Interview Transcript of: The Power of Investing With ESG | Peter Kellner
Alan Olsen: Can you tell us a little about your background?
Peter Kellner: I got out of college in the early 90’s with a real passion for sustainability. I went to Budapest, Hungary on a scholarship. My family is actually from Budapest and so I went back there after college and I set up what is today still the most I think influential environmental policy group in central Europe. It also works at a global level with the World Resources Institute and manifests through a passion for sustainability.
In 1995 I co-founded an organization called Endeavor which is now in 33 countries across the emerging world, but also now in the United States. It is a sustainability organization in its own right with respect to the job and wealth creation that we pursue and then my day job really since the late 90s has been venture capital – seed and early-stage – with some nice investments. I was able to maintain a family office until around 2014 when I partnered up with a dear friend of mine who had been my lawyer at K&L Gates and we started the first institutional venture fund, which is called Richmond Global Ventures. That firm invests all over the world in Indonesia, Latin America, Europe, Silicon Valley, New York, Los Angeles and we have a heavy inclination toward data science and financial services.
We’re big investors in the largest online lending company in Mexico – it’s all pure machine learning. We have a sizable investment company called Data Miner, which is a national security data science company shall we say and then there are few others. But what’s relevant to the Richmond Global Compass discussion, which I assume we’re here to talk about a little bit, is that it is a public securities investment model. it’s actually a multi asset investment model so that it’s in corporate to sovereign asset classes, including everything from equities to sovereign debt commodities and currencies. How I got to that was only because of my venture background in data science and my passion for sustainability.
Back in the early 2000’s, as I was beginning to invest in data science, I started to develop a thesis — you could use machine learning in particular to identify those key environmental, social or governance – what’s called ESG metrics- that affect financial performance. There are two forms of context here that matter. One is the state of ESG metrics – it’s terrible. They’re self-reported, they’re non-periodic, and it’s like financial securities reporting in the 1920s, honestly. So that was one issue, and there are about 3,000 of these metrics out there but only about 120 are what we call material or those that affect financial performance and then of those 120 only about 4 to 6 apply to a given asset whether it’s a corporate or sovereign asset. So, you can imagine now it’s like finding a needle in a haystack and that’s where the machine learning comes into play in identifying those specific alpha driving ESG metrics.
The second thing I looked at in terms of my due diligence is the disequilibrium that exists in the world. If you’re concerned about sustainability and you believe capital markets are a driver to solve for global challenges as I do, the fact that 95% of investing and sustainability is in the private sector and this is great, but it’s venture capital private equity project finance. I have great respect for folks in that area and actually invested a bit in that area, some of that is called impact, which is very different from what we do. Impact is an asset class. What we do is a methodology. So that space is 95 percent of the sustainability investing, but it’s less than a trillion annually in turnover. Now if you look at the global capital market turnover it’s $180 trillion, maybe $200 trillion. It’s four percent penetrated by public securities investors. There is massive disequilibrium if you’re thinking about how we drive change in warding off or pushing back climate change shall we say. I saw that disequilibrium and I thought that’s a great opportunity.
I was fortunate enough to meet – because I’m not a portfolio manager for a public securities fund – my partner at Compass who has a great background at 3G Capital and their macro investing space and also at Goldman Sachs and a fund in Brazil called The Verde Fund which very few people have heard about, but it’s had I think 27 percent net returns for the last 20 years. My partner was the right hand to the founder of that firm, Luis Stuhlberger, so we were able to get together and design this model. It is the first-ever global multi-asset firm that integrates material performance affecting material ESG factors and what has been proven out is that if you use a materiality lens, you can call those specific ESG metrics, you can actually drive significant alpha. In fact, one of our advisory board members, George Serafeim, a part of the Harvard Business School, published a sort of seminal paper on this which was just looking at corporate assets and proved out statistically that you can drive more than 6.02 percent in creative alpha if you’re using these ESG metrics.
I thought to myself, well what if we could pursue this in the multi asset space – not just corporate – because if we could open this up to all asset classes in the public markets, wow, that would be gigantic – not just financially but it could be a real catalyst for change. I did an independent study and what I what I was able to do working with a very prominent data science company is prove out, at least for me, that you could identify material ESG metrics across all asset classes, not just corporate, which was a pretty stunning discovery for me because there was a massive business model embedded in that if you think about the disequilibrium or opportunity that I just described in terms of the size of global capital markets and penetration by global securities investment firms.
I partnered up with my partner in the hedge fund and we spent about a year getting things organized and built an institutional grade platform really focused on building our machine learning platform out. We did not want to go into the market with hypotheticals and so we got that built so it was robust enough to start and is still being built every day. We’re never going to stop building our machine learning platform. We’re learning every day. We launched in June 2017 and we’ve invested literally from Africa to Asia, US, Europe, Latin America – again across all equities including sovereign debt, currencies, commodities, what-have-you, and we’re able to apply the material ESG metrics to a number of those asset classes and we’ve generated I believe some alpha from that.
