Aoifinn Devitt: The first series of 2022 is brought to you with the kind support of Herd Capital, a Chicago-based asset manager that invests in public equities in the technology, media, telecommunications, financial, and industrial sectors. The firm was founded in 2011 and manages assets via a long-short fund and a long-only fund. Our next guest was born to be an activist. Find out why we are mentally wired to divorce doing good from making a return, and why overcoming this is key to effective partnership to address the climate crisis. I’m Aoifinn Devitt, and welcome to the 50 Faces Podcast, a podcast committed to revealing the richness and diversity of the world of investment by focusing on its people and their stories. I’m joined today by Joel Moorland, who is Principal Consultant at Social and Environmental Finance. He has worked in a range of roles, mostly where the financial system interacts with the environment and society. Welcome, Joel. Thanks for joining me today.
Joel: Hi there, Aoifinn.
Aoifinn Devitt: Well, before we go into discussing some of the issues and themes in investment today, can you give the listeners some context for your ideas and opinions by describing your background and the work that you are doing at the minute?
Joel: Yeah, sure. I think it helps really to go right back to the beginning, and I was born into a family that had, you know, strong social and environmental beliefs at the heart of it. My dad was involved in nuclear disarmament, my mum is a South African and was very anti-apartheid, and so I could have gone down many routes with that background, but I was mathematically minded, so finance was the right place to go, um, the most common choice for those who got that kind of background. And banking was where I started, and my first sort of real overlap was environmental credit risk. That’s where banks need to protect their loan book from environmental risks like pollution and so forth. I then moved on to fund management, including an activist house, and most relevant to this discussion is I worked at the Henderson Global Care team. At the time, it was the biggest by far in the UK with a quarter of the responsible investment money. I then moved over to another side of finance, which is called Finance at Triodos, again with a strong social and environmental flavour to it. I was doing bond and share issues, much like kind of crowdfunding, for the likes of Mencap, the learning disability charity, their housing arm, Caffeedirect, the tea and coffee company, and renewable energy and so forth. I’ve long since also been an early-stage green investor. Mostly with Green Angel Syndicate. So this is really getting to companies who are just past the sort of— just past the startup phase, and they really need input, both money but also expertise. And that’s, yeah, it’s a really inspiring part of investment because it’s money that really makes a difference. I’m also very fortunate to have a lot of conversations with asset owners about what responsible investment means to them and how they can integrate that fully into their investment portfolio. I also advise financial campaigners. So the finance industry isn’t going to solve climate change and all these other issues on its own. Certainly needs government action, but it also needs pushing from campaigners. And that’s both the kind of fun side, the throwing the treacle around, pretending it’s oil, but it’s also about working with the industry and supporting those that really are leading in the industry to do more on environmental and social issues. And my final line of activity is using my investment experience and environmental and social knowledge to assess charities’ applications for grant funding. And yeah, that about rounds it out.
Aoifinn Devitt: Well, certainly multiple issues that we can dig into there, and in particular climate tech, which has been the topic of another one of these podcasts. When I ask you about the areas of innovation that you’re most excited about, it would be great to draw upon maybe some of the technologies that you’re seeing But let’s start for the purpose of this discussion, we’ll start with sort of a broad top-down kind of macro view, and then we’ll kind of drill into maybe some of the different verticals to get your sense as to where we are today. And I’d love to hear about many of these different areas. So at the forefront of your mind today, what are the issues? I’m sure there are many, but as you work with institutional clients that you find you’re speaking about the most.
Joel: I think the biggest thing is urgency. That’s what leaps into my mind, particularly in relation to climate, but also other environmental issues. I think there’s a greater awareness that we are bumping up against the boundaries of what the planet can sustain. And that’s often really a challenge for asset owners. Know, You you’ll have many that have only a few committee meetings a year, often with lay trustees, and just injecting that urgency into the whole process without, you know, making mistakes because you rush too fast. But that’s definitely top of mind for me all the time.
Aoifinn Devitt: That’s really interesting because I’m based in the US and I would say that we perhaps don’t have the same sense of urgency here. Among institutions, or maybe it is among institutions, but not all institutions. And then to that, I’d ask you you about, know, whether you perceive that as a global feeling of urgency. And second, how is this translating in terms of some objectives, say around net zero or targets? Is there a desire to pull these forward? And do you think there’s a danger of pulling some of these targets forward by too much so that they’re unrealistic and unattainable?
Joel: Yeah, I think maybe I should clarify the urgency is maybe in my mind, There’s definitely a lack of urgency in some parts of the financial system. I think in terms of net zero targets, really, it’s, yeah, it’s I think there’s actually, there is a kind of an inbuilt lack of urgency in the models that underline them. I think there’s a lack of understanding that if you take a conservative science model, climate model, naturally scientists are always cautious about their predictions, and actually they’ve been consistently pretty good at predicting what will happen to the Earth’s climate over the past few decades. But if you take a conservative model and then turn it into an economic financial model, then that actually flips it and you get an economic financial model that isn’t— is the opposite of conservative. But the problem is that most of the institutions and even the NGOs, they’re relying on models that are insufficiently conservative when it comes to the climate, because we’ve only got one planet. We have to be cautious in terms of how we approach this issue. And there’s also then within those models, there’s issues that then multiply this, such as the negative emission technologies, often things like carbon capture and storage, which is technologically definitely needs investment, but it isn’t going to be a savior for many of these industries. And things like offsets, they’re often used as the balancing item. So a company does or a financial institution makes a commitment, a net zero commitment, say by 2050 they will have net zero emissions, and it’s the bit they can’t manage that is dealt with by offsets or negative emission technologies. And sometimes that’s realistic. Yes, we haven’t invested in— invented all the technologies we need yet, but often it’s huge. And you see, for example, Shell needing a forest the size of Brazil or India, I think it was,, and that’s just not realistic. So we need to get some more realism there. Often these models assume growth in GDP. Now, if we let the climate rip and the changes are very extreme, then definitely anybody can work out that GDP is not going to be growing in a scenario with massive sea level rise and temperature rises. So we need to make sure that these models that the finance industry, that companies are using, that politicians are using. Don’t assume that GDP always goes up. And the last one I’d like to highlight— I could talk about issues with these models for quite some time— is the second-order effects. So modeling the climate, like I say, the scientists have got that quite right. They’re pretty good at getting that reasonably accurate. Economic modeling, we all know it’s hard to forecast next year, even without a pandemic. And so it’s really— I appreciate it’s really hard to do, But if something’s hard to do and there are more likely to be errors, we have to be more prudent. You know, that’s a key word in finance— prudence is absolutely key. So the kind of last example I’d give on to add to the negative emission technologies and assuming that GDP is always rising is that we don’t take into account second-order effects. So for example, heat stress will have a massive impact in the tropics initially, on agriculture and construction. But you won’t find that in any economic model that integrates climate and economics. And that’s fine. I understand it’s really hard to do. How is that going to play out? But we have to then be cautious when we take that. So when you see a model and it says 50% chance of 2 degrees, these other factors mean that it’s not really 50% chance of 2 degrees. It’s beyond that. Yeah.
