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In these times, small investors may feel uneasy, not to mention unsure of how to use their investment power conscientiously. This week on Sea Change Radio, we speak to Dr. Raj Thamotheram, an expert in socially responsible investing, about how the field has changed over the years. We discuss billionaire investor Steve Schwarzman‘s recent comments blaming the energy crunch on the popularity of green investing, take a look at the global divestment movement, and talk about which advisors environmentally-conscious small investors should heed.
Narrator 0:02 This is Sea Change Radio covering the shift to sustainability. I’m Alex Wise.
Raj Thamotheram 0:19 You wouldn’t leave markets to fight a war. You don’t leave markets to deal with public health crisis and you don’t need markets to handle what could become very soon an existential crisis for human civilization, it’s certainly going to result in much devastation. And we we’ve only just starting to see the very, very early signs of what’s coming down the tunnel.
Narrator 0:45 In these times, small investors may feel uneasy, not to mention unsure of how to use their investment power conscientiously. This week on Sea Change Radio, we speak to Raj Thamotheram , an expert in socially responsible investing about how the field has changed over the years. We discuss billionaire investor Steve Schwarzman his recent comments blaming the energy crunch on the popularity of green investing. Take a look at the global divestment movement and talk about which advisors, environmentally conscious small investors should heed.
Alex Wise 1:41 I’m joined on Sea Change Radio by Raj Thamotheram. He is one of the pioneers of the Responsible Investment field in the UK. He’s a board director and senior advisor to several nonprofits in the space. Raj, welcome back to Sea Change Radio.
Raj Thamotheram 1:56 Thank you so much, Alex, I’m very pleased to be back.
Alex Wise 2:01 As I mentioned, you’re one of the earliest experts in the responsible investing field, it’s changed names many times. Why don’t you first summarize the arc? And the evolution of the space briefly if you can?
Raj Thamotheram 2:16 Well, that’s a great, great starter question. So in most countries, it started off as ethical or personal values or personal morals based thing. And so for example, in the USA, I think most people first heard about it in relation to apartheid South Africa and not investing in, in that that can also be extended to dealing with tobacco or any other sector or company that individuals don’t like. And from there, it morphed a bit as you as you were saying into something which was more institutional or retail as a product and then it became known as socially responsible investing where people start investment professionals start to look for good companies. Best in classes, the technical jargon, companies that are doing better, even if they’re in a dirty sector. So for example, without naming names, you can look for fossil fuel companies, which are trying to support the Paris agreement. And invest in those and disinvest or divest from companies who haven’t, that’s probably the most extreme example of of the challenge in terms of finding best in class. And then most recently, we’ve had a range of other players come into the sector who are looking for alpha for outperformance. So, people are trying to integrate non financial or extra financial data into their traditional investment performance processes defined a competitive advantage.
Alex Wise 4:16 And you’ve been a senior advisor at organizations like the university’s superannuation scheme, which is a large UK based pension fund. But that was a while ago. Get us up to date with how larger behemoths of of the investment world whether they be pension funds or hedge funds private equity, how are they adopting ESG into their vocabulary Raj?
Raj T. 4:45 Great question. When I joined the Responsible Investment field I was one of a relative relatively small number a handful of professionals in larger organization’s mind was a big pension fund called the university superannuation scheme. It’s the UK equivalent to Tia cref in the States. And from there, I went to be the head of ESG, or responsible investment at AXA, which is a very big global insurance based fund manager. Since that time, we’ve had organizations like BlackRock and State Street and private equity firms like KKR, all signing up to being members of an organization called the principles of responsible investment. So depending on how you classify between one in three, or even wanting to investment dollars, is now signed up to those principles. On paper, how in practice that gets executed is a very big question. There’s a there’s a lot of concern about greenwashing.
Alex Wise 6:08 Yes, I can’t help but think a lot of times when I hear the stats being bandied about that the ESG sector has gone from 150 billion to $2 trillion in the last how many years? I can’t help but think that that’s just that they’re moving the goalposts a lot, in many cases that these companies aren’t necessarily completely changing the way they do business. But the way we analyze, green investing has changed. Is that overly harsh?