Since 2017 June, we are up almost 19% net of all fees and this year alone almost 8% net of all fees and in October which was a devastating rout for others, we were up about 1.3 percent and in this month, which is another devastating rout, we’re up almost 1%. I think we have a model here and if I could just put sort of a ribbon around it, I’d say what we have discovered is there is an ability – there’s a huge potential – to integrate material ESG metrics into your multi-asset analysis – financial analysis, – so it’s just one more factor in a multi-factor analysis. We’re not talking about impact investing, which again I highly regard. It’s a separate thing. It’s an asset class. We’re talking about information that drives performance so if you’re not looking at this information, you’re probably not being a fiduciary. By the way, it helps generate superior return, so it’s it feels really good. You’re out there every day incorporating these metrics that contribute to planetary sustainability to drive a superior return which is what I really like about this model and I’m hoping that we can help spread that gospel and encourage other fund managers to get into the space because at 4% of a $180 trillion dollar industry annually, we have to really move and then given especially the fact that we’re going to be entering at 1.5 degrees Celsius world in less than 17 years, according to that UN report out about five weeks ago. I am very excited about it and our excellent team, our entire team, is accredited in sustainability. It’s not like we have some environmental folks here and the traders here, they’re one and the same. We call them green alpha and we’re about a year and eighteen months into it and very excited. I’m excited about what we’re doing.
Alan Olsen: When you’re looking at diversification across global asset class what’s the process that you use to see where trading opportunities are and how you approach it?
Peter Kellner: There’s nothing novel about this until we get to the idiosyncratic level and I’ll explain what I mean. We begin with a classic macro view of the world. We look at the big blocks like China, Japan, Europe, the US and we try to figure out what the interest rates are telling us and that’s mostly what the US is doing. Everybody responds to the Fed. Once we figured that out, we’re starting to determine what kind of cycle we’re in. We start to look at different regions and countries so the interest rates and the monetary policy that we’ve been looking at – very traditional macro – is now informing us as to where we should be looking.
Once we figure out which countries and sectors we should be looking at, that’s where we start to apply the ESG materiality. Again, we’ve developed that whole process through machine learning. We’re now able to choose corporate equities or sovereign opportunities where we’re applying the ESG. It’s a very traditional top-down macro approach first, no bells and whistles, but once we get to the point where we’ve figured out where we want to invest and in what particular assets, that’s where the ESG comes into play and that’s where we’re really looking across assets.
So as by way of example, we had a great company, a Danish company called Oersted, which was a form of fossil fuels company and we really liked what they did. They transformed themselves into an offshore wind company and we looked at them using all the material metrics we could derive and recognized that they were on a very exponential growth curve and so they are now the largest offshore wind company I believe in the North Sea, a major one in Taiwan, which has huge offshore wind energy consumption and working on some RFPs in the United States right now and so that was a very good example of a corporate equity. When we think about sovereigns, for example let’s say we just want to look at pairs, so let’s say we’re looking at Egypt and Turkey. Now neither country is run by a particularly democratic leader, but el-Sisi in Egypt is doing different things than Erdoğan is doing. So, do you look at these countries – Erdoğan is packing the government with his family. He’s very nepotistic. Women are not allowed into the workforce and there’s massive corruption all around. I’m not saying there’s not in Egypt, but the central bank is under his control as is the judiciary which is basically neutered. Now you look at Egypt where you have a reluctant Democratic leader el-Sisi, but at least in el-Sisi’s case he’s made a commitment where he is moving women into the labor force, which has by the way a tremendous impact on productivity, which by the way lowers your interest rates. And look at Turkey, its interest rates are skyrocketing so he’s also doing things with children’s education and he’s leading the Central Bank independent. And by the way Egypt’s Central Bank is probably one of the best in the world – amazing Oxford trained economist – very good and the judiciary is kind of so bureaucratic that he can’t really make them do anything so in that case we found a really interesting short-term yield that we had on for a long time that’s been a very good investment for us, but we discerned that opportunity by looking at ESG metrics in a pair trade kind of context if you will. And also looking at the region which if you look at MENA, Middle East, North Africa, Egypt is probably one of the better countries to be looking at versus others.
Alan Olsen: What timing considerations should investors be aware of when considering investing in ESG?
Peter Kellner: The question is when you’re using ESG as a factor – a multi-factor investment model – because we’re not really investing in ESG, right. That’s like impact investing. You’re investing for impact. We’re investing for return using ESG. The horizon for us is about three to five years because you need that. For example, in the equity space we don’t purchase Unilever and Scandinavian bonds – anybody can go out and do that. We’re looking for aspiring companies who have better governance, better community, impact, better environmental impact, better supply chain, cleaner supply, chain cleaner and carbon footprints etc. When you look at that you really can’t churn out of your portfolio a lot and so we have very little to churn in our portfolio. We have to pivot because of certain situations. If you look at January of last year, December 2017 into January there’s a massive run up in the market. We got very uncomfortable, so we put in risk stops. We have great risk management in our team and we basically pulled 80% our profits off the table and our principal, let 20% run and then in February you had this massive implosion. We were able to preserve our P&L profit and loss statement and I think had almost a five percent month when everybody was done which is very significantly excellent.
Alan Olsen: For more information on becoming more involved with Richmond Global Compass, how would a person go about that?
Peter Kellner: We have a website RGcompass.com and there there’s an investor relations link and we’re very good at responding. If folks want to get on our distribution and receive our updates that’s where they should go, and or they can reach out simply directly to us.
Edited for Concision and Clarity
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This transcript was generated by software and may not accurately reflect exactly what was said.
Alan Olsen, is the Host of the American Dreams Show and the Managing Partner of GROCO.com. GROCO is a premier family office and tax advisory firm located in the San Francisco Bay area serving clients all over the world.
