ESG Matters bonus episode: transcript

Transcript

Anna-Marie:
In our first episode of 30 for Net Zero 30, you may recall I spoke with Sean Kidney, CEO at Climate Bonds Initiative, who shared with us a story from the inside of sustainable finance and the extraordinary growth of capital allocated to climate solutions. We covered investor expectations, climate risk, and regulatory action. In this bonus episode, I speak with Richard Peers, who is a marketing and sales leader in the financial services and software industry, and previously at Microsoft. He is founder of Responsible Risk Ltd, a consulting business that drives improvements in sustainable finance adoption, and outcomes for clients through better understanding of data and solutions. So today we're going to talk more about sustainable finance with Richard through that intersection of people, process, and technology,

Richard, your business brings together AI, data, sustainability, banking, capital, markets, firms, alL together in order to solve the biggest challenges facing our world today. From a practical viewpoint, what does that look like?

Richard Peers:
Yeah. Hi, Anna-Marie. And it seems like quite a lot, doesn't it, really? But thanks for having me. I think really the key thing to get across is I'm not sort of trying to run a business which has got everything inside the four walls of that business. Really what I'm doing is working with a fantastic network. And I've put it in three ways really, which is I talk about the company as doing storytelling, matchmaking, and coaching. And so one of the things that I do is work at Finextra on a pro bono basis as the contributing editor on sustainable finance. And that gives me a wonderful platform to highlight what's going on in sustainable finance, but also see great stories that come through our own doors.

And then on the matchmaking side, I'm really keen that we don't just talk, but what we do is we do. And so I've got an amazing advisory board of people that are all volunteering, helping to work on the biggest challenges around sustainable finance as you highlighted, and they range London Stock Exchange, [Triadance Standard Empore 00:02:09], world wildlife fund data sciences. And there we bring together workshops where we convene and work over the biggest challenges. And then the final piece which is the coaching, is working with software companies that need to get these ideas to market an onto a technology platform. So really what we're trying to do is really use the network to be a catalyst to make all of these changes that in renewing opening introduction.

Anna-Marie:
A network approach, and probably something from your Microsoft days, I'd imagine. As you look at this, as you talk on these different levels with people, do you think there is any lack of confidence about viable options around investing in sustainable initiatives? One of the things we've heard previously, that one of the biggest barriers to investment kind of a blame game of individual activity. What do you think on that front?

Richard Peers:
Yeah. I Think you're referring back to Sean's point, and I think he was right to highlight that, don't blame the consumer and ask them to wear a hair shirt and not go out at all, because we know that, that's got its own issues. And it is a systemic issue, in terms of both the way we invest, but also just the way that human behavior walks across the planet. But what I would say as a counter to that, is that really we do need consumer demand, we need social sort of action and request before policy changes. And policy needs to change before corporates really respond, in the big system, not obviously there'll be all sorts of individual actors. And we are seeing that. Clearly there's a crisis, clearly social request is going on, policy is changing, and corporates are responding. But we can't stop any a closed single activities. It has to be a continuous feedback loop of people demanding change, seeing change, and then asking for even better.

Anna-Marie:
Where do you see then data coming in? Obviously key to understanding what people want. But what do you think are the issues then and opportunities around, in particular for sustainable finance kind of risk management and working with data in order to form credit decisions or quantify physical and transition risk?

Richard Peers:
Well, I think this the real key thing and why the previous answer has content. Because if you just leave these things in the financial services industry, in that sort of real back office part of it, there is no transparency. And there is obviously a risk around greenwashing and people just putting labels on things that don't really actually positively contribute. So if you look at where we are today, very simplistically, ESG, which is Environmental Social and Governance, as we've heard, is largely initially started being forced on to financial services firms, from the financial stability board, saying there's a risk to financial instability from climate change, so tell us what the risk is to your system or to your book of business. And then of course, they went, "Well, we've only ever done financial reporting, really. So therefore we don't know how to do the non-financial." And broadly, they default back to disclosure. So who is in your book of business?

Go to the corporates and say, "Tell us what you're doing in these areas." And so the burden falls onto the corporate to respond, and this is where we get into this whole standards conversation about what is green, how do I report it, what do I do with it once I've got it reported, and how do I actually then report that as a risk to my my business? Now the role of data is called out because what people are saying is, "Well, hang on a minute, you're all self-reporting and self-checking." So I think the bigger role of data from just sorting that out is to say, "What we need to do is to look at that circular economy again, and we need to look at the intelligent edge. So down in the material world, the field and the factory and the farm. And we need to look at the data and bring that as we can best as we can through supply chains into the decision making frameworks."

Now that seems enormously complex. But of course we're in this new world now of satellites and sensors and secure transmission of data and allowing data to lay where it resides, but actually just to pass information through APIs in a secure way. So that's what people are getting their head around I think that the moment, is the move from the way it was always done to the need for transparency, but at a much greater scale and further to the edge of what we're doing in the material world.

