From the wilderness to the UN – How one Australian influenced the world of investing

Topics discussed

• How shareholder activism and how it can influence investment performance
• Setting up the UN Principles for Responsible Investment
• From low impact to high impact - three tiers of responsible investing
• Decarbonising your portfolio
• High risk, high reward. A game changer in battery technology

Click on the video to watch the interview or read an edited transcript below.

Edited transcript

James Marlay: 

Hi there Livewire readers and viewers, it's James Marlay here, co-founder of Livewire markets, and as part of our Megatrends Series on decarbonisation, I'm joined by a special guest, Dr. James Gifford, who's head of sustainable and impact advisory and thought leadership at Credit Suisse. James, thanks for your time.

James Gifford: 

Thank you.

Now, a little known fact, you and I nearly crossed paths in our history, both alumni of Sydney University. I specialised in the price of beer at the Manning Bar. You went on to establish the UN Principles for Responsible Investment. What went wrong for me?

Well, I think everybody has their own destiny, but for me it was the passion about sustainable investing. And I started off at the Wilderness Society working on shareholder activism on Gunns Limited. Ended up going to the UN, starting a PhD at Sydney Uni on how to make that as effective as possible, thinking I was going to be an academic in Australia. I spent 10 years at the UN running the UN Principles for Responsible Investment.

I had a look over the degrees that you did, and it was really clear that you were interested in shareholder activism and sustainable investing. Before we get there, you're an Australian, you've made a splash on the global stage. Tell me a little bit about your background, how you grew up, how did you get that influence, that passion?

So I actually spent part of my 20s as a musician, trying to become famous. I was spectacularly unsuccessful. I sold 200 CDs in the '90s. And then I got into IT and building websites, went and worked for the Wilderness Society as the first internet campaigner. And that's where I came across the shareholder activism concept, working with the corporate campaigner at the Wilderness Society who was coordinating shareholder activism at Gunns Limited, the forestry company, which was very controversial 20 years ago.

So that was the pivot from IT into shareholder activism. I got really passionate about that. I thought, "Wow, imagine if we could actually link up the values and preferences of people with the behaviour of their money out there in the capital markets, it could be a revolution." And that's what I've spent 20 years doing.

Can you tell me a little bit about the university experience? I'm thinking you're at the forefront of it at that stage, but the courses established, was it a mentoring programme? How did that work?

I did a master's at University of New South Wales, a Master of Environmental Management, and it was very broad. It covered law, ecology, physics, chemistry, everything around environmental management. But they let you do a major thesis as part of it, and you could choose whatever you want. So because I'd been working on the shareholder activism, I thought let's do a thesis comparing what is traditionally exclusion strategies, which is pick out the bad guys out of your portfolio, to shareholder engagement and activist strategies as alternatives and put them up against each other and try to work out which one has the greatest potential for making the world a better place.

So I did that thesis in 2003 and it really came down strongly on the side of if you wanted to really make a difference in listed equities, then you really need to focus on leveraging the power of those equities through shareholder engagement and activism.

Then I enrolled in the PhD at Sydney Uni in 2004 on that topic. How do we make shareholder engagement and activism as effective as possible? And I analysed all of the factors that go into a shareholder engagement. I spent months at fund managers in London and in the US, and I got access to incredible data sets of internal communications between shareholders and the companies they were trying to influence. And a lot of them had very meticulous notes about conversations and progress over months and years, and I got to document all of that in my thesis. I finally graduated in 2009 of the PhD, and I concluded that shareholder engagement really can work. It's a really important contribution to sustainability.

On the other hand, it's not a silver bullet. You can't use shareholder engagement to fundamentally change the business model of a company. If a company's producing tobacco, you're not going to convince them not to sell tobacco.

Shareholder engagement is most effective where you can incrementally push a company to improve and where there is a pretty strong business case for that improvement.

And I think there are plenty of highly sustainable companies that are making tonnes of money, they've got good relationships with workers, with consumers. They're not getting fined by regulators. And shareholder engagement has a great potential to push the companies that are not there yet to be more like the leaders.

