The Power of Data Podcast
Episode 44: The Importance of ESG In Responsible Business
Guest: Gordon Hagart, Independent Investment Consultant and Special Advisor to the Institutional Investors Roundtable
Interviewer: Sam Tidswell-Norrish, International CMO, Dun & Bradstreet
Hi, welcome back to The Power of Data Podcast today I am delighted to be joined virtually by Gordon Hagart, how are you doing Gordon?
I'm really well thanks Sam. How are you today?
Yeah, not bad at all. Thank you. And I'm really thinking about how to introduce you now. You've had a plethora of exceptional titles and a piece of paper that I have in front of me, actually says, independent investment consultant, which I don't think does you anywhere near justice. The second part is definitely quite cool, special advisor to the Institutional Investors Roundtable. But I think just a reel off some of your past qualifications will give people a true sense of what an industry expert you really are. You held positions, including the CEO of the Australian Council of Superannuation of Investors, otherwise known as ACSI, and you were head of ESG risk management at the Future Fund. And for those that don't know the Future Fund its the Aussie government's hundred and fifty billion dollar-ish fund. Gordon, can you tell us a little bit about your career today?
Thank you. This is very kind of you. I mean, I guess you know, in a word peripatetic might be the way to describe it. So I'm a geophysicist by education way back when, but I've spent essentially all of my professional life so far, at least, in financial services, and in particular in asset management. Spent a bit of time in investment banking in London, and then a brief interlude in public policy working for the UN in Geneva. But other than that, it's all private sector. So I was an investment consultant in Zurich, working with pension funds and sovereign wealth funds and family offices. And as you mentioned, I was in Australia for quite a long time, about six years in a couple of different jobs. And I've been back in Europe for about five years now as an independent consultant. But in my usual field of trying to help asset owners, especially, kind of get their heads around corporate governance, investment governance, and really thinking about how ESG issues and other kind of long term challenges can be best dealt with both independently within an organization and especially through collaboration with like-minded peers.
Sustainability has become less of a buzzword and more of a necessity and companies that don't bear it in mind are already suffering, I think and invariably after COVID-19, governments are going to become far more involved in sustainability, and what that really means towards long term value. And it is probably the most exciting time in your space. I'm sure people have been saying that to you for decades. But I think it really is a slightly confusing industry for many people, if you had to demystify what ESG really is, how would you position it for our listeners?
Great question. It is a mystifying industry in a way. And I think, you know, broadly speaking, the financial services industry doesn't go out of its way to demystify itself. So I think that's kind of an industry wide trend. The industry likes to think, well, it's so wonderfully complicated that nobody else could possibly understand it, why would we bother explaining it to them? ESG, I guess comes from at its heart, an acknowledgment that the world is complex place, that the things that drive risk and return in terms of the way companies behave and operate, and therefore how the investments in those companies perform, are more complicated individually and interact with each other in ways that have not really been captured by traditional financial and economic analysis previously. And also an acknowledgement that the sector is kind of absolutely riddled and rife with behavioral traps and misalignments of interest, and over intermediation and high costs and all sorts of things that stop the money that you would hope would get from an investment towards the person who's actually taking the risk that stop that happening in a good way. And also that cause a broadly short term outlook that doesn't lend itself to thinking about all those complex issues I talked about in the beginning. So ESG is, I guess, at least in my vision of it about saying, let's acknowledge the complexity of the world and let's try and do a better job at analyzing the true drivers of risk and return in companies and other investable assets over a time horizon that aligns somewhat with the average investment horizon. So that's going to be ESG on the analytical side. I guess the other important that we might want to explore is really a whole concept of active ownership and the fact that as an investor, certainly what price you buy at is really important clearly, likewise, when you sell and at what price, but what you do with the asset, while you actually own It is really important too, and can be extremely significant for the value that you derive from that asset. And in terms of ancillary effects can also really be important for the state of the environment and the state of our societies.
That's really useful. Thank you so much for a little demystification there. And I think we've got some wonderful soundbites in that for later. So as the world does become more sustainability focused, we're seeing ESG increasingly affect how businesses of all shapes and sizes operate predominantly in the public company's sphere, but increasingly in the private company side as well. What do you think some of those drivers and catalysts for this kind of shift towards sustainability are?
