FCLTGlobal’s CEO speaks to the challenge of getting investment to support future sustainability and success and not just the needs of the nanosecond.
We often talk of issues of short-termism in capital markets and their impact on climate. As CEO of FCLTGlobal, Sarah Williamson is focused on how long-term capital can support a sustainable and prosperous economy. FCLT is a non-profit research and advocacy organization supported by about 75 members around the world who are either large asset owners, sovereign wealth funds or pension plans focused on public equities (examples include Fidelity, BlackRock, State Street, and Wellington), as well as global companies like Unilever and Walmart.
FCLTGlobal deals directly with the debates, tensions, operational realities and enormous opportunities involved in prioritizing long-term needs and stakeholders, like the environment. As they put it: “Business leaders have long struggled to weigh immediate financial needs against objectives many years into the future in order to succeed over the long term.”
In this conversation with Climate & Capital’s co-founder David Garrison, Williamson discusses what is involved with transforming mindsets — and where the opportunity sits.
- A long-term perspective isn’t a luxury. “The sad truth is that climate change doesn’t matter if all you care about is the trade that’s going to take place in the next nanosecond.”
- There are (at least) three questions to answer before we’re truly prioritizing the longer-term. “How do we fund a climate transition; what does stakeholder capitalism mean in practice; and how do we rewire capital markets to reward doing the right thing?”
- The opportunity in the climate economy is not the same for everyone. “Where opportunity sits depends on the composition of your portfolio and which one of [four] categories you’re positioning on.”
- We need to pay more attention to how we transition assets. “Having a way to own hard-to-abate assets — to actually abate them — is something our current incentives push against.”
You’re working in both the climate and the capital worlds. Maybe it’s a good idea to start off by giving people who don’t know you some context about what FCLT’s trying to do.
We believe there’s no such thing as short-term sustainability and that, to have a sustainable and prosperous economy over longer periods of time, you have to think in those longer periods of time.
We also believe that, in a perfect world, there’d be no distinction between a sustainable investment and another investment: It would just be investing in something that pays off in the future because it solves a problem.
That’s what capital markets are supposed to do, and we’re big believers that markets can drive performance and change.
But the sad truth is that climate change doesn’t matter if all you care about is the trade that’s going to take place in the next nanosecond. So, our work looks at what drives long-term performance — governance, incentives, metrics, investor-corporate dialogue, and a little bit of public policy.
The sad truth is that climate change doesn’t matter if all you care about is the trade that’s going to take place in the next nanosecond.
These are the three questions we’re focused on: How do we fund a climate transition; what does stakeholder capitalism mean in practice; and how do we rewire capital markets to reward doing the right thing?
So, what’s the burning opportunity in climate change?
It’s simply the recognition that our economy is going to change fundamentally in the next 20 years. Many of the businesses that are profitable today don’t have a business model that will survive in the future. And the opposite’s true, too: Business models that we barely understand now represent a huge opportunity.
Part of that change involves externalities that people aren’t paying for that will be incorporated into markets over time — the positive externalities produced by a rainforest, for example. Investors and companies that incorporate these externalities early will prosper — they’ll prosper either because they’re capturing an opportunity to shape a market or because they’re changing their products to be more user-friendly.
The point is that we’re entering a new, more climate-aware market and that we need to understand what people in that new market are looking for. Some companies will adjust. And some will be just like any company that enters a new market and fails because it hasn’t taken the time to understand it.
That’s a relatively rare mindset, though, in part because companies aren’t generally around for the long term — most of the leading brands from 50 years ago aren’t the leading brands (or even around) now. Are you partly solving for climate and partly solving to make companies more stable so there’s a possibility they can have a longer-term impact?
Being long-term is a necessary but not a sufficient condition for impact. Yes, it’s true that not all companies will last forever. But the DNA of those companies often does go on to influence or be absorbed into something else. So it’s important to invest as if they’ll be growing concerns forever.
Being long-term is a necessary but not a sufficient condition for impact.
And the best companies do have a long-term roadmap that starts with purpose and translates into strategy. They say, “We know why we’re here, we know what our long-term strategy is, and we know how climate relates to that strategy.”
For some, that relationship is foundational. For others, it might not be. But there are very few companies where it’s not a factor.
How do you think about the tension between the impact and return companies have through their portfolios?
I was trained to think in portfolio terms. And from that perspective, returns in climate are influenced by decisions on what segments of a portfolio fall into four categories.
The first category is being silent [editor’s note: a “silent approach” occurs where an asset owner’s mandate does not explicitly incorporate or take a stance on climate — see the framework]. Silence is important because it’s unlikely that your whole portfolio is invested with a climate lens.
