Georg Kell is vice chairman of Arabesque Partners, the sustainable asset manager behind the world’s first Environmental, Social, Governance (ESG) ‘Quant’ fund (definition below), which has recently opened its doors to retail investors. He was a founding Executive Director of the United Nations Global Compact and co-founder of the UN Principles of Responsible Investment. He talks to Rebecca O’Connor about the importance of a sustainability strategy to long term profitability – and how the world of finance is beginning to move in the right direction.
“There are three reasons why the world has not moved on climate change. The first is that proposed regulatory changes are misplaced. Carbon pricing, for example. The second is the consumer is a sleeping giant. Demand has enormous power, but it hasn’t woken up yet. The third is the world of finance – despite the financial crisis, the industry still operates by placing a premium on short-term profits – the bonuses of today.
There is a disconnect between finance and Corporate Social Responsibility. Although some are getting ahead of the game before the COP21 talks in Paris.
The world of finance is starting to move.
There were very few investors involved in the Principles of Responsible Investment at its launch in 2006. Initially, it was about responding to crisis situations, such as child labour. Only recently did they start to look at systemic issues. Now, over 1300 signatories representing US$ 45 trillion assets under management have signed up to the Principles.
Arabesque started the world’s first ESG Quant fund, which integrates ESG data with quantitative investment strategies. The word ‘Arabesque’ describes geometric art built with mathematical equations. Patterns are used to organise an investment universe of 1000 global stocks – the best performers on sustainability – using fundamental, quantitative, forensic, financial and non-financial data.
The fund knows all the companies it invests in and compiles a daily report on the portfolio for investors. The system was originally developed at Barclays in conjunction with universities including Harvard, Stanford, Cambridge and Oxford, before a full management buyout in 2013. It sucks up non-financial data to generate performance. We believe this method of investing should be available to everyone and the end goal is that all investors can access it.
I have a genuine belief in a values-based approach to investing.
Over the long term, the most sustainable investments outperform.
The influence of a sustainability strategy is significant. It is like the stock in a soup that all of the other ingredients need to combine.
There is a positive correlation between resource efficiency, low carbon intensity, good governance, the existence of compliance philosophies, the non-discrimination of women in boardrooms (incidentally, a key driver of productivity) and better financial performance.
Although it is important to note that it is difficult to assign clear causalities. Performance is always about the interplay of humans and technology.
Financial success goes hand in hand with environmental and ethical values – they are a natural fit.
A key long-term driver of this is the decarbonisation of economies – pricing externalities in the transition to a low carbon world.
We live in a “bottom up” world – we can’t enforce top down, global limits. It is just not on the cards. The movement towards carbon-pricing will happen at different speeds and to different levels.
COP21 is hugely important. This time, I predict radical change, with foundations being laid in Paris for a new future.
There is a unique constellation of factors working at a political level. For the first time, China and the US are seriously interested. For the first time in history, global businesses are seriously committed. There have been sad examples of greenwash marketing in the past, but now, their efforts are genuine.
Big business realises the regulatory changes will happen – the science is overwhelming. Awareness is increasing and the best companies are genuinely serious on their climate agenda.
What is even more encouraging is the movement from investors, For the first time, they are realising that climate change poses a systemic threat to portfolios, but also opportunities.
There are three criteria a business taking climate serious will meet:
- Disclosure of carbon intensity
- An internal carbon price that reduces carbon use
- No lobbying against government and regulatory climate action measures.
The last of these is extremely important. Businesses used to think it was important to pay lobbies huge sums of money to undermine the movement. This is happening less and less. There is more transparency. Only fools lobby openly.
The oil price is so low that the oil majors have lost the significant influence they once had. Renewables are on the upswing.
Renewal is happening, although you still have those sitting on the fence – or preserving the past because it preserves their returns.
But the request for carbon pricing from the big oil companies was a good thing. This was them breaking ranks with the past. The transition will accelerate with carbon pricing. There is an important role for oil and gas for years to come. Oil is almost too precious for its use as fuel for automobiles, and there are many applications for science that we should encourage. But the switch is happening with the huge sums of green investment taking place – we are already at a point where there is more newly installed renewable capacity than there is fossil fuels.
There will be higher commodity prices again, of course. Of course, demand for oil will rise again. There is still so much to be done. But progress is rapid in renewables. They are increasingly competing without subsidy and progress on battery storage will empower decentralised energy.
What could throw us off course?
Global recession, job cuts, protest in streets – these wouldn’t help the green economy now.
Extreme weather, drought, refugees, these are all predictable consequences of climate change – they are already resulting in huge humanitarian catastrophes. These events increase the case for climate action, not diminish its importance.”