Name: Future of Finance 2024: Why ESG must survive political division and greenwashing
Uploaded: 2024-05-16
Duration: 17 min 58 s
Description: Lorenna Buck, Managing Director, Ariel Alternatives Ron Homer, Chief Strategist, U.S. Impact Investing, RBC Global Asset Management, Roy Swan, Director, Mission Investments, Ford Foundation Moderator: Lee Clifford, Fortune

Lorenna Buck, Managing Director, Ariel Alternatives Ron Homer, Chief Strategist, U.S. Impact Investing, RBC Global Asset Management, Roy Swan, Director, Mission Investments, Ford Foundation Moderator: Lee Clifford, Fortune

Future of Finance 2024: Why ESG must survive political division and greenwashing

Conferences

Lorenna Buck, Ariel Alternatives, Ron Homer, U.S. Impact Investing, RBC Global Asset Management, Roy Swan, Mission Investments, Ford Foundation, Lee Clifford, Fortune

Hi, everyone. All right. So we named this panel is Esg Dead, but obviously, I don't think that our panelists are going to say that ESG is dead spoiler alert. So, um let's just talk a little bit about the ESD backlash where it came from and what ESG is evolving into Marina, you want to go first? Sure. Um Well, that's a loaded question. I mean, I think the ESG backlash I think has come from a few dimensions in my mind. I mean, there's a piece of it that is, it's become politicized, right? And so there's a lot of drama around that. I think the other piece has been that what ESG means um has also been, you know, I'd say confusing for folks, right? I think we've all heard the term of greenwashing and so it's made it really hard to know what does it mean and how useful is it as a term. Um And so I don't know, in my opinion, I think that there's a high likelihood that the, the acronym ESG may be dying. Um But I think what's underneath it for the folks who actually believe that these are important parts of managing a business is not going anywhere. And you, you called that impact investing, which is another name, what, what well actually impact that investing is entirely different than ESG. So ESG to me is, is uh it, it, it's a way to evaluate how a company operates. It looks at its processes and it takes into account environmental, social and government factor factors that might impinge on its ability to make money and to, to survive. Uh Whereas impact investing, you're actually looking to make a financial return as well as provide a specific social outcome. So it's, it's kind of a, a hyper esg but it uh we're looking at the end product and outcomes uh trying to align that uh to make a financial return. Uh um And so I, I would say we, we're, we're creating Social Alpha and Investment Alpha and the, the best marriage is when one creates the other, when solving a social problem actually creates outsourced financial returns. All right. So I'm going to do something a little bit different without asking permission. Can I get a showing of hands everyone in this room? Who believes that fairness is bad? Who believes that fairness is good? OK, II I think I have an overwhelming majority. The reason, a definition of the reason why the reason why I wanted to raise that point is the power of words and semantics. So if you think about the s of ESG and you think about the concept of fairness. Most people agree that fairness is good, but there's also a backlash against DE I and DE I is just another term for fairness esg has faced backlash even though it is simply a risk management framework that was created to provide non GP information for investment modeling purposes. It has and I'm going to say it has the backlash um to some extent is rational. And here's what I mean by that. If your livelihood is based on, um, working at a fossil fuel company, uh, if your wealth is tied up in a fossil fuel company and you're receiving ratings for the company that are saying this is a terrible company. What reaction would you expect? So, um, there are, I think ways to address this and we can talk about that later, but that's, um, I wanted to layer in the power of words, the ability for words to be weaponized. So, what words are you using to describe what you do now? Oh, we, we, um, we've come up with the term called patriotic capitalism. And the reason why I came up with that term, I don't know if it's the first time it's been used is certainly in this context. The reason why is because of this, um, the word patriotic and the word capitalism are both imbued with such, um, positive meaning that they're much harder to weaponize than unknown terms like de I or even woke. And when we talk about patriotic capitalism in the context of impact investing. We think about investing with a few considerations in mind, country democracy in the common good. And we believe, and we have proof based on our investment performance. And there's plenty of others, we believe that it is possible to generate superior financial returns through patriotic capitalism, which is essentially fairness. The simplest example I can give on this is um fairness to workers. So one of our impact investing themes is quality jobs. The quality jobs theme looks at what has happened in the live lives of workers over the last sort of 40 to 50 years. And um one of the things I have to confess to everyone uh is because of my background um and educational um uh history. I rely quite a bit