Aoifinn Devitt: Really interesting. And also that you mentioned the tropics, because I had another guest who discussed forestry and obviously the very different dynamics of growth say in a tropical region versus say in Scotland, how a forest could grow maybe 2 centimeters a year in Scotland and 2 centimeters a day in Bolivia or Paraguay, and how that might be obviously a region that we need to spend more time focusing on if we do want to achieve some of these forestry goals. The other area, it’s very interesting when you speak about some of the, I suppose, the places that we’re missing or there’s disconnects between what we understand and what we need to understand. Are there other kind of red herrings or areas that we’re clearly getting wrong or barking up the wrong tree when it comes to the institutional response to climate change and building resilient portfolios more generally?
Joel: I always think there’s not a kind of a blanket getting wrong, and I’m not saying that you’re saying that. I just think that there are some, just some green shoots in some areas that really need much more encouragement, and one of those that I see is government lobbying. The investment industry is very clear on its mandate with companies and that they are able to lobby and what they call engage with companies to try and change behavior, both in terms of risk management but also in terms of the impact that those companies have on the environment and society. And we’re starting to see more of an engagement approach with bond investing. So previously bond investors would either buy or not buy an issue and that would be it, there would be no discussion. But we’re seeing more in terms of, particularly with sovereign issues, so government issues, that the investors are trying to use their influence, particularly around climate. There’s an initiative called ASCOR, please don’t ask me to remember what that acronym stands for, there are so many acronyms here, but it— that’s a real great green shoots. We just have not enough investors that, in involved in that initiative, and we don’t have enough ambition in terms of the kind of pressure that they could apply to governments like Saudi Arabia. So you can’t apply pressure to Saudi Arabia in terms of Aramco you because, know, the shareholding is de minimis from external investors, but the bonds definitely fund what Aramco does, and so it could have a real impact. And also around this whole applying pressure to governments to do the right we thing, see the UN via the Investor’s Agenda brings together a number of different organizations from an Asia-based investor group on climate change, US one series, European ones, and they wrote a letter that was backed by 733 institutions, including a lot of the biggest ones, just before COP. And what we’ve seen a lot over the years is investors saying, oh, we need a carbon tax, and we’ll write a letter here or do opinion piece here. But we’re starting to see with the Investor Agenda policy lobbying over the past couple of years, a kind of a regular drumbeat of interaction on climate with governments, and often quite directive. It’s debatable whether we want institutional investors to define the future, but certainly what they’re saying is in is generally in alignment with what civil society is asking for and what the electorate want from government action. And to see 733 institutional investors backing this, that’s a great start. What we need to see much more is those CEOs of those investment industries standing up and talking much more about this in a coordinated and planned and joined-up way. Apparently at the COP there was a few CEOs in the room with the finance ministers, arguing for more action. We need to see much, much more of that and the investment industry to do much more of that. I’m not saying don’t do engagement with companies, but when it comes to a systemic issue like climate change, where externalities are not priced in, so the emission of carbon emissions is free to the atmosphere. And so it’s vital that we see the government action to support action within the investment industry. The investment industry doesn’t think lobbying is just limited to whether gas is included in a taxonomy. And for those who aren’t familiar with taxonomies, there’s green taxonomies, which are definitions of what’s green and what isn’t in terms of activities being popping up all around the world. That’s fine, it might be useful for categorization and so forth, and there’s various uses, but it doesn’t solve climate change. And so it’s really important that lobbying by investors goes to what needs to change in the real economy. And I hope to see much more of that, and I hope to see civil society pushing investors to do much more of that.
Aoifinn Devitt: Just on the topic of lobbying, and one area that’s got a little bit of focus is this corporate lobbying that might actually be going on behind the scenes by corporates around regulatory change, perhaps that is actually in their own favor, but perhaps not in the long-term environment’s best interest. Do you think that we have enough understanding as to what lobbying corporates may be doing behind the scenes that may actually be contrary to their professed direction around ESG issues?
Joel: It’s been an issue, well, certainly since the two decades I’ve been involved in responsible investment, the behaviour of you corporates, know, everyone thinks of the likes of Exxon and its climate denial work, is that it’s been an issue, it’s been talked about, It certainly seems like there’s a— just in the past couple of years, a ramp up in focus on this. I still think it’s a long way off. The kind of the targeting of the trade groups has really only started with a few companies because often these companies, they don’t do it directly. The CEO doesn’t stand up and spout climate denial, certainly not anymore. But they get their trade associations, lobby groups paying into campaign funding. The politicians to not so much do denial anymore, but do the delay that we now see on climate. And I think, yes, investors are doing this. It needs to be so much faster. There needs to be so much more pressure on this. There really needs to be— often, like, you’ll see a big oil and gas company will be a member of tens of trade associations, all of which arguing in the opposite direction to the the oil and gas companies’ professed preference. So it’s really something that’s got to ramp up massively.
Aoifinn Devitt: And let’s move from there to another reasonably controversial area, at least from the institutional investor standpoint. You spoke already about engagement and how that needs to continue, but it’s the engagement versus divestment debate. And how would you say that that needs to evolve, and what do you think is best practice in that respect?
Joel: Yeah, so I think it’s, um, there’s a lot of misunderstanding within the investment industry. And so I spent a lot of time talking to investment people who see divestment as a cost of capital campaign. And obviously I mentioned my, my mother is South African. So definitely as a youngster, I followed the divestment campaign against South Africa there. And there’s a confusion that it was a wholly political act. There was no financial risk or return. Aspect to it. It was politics. You know, the ANC were calling for it and other African liberation groups, churches and universities and faith groups were leading on it. And yet I read papers that approach it as if they were trying to impact valuations, financial valuations on markets. So I get— I, yeah, I’m confused by that. And I see it again with fossil fuel divestment, a real focus on this cost of capital argument. Now Goldman Sachs hardly left-wing yogurt-munching crazies, said that yes, divestment did have a cost of capital impact on coal companies. They did a report in 2018 and Shell and Peabody, the coal company, both said it has cost of capital impacts. So yes, it— maybe it does, but I think if you were to ask the average divestment campaigner or the average asset owner why they divested, they would say, well, we’re trying to manage the risk of exposure. You know, we’ve never seen— you just don’t see incumbent industries change their core business model. You might see the odd one or two do it. You know, we’ve seen business transformations. Often during those transformations, the company loses investors a lot of money. Know, You IBM, for instance, is still around, but it’s gone through more than one iteration of what its business is., and some of those were quite painful iterations. So when we look at incumbent sectors, yeah, it is about risk You management. Are— until you see companies actually making that transition, do you want to be part, and successfully, and making money doing Because, it? You know, trustees have a fiduciary duty. Do you want to be involved in that risk? And then the other side of it is it’s a political point. You can’t engage, as I was saying, an incumbent sector and transform it It just hasn’t been done. Maybe if you you’re, know, maybe a charity or something and you don’t have that fiduciary responsibility, but for most investors, it’s a fiduciary duty not to try and do something that’s never been done before with a pensioner’s money. So divestment gives them the opportunity to have an impact, as we saw with the big ABP pension fund in the Netherlands recently you divesting, know, saying, over to you politicians, this is a sector that you need to regulate. We want to see the workers in this sector looked after, but we don’t want to suddenly change these companies and shut them down overnight. This needs to be a process that’s managed by politicians. They haven’t stepped up yet. I just can’t see another way of them doing it. Yeah, so that’s— but then stepping back from just the fossil fuel example, just South Africa, everywhere else What we need is investors to be engaging. And, you know, I, you know, maybe I differ with some of the campaigners in fossil fuel, but I see like international mining companies, um, they’ve got a small fossil fuel division and they— we don’t just want them selling that off and it being carrying on operating, we want them to manage it down. And I think there’s an economic logic to managing it whole down now. So you can align the wishes of investors with the companies because coal is just not competitive anywhere. Even operating coal in so many places is less effective than— more expensive to run than renewables, and definitely doesn’t compete with gas anywhere. So there’s an economic alignment there on coal, and so that engagement conversation has got space to operate. But government or technology needs to create that same alignment of investment interests and the environmental requirements for oil and gas. And we don’t have that yet from government, and we can’t rely on technology— technological innovation giving us that outlet, because technological innovation happens at its own timescale, so it doesn’t meet environmental boundaries. And again, that’s something I see very often in finance, is this techno-optimist attitude, you know, often Bill Gates is personified as this, although that’s not 100% his view. We can’t rely on technology to solve us from climate change. It’s absolutely essential. It just doesn’t operate on, on our required timescale.