And for you, where did the investing piece start? Because that's a big part of what you're doing, but I understand the appeal of the wanting to do well for the environment, have an impact. But what about the investment piece? Were you keen on investing as well?

Yeah, so I think it was a really important part of my research, because when I compared exclusion strategies to shareholder engagement, I looked at all of the finance literature on block trades, and if a company gets excluded from the S&P 500, what happens to the share price? Because that is a natural experiment for what would happen if all of the socially responsible investors were successful in convincing a bunch of the investment universe to move out of a stock. And what I concluded of looking all of that finance literature is markets are reasonably efficient. They may not be perfectly efficient, but they are efficient enough that most divestment campaigns don't really make much difference.

And the most divested stock ever, or sector ever, is tobacco. And tobacco has done perfectly fine, even though most US and European pension funds have divested from those stock. Yes, the share price might be slightly depressed, but the cash flows are perfectly solid. It's a cash flow business and they continue as always. So that's why I looked at that. 

Now from an ESG perspective, I think there's a very strong argument that good companies from an ESG perspective, companies that look after their workers, have a good reputation, both from investors and consumers and regulators, they get the best out of their people. Their people are proud to work there. They trade at a premium. This quality associated with ESG leadership is often priced in, and these companies are successful. 

So if you're talking about how do you outperform, then arguably working with companies that are not so strong and helping them become leaders could actually also be the best way to generate alpha. 

So that was the investment aspect I was looking at.

I'm going to go to 2003 when you pitched the idea of setting up what ultimately became the UN Principles for Responsible Investing, and your mentor at the time gave you the green light after your pitch. He also agreed to a small salary. How did you feel, and what did you do next?

I mean, I was absolutely delighted. I just thought this would be a few months of internship at the UN, and then I'd come back to Sydney Uni and continue with my PhD. But what happened was the UN was looking for opportunities to engage with the finance sector on sustainability, but they hadn't really thought about the angle of mobilising pension funds, super funds, fund managers to use the power of their shareholding through shareholder engagement to push companies to improve.

So I framed it in that sense and said there's a huge potential to use the UN brand, in effect, to bring together the world's biggest pension funds to come up with a set of principles that would encourage them to leverage this latent power to push companies to improve.

So then that became a job, and I did the PRI, the Principles for Responsible Investment and the PhD at the same time over the subsequent five years. So that was a dream for a PhD student to actually get a job to really drive a project which is very closely connected to the research.

What defines an impact investment, and what hurdles does a manager or a product need to clear to make that definition? Can you get some more specifics on that?

Absolutely. So we wrote a publication called the Double Delta of Impact Investing, that is creating impact at both the company level and the investor level. So let me unpick that a bit. At the company level, does the company produce products and services that are solving a problem? Is it education? Is it healthcare? Is it renewable energy or clean tech? Is it agricultural productivity improvement?

The product itself of the company has to be fixing something in a way that is significantly beyond business as usual and very needed in society. That's what most of the conversation in the impact investing space is about. To what extent are the companies making a difference?

The second delta, is to what extent is the fund manager, the investor helping that company further grow? So, for example, if it's a venture capital fund, the investor, the VC fund will be financing that company so the company's growing faster than it would have otherwise, but it is also joining boards, it's also providing technical assistance, it's helping with follow on rounds, fundraising rounds. So those are the two deltas. One is the impact that the company has on the world, and the other is the impact, positive impact that the investor or the fund manager has on helping that company do more of what it's doing. So unpicking that.

Now, you might say aren't all investments therefore impact investments? Well, if you're talking about liquid markets, the fund manager just buys shares from somebody else over here. They're not actually injecting new capital capital. And that's really the difference.

Impact investing requires investor additionality, and investor additionality requires you injecting new capital into the company so it can grow beyond the counterfactual or shareholder engagement and activism, where you're using your power and influence to push companies to improve. And that can also be that investor impact delta.

So on the activism side, let's take a fossil fuel company, for example, can a fund manager own shares, take a big stake, look to influence the behaviour of that company, engage with the board, look to make changes to the business, and be classified an impact investment?

Potentially. So there is a very famous case of the hedge fund Engine No. 1, which just got three board members on the board of ExxonMobil, and it's secured a majority vote at the ExxonMobil AGM. So I think to the extent to which they can demonstrate that activism has actually made a difference in ExxonMobil strategy, which I believe is inevitable if you have three board members, they will be able to demonstrate significant impact. That impact, I think, absolutely would justify that fund being classified as an impact fund.

Can you tell me about the decarbonized portfolio that you talked about and some specifics around what goes into it? What are some of the examples of the investments that you're making? The more granular, the better.

We divid it up into three different strategies. The first one is decarbonizing your portfolio, which is really removing the heavier emitters. It depends on exactly your portfolio construction, but we're talking about reducing the carbon footprint. But if you go along that path, you'll end up with companies with low carbon emissions, like, say, Microsoft, or Amazon, even. They are low carbon, but does that really change the game? You'll end up with a portfolio of large cap companies who are doing a good job on carbon.

The second phase is maybe you want to invest in solutions. So wind turbine manufacturers or electric vehicle manufacturers. So, then clients tend to shift at least part of their portfolio into these sustainable thematics, which are solving the problems, but mostly in liquid markets. But then again, you're only buying the shares from somebody else. You're not injecting new money in. So while that's a more focused way of getting exposure to solutions type companies, it's not necessarily really changing the world, necessarily.

The third category is private markets. That's where you're injecting capital through venture capital, unlisted, highly green real estate, renewable energy infrastructure, anything where your capital injection is additive to the pot. And that is really impact investing. So that tends to be the decarbonizing path. You start off with your existing portfolio and just reduce your exposure to the heavy emitters. Then you include some of the thematic ones, like your clean tech funds and these things. And then you include the private market impact end of the spectrum. And of course it gets more risky and more tricky as you go along because the sustainable thematics tend to be more risky and more volatile than your large caps. And then on the venture capital end, it tends to be even more risky, and it's obviously illiquid, so your money's locked up for some time.

You've talked about your interest in those private markets and some of the venture activities. Can you share an impact investment that you've selected that you're really excited about? Something that goes to your roots and where you started, whether it's a scientist or a group that are doing something incredibly innovative that blows your mind, but maybe blows our viewers minds as well?

I'll just give you an example of a company that was invested in by one of our venture capital funds that we backed and it focuses on battery technologies but at huge scale. 

So lithium ion batteries are very high tech and they're packaged in a small package to have a big bang. Now, what we need is utility scale batteries that can take the power of a wind farm for days and weeks, and then discharge it slowly. The problem with renewables is that they are intermittent. So, the sun shines, it doesn't shine. The wind blows it, doesn't blow. We need batteries to fill that gap and then renewables compete head-to-head with any fossil fuel. And this is really what we really, really need. 

So this company out of Boston is building batteries that are size of a football field and a metre deep. They're made of non-toxic materials and they can discharge the power of an entire wind farm over a three, four day period.

It's also being made from very low cost materials, so if they can get this right... And it's been invested in also by Gates and other VC investors in Silicon Valley, if they can get this right, we can potentially reduce the cost of battery storage by 90% or 95%. Now, if we can do that, suddenly all renewals become base load. 

Anyone who's looked at this space understands the problem of intermittency, and if we can solve this problem, it is an absolute game changer, and you can imagine Australia has very good renewable resources. If we can bridge that intermittency gap, it will be a game changer for the environment and for the entire energy system.

As someone that sounds really close to, I guess, that race to solve that problem, how close do you think we are? How far along that journey of that battery storage and to solve that intermittency problem are we?

Well, the price of battery storage is coming down very fast. I can't remember the figures exactly, but we're talking like... It's come down by more than half over the last decade. So it's just a matter of continuation of the previous reductions. Solar has come down more than 90% in a decade. Wind, similar. And if we see the same for batteries... Now, batteries took a bit longer. But if we see the same for batteries over the next 10 years, then I think we'll be in really good shape. So I think within 10 years we will potentially have solved in intermittency in renewables.

Well James, thanks very much for your time. I know you've got a really busy schedule while you're here in Australia, apparently a very popular man, and I've really enjoyed our chat today, and thanks for being part of Livewire's decarbonization series.

Thank you. My pleasure.