You know, there's some fairly obvious ones, or more obvious ones, in that the issues that tend to kind of bubble up to the top when people, both in companies and investment houses, talk about ESG issues are just really becoming incredibly in our faces. So you kind of said you need to be living under a rock to not hear about ESG issues. Well, you know, more broadly, I guess climate change is just so dominant in the media and in the way our societies operate in good ways and in bad ways, both in terms of some action that's been taken and plenty of inaction. But if nothing else, in terms of the physical impacts, I mean, you don't have to look very far just to see the real physical impacts of climate change, income inequality, various other sources of tension in our society. So I mean, the issues themselves are right there in front of us. And therefore, they're becoming more flagrantly important to companies’ business models, to sectors as a whole, to the overall economy, to social stakeholders, to policymakers, and so on. And so it's kind of hard to justify not thinking about those issues as you make your decisions as either the manager or director of a company or of an investment portfolio. So I mean, I think that's, you know, kind of really the primary driver of this interest, you would hope but I think it's true to say that the investment industry is becoming more sophisticated as a whole, getting better with every year at creating and analyzing alternative data sources, being open to the fact that those alternative data sources can be sources of value that it is possible to derive them and to analyze them and to add value to your process. So I think those are kind of two sides of fairly important primary drivers of this interest in ESG issues. I think there's maybe also, Sam, a bit of a less obvious driver. And that's, to my mind, the professionalization and the empowerment of the asset owner end of the investment chain, which has traditionally been quite, you know, the weak end of the chain. But as that end begins to professionalize, and be empowered relative to downstream actors, then you start to see an interesting effect. Because if you want to really look at ESG issues and take concerted action on them as an investor, then you do need that longer-term horizon. It's certainly hugely helpful as a facilitator, you really need to think about not just the single assets or single sectors or single currencies or single regions, but you need to think about the economy as a whole, and how different elements of the economy interact with each other. And you really, in an ideal world, need to think about who actually owns the money that I'm investing in or managing, who is actually taking the risk, you need to kind of think about the true beneficial owner and try to act like a proper fiduciary. You know, think about playing positive-sum gains and absolute returns, and, rather than just always relative returns. So all those things come as the asset owner becomes relatively empowered vis-à-vis the asset manager or other service providers, and that is a kind of industry wide phenomenon, which I think is really interesting and really important, and is certainly, you know, a catalyst also, I think, for this interest in ESG issues.
You couldn't be more right, in my mind I think, traditionally, the route for ESG has been through a CSR function, and then more increasingly through a sustainability department or even supply chain and now it's an issue for the CFO. And the reason for that, I think as you just said, is that there are significant implications for the cost of capital, but also just the access to capital. We've seen a number of articles recently that have highlighted that, there was one thing just yesterday about Boohoo in the FT, which really highlighted that as an issue. How have you seen companies adapt to this change? And what extent do you think they're addressing the shift in responsibility? How are you seeing it internally change?
Yes, I think that that's happening, that that kind of positive trend is definitely happening. And as you say, you know, moving away from the sustainability team or not, not away from necessarily but a parallel stream emerging that brings in investor relations, brings in the CFO, brings in the CEO, you'd hope and, you know, from my perspective, at least, also, perhaps above all, the board and, well the chair of the board and other parts of the non-executive. I think that's, that's really important that they engage with these issues. And I think you do see companies increasingly understanding that these are issues on which they need to engage not just with a specialist sliver of the, of their investor base, but with all their investors, to the extent the conversation is caged within a financial materiality framework. They also see that they need to, you know, on both sides of the table, it really needs to be senior participation, it needs to be not, okay, well, we'll talk about the really important things and then we'll allocate five minutes at the end for the sustainability people to come in, and they'll talk to your sustainability people and I'll kind of go for a coffee. I think it needs to be integral to how companies talk about their own business and the sector and the economic climate within which they exist. Some of these things are happening, some of them are a longer burn, you know, more aspirational, but at least in my mind, I think companies need to really be clear to separate out the ESG discussion that goes to investment decision making inputs, in terms of thinking about data and you know, how companies are performing on various ESG metrics vis-à-vis ownership discussion, which is about, you know, E and S is a big part of that, but it's mainly in the framework of a G conversation, a governance conversation. Is the company set up and governed in a way that is beneficial for the owner rather than the manager. Now, there's a really strong interface between those two conversations, but they're not the same thing and I think you've got to make some kind of distinction between them. And, you know, above all, I think, really acknowledging, and this is this has definitely happened in recent years, I think, for management and the non-exec to acknowledge that their investor base is just really heterogeneous. You know, perhaps especially on ESG issues, but they need to have different conversations with different types of investors who have different strategies running different time horizons, you know, it's natural that they would care about different things. Sophistication is kind of the order of the day and I think it is happening slowly but surely. Allied to that point and, and to my kind of having mentioned the ownership bit being different to the, the analytical bit, you know, I always had in my mind, the concept that investor relations is great, obviously, and having you know, that team support your CFO to communicate certain elements of the company performance is obviously crucial, and that will continue to be so and we will hope that ESG issues will make it increasingly into that conversation. But it always seemed to me that there was almost a need for another function at the non-executive level, which is, you know, what I in my head kind of talked about as owner relations which is between the non-exec and really the long-term investor base, which oftentimes is going to be made up of asset owners rather than asset managers, and really talking about the kind of issues that matter and a really primary sense to them. So I think the whole space of communications between corporations and their investors is becoming more sophisticated, and that's a necessity, and that's a really, really kind of positive phenomenon that we're seeing.