Aoifinn Devitt: That’s fascinating. I like the techno-optimist term, and it actually is a nice segue to my question around innovation. And maybe it can tie this to what I was going to ask about where you see areas for optimism. So you said you’re focused as an angel investor. In some climate tech opportunities. Do you see any areas that are particularly promising where we could maybe see this quantum leap or this exponential effect that technology could have in perhaps leading us to an optimistic, perhaps, view of some of the climate change predictions? Because there could be potential to make a massive impact.
Joel: Oh yeah, there’s just, there’s so many of them. And so often it works in tandem with government action and cultural change. So one of the areas is, say for example, cars, autonomous vehicles. So autonomous vehicles could be a nightmare. There are some scenarios where people say that we would have autonomous vehicle offices. So people would be moving around in an office in a vehicle. And so you’d have this huge vehicle as an office moving around and just the pollution from that. And it would be an internal combustion engine as well. And just the size of it, it’s just, yeah, a nightmare scenario. The other side of that is that autonomous vehicles mean, you know, most vehicles, particularly privately owned cars, are sat around over 90% of the time. So that’s a massive embedded energy. In a typical internal combustion engine car, a third of the emissions are in the production and the disposal, the carbon emissions. And so if we can shift by design autonomous vehicles to do most of the transporting of people while encouraging obviously active travel. We want people walking and cycling, not scooting and sitting in autonomous vehicles, because there are massive health benefits. But there’s a real opportunity there in terms of autonomous vehicles to reduce massively the number of cars on the road, free up loads of street space, make journeys much more efficient, some more shared transport. And it’s really about people not imagining ‘Oh, I just buy— I go from owning an internal combustion engine car and then I move to owning an autonomous electric vehicle.’ That’s not a solution. We haven’t moved forward much there. What we want to do is move to a sharing economy where the vehicles are shared but while protecting safety. So it won’t look like a normal car. You won’t get in a car with someone and sit right next to them. They’ll be like little buses. With dividers if required. You know, we’re thinking about children here or women late at night, so they need to be safe. And so it’s, it’s not imagining the current world just autonomous and a bit electric. That’s not a solution. Other areas that we have to be super, super careful about: we absolutely need negative emission technologies. So we need to take carbon out of the atmosphere and bury it for a very, very long time. I’m not talking about offsets where where we— a company pays or an individual pays for a tree to be planted, and then as we saw in Washington State, because of climate change, that tree burns down. That’s not a solution for anybody. But we do need to take carbon out of the atmosphere and lock it away, and that’s a really important technology. And in common with many other aspects of the low-carbon transition, there’s a problem because we can do a lot with software and venture capital and so forth have got really good and really focused on how to turn a software company into a major monopoly, often very rapidly. But we— that investment cycle is quite light in terms of the capital. And what we need to see now is not necessarily as much innovation. Innovation is important, but what we need to get really good at really quickly is scaling. And capital-intensive businesses. Things like carbon capture and storage and direct air capture of carbon emissions, they are capital-intensive businesses. They are— it can be modular to a degree, but often there’s a certain amount of site-specificness to them. And so the finance industry needs to get much better at taking an idea that’s kind of proven, maybe got one or two pilot sites, and then taking it global. And taking it global really quickly on the timescale that the science around climate determines. And I just don’t think the finance industry is there. It’s going to need government to facilitate that and make sure that those trillions that Mark Carney, the former governor of the Bank of England, announced at the conference in Glasgow— he announced they were ready— well, that is an absolute place that they need to go. And that’s risk capital, because if you take a number of those businesses will fail. You might have a couple of good pilots, but actually at scale this business doesn’t work and it’s just not cost effective. So we need to see institutional investors with those big pots of capital doing this. It can’t all be done on corporate balance sheets. We can’t rely on corporates to do this kind of capital-intensive investing.
Aoifinn Devitt: And you mentioned COP26 there. We’re just recording this in the immediate aftermath. What were the key takeaways, do you think, of that conference? Did any of them give you cause for optimism, or were you a little disappointed?
Joel: Yeah, I think about after the 2009 COP conference in Copenhagen, when people were really depressed, I think it was probably looking back with the historical perspective, that was when we missed the chance of what we now call a 1.5-degree trajectory. The scientists probably knew at that point that that’s where we needed to really bend the curve of carbon emissions, but we didn’t. Now the scientists have really come out and said that we need to bend the curve incredibly steeply. Realistically, you know, just that what we were talking about just a moment ago about capital investment and so forth, and the challenges around that, and the challenges around culture change of people eating less meat, people in the West and the global middle class flying less than we have done historically. All those challenges around those things mean that what we’re working to now is minimizing the damage. It’s nice that they talk about keeping 1.5 alive, and absolutely we all need to be working on that. But really what we’re doing is we’re just trying to minimize the amount of damage. And obviously at 1.5 degrees, there’s still damage. We’re seeing it already in in Germany this year, and the floods in— also in China, and the extreme temperatures, and now flooding in Canada. Yes, so that’s all quite depressing, but the thing is, if we don’t act and we don’t keep driving as hard as we can for 1.5 degrees, trying to get as close as possible to that, then the rest is much worse. So I remain hugely optimistic that we can make a massive difference by coal becoming economic and the world seeing that it’s not the power system of the future. We’ve cut out the most likely scenario. It’s called RCP 8.5, I think. And that was just like, yeah, that was like hell on earth. So that’s one down. That’s one ticked off the list in my mind. We’ve got to get rid of the other ones. There’s still comfortably without much trying, we can go over 3 degrees and that is just unbearable. It makes most of the tropics nearly unlivable. Certainly not of any good standard of living unless you’ve got amazing air conditioning and private security.