Anna-Marie:
No, really interesting points, Richard, and particularly this focus and ability to get to data now in a way that people haven't before is I think going to be a game changer as we look at what people are actually delivering in this space. Obviously, from your own background, you pretty involved in the Fintech boom and the kind of the '2010s and so. Do you see any similarities here between what happened then, and focus on innovation, new business models, new user experiences, new companies, and what's happening now in the 2020s around sustainable finance?

Richard Peers:
Yeah, absolutely. I totally think that the Fintech model is what we need to be looking to. As I described when I was talking about my business, really, you could see that I'm drawing a lot of that experience. One of the key stories for me was that I was working at Microsoft and we were working with policy regulation, all of these important things that have to be done, about the simple problem, quite frankly, of how do you move to the cloud, how do you move a box of computers in your own offices to a shared box of computers in Microsoft offices. In a sense, quite trivial. And we were 10 years into policy and discussion and regulation, and everybody spending millions to try and persuade organizations to do it. And I came across a guy called Nick Holden from Worldpay, and we sat down and he spoke about a vision for a new clearing bank. And we spoke about how we would build that completely in the cloud.

Once we went through that process. Pretty quickly I might add, it was extraordinary how the world's banks came to knock at his door and try and find out how they did it. And things moved really fast after that. In a way, what I want to do here is to find the sort of sustainable finance organization that will be a mirror to that, which people will want to come and look at and see how things are done. And we're showing examples of that. So on my previous example, I spoke about satellites and sensors and how they would inform risk. And in our last event we spoke about a company called Mantle Labs who are using, again, satellite and sensor data to analyze climate risk in the farms of India, apply it to credit risk and offer that as a service so that you can actually deliver more loans to farmers in India, where previously they wouldn't have been take them onto the company's books before. So I want to find great examples to change the models, as we did with Fintech.

Anna-Marie:
Excellent. Well, I guess it's changing tacks just a little bit from what companies are doing and how they're approaching it. Can we talk for a second about what you're seeing around how investors are approaching this? So, how viable is say sustainable investing when you've got the world reeling from COVID? How reliable are the returns? What are you seeing in that space?

Richard Peers:
Yeah. We did a piece on this, on Finextra actually, we call it sort of myth-busters. Because there was a lot of talk about this thing about values, but don't value. And I genuinely think the narrative has changed on that now. But just you a couple of statistics, the ESG boom is being reported, and Palestone, who we might know, do a monthly letter on the fund flow. They spoke investors buying a record 1.1 billion of ESG funds in a single month, which was roughly equivalent to the entire inflow from 2015 to 2018 combined. And ESG funds accounted for more than half of flows in 2020. So still small, but growing really fast and those numbers keep cracking up. But then what about, does it give you a good return? We reported on a study by the Global Alliance for Banking, on values. And they found that ethical banks grounded in the real economy outperform their nonethical counterparts.
 
So they looked doing 2010 and 2016, and they could see that they offered a better return on assets then globally systemically important banks. And then if you look at various funds, you will see you need to get into the nuance of the mix of their assets in their funds. But basically the general trend is that performance is doing well, flows are doing well. The only real concern that people are talking about is are things being marketed as green that aren't green? And I think that's a genuine concern we need to shine light on and make sure we show the good from the pretending to be good.

Anna-Marie:
Most definitely. And I think that also highlights a really interesting point that people don't talk about too much, which is kind of this halo effect on governance when you have a focus on climate and you have a focus on sustainable finance inside of companies and inside of banks. I think we see that as well as people are talking more about various things within their organization, you get this halo effect on overall governance that I don't think necessarily people are tying those two together. But talking about halos and the future, through your crystal ball, what does sustainable finance in the entire sustainable finance industry look like to you in five or even 10 years time?

Richard Peers:
Well, I think it's that sort of we're in that sort of phase where you overestimate what will happen in two years and you underestimate what will happen in 10, which I think Bill Gates originally said. And I think it's the same here. At one level, everybody that's a fan of the topic, expects it to be sort of perfect overnight, and perfect ESG, perfect data, and perfect correlation and everything is fair and equal. But we all going through a massive transformation of the way that companies are reporting and how investors are making their decisions. So my feeling is that what we'll do is that we'll see this wave of, if you like, the hype cycle.

We're seeing I know a lot of engineering work, a lot of business decision making work, a lot of business modeling work going on to improve at every level, both the offering of funds and working on portfolios, but also the regulatory and data regimes around it. And so we'll go through this phase. Few people will call out a few of the foul plays. But let's not that spoil the direction of the traveling in. Because in 10 years, what we'll see is that actually sustainable finance ESG we won't talk about, because it would just be inherently embedded into every investment decision that is made. And as we've heard, climate risk is financial risk, natural risk will be financial risk. I think it'll just be embedded into everything we do.