Raj T. 6:44 So I’m gonna say yes or no, the concern is absolutely right. I have been talking about it for over 10 years, it’s one reason why I went independent and set up my own Think Tank, it’s much easier to see what you think when you’re when you’re not wearing an organizational hat. So where you’re absolutely right out, is that it’s very easy to slap a label of ESG on a fund, which isn’t very different from the funds that didn’t used to be called ESG. So you do a tiny bit of divestment. You take out tobacco here, you overweight companies, which have a good carbon footprint and suddenly, wham, bam, you’ve got a ESG fund. Well, actually, the real world value of that is pretty minimal with anything. So that’s one problem. The other problem is a lot of very big fund managers are doing what they do best, which is to push products. So on top of their normal business, they’ve added a new set of products called ESG. Products. Well, that’s a bit like, I don’t know having some extra salad, but at the same time stuffing yourself with high carb, fizzy drinks and unhealthy food doesn’t change the real impact of those organizations. And so I have some big questions about the greenwashing that’s allowed in the sector at the moment.
Alex Wise 8:24 Let’s turn to a specific player in the private equity space. Blackstone, you mentioned Black Rock I get confused about these a lot but they’re different. And Steve Schwarzman is one of the one of the leaders of the billionaire class as the head of Blackstone, there was an article in The New York Times which you pointed out to me and titled Why this billionaires worried about green investing. And Schwartzman I guess goes on to talk about the energy credit crunch and why this is concerning for supply chain issues and for the health of the global economy is ESG. The how is ESG related to Schwartzman concerns, are they valid?
Raj T. 9:10 You know, it’s it’s great when someone like Steve Schwarzman talks about these issues because it gets covered. And I was quite intrigued by that, by his concern that ESG investors were helping to cause the energy credit crunch partly because Blackstone is actually an ESG investor, it’s signed up to the PRA, the principles of responsible investment, so so I was sort of scratching my head and wondering, Is he saying he’s responsible for it or are the other ESG investors? And then the other thing that made me scratch my head because of the concerns I have about greenwash was was he actually saying that the sector ESG investors having impact in the with the fossil fuel companies or he See saying that there’s an energy crunch coming and those who kind of profited from the previous oil age are looking to someone to blame and hey whoa let’s try the environmentalists and the ESG investors because you know fundamentally is this an economics 101 problem that Saudi Arabian oil is cheaper than oil from listed private companies.
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Alex Wise 11:45 this is Alex Wise on Sea Change Radio and I’m speaking to Dr. Raj Thamotheram. He is an early pioneer in the responsible investing space. So, Raj, maybe we can take a step even further back though, and you can encapsulate Schwartzman ‘s actual concerns with ESG, which is kind of odd in that you mentioned that his firm just joined PRI, and PRI for our listeners, it stands for the UN’s principles for responsible investment. It’s an organization that incorporates ESG factors that’s environmental, social and corporate governance into investment decision making. Sorry,
Raj Thamotheram 12:29 I know Blackstone joined pra in I think July 2021. But some other very big private equity houses moved much earlier. KKR – Kohlberg Kravis and Roberts, a big US player joined in 2009. He also says that he’s concerned about political troubles. But I remember reading in January in New York Times as well, that after Donald Trump refused to accept the election results, Mr. Schwartzman avoided criticizing him. And then he says that he’s concerned about unhappy people. And I like that. But I haven’t seen much about Blackstone, talking about, say, the big vaccine inequity problem where we’ve had something like probably 10 to 19 million excess deaths globally. These, well, they’re not unhappy now. But these very unhappy families and communities, but I haven’t seen private equity players really take a lead in addressing this challenge. So so I’m scratching my head as to the real motives of people who talk about ESG. Being the cause of problems, my hunches, it’s better to listen to people who’ve been talking about these problems and coming up with solutions for much longer. So what He is quoted as saying in the New York Times, is that the concern that ESG investors have about the oil and gas sector is reducing the investment of the oil and gas sector in exploration and production. And frankly, I see no evidence of that happening. There is, I think, a good reason for expecting ESG investors to do that coming forward, particularly after Glasgow, particularly after the fact that governments have effectively tasked the finance industry with pushing decarbonisation. Mark Carney has been tasked with leading that process But that hasn’t started yet. And so any, any real, any real world changes that we’re seeing are really economic, its economic 101 stuff, it’s the price of oil, in some places is much cheaper. Companies are choosing not to invest in the expensive places.
Alex Wise 15:22 If you were to respond to Steve Schwarzman or somebody who’s linking the responsible investing movement to the energy credit crunch, you just mentioned how the market itself is kind of telling us that oil and gas is on its way out.
Raj Thamotheram 15:42 You know, areas gravity is gravity, you can lobby to make sure, gravity doesn’t look bad. But actually the sciences, the zones, climate change, is happening probably faster than the scientists even warned us about some years ago. And so why is investors wise companies are making a transition to a low carbon economy. And that’s really what private equity has, should be encouraging, because they say they have a long term perspective. And therefore, it’s absolutely critical that the companies they invest in, prove that they’re better suited to a low carbon future, a low energy future. So that’s what I would be expecting private equity houses to do to show that they have excellence and helping drive the transition to a low carbon economy.
Alex Wise 16:45 It’s kind of hard to take a Steve Schwarzman seriously, when who can imagine the kind of carbon footprint he might have, right?
Raj Thamotheram 16:54 You know, I think much less important than the personal carbon footprint of billionaires and it is very significant. Often. If you have your private yachts and private jets, you will have a big carbon footprint is the carbon footprint and the policy footprint of their organizations. And that’s what we I think, are legitimately able to question particularly if we’re customers of those investment firms, how are they using their influence in the companies they invest in? And how are they using their political influence. And this is particularly important in the states where rich and very rich people are major political donors. Because they can either be part of the solution to the climate crisis, or they’re going to be part of the problem. There’s not much middle ground. Today, given the crisis, and the polarization in the in the politics, I would say that we need to focus on the policy footprint, and the carbon footprint of these organizations. And when I say carbon footprint, I’m not talking about the green headquarters and the changing of lightbulbs in the HQ of these firms. I’m talking about the companies that they invest in, and the carbon footprint of the portfolio.
Alex Wise 18:25 And what’s your take on the divestment model led by Bill McKibbens of the world that are trying to get these larger pension funds, universities and organizations to divest themselves from the fossil fuel industry.
Raj Thamotheram 18:44 You know, at the start of my career, and you were very kind to call me a pioneer, I think you’re saying I’m old. But at the start of my career, I was committed advocate for assertive engagement and they later term this forceful stewardship, the idea that investors could ask and require companies to make the transition. Over the decades that I’ve been pushing this idea, I’ve come to realize that most investors will do everything they possibly can not to do that kind of stewardship. And either will do what I call slightly tongue in cheek tummy tickling, engagement or, or tea and biscuits engagement or might be coffee and cookies engagement in the states where you don’t really have any social change value, but you you go through the process. And in that context, I’ve come around to thinking given the emergency that actually, if that’s the alternative, then divestment is the right is the right option because The worst option is this non effective box taking constructive engagement approach. So either divest or be forceful stewards.
Alex Wise 20:11 So we’re seeing more severe weather as a result of the climate crisis. And then that leads to the energy crunch, I can’t think of a more tautological explanation for why we need to level the playing field, then the annual hurricanes that hit the Gulf of Mexico, let’s say.