There’s nothing wrong with being silent in parts of your portfolio — just acknowledge it. If a pension plan has cash that it’s keeping overnight to pay benefits to retirees tomorrow, for example, it’s probably silent on climate in that cash; it’s more worried about making payments.
There’s nothing wrong with being silent in parts of your portfolio — just acknowledge it.
The second category is principles-based. It says, “I’m not going to buy fossil fuels because I think they’re wrong.” It’s classic divestment or exclusion.
Interestingly, it’s also associated with a classic, concessionary approach to impact, which says, “I’m willing to give up returns; I’m investing because I care, and these are my principles.” In the U.S., this one can be hard for fiduciaries.
The third is analytical. This is where most of the opportunity is.
Take carbon, for example. The chance of there being a carbon price in some countries in the near future is high. It’s an analysis that suggests we need to take that into account. To pretend there’s not and never will be simply isn’t good investing.
That cool green-tech company you might want to invest in? Maybe you couldn’t care less about the environment, but the venture’s going to make money. Both of these are analytical opportunities.
The fourth category is catalytic, which asks how we might throw our weight around. How might we engage companies to do a better job, create new markets or lean into things that aren’t there already? I see this one as the fiduciary duty of a responsible investor. Because if you don’t think climate is going to have an impact on you, your timeframes aren’t very long-term.
Where opportunity sits depends on the composition of your portfolio and which one of these categories you’re positioning on. And it’s true that there are some people whose whole portfolio will be principled. That can be appropriate, but they should do it because they understand it makes them feel better, not because it necessarily has the greatest impact on the planet.
This is where the real discussion starts: Are you investing for a green portfolio or a green planet? Because those aren’t the same thing.
Are you investing for a green portfolio or a green planet? Because those aren’t the same thing.
There’s a tension between the potential capitalism has to be catalytic and drive innovation and how it encourages short-term tactical moves. How do we round that square?
That’s what we’re trying to do.
To be clear: Business is good at adjusting to short-term, unforeseen events. That’s not the issue (nobody two-and-a-half years ago, for example, had any idea how they would adjust to a global pandemic).
No, the problem is the shortcut with costs in the long term. Take quotas: If you’ve ever gone to a car dealer to buy a car around the end of a quarter, you’ll know it’s cheaper to buy that car on March 31 than it is on April 1. That’s probably not the right long-term decision for the dealer, but the incentive system encourages short-term behaviors. What we see time and again is that incentives – not competition – encourage poor behaviors.
That’s why we focus so much on governance and incentives. How do you tweak, nudge and poke people to do the right thing instead of taking shortcuts?
What’s a prevalent incentive that you’d like to see changed?
Quarterly guidance is a practice that (formally) is much less common in the United States than it used to be and is fairly rare in other countries. But it still happens informally.
Here’s how it goes: As CFO, I say, “Next quarter, we’re going to make $1.27 to $1.32.” But then it turns out that we’re actually going to make $1.24.
So, what do I do? The right thing is to say, “Oops. I was wrong.” But what many people say instead is, “Go find me three cents.”
And the easiest place to find that money is through long-term investments – training people, investing in R&D, building a brand. You simply don’t spend the money that quarter; you hit your numbers and you move on.
The easiest place to find money is long-term investments – training people, investing in R&D, building a brand. You simply don’t spend the money that quarter; you hit your numbers and you move on.
But when you do that again and again, you degrade long-term efforts. Quarterly reporting and guidance are the poster children for bad behavior. They’re a great example of a short-term incentive with costs in the long term.
You’re saying systems are often biased toward undesirable tradeoffs. So, how do we challenge those biases?
First, talk to people who are different from you – that’s where ideas get sparked. It’s one reason FCLTGlobal works with asset owners, asset managers, and companies: When we sit people down together from across the value chain, the light bulb turns on because they hear different perspectives.
Second, consider the bear case. Maybe company X is great. But where might you be wrong? What might you be missing? Asking these questions consistently well is a rare skill.
Third, part of the reason Tech’s been so successful in the U.S. is that we’ve had a venture capital system that allows failures to happen and that there’s a process that takes time before you get to a public market.
So how do you foster a system that supports those three things? Focus capital on the long term.
One practical problem in ESG is that we often don’t have our houses fully in order before we announce significant commitments, which can lead to concerns about hypocrisy and greenwashing. How do you think about the balance between acting fast and making sure your house is in order?
One tension is that a get-your-house-fully-in-order-and-then-go-out mindset doesn’t allow for the continual improvement you see at the best companies. A more humble approach is an evolving one: try, innovate, fail, try again, innovate again, figure it out.