Yeah, and it's absolutely something that's driven by the boost in available data and subsequent analytics and technology. You and I've been talking about this since we were first introduced, talking about the role of data and technology and helping organizations improve their understanding of sustainability metrics, but it's not easy and it is a complicated space, particularly with different requirements, configurations, taxonomies and frameworks for both the organizations doing the measuring, and those being measured at the same time. What do you think the role of data and technology is within ESG for the future? How do you see this evolution panning out in the coming years?
I think it's super important. I think, you know, we spoke at the outset of ESG, being about kind of opening your mind to this complex world and the fact that you maybe need to look harder and do more analysis to understand what's truly driving risk and return. So the kind of data sets and data tools and analytical approaches that are emerging are really fundamental to that in allowing us to get our heads around the analytical challenge and just deal with the sheer volumes. That's really important. I think the ESG data and analytics conversation sits within a broader context of a kind of overall conversation about alternative or enhanced data and analytics that are coming from a whole bunch of different sources for a bunch of different reasons. And that's all again, part of that kind of trend of sophistication of our industry and also having the computational firepower or engine capacity, whatever it is, to be able to deal with those data sets. So every day, yeah, for sure we have access to better and more data that we're getting more quickly, we can process those data better. And you know, we've got longitudinal studies, we've got better time series that, that allow us to gain confidence that the trends we think we're seeing are actually real, they are statistically significant. I think at the same time, you know, we're still in a world where there's still a requirement for really good fundamental analysis done by humans, you know, if nothing else to design which data you're trying to capture and what analytical frameworks you are trying to put it into, you've always got the kind of danger of the garbage in garbage out phenomenon, not just an abundance of data that's going to win the day here. And also, you know, in a similar vein we’re in a market, right, you know, we're all kind of setting prices based on this Keynesian beauty parade where it's not just about the fundamentals, it's about what I think somebody else thinks about the fundamentals that sets the price to a certain extent, you know, and if you if you want to sell an asset, you've got to have a buyer for that asset. So yeah, so I think that the data and analytics trend is really fundamentally important and showing some of the positive signs but it needs to be accompanied by a bit of a grounding, a bit of rational thinking about how the market we operate in actually works.
And how do you think that the data and ultimately analytics will help drive the standardization and transparency in the industry that's been arguably lacking for many investors?
That's definitely been, I guess, in the first instance, a complaint you hear from companies. I mean it's, I think that's, that noise is going down a little bit, but you used to speak to companies and they’d say, oh, you know, what worries me I've had 17 different questionnaires in the last three days asking for GRI and says be in this TCFD and this and that, and the next thing, how can this possibly be. So, I think, you know, it was important that a standardization conversation and a rationalization conversation emerged and that that's absolutely happened and happening and going towards, you know, I think a good conclusion and that's, that's really pleasing to see. At the same time, I'm not sure if we'll ever get to the one ring to rule them all stage of things, but I think that's okay. And I think, you know, in part that's about acknowledging that whereas It's absolutely obvious to see what the interest is in having standardized data forms, albeit acknowledging the particularities of different sectors and different regions and so on. But, but having data that are somewhat standardized, and above all, reliable, trustworthy, is absolutely important. But it's a non sequitur, to go beyond that and say, oh, that means that the analytical conclusions that will come from the use of those data will be the same. And again, kind of thinking back to the dark days you used to get companies going, well, how can this be, you know, some industries rated me an A-plus and somebody else rated me a B-minus, I mean, that's just cannot be. Well, of course, it can be you know, people make different conclusions based on the same data every day of the week that those two concepts can coexist is normal and is the sign of a kind of maturing and sophisticated market. So I think we're on the right track on those fronts, to my mind.
In January in fact of this year, god it feels like a lifetime ago, I was at the World Economic Forum's Annual Meeting in Davos and the International Business Council announced plans for coordinating new reporting framework with 140 of the world's biggest organizations pledging to sign it and push it forward. And it's the right forum to do that you have world leaders, both political and business, there to collaborate on exactly this sort of stuff, other than some of our world leaders who don't believe in some of these issues. What do you think needs to be done to improve the quality of the ESG data we use? Because as you say, rubbish in rubbish out, you know at D&B we pride ourselves on making sure we, we cleanse structure and maintain data to the highest possible industry standards? So how do we improve it, part one, and part two should we be looking to set a policy framework to deepen the application and reporting on ESG?
Those are thorny questions. That's not so much my domain of work. I'm kind of obviously interested in and impacted by that. But it seems to me that as we said previously, that the community such as it is has identified the right problem and is working towards a solution. So I see that as being an imperfect state of affairs right now, but it's on the way to a better place, and I think we will get there. And, you know, policymakers have interested themselves in that, whether it be the European Union or others, have kind of tried to catalyze that action and I think that's welcome and important in some really good discussions between large institutional investors and policymakers on that front. You know, as with many standards conversations you know in kind of a Betamax versus VHS, or MiniDisc, or whatever it might be it's not always the best standard that emerges, you get these kind of funny effects that emerge from time to time where it's not really a meritocracy. But if we get to somewhere where they're broadly comparable, useful, reliable data that are looking at the right things for the right companies in the right sectors, then that will be good. I think we're headed towards that destination. I mean, to my mind, that's not the major impediment to the uptake of ESG issues. It's much more to do with the volition of the asset management community and the asset ownership community to actually use those data analytics and to invest differently because of them to the extent that they find them to be financially material. So it’s the leadership and changing of paradigms and changing of incentives and thinking about why we're all here in the first place, as opposed to fretting about the quality of the underlying data, which is an issue but not necessarily the massive barrier that it's sometimes made out to be.
I'm gonna press in a kind of slightly polarized area of what you've just said, I'm a big believer in inflection points, both societal and economic moments of time being forced. I don't think inflections happen naturally and COVID-19 has shone a new light on the interconnectedness between the human and the natural ecosystems. And it's going to ultimately, as I said, at the beginning, totally change the way we do business. It's going to change how much governments are involved in the private sector, it’s going to change our view of responsibility and who those responsibilities ultimately sit with and look out for who. How do you see COVID-19 accelerating any organization of any size’s adoption of sustainability metrics? Do you think this really is the inflection point for ESG?
It could be, that's not a very useful answer is it. Yeah, so I've got kind of, you know, one, one little bird on each shoulder, one saying, yes, this is a unique moment in history and from my little part of the world, then this could be a really positive force, a really nice silver lining to an almighty gray and horrible cloud. It is another torch that’s shining a light on this complex world and the fact that you cannot run a business or run an investment portfolio without thinking about the health of the economy and the fact that the health of the economy is based on the social and environmental substrate on which the economy sits. So I think all these things are positive impacts of this otherwise horrible situation. The other a little bird on my other shoulder, which is probably the Scottish one that's kind of grumpy is the one that's saying, well, you know what, ESG has always been at the risk of being in the nice to have camp rather than the need to have camp and when investors and companies thought that things were going well, then they can oh, you know, let’s think a bit more broadly. Let's think longer term. Let's think about these issues. Let's be good guys. You know, we're in a major economic crisis right now and despite what the stock market indices would have us believe. And so there is a risk on the counter side of the argument, I think of some of the momentum that ESG has built up dying off a little bit because it's kind of all hands on deck and just trying to batten down the hatches. And you know, whenever I speak to clients and investors it's not that they're disavowing the interest in these issues, but there’s survival issues right now, it's just a kind of crazy world. So hopefully, that will be a temporal effect. But there's potential for cons as well as pros there, I think.
So let's do some quick thinking, some quickfire rounds. If you had to add a fourth component to environment, social and governance. ESG. What would that final letter or final component be?
Oh, well, I think I would say full stop three spaces, new paragraph, and then ownership or active ownership, I would make clear that there was a big difference the two.
What is one common myth about ESG that you want to debunk?
Here comes the Scotsman again, I think it's the concept that it's all about win-wins. And that, you know, in any set of circumstances, if the company does the right thing, environmentally, the right thing in terms of social performance, it's going to make more money. And therefore, of course, we should all do these things. I mean, that would be lovely if that were the case, and that would be reflective of policymakers, if nothing else, having managed to re-internalize all the negative externalities from which companies can benefit right now. But that as of today is not the case. And there are unfortunately plenty of cases where what's good for society and for the environment in the long term and what's profitable in the short term are in distinct tension. So the ESG industry or sub-industry needs to continue to be or be more frank about the fact that both situations exist, and that it's not just win-wins, there are plenty of win-loses in the world and in the economy. So if we're mature as an industry, we can have open conversations about that. And I think that will improve our credibility and ultimately will help us to get to where we're trying to get to.
What's your favorite stat in the ESG space?
It's not statistical at all, but you know, I work a lot in the private market space around private equity and coming back to your original point of are we at an inflection point, are we on the cusp of a sea change, if you'll excuse that horrible metaphor, but in private equity they always talk about the J-curve and it always feels to me like the ESG breakthrough has a massive J-curve as well. Or a kind of really flat lazy “L” or something. We almost seem to be getting there but it never quite, quite happens. So that's my parallel if you like.
To add the number to that it’s something like $85 trillion of assets under management with the signatories of the UN PRI, which, you know, if you want to put the stat to the J-curve, that's the weight that's behind this movement, which is really quite, quite something. Okay, what is your favorite ESG focused initiative from an organization?
You're asking me to kind of pick favorites and pick winners, aren't you just wait, so I asked you to predict things in a minute. I'll be a perfect counter indicator for your audience. They can do the opposite. So yeah, I mean, I guess I boringly work on things that I find interesting and worthwhile. So I mean, this this thing you mentioned at the beginning, the Institutional Investors Roundtable, is something that's really close to my heart. And why is that? Well, because it's about asset owners whom, as I said earlier, I think, you know, are really an important part of the solution to this whole thing, working together kind of saying to each other, you know, although the industry would have us constantly play zero-sum games against each other, what if we all acknowledge the common purpose of just trying to get kind of good, solid long term returns for pensioners and for states and for universities and stuff like that? And what happens if we just work together on that making the economy better and more robust, thinking about how it all works? So I like the IIR a lot, because it's about positive-sum games, and it's about learning from each other and realizing that not everything is a fight where in order for me to win, you have to lose.
It's a great answer, only a couple more, and then you're free to go. Over the next 10 years, what do you hope or predict will have changed or be achieved in our space?
So I guess you know, you'll often hear an answer where people will say, well, I hope that ESG people both in the company side and on the investor side would have disappeared. And there would no longer be that role and it would be fully integrated into mainstream business into mainstream investing. And I don't think that's realistic, near-term. And I'm actually kind of indifferent as to whether or not that's something that we should desire. Because I think ESG people are specialists and trying to acquire and use specialist sources of information, I think, you know, the need for that will persist for some time. What counts is why they're actually doing their job, what is their purpose? Do they have any influence in their organization? To whom do they report? And all those kind of things. So yeah, now suddenly, realizing I just told you, not what I think but what I don't think. But what do I think? Well, I suppose and this again, flexes is a little bit off what I said about the IIR a second ago in terms of that, and my passion for asset owners and for collaboration. You know, I think ESG analysis and investors being active owners and thinking about the long game, that's all just really part of a bigger conversation around the financial system, and I suppose the economy as a whole really working better for those that actually own the money, those that take the risk and those that are trying to secure a return for their retirement or whatever it might be. You have people that talk a lot about whether the financial system should be completely retooled and completely rewired to serve positive social and environmental outcomes. And that's an interesting debate philosophically and politically. I don't think that's particularly realistic in our Anglo-style economies. And I'm not sure if it's even actually all that desirable. But I do think that that agenda around thinking about the asset owners that are closest to the true beneficial owners, thinking about empowering them, professionalizing them, helping them to work together, rather than fighting against each other. That conversation which is happening but needs more impetus and needs to be enhanced, I think is bizarrely the thing that will really be the breakthrough. And it sounds extremely unsexy when I describe it in that way, and it's definitely one of those games where you're not trying to turn a speedboat around, but you're trying to nudge a supertanker of institutional investment, you know, a few degrees in a better direction, so it's not necessarily a debate that arises much passion. But it is such a big supertanker. And if we're talking about the long term, then just that couple of degrees can make a massive difference to regular people that save money for their retirement, school teachers and firemen and states that have set up sovereign wealth funds, it can really make a massive difference to the outcomes that they experience and kind of accidentally by design, it can have some pretty spectacularly positive benefits for the environment and for society as well. So that's the agenda I think needs to be pushed. And that's where I really hope the conversation will go in the next 10 years. And I think the private markets discussion is super important, super interesting. And you know, I hope that that continues to be sophisticated and to cross-pollinate with the listed markets discussion so they can both benefit from each other.
Awesome, awesome answers all around and to finish it off, if you could have been the interviewer today, what is the one thing you would have asked which I did not?
Well, you know, you run a really tight ship Sam. So it's been a great set of questions and a really fun interview to participate in. I suppose, you know, every morning I turn on my computer and if you look at listed equity markets, I mean, across the board, everything is basically flat or up right now. What’s with that? I mean, yes, you can point to a bunch of reasons why that may be vaguely rational, but look at the real world at your window, and then look at the equity markets in your screen. So to think about what happens when the demos works out where all that public stimulus money actually went, where it ended up, that's kind of a smoldering problem that might burst into flames at some point. That could be an interesting conversation for some of your other podcasts. The other thing I mean, I do think it's really important to any conversation about ESG issues needs to start with framing discussion about whether you're in this business because you think that capitalism is fundamentally broken and needs to be thrown out and we need a new system, totally reinventing the way our western economies work. Or you think that kind of Western shareholder capitalism or shareholder primacy, that's okay, but we're just executing it poorly and you need to do a better job within the existing paradigm. Both philosophically are totally legitimate and you could argue them either way. But I think you kind of need to nail your colors to one of those two masts before you can really have a long, hard conversation about this. Whether you're coming as a service provider, a company, an investor, a concerned citizen, a policymaker, whatever it might be. I think there are tensions there. And it's not possible to cut through all those tensions unless you really are clear at the outset as to where you're coming from.
Yeah, to the first section of your comments. You know, what is that all about? It's pretty terrifying. In fact, I was talking to a friend about it just recently, and the disconnect between the economy and the markets is frankly frightening. And it stands to something I suspect that is even more frightening, which is the disparity and the inequality between the wealthy and the not wealthy, where you have the lower economic groups really at a substantial disadvantage through something like this and you have the wealthy who really only profit and only makes things worse, it creates much larger inequality gaps. It's terrifying. And I think you're right, we're going to see it unravel. And it could well be that this is just the beginning.
Yeah, on that point where you move towards universal pension systems where you earn a dollar and you contribute to a system. That's some mitigant on that phenomenon. If you can get the pension system right, get the wealth funds right, then that is a kind of democratizing force.
I completely agree. And we're not going to get started on the pension crisis, certainly not in the UK, because I could go on for a long time. But you're right, I think the Canadians, Australians, they've all things to teach us about the way to distribute wealth. It's such a good point. But we're getting into the end. And I think we've given ourselves plenty more to talk about, certainly as Dun and Bradstreet evolves, its own thinking in this space to. Gordon, thank you so much for your time and on a continuous basis. You know, the listeners should know that you've been really generous with your time with me and been thinking about this space a lot. So thank you. And I look forward to hopefully one day returning the favour.
Thank you very much for the invite. It’s much appreciated. It's always a really fascinating and stimulating conversation with you Sam. So I'm looking with forward so many more.
Thanks so much.
Thanks, bye bye.