on um the, the advice of dead white men. And um um so Milton Friedman, Adam Smith, if you read all their stuff, what you'll find is the only way to have a healthy economic system is by being fair to work to workers. And I'm gonna stop there because I don't want to monopolize time. We can return to some of these thoughts. Anyone else have any confessions they wanna make. Well, one thing that the uh you talked about the semantics and, and the wordsmith, um what I like about the impact investment. It's, it's pretty clear you have a social outcome. You either want that social outcome or, or you don't and you have financial returns, you either make it or you don't. And so that, that, that uh cuts through a lot of uh the words manship. And I think there's plenty of opportunity to have impact whether it's in health care, education, promoting fairness, developing communities. Um There's plenty of problems to solve. One of the measurements that we use is the uh United Nations Sustainable Development Goals. And we try to uh uh look through those universal goals that societies and, and countries and individuals uh aspire to and see if we can find ways to make money fulfilling those needs. Yeah. Well, and it's funny because I would say so, I like the idea of patriotic capitalism because so we don't consider ourselves an impact fund. We actually say we are capitalist with a capital c um even though we expect to have a lot of impact. But part of it is because, um, I think we do see it as just so fundamental to the fairness that we're trying to drive and so similar to what, uh uh uh you know, the idea of quality jobs. We, that's a big part of how we think about it. We're thinking about if we're going to invest in a company, we want to invest in a company that's gonna create quality jobs in the US. And if we're gonna do that, we hope to have an impact on the folks that are the least employed who are those people who are the folks who need those jobs. It's going to be overwhelmingly minorities who need to be uplifted if we're going to get to a place where we have more equitable wealth distribution in this country. And so that's what we focus on. Well, I'll quote another dead white man, uh, Walter Riston who was the CEO of Citibank. And, uh, Citibank was just embarking on a global footprint. And, uh, they asked him, how does he decide where he goes with? Citibank was going? And he says, well, capital goes where it's invited and welcomed and stays where it's well treated. So, in part, um I, I think when you talked about ESG and uh whether there's impact um capital is impacted by its relationship to government relationship to society, relationship to its clients, to its individuals that it serves, et cetera. And so when you look at the question Esg did that, it's like saying due diligence is dead. I mean, why wouldn't you look at what a company does? Because it, it has geopolitical risk, it has government intervention risk. Uh It has a risk with its workers and, and so all of these things are important tools to evaluate the ability of a company to generate cash and to pay its bills and to survive. Well, let's dig into how you guys decide which companies to invest in and bet on. We were talking backstage and you said, you know, when you have a lot of money to deploy companies, find you, they, you know, they want the, they want the investment, what are you looking for? Um So for me, I would say we're right now very focused on identifying companies that create good jobs for um communities of color in the US. And so, and I wouldn't say just focus on that, but again, it's this idea of good jobs, not the ones that are gonna go offshore that are gonna go away, not the ones that are gonna be completely disrupted by A I, but the ones that are gonna stay around. And so for me, that's been actually looking at a lot of businesses that might be utility services, technician, businesses, places where no matter what you're gonna need a person doing something. Um And the benefit of that is to me, it's, you know, they are going to be good jobs, they're going to be skilled jobs. They may not all require a four year degree, right? So they can be more accessible. And if we're being thoughtful about the ways in which you actually start to create pathways into these jobs, um then we can have a more competitive workforce, right? One that might stay around with us for a while. Um If we're thinking about the various other levers that we can use as tools um to better incentivize those workers to stay with us, like actually finding ways to incent, not just like the fact that you have a 401k plan in place, but actually getting participation in that creating equity ownership plans. Um Things that actually make folks feel like they are owners of the business and therefore want to stay, then we're going to be able to have the best possible business that can grow faster than others because we can keep the talent, right. Um And so to me, that's what gets really exciting is getting to spend time identifying those pockets, those businesses and putting together the road maps that can allow us to be wildly successful. Yeah, so my background was in banking and I actually started back when the business of banking was actually growing its community uh when it was restricted geographically. So I'm kind of old school. So uh my focus has been and our focus at our R BC has been around building strong communities, particularly those communities that are under resourced and underdeveloped uh and underserved. And so we think our, our, you know, we're, we're, we stress homeownership, small business development and quality safe housing. And to me, that's the bedrock also health care, clean water and infrastructure. So we uh we, we, that's our focus. Um We actually think there's plenty of opportunity to make money. Ironically, when people look at under resourced and underserved communities, a big R sign comes up, risk, risk, risk, risk, and a negative return return return. But there is actually a number of tools that are available and those tools are actually growing and in the hands of uh more resourceful people around um making small business loans. I think after COVID uh with PPP and, and the Black Lives Matter pro protest, we realized there are many communities throughout our country that uh suffered inordinately and, and uh who um felt the brunt of all of that and that uh long term that's not going to be healthy for a strong country, talk about patriotism and that um there's interventions that have taken place in the past using government tools, whether it's uh the GS CS and Fannie and Freddie or whether it's the Small Business Administration and I'll give you a story. Starbucks came to us, uh uh right in the middle of COVID and they were having problems with expanding some of their stores and they wanted to do something with small businesses so that they could be a friendly neighbor. Uh We took 50 million from them invested uh in uh SB a loans around the country. Um at the time they had cash and they got a little extra spread out of their cash proceeds. It's, it's full faith and credit of the government. And um the return now is 666.7% return. Uh And um in a, an environment that was 1.5 2%. So you can actually uh same thing with home mortgages. Uh There's plenty of opportunity, you know, be between fintech. Part of the problem in some of these communities is there are plenty of people who are qualified and should have access to capital. But the transaction cost of finding them and because their deals are so small, they've been on the serve, but the combination of fintech uh as well as um uh social media to educate in financial literacy, uh I think it's opened some of those doors and when you aggregate those uh particularly in the mortgages areas, we've proven since 1996. And we've been doing this through 2007, 2008, 2009 that uh small balance mortgage loans to working class and lower income individuals based on 30 years outperform substantially and to the extent that even even Black Rock and Timco and all the rest will pay a premium for those if you can create a pool made up of those loans. Wow, that's a great stat. And where you said you're gonna name some names for us, I'm gonna let me first zoom out to 30,000 ft um for the Ford Foundation. Um We have what I'll refer to as the audacious and ambitious goal of systems change. We wanna change the way uh the form of capitalism in our country and, and, and perhaps the world going back to that quality jobs, impact investing theme and workers. There's a lot of as an investor, you're always looking for low hanging fruit and just real quickly, workers are the wellspring of innovation productivity, profitability in order to generate that they need to be engaged globally, 70 to 80% of workers are disengaged. That is costing $8 trillion in annual profits globally. 550 billion in the US alone. That does not include the going back to the fairness topic that does not include the cost of unfairness, race-based unfairness in the US, which has been estimated to cost to have cost the US $50 trillion since 1990. So we invest in private equity funds that focus on quality jobs. Uh We look for diverse fund managers because um 1.4% of all capital of 80 trillion plus and capital in the US is managed by firms owned by women and people of color, people of color. That's a problem and on the naming names, one of the things I mentioned we were talking backstage is in the ESG area. One way to manage uh the weaponization is to go from ESG qualitative disclosures to currency based quantification of the ESG disclosures. We just invested in a relatively early stage A I driven company um that is focused on uh quantifying ESG so that it can be used directly by investors in their investment modeling. It can be used by policymakers so they can decide whether to force companies to internalize costs or tax those costs and regulators and by consumers. So they can make decisions based on what is this company costing society, I should stop, you know, in, in Europe. Uh this has been long standing the use of ESG because uh in Europe, they, a company is part of an ecosystem and it's not divorced from the other sectors. And so ESG and uh um most companies, European companies are required to put out an ESG statement just uh and it's as required as, as an offering memorandum or perspective. Uh So I think um uh the US has a little bit of a catch up to come in. So it's patriotism in Europe as well as in, in, in the United States that takes us to the end of our panel. Um Thank you guys for the really thoughtful conversation. We appreciate it.