Aoifinn Devitt: And they— so, well, that’s certainly very encouraging to hear those takeaways. Let’s move now to the investor mindset. And we spoke probably about some of the leading thought leaders in this arena, those who are breaking paths. How about those that are perhaps laggards and are not convinced of the need to integrate ESG factors in a portfolio, the need to build resilience? Do you perceive that there is still a concern that making a return from doing good doesn’t sit well, or that there is a return sacrifice when these factors are taken into account?
Joel: I think there’s, yeah, there’s many motivations for the laggards, and I think it’s all too easy to say this has got to be government action driving it, and when government correctly prices all the environmental and social negatives, then we’ll all be fine. And that’s just not good enough. Know, You the investment industry, for its own good health and continued growth, needs us to tackle issues like inequality and child labor in supply chains and the climate crisis. So you know, it’s, it’s really, really important that, as I was talking about earlier, that investment stands up and you says, know, we need action in these areas. And is really clear about it and has really planned about it and works together, yeah, we will get free riders who just sit on the back and don’t do anything. But we’ve, we’ve seen the consequences of that. Those who stayed invested in coal, they lost a lot of money. Those who stayed invested in oil and gas over the past decade, yeah, there’s been a little run-up recently, but they generally lost a lot of money. So there is a cost to doing this and there is, yeah, there’s loads of claims and misleading claims about how amazing environmental, social, and governance is. But there are some fundamental areas that you can make, make money within this. And the lobbying of government isn’t completely altruistic because, you know, I learned to my you cost, know, if governments tighten regulations and look after the environment, society more, our portfolio performed better. But if they change the rules then it went the other way. And so there is a benefit to the fund managers for pushing for this better regulation. The other side of this is maybe more from the retail side. There’s a lot of good research, it’s called values and frames, is the underlying principle. And when I first heard it, you know, really the penny dropped for me. I’ll tell an analogy first that will seem completely irrelevant until I get to the end. So I used to do kids’ football coaching for my kids’ teams, and we had a coaches’ get-together over dinner to discuss how the club was running. The chairman said there’s a bit of spare money in the kitty and said, you buy your alcohol, but I’ll pay for dinner. I sat there thinking, well, that seems reasonable. I work really hard, the kids are great, the parents are quite hard to deal with. That’s fine, you can pay for my dinner. Everybody else around the table absolutely kicked off. They said that was not appropriate at all, they should pay for their own dinners, they weren’t doing this to get paid. And actually, I realized that everybody around the table was normal and I wasn’t. The reason is, is that people, most people, don’t like to mix doing good and making money. They feel much more comfortable when those things are separated. It’s why charity galas that are glitzy and really focused on the hedonism of those who attend, do very little to align those people with the needs of the charities that being— are the money is being raised for. They’re just different parts of how people think. If they’re going to a hedonistic party, they’re not thinking about the issues that underlie the charity’s work that’s raising the money. And this applies to investment as well, because people feel quite uncomfortable about making money and doing good at the same time. And I saw that a lot when I worked at Triodos. People almost seem to feel more comfortable making a charitable donation and just wanted to give their money away and not earn a return from it. And I think that really explains partly why the responsible investment industry will always struggle in a degree with its clients, the retail clients, because they want to align with their values. So they don’t want to be involved in, say, tobacco or gambling or whatever they dislike. And they just want the investment manager to go away and do that. And the investment manager’s trying to talk to them about the slight additional value of better employment practices. And for a lot of their clients, that just doesn’t sit well. Yeah. So I think that’s— it was really interesting for me, and I think it’s good for those who work in the marketing and so forth of investment management companies to think about that.
Aoifinn Devitt: Well, you’ve left us with a treasure trove of a fascinating, fascinating area to explore, especially as we think about the money mindset, you know, our behavioral finance mindset. And I don’t think we’ve even given a lot of thought at all to how we compartmentalize those two areas. And of course, if we were to apply the same efficiency standards, the same profitability imperative to doing good, I think it would actually be a much more efficient enterprise. And we probably would have less waste and, and probably a more profitable enterprise all around.
Joel: It’s interesting you say that because on the grant evaluation work I do, talking to other grantmakers, it’s a similar thing. Some of them feel uncomfortable about asking tough questions of those who are looking for the money. It’s putting together that analytical mind and the efficient mind with the giving and wanting to support mind. That’s a challenge for a lot of people. For good reasons, they aren’t necessarily a natural fit. So yeah, it applies across the line.
Aoifinn Devitt: Well, it’s such an interesting area. Well, Joel, thank you so much for what you’re doing, for the work you’re doing, the awareness you’re raising, and the way you are translating this into such digestible plain English, which I think is quite remarkable in an area that has become laden with jargon. And I think just on the last point, as I said, gives us lots of food for thought, but also now that we see a huge amount of funds being essentially thrown at this area and ESG teams being built, one might question whether that’s the future or whether we need to see better integration of those teams so that everything essentially has an ESG integrated angle.
Joel: Yeah, I think for me on that, it’s— we need to get much more— and there’s much better thinkers on this than me, so I’m going to garble my way through it— but the current focus is much more on the outside in, so the risk management aspect of ESG and how that affects the company positively or negatively. And I think a lot of ESG integration and trying to get all of the funds to work under this basis is in that direction. I think particularly when we talk about universal owners, so these are long-term asset owners who, like pension funds and university endowments and faith bodies, when they are thinking about— they own the risks, they own climate change risk because their portfolio will be around when climate is even worse than it is, climate change is even worse than now, and they own the inequality risk and the risk of that driving right-wing populist governments, they need to be thinking much more about the inside-out, their impact on the outside world. And that’s what I would hope to see much more from the regulation of finance as well as the practice of finance, is that it’s how finance should always be. We built it up to be this huge important thing, it should always be in service to the real economy and society. And you currently, know, the innovations and the efficiency and the risk management is all very impressive, but until it gets back to being in service to society— I am absolutely not against the profit motive and Mr. Friedman’s maxim about, you know, that focus on profit is very— makes it much easier to run a business. But he also said in that statement about the profit motive and business focusing on that, he also said that it had to be in a wider of, you context know, a functioning society. And that’s where finance has let itself down. It’s lobbied against that and allowed good regulation to be tarred with the same brush as bad regulation. But actually regulation is what has brought us things like welfare states, clean water, clean-ish air, although we’re still breathing pretty filthy air all around the world. A lot of those benefits from regulation, good quality regulation, are in the interests of finance in the long term. And so the industry needs to shift from lobbying against that to being lobbying much more vocally for it.
Aoifinn Devitt: Well, thank you for bringing it back up to the top level again. We started there, we drilled into some specifics, and we’ve moved back up again. It’s been a real pleasure speaking with you, Joel. I think we can come back for a round two. Certainly in the future, there’s a lot to discuss here. Thank you very much for coming here and sharing your insights with us.
Joel: That’s great. It’s my pleasure. Really good to talk to you.
Aoifinn Devitt: I’m Aoifinn Devitt. Thank you for listening to the 50 Faces podcast. If you liked what you heard and would like to tune in to hear more inspiring investors and their personal journeys, please subscribe on Apple Podcasts or wherever you get your podcasts. This podcast is for informational purposes only and should not be construed as investment advice, and all of Views are personal and should not be attributed to the organizations and affiliations of the host or any guest.
