Interview with Robert Rubinstein

In trying to get the business community to participate in an economy which takes into account people and the environment, not just profit, Robert Rubinstein, founder of  TBLI (Triple Bottom Line Investing), doesn’t put his faith in the sector’s idealism but in investors’ greed and the ability to inflict ‘excruciating pain’ on business. He explains to Caroline Hartnell how and why this works. He is optimistic about more money flowing into impact investing, as defined by TBLI, but not that hopeful that it will be in time for climate change mitigation. ‘Get your wellies out,’ he advises.

You founded TBLI in 1998. What did you hope to achieve?
I wanted to create an economy based on well-being by engaging with the business sector. I realized that to do that, the business sector has to buy into it, and they will only buy into it if they feel excruciating pain. I concluded they had three pain buttons: finance, personnel and reputation.

First, I looked at personnel. I tried teaching MBA students about sustainable finance, but most of the students were only worried about defaulting on their student loans. They didn’t follow their hearts and went to work for companies that didn’t share their values.

So then I looked at finance. I decided to focus on the financial sector. I worked out that the top hundred or so owners or managers in 1998 had direct or indirect control of 30-40 per cent of the money. So I hit on the idea of trying to convince those hundred CIOs [chief investment officers] through a conference. It sounds rather naive but it does work: if you show the financial sector over and over again the self-interest, opportunity and money flows in sustainable business, it’s not hard to change behaviour.

The hard part is access. I call it the Shawshank Redemption approach – that’s the prison movie where, after 15 years of chipping away at a wall, the guy broke through but no one knew about it. That’s what this work is, it’s chipping away over and over again, there’s no big ribbon-cutting ceremony. We’ve seen massive money flows and very large deals done at the TBLI Conference, so I know we’ve had an influence on the behaviour of the financial sector, and now I would like to scale up dramatically.

So what is the pain that you’re making them feel?
If people don’t want to invest in you or work for you because of your lack of interest in sustainability, which is what happened to Shell in Nigeria and over Brent Spar, it’s a very painful thing. Look at Dow Chemical, which is now seen as the superstar sustainable chemical company. What were its best-known products in the sixties? Napalm, Agent Orange, defoliants. How did they get from there to here – because during the Vietnam War many students didn’t want to work for them, and if you’re a big company and the best and the brightest don’t want to work for you, you have a problem. We’re focusing on the financial sector, showing them that it’s in their interest to look at what they call extra-financial issues: climate change, waste, energy, resource use, human resources management. All of these things ultimately produce better returns with a reduced risk, and if you ask anybody – even cocaine traffickers, criminals – do you want a financial return with a social and environmental added value, it’s pretty hard to find somebody who says no.

But you cannot push the moral imperative to someone who has a target if the two things are in conflict. You have to show that their self-interest aligns with the social and environmental added value. If the financial sector sees money flows going in a certain direction, they’re likely to follow.

I remember when I started, people would ask for research to show that ESG [environmental, social, governance] investing doesn’t underperform and that, at its best, it can outperform. So I stupidly sent out hundreds and hundreds of research papers before I had my ‘aha’ moment: I realized that it wasn’t about proof, it was about belief. How many investors read the research on the risk associated with sub-prime collateralized debt obligations that created the financial meltdowns? Almost nobody. How much money went into it? Everything, because people believed that this was the new way of endlessly making money.

Since the financial meltdown, are you finding finance companies more willing to listen?
Yes, but not as much as I’d like them to.

And to act as well as listen?
That’s phase two. It takes time to get them to see how their self-interest can be served because they have a limited supply of information. They read the Financial Times or the Wall Street Journal; they hang out with people who think like them; so it’s very hard getting information through. These are large institutions that are often anti-creative and, because of the crisis, very afraid of their asset owner clients leaving. All the research says that 90 per cent of next gen, high net worth individuals are planning to move their money away from their present wealth manager, which makes the wealth managers very afraid to make changes.

It takes a long time to plant the seeds. How long have the pension funds been talking about ESG? Since I’ve been doing TBLI. And have they really moved much money into sustainable investments or have they just ticked boxes? Imagine trying to get your teenaged son to clean his room, then multiply that by a factor of a billion, and you understand trying to get a Goldman Sachs or JP Morgan or HSBC to completely change their model. But I think it might be easier with other asset owners, particularly family offices.  I think they can move much faster than the large pension funds, and that creates money flows.

And I do think we are coming to the tipping point. We’ve been chipping away for a long time and the tone of the conversation is different. People will start to see the self-interest. China’s growth of 6–8 per cent means it will reach US consumption levels of oil in 25 years. The predictions are that China will need 50-60 million barrels a day at this level of growth and inefficient use of oil. Add the other commodities – rice, wheat, wood, iron ore – and then add India and the other 3 billion in emerging markets, and us, and you see this linear growth cannot continue with this level of inefficient use of resources. So the real investment opportunity will be resource efficiency on a massive scale. Continuing to fuel economic growth without CO2 growth and without running out of materials – these are the macro drivers, and people will start to get it.

A large part of the Alliance audience, and another group that ought to be willing to make these changes in investing practice, is endowed foundations. Do you see signs that they are moving?
Yes, but they need to be beaten up a lot more. Most people believe foundations invest their endowments in line with their mission whereas mostly they don’t. And the ones who are doing the most are talking the least and vice versa, and nobody is questioning what people are saying, not the media, and certainly not the other players in the market. If you google impact investing and Rockefeller Foundation or Ford, for instance, you’d get the idea that they’re doing incredible stuff but if you actually see how much of the endowment is invested for mission, it’s nothing.

So we’re working on an exposé of how much foundations have and what they invest in. I’m not interested in what foundations do with their 5 per cent payout requirement, I’m interested in where the 100 per cent is going, because that’s how you really create this economy of well-being. We have to keep chipping away to get that story out.

And on top of that they are asking taxpayers to subsidize them. Why should they?

On your website you distinguish between ESG investing and impact investing. Could you clarify what the difference is?
For us at TBLI it’s very simple: ESG investing means liquid investments – stocks and bonds, listed companies, fixed income, things you can get in and out of easily and quickly. And then impact investing means illiquid investments – it could be microfinance; it could be private equity or venture capital: it could be investments in real estate or public transport infrastructure. So for us impact investment means illiquid investment that has a social and environmental added value. Others will disagree, but when I explain it like this to the BlackRocks of the world, they get it.

And if investments are illiquid, that means they are riskier?
Sure, which is why you want a higher return. In ESG, where people are investing liquid assets in the so-called best of class of company, some investors want an improved return, but they also want to contribute towards a more balanced economy. Maybe these companies will perform better, and maybe they will show sustainable performance.

But it’s often easier with some of the illiquid assets to show the performance, particularly real estate and public transport infrastructure. The minute you build a building that has lower energy or water use than the one across the street, the payout is clear. So these are also less volatile investments; they’re not correlated to the stock market – which is why people are gravitating more towards impact investing.

Still, most of the world, foundations included, invests in stocks and bonds. The average portfolio is still 80-90 per cent or often more in liquid assets with a small percentage of illiquid assets.

Are foundations and pension funds going for ESG best of class or are they doing straightforward, traditional investing?
It depends on the individual organization; some are taking this seriously. I remember in the Netherlands, there was a TV documentary showing that the pension funds were investing in cluster bomb manufacture, which horrified everyone, and in two years the amount of money invested in ESG went from $46 billion to $480 billion. You cannot move that amount of money that quickly if you’re doing it properly. What they did was eliminate cluster bomb manufacturers from their portfolio and say they had integrated ESG into their investments. That is a joke. The total market cap of listed cluster bomb manufacturers is nearly nothing.  If you want to be serious, you have to consider not only best of class but future best of class. In general the money flows are going to look at all these extra-financial issues, but it would happen much faster if things like carbon had a real cost.

Carbon Tracker is fantastic in showing that the energy companies are 40 per cent overvalued because they won’t be able to take the fossil fuels they own out of the ground if we want to stay under two degrees of warming, but they’ve put it all on their balance sheets anyhow. So for investors it’s a question of doing the maths and starting to understand the risk.

What would speed up the process would be if policymakers started making products reflect their true cost. In the Netherlands, the VAT on a bicycle is 21 per cent; on a plane ticket, it’s zero. Again, petrol is expensive mainly because of excise taxes on gasoline. There are no excise taxes on kerosene, which is the jet aviation fuel, so we’re sponsoring the airline industry massively. People argue that if you start charging VAT on airline tickets, it’s going to affect a lot of jobs – well, so do sales taxes. Instead of having labour so heavily taxed, let’s have resources heavily taxed. The business sector will adapt to resources costing more, to CO2 costing more, as long as they’re given time. In all these years since Kyoto, we still don’t have prices reflecting the true costs of carbon.

Do you see any movement towards disinvestment from fossil fuel companies?
It’s beginning. When a dam breaks it doesn’t start immediately pouring through, it just trickles through, and we’re starting to see this. We’re starting to see more and more asset owners taking this seriously. And as this happens, it will speed up because it will attract more money flows.

As you said earlier, a lot of people are talking about impact investing but not doing it, but there’s also a huge amount of hype. Do you think the potential justifies the hype?
Definitely, if you’re willing to accept what we consider impact investing – green real estate, public transport infrastructure, etc. London borrowed £15 billion to renovate the Underground for the Olympics. These are big investments and they are all low-carbon. But if you’re talking about poverty alleviation, what the DFIs [development finance institutions] have been doing for 50 years, that’s much smaller and a lot of it is talk. I’m more interested in financing the retrofit of the Empire State Building for $520 million.

So investing in promising social enterprises even if they’re packaged up together wouldn’t be what you’re including in impact investing?
It is, but it’s a small portion and it’s not where the emphasis should be. What would be the impact on the market if BlackRock started to move the trillions? We have very big issues that we need to address and we can’t do it scratching at a safe with a plastic spoon. We need some really massive money flows.

Sahara Forest ProjectTake the Sahara Forest Project, a fantastic project addressing climate change, food security, jobs, water, energy, in one go, a $10 million pilot project and now going to scale. This is a really exciting project, but it doesn’t get much attention. What do we have too much of? We have too much salt water, too much CO2. So let’s use them as a feedstock for creating food, jobs, energy, biomass, CO2 offset and jobs. Brilliant and full profit.

You’ve just set up a charitable vehicle in the Netherlands and you’re going to be setting them up in the US, the UK and Hong Kong as well. What will you use the donations for?
We’re going to scale up our educational outreach activities. That’s what’s missing to really scale up impact investing. We’re partnering with the world’s leading business schools to host events for their asset owner alumni. We’re planning to quadruple the number of events with business schools. It will allow us to do much more research and disseminate much more of it. We want to develop a range of educational tools with the business schools to teach students about ESG and impact investing.

We also want to capture and publicize the impact of our work. A few years ago, we were asked to introduce a microfinance bond package to a Japanese mega bank. We did that. I didn’t hear anything more about it until, a year later, I read in a newspaper that the bank had given the bond package $250 million. We’ve not had the capacity to capture the value of what we do and what deals have come out of it.

Are you optimistic that the tipping point will be reached before it’s too late for the world?
No. I think we’ve run out of runway to mitigate climate change. My friend who’s doing the Sahara Forest Project disagrees with me. He thinks we can turn this around, we can scale up the Sahara Forest Project to millions of hectares on a massive scale. I hope it’s true but I just don’t see the political leadership to take the tough decisions. Should the floods in the UK be ten times worse before serious discussions? We won’t kill the planet but we might hurt ourselves significantly, and maybe the pain has to be much worse before people start to see it.

Cookham Moor, UK, 2014I am very optimistic about money flows going into impact investing, but is it large enough and fast enough to create a mitigation policy? I’m quite doubtful. I remember speaking at the Netherlands Ministry of Environment, and they were talking around and around about the problem and I just lost my temper and said, ‘There’s a fire. Grab the bucket, pour water on it! Stop studying it to death!’ (Image credit Marc Berry Reid)

What I find very encouraging is that even in the US people are starting to talk very differently about climate change because they see the cost of not dealing with it. And something I would never have thought possible is that in the US you can’t get a coal-fired power plant built, which was unheard of five years ago. As soon as China sees the mass pain of environment degradation is so bad that people can’t live with it, then maybe they’ll change direction. But CO2 stays in the atmosphere for a long time. Will somebody find the technology to suck it out of the atmosphere as fast as they’re putting it in there?

Some things are obvious but they still take a long time to see. Why don’t we just push renewables off the chart and create many more jobs? Opening up an oil pipeline doesn’t even create that many jobs. Why should airline tickets be zero VAT? The obvious is so obvious that it’s ridiculous that we’re even having a discussion about it.

I’m optimistic about the money going to these things, but we’ve got to move a hell of a lot faster. The Sahara Forest Project gives me great call for optimism. I think it’s absolutely brilliant, because it’s very easy to comprehend and the saleability is amazing. But I don’t really believe it’ll be enough in time – so get the wellies out!

Robert Rubinstein is founder of TBLI.


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