Anna-Marie:
So Richard, I think you're right, and it's really interesting the point you make around the hype cycle and the fact that there will be some behavior called out. But that that shouldn't stop the process overall. What are some of the biggest learnings that you you've had since you founded Responsible Risk and you wear these multiple different hats of coach and mentor and educator?

Richard Peers:
Well, I think the first and biggest is what an extraordinary set of goodwill there is out there, what a great community. I've never really encountered anything like it. I knock on people's door and say, "Can you join into this network?" I'm not paying anything. But people really are passionate and are rolling up their sleeves across the complete spectrum. I think the second thing is everybody realizes that you do need a diverse network of people from NGOs to environmental scientists, data scientists, as well as financial people to work together to really roll up our sleeves. And we're at our best, aren't we, when there's a crisis. We've seen that with the speed at which the vaccine was delivered and the great work of the NHS, et cetera. And I think there's a similar sort of urgency and goodwill.

But probably my biggest insight is to kind of stick to what I was seeing at Microsoft. I was seeing this talk about a planetary computers, talk about sensors at the edge of everything which will give us data to make better decisions. But initially I got sort of sucked into, no, we just need to focus on corporate reporting, and we need to sort of sit in committees and we need to write reports. And absolutely it's clear to me that, that will take too long, given that we have a crisis. And we need to sort of put a vaccine shot in the arm of our response to data needs for climate change by bringing in this satellite and sensor data, normalizing it, making it available so that really good risk decisions can be made. And we can get away from people sort of saying, "That's not the way we used to do it. That's not the way we do it today." And really bring a step change. That's been my confirmation and biggest learning.

Anna-Marie:
And so I guess if I were going to ask you what actionable things that can be done, obviously, our listeners may not be the best place to sort out a satellite data availability. But are there any other actions you think that people listening in can do to stay abreast of what's happening in this area and the opportunities that are arising?

Richard Peers:
Yeah. It's obviously not for everybody, but I think that if you make a conscious decision, as we've heard from Make My Money Matter, if people are aware of that campaign. If you make a conscious decision, "Well, what can I do about my own money?" I'm sure people are struggling in lots of ways, but you've probably got a pension. You may have the opportunity to do an ICER, we're heading into the ICER season. And if you look at just some of these robo-advisors and you look at what they're ethical or sustainable portfolios, and you start to examine what's under the cover. So test it a bit, who's in there, do those companies match my values from what I know? You might not get it right. You don't necessarily have to know every in and out. But I think you'll start to really sort of be engage what you feel you can do consciously in yourself and with your own money as you'll be a stakeholder in it, then essentially, I think that's a really big piece that you can be proactive in. But moving on from that, I think that get involved.

One of the reasons that we do the Sustainable Finance live workshops at Finextra is that we're trying to get together a bunch of experts that I've described before, but we're doing it in a public forum. Anybody can dial in. We all know the game now, right? You connect into your teams and you sit there. And I described it as a bit like sort of Saturday live pitching. We've got a few experts in the room that know they're going to cook an omelet, let's call it an omelet, a climate change omelet. We've got a few wine pairers there who know a bit about other pieces that are important to it. And then the audience can basically sit in and either contribute by suggesting their best recipes or just liking what we're doing. But they'll see an active debate around this, about the opportunities and the pitfalls of this area. And the next one is around natural capital and the rest of biodiversity and not investing in this and the way that that mirrors the challenges of climate change.  

So a huge topic, people can dial in. But finally, follow the Mark Armys and the Bevis Watson triadance and Gillian Tet on he FT, even Finextra on the Sustainable Channel. And just read and follow people and just feel engaged.

Anna-Marie:
Excellent. Thanks, Richard. So get engaged, pay attention to where your money is going. I think one of the real themes coming out of this is get moving in the right direction, even if it's not perfect now it will get better and better over time. But thanks so much, Richard, for joining us today.

Richard Peers:
Thank you so much. Appreciate it. Thanks Anna-Marie.

Anna-Marie:
Thanks for listening to this special edition podcast, we hope you found it worthwhile. To learn more about the issues we've just covered, please visit ashurst.com/podcasts. If you'd like to hear more from Richard and discover more about ESG data and technology, impact investing in sustainable finance initiatives, please visit Finextra.com and click on the sustainability tab, where he'll also have information about their twice a year workshops. This special episode is just one small part of our continuing podcast series, ESG matters @ Ashurst. Make sure you don't miss any of our future episodes by subscribing via Apple Podcasts, Spotify, or wherever you listen to your podcasts. While you're there, you can also listen to our other episodes and leave a rating or review. In the meantime, thanks again for listening and goodbye for now.