Aoifinn Devitt: The first series of 2022 is brought to you with the kind support of Herd Capital, a Chicago-based asset manager that invests in public equities in the technology, media, telecommunications, financial, and industrial sectors. The firm was founded in 2011 and manages assets via a long-short fund and a long-only fund. Our next guest was born to be an activist. Find out why we are mentally wired to divorce doing good from making a return, and why overcoming this is key to effective partnership to address the climate crisis. I’m Aoifinn Devitt, and welcome to the 50 Faces Podcast, a podcast committed to revealing the richness and diversity of the world of investment by focusing on its people and their stories. I’m joined today by Joel Moorland, who is Principal Consultant at Social and Environmental Finance. He has worked in a range of roles, mostly where the financial system interacts with the environment and society. Welcome, Joel. Thanks for joining me today.
Joel: Hi there, Aoifinn.
Aoifinn Devitt: Well, before we go into discussing some of the issues and themes in investment today, can you give the listeners some context for your ideas and opinions by describing your background and the work that you are doing at the minute?
Joel: Yeah, sure. I think it helps really to go right back to the beginning, and I was born into a family that had, you know, strong social and environmental beliefs at the heart of it. My dad was involved in nuclear disarmament, my mum is a South African and was very anti-apartheid, and so I could have gone down many routes with that background, but I was mathematically minded, so finance was the right place to go, um, the most common choice for those who got that kind of background. And banking was where I started, and my first sort of real overlap was environmental credit risk. That’s where banks need to protect their loan book from environmental risks like pollution and so forth. I then moved on to fund management, including an activist house, and most relevant to this discussion is I worked at the Henderson Global Care team. At the time, it was the biggest by far in the UK with a quarter of the responsible investment money. I then moved over to another side of finance, which is called Finance at Triodos, again with a strong social and environmental flavour to it. I was doing bond and share issues, much like kind of crowdfunding, for the likes of Mencap, the learning disability charity, their housing arm, Caffeedirect, the tea and coffee company, and renewable energy and so forth. I’ve long since also been an early-stage green investor. Mostly with Green Angel Syndicate. So this is really getting to companies who are just past the sort of— just past the startup phase, and they really need input, both money but also expertise. And that’s, yeah, it’s a really inspiring part of investment because it’s money that really makes a difference. I’m also very fortunate to have a lot of conversations with asset owners about what responsible investment means to them and how they can integrate that fully into their investment portfolio. I also advise financial campaigners. So the finance industry isn’t going to solve climate change and all these other issues on its own. Certainly needs government action, but it also needs pushing from campaigners. And that’s both the kind of fun side, the throwing the treacle around, pretending it’s oil, but it’s also about working with the industry and supporting those that really are leading in the industry to do more on environmental and social issues. And my final line of activity is using my investment experience and environmental and social knowledge to assess charities’ applications for grant funding. And yeah, that about rounds it out.
Aoifinn Devitt: Well, certainly multiple issues that we can dig into there, and in particular climate tech, which has been the topic of another one of these podcasts. When I ask you about the areas of innovation that you’re most excited about, it would be great to draw upon maybe some of the technologies that you’re seeing But let’s start for the purpose of this discussion, we’ll start with sort of a broad top-down kind of macro view, and then we’ll kind of drill into maybe some of the different verticals to get your sense as to where we are today. And I’d love to hear about many of these different areas. So at the forefront of your mind today, what are the issues? I’m sure there are many, but as you work with institutional clients that you find you’re speaking about the most.
Joel: I think the biggest thing is urgency. That’s what leaps into my mind, particularly in relation to climate, but also other environmental issues. I think there’s a greater awareness that we are bumping up against the boundaries of what the planet can sustain. And that’s often really a challenge for asset owners. Know, You you’ll have many that have only a few committee meetings a year, often with lay trustees, and just injecting that urgency into the whole process without, you know, making mistakes because you rush too fast. But that’s definitely top of mind for me all the time.
Aoifinn Devitt: That’s really interesting because I’m based in the US and I would say that we perhaps don’t have the same sense of urgency here. Among institutions, or maybe it is among institutions, but not all institutions. And then to that, I’d ask you you about, know, whether you perceive that as a global feeling of urgency. And second, how is this translating in terms of some objectives, say around net zero or targets? Is there a desire to pull these forward? And do you think there’s a danger of pulling some of these targets forward by too much so that they’re unrealistic and unattainable?
Joel: Yeah, I think maybe I should clarify the urgency is maybe in my mind, There’s definitely a lack of urgency in some parts of the financial system. I think in terms of net zero targets, really, it’s, yeah, it’s I think there’s actually, there is a kind of an inbuilt lack of urgency in the models that underline them. I think there’s a lack of understanding that if you take a conservative science model, climate model, naturally scientists are always cautious about their predictions, and actually they’ve been consistently pretty good at predicting what will happen to the Earth’s climate over the past few decades. But if you take a conservative model and then turn it into an economic financial model, then that actually flips it and you get an economic financial model that isn’t— is the opposite of conservative. But the problem is that most of the institutions and even the NGOs, they’re relying on models that are insufficiently conservative when it comes to the climate, because we’ve only got one planet. We have to be cautious in terms of how we approach this issue. And there’s also then within those models, there’s issues that then multiply this, such as the negative emission technologies, often things like carbon capture and storage, which is technologically definitely needs investment, but it isn’t going to be a savior for many of these industries. And things like offsets, they’re often used as the balancing item. So a company does or a financial institution makes a commitment, a net zero commitment, say by 2050 they will have net zero emissions, and it’s the bit they can’t manage that is dealt with by offsets or negative emission technologies. And sometimes that’s realistic. Yes, we haven’t invested in— invented all the technologies we need yet, but often it’s huge. And you see, for example, Shell needing a forest the size of Brazil or India, I think it was,, and that’s just not realistic. So we need to get some more realism there. Often these models assume growth in GDP. Now, if we let the climate rip and the changes are very extreme, then definitely anybody can work out that GDP is not going to be growing in a scenario with massive sea level rise and temperature rises. So we need to make sure that these models that the finance industry, that companies are using, that politicians are using. Don’t assume that GDP always goes up. And the last one I’d like to highlight— I could talk about issues with these models for quite some time— is the second-order effects. So modeling the climate, like I say, the scientists have got that quite right. They’re pretty good at getting that reasonably accurate. Economic modeling, we all know it’s hard to forecast next year, even without a pandemic. And so it’s really— I appreciate it’s really hard to do, But if something’s hard to do and there are more likely to be errors, we have to be more prudent. You know, that’s a key word in finance— prudence is absolutely key. So the kind of last example I’d give on to add to the negative emission technologies and assuming that GDP is always rising is that we don’t take into account second-order effects. So for example, heat stress will have a massive impact in the tropics initially, on agriculture and construction. But you won’t find that in any economic model that integrates climate and economics. And that’s fine. I understand it’s really hard to do. How is that going to play out? But we have to then be cautious when we take that. So when you see a model and it says 50% chance of 2 degrees, these other factors mean that it’s not really 50% chance of 2 degrees. It’s beyond that. Yeah.