Raj T. 20:33 Absolutely, spot on. We cannot allow human civilization to be put at risk because of ideological beliefs. And one ideological belief is the the assumption that the market left to itself will solve every problem under the sun. The market cannot deal with what isn’t priced in and we don’t have a carbon price. And so it’s going to be a very ineffective solution, it’s proven to be a very ineffective solution. It’s contributed the problem. The market does some things very well, particularly incremental improvements and efficiency improvements. It’s modular so that, but it doesn’t deal with systemic threats. We’ve seen that this year. And last year, through the pandemic, the countries which were ideologically, most committed to market forces, USA and UK have done the worst in the rich world. So we better receive these wake up signals were getting, and then adapt. That doesn’t mean we throw everything out with the bathwater, you know, the baby with the bathwater. But it does mean that we we can rely on market forces to deal with everything under the sun. Systemic threats, require government intervention, it’s this, it’s as obvious as saying governments are needed as saying that, you know, you wouldn’t leave markets to fight a war, you don’t leave markets to deal with a public health crisis. And you don’t need markets to handle what could become very soon an existential crisis for human civilization, it’s certainly going to result in much devastation. And we we’ve only just starting to see the very, very early signs of what’s coming down the tunnel letters.
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Alex Wise 23:23 This is Alex Wise on Sea Change Radio, and I’m speaking to Dr. Raj Thamotheram. He is an early pioneer in the responsible investing space. So Raj, you write that we should listen mostly to the people who’ve been ahead of the curve for how best to thrive given the inevitable turbulence ahead. So beyond listening to you, who should we listen to then who who did you have in mind when you wrote that, Raj?
Raj T. 23:51 You know, I think there are some amazing minds in this field and we need to dig them dig out what they’ve told us and maybe they’ve got fed up telling us because everything is the same thing for the last five or 10 years. People like Jeremy Grantham, who’s a founder who is the founder of GMO Woolley. Mark Carney himself, former Bank of England Governor futurists like Alex Steffen political commentators like Martin Wolf from the ft. There are a range of very mainstream very well informed experts who understand the climate crisis. Probably the biggest thing we have to do is to just part ideological questioning of Science?
Alex Wise 25:01 And what would you recommend listeners who are just interested in putting their money in the right places? Where should they start to educate themselves and to become better, smarter stewards of not only the marketplace but of the planet?
Raj T. 25:21 It’s great question. And there’s an awful lot we can do. You know, it’s a bit like voting for a political leader, individual votes do matter, because the sum of all the votes matter.
Alex Wise 25:39 And that’s a good parallel, because when you’re an activist in the political realm, you try to get your votes to count more, you know, you want to have exponential impact. So how can somebody have exponential impact with their limited amount of dollars.
Raj T. 25:54 So I think that for most people, they will be investing in the stock market via their pension funds or via their insurance premiums. I’ll come in and come back to those individuals who are wealthy enough to have their own portfolios, but most people investor their pension funds, and I know having worked in a pension fund, that if enough members make it explicit that they want that pension fund to invest responsibly, and for the long term and take account of systemic risks that aren’t priced into the market, that will be more likely it will take time. It’s not, it’s not gonna one letter, one email isn’t gonna do it. But there is a there is a real awareness that this is happening and members supporting it is essential are essential. When I look at what’s happening in the North American context versus Europe, I see North American pension funds moving much more slowly than European pension funds. And since these are all equivalently trained professionals, I can only assume it’s politics and ideology that’s holding things back. For individuals who are rich enough to have a private relationship with a wealth manager. Well, that absolutely gives them customer rights. And I would argue responsibility to push that fund manager as to how they’re dealing with, for example, the climate change. Tell me about how my portfolio helps get us to a world where warming is kept to 1.5 degrees. If the fund manager or advisor can’t answer that question, then move your money
Alex Wise 27:56 Raj Thamotheram, thanks so much for being my guest on Sea Change Radio.
Raj T. 28:00 Thank you so much.
Narrator 28:16 You’ve been listening to Sea Change Radio. Our intro music is by Sanford Lewis and our outro music is by Alex Wise. Additional music by George Benson, Jeff Buckley and The Flying Lizards. Check out our website at SeaChangeRadio.com to stream or download the show or subscribe to our podcast. Visit our archives there to hear from Bill McKibben, Van Jones, Paul Hawken and many others. And tune in to Sea Change Radio next week, as we continue making connections for sustainability. For Sea Change Radio, I’m Alex Wise.