the most important of that unpaid work is the effort we make to take care of one another. Currently, 40 million Americans provide unpaid care to a loved one, and as America ages, the number of people needing care will only increase. By 2050, the number of Americans above the age of 65 is expected to almost double, a phenomenon that has been called the “silver tsunami.” Because the contributions of family caregivers aren’t valued by our political or economic systems, people face a tough choice: stay home and care for an aging parent or young child and forgo a paycheck, or go to work so they can pay their mortgage, put food on the table, and hire someone else to care for their family.
It doesn’t have to be this way. With the greater prosperity that technology makes possible, we can afford to invest in the vital work that doesn’t take the form of traditional jobs. Public policy should shift to recognize the work of unpaid caregivers as valuable contributions to their loved ones and their communities. U.S. Sen. Sherrod Brown, Rep. Bonnie Watson Coleman and Rep. Ro Khanna are leading the way by proposing to expand the Earned Income Tax Credit, or EITC, to benefit unpaid caregivers.
The EITC was designed to encourage people to find a job, work, and contribute to society. But people contribute to society through work in ways that don’t yield a paycheck. Especially as we meet our society’s material needs with the work of fewer people, we should start considering other contributions to society. Home care is a great place to start.
The American people hold a deep reservoir of hard work, good ideas, and common decency. Redefining work can unleash that potential in ways that improve the lives of everyone. That might sound like a big task. But previous generations of sacrifice and struggle show us the way forward.
Increasing numbers of companies today recognize the value of having a corporate sustainability strategy, but few recognize the impact that they have on the health of their employees and communities. By not prioritizing and focusing on health, those companies are missing a golden opportunity to mitigate risks and create long-term value for their business and their investors.
Environmental, social and governance (ESG) reporting by companies has been on the rise over the last decade, increasing to 72 percent in 2017 from 41 percent in 2005, according to a KPMG survey. Investors also are now paying more attention to ESG ratings and practices.
However, across the board, companies are not giving enough weight to human capital in the “Social” component of their ESG strategy. What’s more, they are lagging in important employee health-related disclosures. There is a “ripple effect” when it comes to health; healthy employees positively impact the health of their families, and consequently, their communities. New research from the Robert Wood Johnson Foundation (RWJF) and the Global Reporting Initiative (GRI) shows that certain health practices are hardly represented in major ESG reporting frameworks. For example:
Employer-based health insurance appears in 0.5% of frameworks
Physical Environment appears in 0.3% of frameworks
Financial Literacy appears in 0.3% of frameworks
To offer a much-needed solution to businesses and investors alike, RWJF and GRI developed a new ESG reporting framework – A Culture of Health for Business – designed to enable the private sector to contribute more effectively to public health. This framework contains essential employee and community health metrics that inform decision-making for businesses, and recognizes the significant impact they have on corporate bottom lines, as well as on society at large.
Culture of Health for Business Framework: Key Elements
The Culture of Health for Business framework is built on an extensive review by analysts involved in the project of existing data around programs, benefits, investments, and partnerships that have a demonstrated connection to improvements in key business indicators such as productivity, brand, and financial performance.
The framework starts with four guiding principles that lay the foundation for the private sector’s critical role in building and promoting societal values around health, as well as articulate the changing expectations of both businesses and investors to provide further leadership and contributions to population wellbeing.
The framework further identifies 16 business practices that have shown to promote population health while also demonstrably improving key business indicators. Some of the practices are considered fundamental to corporate health, such as Occupational Health & Safety, Health Insurance, and Community Environmental Impacts. Other practices embody more innovative expectations of a responsible corporate citizen, such as Pay Practices (reporting on wage policy and satisfaction; wages make up the largest share of income, an important determinant of health),Social Capital & Cohesion (encouraging links, shared values and understanding that enable individuals and groups to trust each other and work together, thereby improving mental and emotional well-being), and Health Culture (represents the interaction of personal and organizational values and norms and business performance that creates an environment supporting of physical, mental, spiritual and social well-being). All 16 practices contribute to long-term business success.
How to Integrate a Culture of Health into Your Business
In recent years, more U.S. companies have implemented foundational health programs and policies to expand awareness and change employee behavior. Some have gone a step further and implemented programs that reach employee families and communities, as did CVS Health, when it banned all tobacco products, leading to a powerful impact on our public health. As a result, tobacco sales decreased across all retailers.
But creating a true Culture of Health requires a commitment to measuring the health of employees and communities. This type of data is essential for shifting to longer-term thinking that is currently underrepresented in quarterly reports and shareholder communication.
Why It is Important for Investors Too
Aside from obvious benefits for companies of having healthy employees and communities, which include less downtime, greater productivity, higher retention, lower cost, reduced-long term risk and a stronger talent pipeline, there are major benefits for investors. Incorporating employee health factors into ESG analysis and reporting will enhance investors’ ability to identify companies with superior business models and strategies. Health can also have an impact on outcomes and in turn, a company’s valuation. At CECP, we have found that focusing on human capital and health as part of long-term planning delivers better corporate performance. Besides, there are consequences to not investing in health that impact the bottom line.
According to related research from the Robert Wood Johnson Foundation, not integrating health into business operations can lead to lost revenue of up to $2,250 per employee every year. Furthermore, the absence of paid family leave has been associated with a range of negative maternal mental and physical health outcomes, including increased risk of depressive symptoms and poor mental well-being for mothers.
“The World Needs Your Leadership”
In his 2019 letter on corporate governance, BlackRock CEO Larry Fink noted that we need corporate leadership now more than ever before. In particular, we need leadership to pay closer attention to the health of today’s workforce. The shift away from a narrow focus on short-term financial returns and metrics to a more expansive, long-term focus on human capital and safeguarding public health is an idea whose time has come. Companies and investors that remain on the sidelines will sacrifice their opportunity to shape their own and the planet’s future.
“In line with the Paris Agreement’s ‘well-below two-degree’ goal, ING has begun steering its lending portfolio of over EUR 500 billion to meeting this goal.”
After launching a new survey on the circular economy, Anne van Riel, Head of Sustainable Finance Americas at ING, explains the growth trajectory of their new sustainable lending business. In this context, “sustainable lending” connotes a new business line where ESG performance incentives are part of obtaining a lower cost of credit. According to ING, it’s both good business risk management and good for the planet. Tim Nixon, Managing Editor, Thomson Reuters Sustainability.
Tim: What is the scale of your sustainable lending business compared to overall?
Anne: ING has mainstreamed sustainability across all its financial services, in lending, strategic advisory and debt capital markets. Every financing opportunity can be approached through a “green lens” and almost all projects can have a sustainability component. In 2017, we committed EUR 14.6 billion to climate finance and our goal is to double our lending to ESG industry leaders by 2022.
Tim: How fast is it growing?
Anne: Our Sustainable Assets Under Management grew to EUR 4.8 billion in 2017, up by EUR 1.1 billion of new business. We structured 23 green bonds for our clients in 2018, up from 12 in 2017. Since closing our first sustainability-improvement loan with Philips in February 2017 – which links the interest to the company’s sustainability rating – we have closed about 30 deals across various sectors and regions.
Tim: What are the growth targets as a % of total business?
Anne: In line with the Paris Agreement’s ‘well-below two-degree’ goal, ING has begun steering its lending portfolio of over EUR 500 billion to meeting this goal. To help us achieve and measure this, we have co-created, along with think tank 2° Investing Initiative, an approach called Terra. This will help us determine the climate impact of our portfolio and steer it towards alignment with the well-below two-degree goal. As far as we know, ING is the first bank to commit to using a science-based based approach such as Terra to steer business strategy in this area.
Tim: How are you using your recent circular economy survey and engagement to target and catalyze the growth ?
Anne: We commissioned this research to better understand how the circular economy is viewed in the US and what progress has been made, and where the gaps and opportunities are so ultimately we can help companies make the transformation to sustainable business models. For example, the survey showed that across all sectors US firms are having difficulty recovering materials for recycling, and that there are concerns around the potential risks associated with testing circular business models. This is valuable insight and we can take our learnings and experience for other projects and apply it to these challenges.