Aoifinn Devitt: Really interesting. And also that you mentioned the tropics, because I had another guest who discussed forestry and obviously the very different dynamics of growth say in a tropical region versus say in Scotland, how a forest could grow maybe 2 centimeters a year in Scotland and 2 centimeters a day in Bolivia or Paraguay, and how that might be obviously a region that we need to spend more time focusing on if we do want to achieve some of these forestry goals. The other area, it’s very interesting when you speak about some of the, I suppose, the places that we’re missing or there’s disconnects between what we understand and what we need to understand. Are there other kind of red herrings or areas that we’re clearly getting wrong or barking up the wrong tree when it comes to the institutional response to climate change and building resilient portfolios more generally?
Joel: I always think there’s not a kind of a blanket getting wrong, and I’m not saying that you’re saying that. I just think that there are some, just some green shoots in some areas that really need much more encouragement, and one of those that I see is government lobbying. The investment industry is very clear on its mandate with companies and that they are able to lobby and what they call engage with companies to try and change behavior, both in terms of risk management but also in terms of the impact that those companies have on the environment and society. And we’re starting to see more of an engagement approach with bond investing. So previously bond investors would either buy or not buy an issue and that would be it, there would be no discussion. But we’re seeing more in terms of, particularly with sovereign issues, so government issues, that the investors are trying to use their influence, particularly around climate. There’s an initiative called ASCOR, please don’t ask me to remember what that acronym stands for, there are so many acronyms here, but it— that’s a real great green shoots. We just have not enough investors that, in involved in that initiative, and we don’t have enough ambition in terms of the kind of pressure that they could apply to governments like Saudi Arabia. So you can’t apply pressure to Saudi Arabia in terms of Aramco you because, know, the shareholding is de minimis from external investors, but the bonds definitely fund what Aramco does, and so it could have a real impact. And also around this whole applying pressure to governments to do the right we thing, see the UN via the Investor’s Agenda brings together a number of different organizations from an Asia-based investor group on climate change, US one series, European ones, and they wrote a letter that was backed by 733 institutions, including a lot of the biggest ones, just before COP. And what we’ve seen a lot over the years is investors saying, oh, we need a carbon tax, and we’ll write a letter here or do opinion piece here. But we’re starting to see with the Investor Agenda policy lobbying over the past couple of years, a kind of a regular drumbeat of interaction on climate with governments, and often quite directive. It’s debatable whether we want institutional investors to define the future, but certainly what they’re saying is in is generally in alignment with what civil society is asking for and what the electorate want from government action. And to see 733 institutional investors backing this, that’s a great start. What we need to see much more is those CEOs of those investment industries standing up and talking much more about this in a coordinated and planned and joined-up way. Apparently at the COP there was a few CEOs in the room with the finance ministers, arguing for more action. We need to see much, much more of that and the investment industry to do much more of that. I’m not saying don’t do engagement with companies, but when it comes to a systemic issue like climate change, where externalities are not priced in, so the emission of carbon emissions is free to the atmosphere. And so it’s vital that we see the government action to support action within the investment industry. The investment industry doesn’t think lobbying is just limited to whether gas is included in a taxonomy. And for those who aren’t familiar with taxonomies, there’s green taxonomies, which are definitions of what’s green and what isn’t in terms of activities being popping up all around the world. That’s fine, it might be useful for categorization and so forth, and there’s various uses, but it doesn’t solve climate change. And so it’s really important that lobbying by investors goes to what needs to change in the real economy. And I hope to see much more of that, and I hope to see civil society pushing investors to do much more of that.
Aoifinn Devitt: Just on the topic of lobbying, and one area that’s got a little bit of focus is this corporate lobbying that might actually be going on behind the scenes by corporates around regulatory change, perhaps that is actually in their own favor, but perhaps not in the long-term environment’s best interest. Do you think that we have enough understanding as to what lobbying corporates may be doing behind the scenes that may actually be contrary to their professed direction around ESG issues?
Joel: It’s been an issue, well, certainly since the two decades I’ve been involved in responsible investment, the behaviour of you corporates, know, everyone thinks of the likes of Exxon and its climate denial work, is that it’s been an issue, it’s been talked about, It certainly seems like there’s a— just in the past couple of years, a ramp up in focus on this. I still think it’s a long way off. The kind of the targeting of the trade groups has really only started with a few companies because often these companies, they don’t do it directly. The CEO doesn’t stand up and spout climate denial, certainly not anymore. But they get their trade associations, lobby groups paying into campaign funding. The politicians to not so much do denial anymore, but do the delay that we now see on climate. And I think, yes, investors are doing this. It needs to be so much faster. There needs to be so much more pressure on this. There really needs to be— often, like, you’ll see a big oil and gas company will be a member of tens of trade associations, all of which arguing in the opposite direction to the the oil and gas companies’ professed preference. So it’s really something that’s got to ramp up massively.
Aoifinn Devitt: And let’s move from there to another reasonably controversial area, at least from the institutional investor standpoint. You spoke already about engagement and how that needs to continue, but it’s the engagement versus divestment debate. And how would you say that that needs to evolve, and what do you think is best practice in that respect?
Joel: Yeah, so I think it’s, um, there’s a lot of misunderstanding within the investment industry. And so I spent a lot of time talking to investment people who see divestment as a cost of capital campaign. And obviously I mentioned my, my mother is South African. So definitely as a youngster, I followed the divestment campaign against South Africa there. And there’s a confusion that it was a wholly political act. There was no financial risk or return. Aspect to it. It was politics. You know, the ANC were calling for it and other African liberation groups, churches and universities and faith groups were leading on it. And yet I read papers that approach it as if they were trying to impact valuations, financial valuations on markets. So I get— I, yeah, I’m confused by that. And I see it again with fossil fuel divestment, a real focus on this cost of capital argument. Now Goldman Sachs hardly left-wing yogurt-munching crazies, said that yes, divestment did have a cost of capital impact on coal companies. They did a report in 2018 and Shell and Peabody, the coal company, both said it has cost of capital impacts. So yes, it— maybe it does, but I think if you were to ask the average divestment campaigner or the average asset owner why they divested, they would say, well, we’re trying to manage the risk of exposure. You know, we’ve never seen— you just don’t see incumbent industries change their core business model. You might see the odd one or two do it. You know, we’ve seen business transformations. Often during those transformations, the company loses investors a lot of money. Know, You IBM, for instance, is still around, but it’s gone through more than one iteration of what its business is., and some of those were quite painful iterations. So when we look at incumbent sectors, yeah, it is about risk You management. Are— until you see companies actually making that transition, do you want to be part, and successfully, and making money doing Because, it? You know, trustees have a fiduciary duty. Do you want to be involved in that risk? And then the other side of it is it’s a political point. You can’t engage, as I was saying, an incumbent sector and transform it It just hasn’t been done. Maybe if you you’re, know, maybe a charity or something and you don’t have that fiduciary responsibility, but for most investors, it’s a fiduciary duty not to try and do something that’s never been done before with a pensioner’s money. So divestment gives them the opportunity to have an impact, as we saw with the big ABP pension fund in the Netherlands recently you divesting, know, saying, over to you politicians, this is a sector that you need to regulate. We want to see the workers in this sector looked after, but we don’t want to suddenly change these companies and shut them down overnight. This needs to be a process that’s managed by politicians. They haven’t stepped up yet. I just can’t see another way of them doing it. Yeah, so that’s— but then stepping back from just the fossil fuel example, just South Africa, everywhere else What we need is investors to be engaging. And, you know, I, you know, maybe I differ with some of the campaigners in fossil fuel, but I see like international mining companies, um, they’ve got a small fossil fuel division and they— we don’t just want them selling that off and it being carrying on operating, we want them to manage it down. And I think there’s an economic logic to managing it whole down now. So you can align the wishes of investors with the companies because coal is just not competitive anywhere. Even operating coal in so many places is less effective than— more expensive to run than renewables, and definitely doesn’t compete with gas anywhere. So there’s an economic alignment there on coal, and so that engagement conversation has got space to operate. But government or technology needs to create that same alignment of investment interests and the environmental requirements for oil and gas. And we don’t have that yet from government, and we can’t rely on technology— technological innovation giving us that outlet, because technological innovation happens at its own timescale, so it doesn’t meet environmental boundaries. And again, that’s something I see very often in finance, is this techno-optimist attitude, you know, often Bill Gates is personified as this, although that’s not 100% his view. We can’t rely on technology to solve us from climate change. It’s absolutely essential. It just doesn’t operate on, on our required timescale.
Aoifinn Devitt: That’s fascinating. I like the techno-optimist term, and it actually is a nice segue to my question around innovation. And maybe it can tie this to what I was going to ask about where you see areas for optimism. So you said you’re focused as an angel investor. In some climate tech opportunities. Do you see any areas that are particularly promising where we could maybe see this quantum leap or this exponential effect that technology could have in perhaps leading us to an optimistic, perhaps, view of some of the climate change predictions? Because there could be potential to make a massive impact.
Joel: Oh yeah, there’s just, there’s so many of them. And so often it works in tandem with government action and cultural change. So one of the areas is, say for example, cars, autonomous vehicles. So autonomous vehicles could be a nightmare. There are some scenarios where people say that we would have autonomous vehicle offices. So people would be moving around in an office in a vehicle. And so you’d have this huge vehicle as an office moving around and just the pollution from that. And it would be an internal combustion engine as well. And just the size of it, it’s just, yeah, a nightmare scenario. The other side of that is that autonomous vehicles mean, you know, most vehicles, particularly privately owned cars, are sat around over 90% of the time. So that’s a massive embedded energy. In a typical internal combustion engine car, a third of the emissions are in the production and the disposal, the carbon emissions. And so if we can shift by design autonomous vehicles to do most of the transporting of people while encouraging obviously active travel. We want people walking and cycling, not scooting and sitting in autonomous vehicles, because there are massive health benefits. But there’s a real opportunity there in terms of autonomous vehicles to reduce massively the number of cars on the road, free up loads of street space, make journeys much more efficient, some more shared transport. And it’s really about people not imagining ‘Oh, I just buy— I go from owning an internal combustion engine car and then I move to owning an autonomous electric vehicle.’ That’s not a solution. We haven’t moved forward much there. What we want to do is move to a sharing economy where the vehicles are shared but while protecting safety. So it won’t look like a normal car. You won’t get in a car with someone and sit right next to them. They’ll be like little buses. With dividers if required. You know, we’re thinking about children here or women late at night, so they need to be safe. And so it’s, it’s not imagining the current world just autonomous and a bit electric. That’s not a solution. Other areas that we have to be super, super careful about: we absolutely need negative emission technologies. So we need to take carbon out of the atmosphere and bury it for a very, very long time. I’m not talking about offsets where where we— a company pays or an individual pays for a tree to be planted, and then as we saw in Washington State, because of climate change, that tree burns down. That’s not a solution for anybody. But we do need to take carbon out of the atmosphere and lock it away, and that’s a really important technology. And in common with many other aspects of the low-carbon transition, there’s a problem because we can do a lot with software and venture capital and so forth have got really good and really focused on how to turn a software company into a major monopoly, often very rapidly. But we— that investment cycle is quite light in terms of the capital. And what we need to see now is not necessarily as much innovation. Innovation is important, but what we need to get really good at really quickly is scaling. And capital-intensive businesses. Things like carbon capture and storage and direct air capture of carbon emissions, they are capital-intensive businesses. They are— it can be modular to a degree, but often there’s a certain amount of site-specificness to them. And so the finance industry needs to get much better at taking an idea that’s kind of proven, maybe got one or two pilot sites, and then taking it global. And taking it global really quickly on the timescale that the science around climate determines. And I just don’t think the finance industry is there. It’s going to need government to facilitate that and make sure that those trillions that Mark Carney, the former governor of the Bank of England, announced at the conference in Glasgow— he announced they were ready— well, that is an absolute place that they need to go. And that’s risk capital, because if you take a number of those businesses will fail. You might have a couple of good pilots, but actually at scale this business doesn’t work and it’s just not cost effective. So we need to see institutional investors with those big pots of capital doing this. It can’t all be done on corporate balance sheets. We can’t rely on corporates to do this kind of capital-intensive investing.
Aoifinn Devitt: And you mentioned COP26 there. We’re just recording this in the immediate aftermath. What were the key takeaways, do you think, of that conference? Did any of them give you cause for optimism, or were you a little disappointed?
Joel: Yeah, I think about after the 2009 COP conference in Copenhagen, when people were really depressed, I think it was probably looking back with the historical perspective, that was when we missed the chance of what we now call a 1.5-degree trajectory. The scientists probably knew at that point that that’s where we needed to really bend the curve of carbon emissions, but we didn’t. Now the scientists have really come out and said that we need to bend the curve incredibly steeply. Realistically, you know, just that what we were talking about just a moment ago about capital investment and so forth, and the challenges around that, and the challenges around culture change of people eating less meat, people in the West and the global middle class flying less than we have done historically. All those challenges around those things mean that what we’re working to now is minimizing the damage. It’s nice that they talk about keeping 1.5 alive, and absolutely we all need to be working on that. But really what we’re doing is we’re just trying to minimize the amount of damage. And obviously at 1.5 degrees, there’s still damage. We’re seeing it already in in Germany this year, and the floods in— also in China, and the extreme temperatures, and now flooding in Canada. Yes, so that’s all quite depressing, but the thing is, if we don’t act and we don’t keep driving as hard as we can for 1.5 degrees, trying to get as close as possible to that, then the rest is much worse. So I remain hugely optimistic that we can make a massive difference by coal becoming economic and the world seeing that it’s not the power system of the future. We’ve cut out the most likely scenario. It’s called RCP 8.5, I think. And that was just like, yeah, that was like hell on earth. So that’s one down. That’s one ticked off the list in my mind. We’ve got to get rid of the other ones. There’s still comfortably without much trying, we can go over 3 degrees and that is just unbearable. It makes most of the tropics nearly unlivable. Certainly not of any good standard of living unless you’ve got amazing air conditioning and private security.
