We recently hosted a video call to share our latest thinking about the markets globally and to take questions from our audience. Moderated by Chief Investment Officer Craig Metrick, the team shared our outlook for equities (Michael Geraghty), fixed income (Shahnawaz Malik) and alternatives (Jennifer Leonard).
We also had the pleasure of welcoming Larry Hatheway for this call. Larry is co-founder of Jackson Hole Economics, an ‘action tank’ designed to “provide context for the world we inhabit.” Prior to this new initiative, Larry was Group Chief Economist and Global Head of Investment Solutions at GAM Investments from 2015-19. This position followed more than 20 years at UBS Investment Bank serving in roles such as Chief Economist, Head of Global Asset Allocation, and Global Head of Fixed Income and Currency Strategy.
Larry’s macro backdrop set the scene for our dialogue, focusing on the impact of the pandemic-driven economic downturn on GDP both domestically and abroad, the hurdles to overcome in a recovery, and the longer-term risk posed by mounting debt.
Read our Quarterly Update and Outlook here.
We are pleased to present this replay of our recent panel discussion with leaders in the LGBTQ movement for equality — access the event replay above. Our panel addressed:
- The history of organizing in the LGBTQ movement and what kind of action has led to change, bringing us up to the current moment.
- The recent Supreme Court decision barring employment discrimination on the basis of sexual orientation and gender identity, and how companies will have to implement changes to policies and corporate cultures.
- The role of politics, education and advocacy in creating accountability.
- The role of impact investors in helping to ensure that LGBTQ equality is actualized in a corporate environment, including the role of investors.
Here are some links you may find useful in further exploring the issues raised in our discussion:
Relevant Cornerstone Research in chronological order (we are pleased to announce the imminent publication of an update to Investing to Advance Racial Equity.)
Systemic risks to financial institutions can lead to serious negative consequences for the economy. Climate change, like the COVID-19 crisis, is indisputably a systemic risk.
Cornerstone’s CEO, Erika Karp, recently hosted a panel discussion on Ceres‘ new report titled Addressing Climate as a Systemic Risk: A Call to Action for U.S. Financial Regulators. Erika was joined by Steven Rothstein, Managing Director of Ceres’ Accelerator for Sustainable Capital Markets, which issued the report, and Ibrahim al-Husseini, Founder and Managing Partner of FullCycle, an investment firm focused on climate solutions. (Ibrahim is also a member of Cornerstone’s Board of Directors.)
In the report authors’ words:
While policymakers at the federal, state and global levels need to take the lead in tackling the climate crisis, U.S. financial regulators themselves have critical roles to play in keeping a now-weakened economy resilient in the face of ongoing and future climate shocks. Rather than standing back, they should seize the opportunity in this moment of potential economic transformation to join global peers and develop a playbook for climate action. With global emissions and average temperatures still rising, watching and waiting are no longer responsible options, and will in fact guarantee the worst. And, unlike in the possible resolution to the COVID-19 pandemic, there will never be vaccines developed to protect against climate risk. But the good news is: we already have all the tools and knowledge in the financial markets to take sound preventative action.
Climate change presents risks to both the future and today — unless regulators act boldly, now.
We recently held a video panel discussion with experts in the field of education and educational technology, to further explore the topic we first raised in our report Investing in the Future of Work. The Cornerstone team was joined by:
- Susan Cates: Susan is a partner at Leeds Equity Partners. Susan has over 25 years of experience in investment banking, private equity and education leadership. Prior to joining Leeds Equity, Susan was Chief Operating Officer at 2U, Inc., an educational technology company that contracts with universities to offer online degree programs, where she oversaw all product and service delivery operations.
- Sam Caucci: Sam is the CEO and Founder of 1HUDDLE, a workforce training platform using game technology to help organizations better prepare their people for work. 1HUDDLE has impacted people across organizations in a wide array of sectors. Applying an innovative approach to preparing people for the workforce, Sam oversaw the creation of the training game platform, the first game-based platform that transforms the way organizations onboard, train and develop their team members.
- Josh Cohen: Josh is the Founder of City Light, an early-stage investment firm committed to tackling education for underserved communities, the global climate crises, and keeping families safe. Before founding City Light, Josh led direct investments for a family office, worked in venture capital, was a partner in a private debt fund, and was the Director of Business Development for Mobility Electronics. