IMPACTING THROUGH SUSTAINABLE INVESTMENT

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MIT-trained scientist Dr. Indranil Ghosh, Founder and CEO of Tiger Hill Capital discusses ESG and explains how to create impact through investment with his expertise as a sustainable investor, author and strategic advisor to global leaders.

 

Tell us about your academic training and professional experience?

I hold a PhD in Chemical Engineering from MIT and an MA in Natural Sciences from Cambridge University. I am the CEO and founder of Tiger Hill Capital which partners with visionary leaders to build investment platforms and businesses with a societal impact mission. Previously I was the Head of Strategy at Mubadala (Abu Dhabi’s Sovereign Investment and Development Fund) and have held senior roles at Bridgewater Associates and McKinsey & Co.

Tell us about your journey that shaped your career path as a sustainability expert?

I have a multicultural heritage and have lived around the world which helps me to see the world from multiple perspectives: developed vs. emerging markets; rich vs. poor; multiple ethnicities and cultures. I was born in Calcutta and moved to the U.K. when I was 3 years old. My father worked at the U.K.’s NHS for 30 years so I had a very British upbringing, but I always maintained strong ties to my Indian subcontinent roots. During the first 15 years of my career, I was based in the U.S. and worked in Europe, Japan, India, and Australia. In the past decade, I worked across the Middle East in Abu Dhabi, Dubai, Saudi and Kuwait, before finally returning to London.

From these diverse experiences, I learned that every economy is a developing economy. In my younger days, my father worked in many public hospitals in working class neighborhoods across Northern England. Many people in these towns lived in desperate poverty — for many of the children I went to school with, the only hot meal of the day was the school lunch. Following the death of George Floyd, the world has come to learn of the incredible racial inequality that is still prevalent in America. Even the richest countries in the world have big development challenges.
Sustainable development is a universal issue that needs to be addressed by careful economic development and investment strategies.

What is the global scenario regarding ESG currently?

We are at an early stage of people truly taking environmental, social, and governance (ESG) seriously. Most companies seeking ESG capital are still at the ‘greenwashing’ stage. The biggest problem is that there is not a single defined way to measure, monitor, and report on ESG outcomes and there is little regulation to enforce ESG practices. We are still in a state of volunteerism.
The main driving force behind ESG is actually social pressure. Millennials are really into ESG with older demographics also getting engaged. Asset managers have realized that they need to offer ESG products to get a piece of the growing amount of capital seeking ESG outcomes. And corporations are ‘greenwashing’ themselves to attract investment from these ESG funds. Without regulation and oversight, most of the industry is sadly falling short of delivering the outcomes that investors are seeking.

Another problem with ESG investing today is that 95% of the trillions of dollars of capital that have flowed into ESG has gone to large-cap Fortune 500 companies, but very little has flowed into private companies, smaller companies (where a lot of the job creation and innovation happens), and green infrastructure—all of which are essential for achieving development goals. There is a capital flow problem as ESG capital is not going into the right sectors of the economy.

What is the future of ESG worldwide especially in developing countries in 10 years?

We must talk about developed countries first where regulatory changes are beginning to happen. Measurement, reporting and disclosure will need to be regulated. This will happen in the E.U. over the next few years. First, regulations will be implemented requiring asset managers to understand what the ESG goals of their investors are. Second, the E.U. taxonomy is being refined to define what an ESG-compliant investment is. ESG asset managers will have to ensure their investments meet the E.U. taxonomy to qualify as sustainable investments. They will also have to report to investors how their ESG goals are being met. Third, stress tests associated with exposure to climate change will be applied to loan and insurance portfolios to see how vulnerable they are to climate change. Across the board, measures are being implemented to increase the cost of capital for unsustainable environmental and business practices.

Emerging markets will eventually have to adopt these types of practices as well. Investors will want global portfolios with harmonized investment standards. If they invest in Asia and Africa, they will want the same confidence in ESG outcome as U.S. or Europe. As a result, companies will be under pressure to be green and have better labor practices. Trade barriers will be raised against countries which are seen to be competing unfairly by prolonging dirty carbon-intensive production and poor labor practices.

What impact does sustainable finance and investment play in the growth of developing nations?

When analyzing developing nations, I think you need to start by looking at population. The population in many developing countries like Bangladesh is still growing quite fast. If you can educate this bulging youth and make them productive in high-value industries, you get a huge ‘demographic dividend’. If you are unable to harness this young labor pool, you get a demographic drag—disaffected youth that leads to instability like we saw in the Arab spring.

But if you do capture the demographic dividend, you must be vigilant to the rising cost of living that can lead to plunging birth rates as we’ve seen in developed countries. As people become clustered in cities, the cost of housing, education, health, and amenities goes up. And even people with good jobs can’t afford to have more than 1.5 kids.
Infrastructure and women’s empowerment is key to solving the problem of aging populations once the workforce gets richer.

Digital infrastructure is particularly important because it lets people get access to education, healthcare, and work remotely. If people can live further from city centers, it creates less congestion in urban areas and places less strain on housing as well as the energy and transportation systems. Meanwhile the cost and pollution of energy and transport can be reduced by investments in renewable energy and electrified transportation. Urbanization is very important in developing countries because it allows people to get access to more services, amenities, and work opportunities. But if urbanization can be distributed in more numerous smaller cities which are less congested and more affordable, it’s more likely that birth rates will not plunge as emerging countries become wealthier.

The other key factor to preventing a plunge in birth rates as the countries get richer is to enact women-friendly policies. We need to stop asking women to do the impossible: work as hard as men; come home and do housework; take only a few weeks off after a birth; and still get paid less than men. Prosperity is all about healthy families and work-life balance. In this regard, I’m very supportive of the Biden administration’s recent policies to support working families by making it easier for women (and men) to work while getting support to raise families in the form of subsidized childcare and generous amounts of paid maternity/paternity leave etc.

Which sectors are sustainable investment funds mainly being allocated to currently?

Sustainable real estate, energy efficient housing, renewable energy, transportation, and digital connectivity.

Where should the investments be focused on?

We should focus more on

(i) improving the electrical grid,
(ii) on decarbonizing dirty sectors like agriculture, steel, fertilizers, and waste management, and
(iii) on making the ‘basics’ more affordable.

As we increase the amount of renewable power generation, the electrical grid will need a massive overhaul. Solar arrays and wind farms are far from the big cities where people live. And the sun doesn’t always shine and the wind doesn’t always blow when there is peak demand for energy. We need a lot of grid upgrades to store energy until it is needed, and to connect the places where energy is generated to the places where it is consumed.

For example, indoor farming is another revolution waiting to happen. Bushy fruits, leafy greens, herbs mushrooms can all be grown indoors 24x7x365 in controlled growing environments. We can grow strawberries in December and power these ‘vertical farms’ with solar energy and bioenergy from treating manure etc.

There is also not enough investment in waste. By 2023, countries like Scotland will end landfill and stop the import or export of waste — measures that many other countries will soon follow. As a result, huge new industries will boom in converting waste to energy, or to clean transportation fuels, or to biodegradable plastic. The technology to do this exists and there is plenty of capital to make projects like this go ahead.

The basics in life have become way too expensive in most countries. The real cost of housing, education, and healthcare have increased 2x to 4x in most economies since 1990. In some emerging countries it’s even higher. It’s time that we infuse technology into these sectors to increase productivity – the same way we’ve used technology to drive down the real cost of material goods like cars and electronics.

For example, education is a sector that is ripe for change. Instead of going to an expensive 3 or 4 year college to absorb theoretical knowledge, rack up debt, and still not be very employable, isn’t it better to do work-study programs through a combination of e-learning/some campus activities/practical internships. You could easily become qualified for a good job in 1-2 years in this manner. It’s high time we overcame ingrained social attitudes and started using technology to reduce the cost of education (and healthcare) to make it more affordable and accessible.

What are the main pillars to attain a more sustainable world, especially from the private sector perspective?

In 1970 Milton Freedman said the only objective of a firm is to create profit for its shareholders. What the ESG movement is basically saying is that people believe that it’s important that corporations address the needs of all stakeholders – not just shareholders. Companies need to focus on employees, by offering work life flexibility, maternity and paternity leave, and ensuring their workers are healthy. Gender pay equality, proportionate racial and gender representation on boards and senior management is vital. Old school managers may say it harms bottom line – but promoting preventative healthcare and making workplaces more women-friendly and family-friendly increases worker productivity and retention.

What role does ESG investments play in attaining the UN SDGs?

I think if ESG steers us to fight climate change and be more inclusive, it will have achieved most of the UN SDGs. As investors and consumers, we can make a big difference by buying from and investing in the companies that really promote these two key principles.

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