Aoifinn Devitt: And they— so, well, that’s certainly very encouraging to hear those takeaways. Let’s move now to the investor mindset. And we spoke probably about some of the leading thought leaders in this arena, those who are breaking paths. How about those that are perhaps laggards and are not convinced of the need to integrate ESG factors in a portfolio, the need to build resilience? Do you perceive that there is still a concern that making a return from doing good doesn’t sit well, or that there is a return sacrifice when these factors are taken into account?
Joel: I think there’s, yeah, there’s many motivations for the laggards, and I think it’s all too easy to say this has got to be government action driving it, and when government correctly prices all the environmental and social negatives, then we’ll all be fine. And that’s just not good enough. Know, You the investment industry, for its own good health and continued growth, needs us to tackle issues like inequality and child labor in supply chains and the climate crisis. So you know, it’s, it’s really, really important that, as I was talking about earlier, that investment stands up and you says, know, we need action in these areas. And is really clear about it and has really planned about it and works together, yeah, we will get free riders who just sit on the back and don’t do anything. But we’ve, we’ve seen the consequences of that. Those who stayed invested in coal, they lost a lot of money. Those who stayed invested in oil and gas over the past decade, yeah, there’s been a little run-up recently, but they generally lost a lot of money. So there is a cost to doing this and there is, yeah, there’s loads of claims and misleading claims about how amazing environmental, social, and governance is. But there are some fundamental areas that you can make, make money within this. And the lobbying of government isn’t completely altruistic because, you know, I learned to my you cost, know, if governments tighten regulations and look after the environment, society more, our portfolio performed better. But if they change the rules then it went the other way. And so there is a benefit to the fund managers for pushing for this better regulation. The other side of this is maybe more from the retail side. There’s a lot of good research, it’s called values and frames, is the underlying principle. And when I first heard it, you know, really the penny dropped for me. I’ll tell an analogy first that will seem completely irrelevant until I get to the end. So I used to do kids’ football coaching for my kids’ teams, and we had a coaches’ get-together over dinner to discuss how the club was running. The chairman said there’s a bit of spare money in the kitty and said, you buy your alcohol, but I’ll pay for dinner. I sat there thinking, well, that seems reasonable. I work really hard, the kids are great, the parents are quite hard to deal with. That’s fine, you can pay for my dinner. Everybody else around the table absolutely kicked off. They said that was not appropriate at all, they should pay for their own dinners, they weren’t doing this to get paid. And actually, I realized that everybody around the table was normal and I wasn’t. The reason is, is that people, most people, don’t like to mix doing good and making money. They feel much more comfortable when those things are separated. It’s why charity galas that are glitzy and really focused on the hedonism of those who attend, do very little to align those people with the needs of the charities that being— are the money is being raised for. They’re just different parts of how people think. If they’re going to a hedonistic party, they’re not thinking about the issues that underlie the charity’s work that’s raising the money. And this applies to investment as well, because people feel quite uncomfortable about making money and doing good at the same time. And I saw that a lot when I worked at Triodos. People almost seem to feel more comfortable making a charitable donation and just wanted to give their money away and not earn a return from it. And I think that really explains partly why the responsible investment industry will always struggle in a degree with its clients, the retail clients, because they want to align with their values. So they don’t want to be involved in, say, tobacco or gambling or whatever they dislike. And they just want the investment manager to go away and do that. And the investment manager’s trying to talk to them about the slight additional value of better employment practices. And for a lot of their clients, that just doesn’t sit well. Yeah. So I think that’s— it was really interesting for me, and I think it’s good for those who work in the marketing and so forth of investment management companies to think about that.
Aoifinn Devitt: Well, you’ve left us with a treasure trove of a fascinating, fascinating area to explore, especially as we think about the money mindset, you know, our behavioral finance mindset. And I don’t think we’ve even given a lot of thought at all to how we compartmentalize those two areas. And of course, if we were to apply the same efficiency standards, the same profitability imperative to doing good, I think it would actually be a much more efficient enterprise. And we probably would have less waste and, and probably a more profitable enterprise all around.
Joel: It’s interesting you say that because on the grant evaluation work I do, talking to other grantmakers, it’s a similar thing. Some of them feel uncomfortable about asking tough questions of those who are looking for the money. It’s putting together that analytical mind and the efficient mind with the giving and wanting to support mind. That’s a challenge for a lot of people. For good reasons, they aren’t necessarily a natural fit. So yeah, it applies across the line.
Aoifinn Devitt: Well, it’s such an interesting area. Well, Joel, thank you so much for what you’re doing, for the work you’re doing, the awareness you’re raising, and the way you are translating this into such digestible plain English, which I think is quite remarkable in an area that has become laden with jargon. And I think just on the last point, as I said, gives us lots of food for thought, but also now that we see a huge amount of funds being essentially thrown at this area and ESG teams being built, one might question whether that’s the future or whether we need to see better integration of those teams so that everything essentially has an ESG integrated angle.
Joel: Yeah, I think for me on that, it’s— we need to get much more— and there’s much better thinkers on this than me, so I’m going to garble my way through it— but the current focus is much more on the outside in, so the risk management aspect of ESG and how that affects the company positively or negatively. And I think a lot of ESG integration and trying to get all of the funds to work under this basis is in that direction. I think particularly when we talk about universal owners, so these are long-term asset owners who, like pension funds and university endowments and faith bodies, when they are thinking about— they own the risks, they own climate change risk because their portfolio will be around when climate is even worse than it is, climate change is even worse than now, and they own the inequality risk and the risk of that driving right-wing populist governments, they need to be thinking much more about the inside-out, their impact on the outside world. And that’s what I would hope to see much more from the regulation of finance as well as the practice of finance, is that it’s how finance should always be. We built it up to be this huge important thing, it should always be in service to the real economy and society. And you currently, know, the innovations and the efficiency and the risk management is all very impressive, but until it gets back to being in service to society— I am absolutely not against the profit motive and Mr. Friedman’s maxim about, you know, that focus on profit is very— makes it much easier to run a business. But he also said in that statement about the profit motive and business focusing on that, he also said that it had to be in a wider of, you context know, a functioning society. And that’s where finance has let itself down. It’s lobbied against that and allowed good regulation to be tarred with the same brush as bad regulation. But actually regulation is what has brought us things like welfare states, clean water, clean-ish air, although we’re still breathing pretty filthy air all around the world. A lot of those benefits from regulation, good quality regulation, are in the interests of finance in the long term. And so the industry needs to shift from lobbying against that to being lobbying much more vocally for it.
Aoifinn Devitt: Well, thank you for bringing it back up to the top level again. We started there, we drilled into some specifics, and we’ve moved back up again. It’s been a real pleasure speaking with you, Joel. I think we can come back for a round two. Certainly in the future, there’s a lot to discuss here. Thank you very much for coming here and sharing your insights with us.
Joel: That’s great. It’s my pleasure. Really good to talk to you.
Aoifinn Devitt: I’m Aoifinn Devitt. Thank you for listening to the 50 Faces podcast. If you liked what you heard and would like to tune in to hear more inspiring investors and their personal journeys, please subscribe on Apple Podcasts or wherever you get your podcasts. This podcast is for informational purposes only and should not be construed as investment advice, and all of Views are personal and should not be attributed to the organizations and affiliations of the host or any guest.