On the hypocrisy point, there are many investors out there who are putting labels on products because they believe it’s what the market wants. And they may make money that way. If the market demands a fund with ESG in the label, they offer a fund with ESG in the label.
But truth and labeling are important. And those who deliver on their commitments are going to raise the next fund. That’s how competition goes.
So, take two funds [for example]. One says, “I’m green.” The other says, “I’m green, too.” Half of us put $1 in one, half in the other. Three years later, it’s going to be pretty obvious that one of them can barely spell ESG while the other was really thinking about what they’re doing in the climate space. That one’s going to win and grow.
That’s true as long as people aren’t prioritizing short-term financial return. But if the window-dressing fund performs better, it complicates the response.
ESG aside, people are notoriously poor at selecting investments. This is part of the short-term/long-term problem.
What happens with most funds is, essentially, that they perform well, money flows in as people look in the rearview mirror, then they get too much money, it rolls over, they perform poorly, and then people sell it. That’s been a serious problem in the investment world for a long time.
People don’t want to judge a book by its cover, but we do. So, particularly in something like ESG, it’s important for the cover to match what’s inside. Where it doesn’t match, companies are going to get themselves in big trouble – investors will be disappointed, and regulators will (and should) step in.
Do you see an issue with variations in taxonomy and ratings?
Here’s the important nuance. Let’s say you and I are investing in the same stock, and it made $1.27 this quarter. Unless there’s something strange going on, we won’t argue about whether it actually made $1.27. Now, you might think $1.27 was good, and I might think it was bad because I expected more – there are a hundred things to argue about – but what we aren’t arguing about is the $1.27.
In the sustainability metrics space, we’re still arguing about whether it’s $1.27 or $4.53. We don’t know what the number is! And so, the key distinction is between the data and a ranking/judgment. In the investment world, we want data that’s consistent and reliable. I might put more emphasis on one factor than you do – those differences of opinion are what make a market.
This is why we appreciate the work the International Sustainability Standards Board (ISSB) is doing around the consistency of reporting and why we’ve worked with data providers like the World Economic Forum on how to get data onto the desktop of the investor.
But I do not believe that there’s anything wrong with having different ESG ratings that are driven by different priorities. What we need are consistent numbers and thoughtful judgments.
I do not believe that there’s anything wrong with having different ESG ratings that are driven by different priorities. What we need are consistent numbers and thoughtful judgments.
What’s the piece of information or data leaders still need in order to take a more active public stance on shifting pools of capital?
Every economist I’ve ever met loves a carbon price. Every politician I’ve ever met hates a carbon price.
I’m sure what every company would love to have is to know if, when, and how there will be a carbon price because leaders are making a large investment in an uncertain future with an unclear regulatory environment. And allocating capital in a highly uncertain time is hard.
Anything that can clear that fog is really, really helpful.
What would you like to see the market paying attention to that it’s not?
The importance of how we transition. One of our investors said the other day, “I can’t transition an asset if I can’t buy it.”
Let’s say you’re a responsible utility and I’m an irresponsible one who cuts corners and doesn’t report. Your incentive is to sell me that bad coal power plant.
You’ve got to get it off your books because it’s ugly – it’s messing up your carbon footprint. That incentive to sell is wrong: Yes, your portfolio is greener, but the planet is worse off at the end of that transaction.
Having a way to own hard-to-abate assets – to actually abate them – is something our current incentives push against. I’d like to see more ways that you, as a responsible utility or investor, could keep or buy dirty assets and clean them up.
Having a way to own hard-to-abate assets – to actually abate them – is something our current incentives push against.
It’s too easy to get your own house in order by throwing the trash on the street. And that doesn’t help the street.
What question would you like to hear other leaders answer candidly?
If you walked into your own business five or ten years after you’ve retired, and you looked around at what you’re doing with climate, what’s really different?
The problem isn’t around what you’re going to do this quarter. It’s not even thinking about what’s happening on your watch. It’s not what somebody’s going to give you a gold star for.
No, it’s about what you want to see take shape. For a car company, that might mean saying something like, “All of our vehicles are electric, and we’ve created a battery that doesn’t require all the bad stuff from mining.” A shampoo manufacturer might say, “All my products are carbon-free.”
The truth is that most leaders make commitments they don’t know how to fulfill but that inspire their people. I’d like to hear how they’re getting people to say, “Oh, wow. That’s the goal? Yeah, I can figure that out.”
Climate & Capital’s Leadership Interviews is an ongoing series of in-depth discussions with a wide range of leaders in the climate economy. It explores the nuance and tension in leading bold transformations — of individuals, organizations and markets — at the intersection of climate and capital. We hope these conversations give you food for thought and spark conversations as you lead in the climate age. We’re looking forward to hearing from you.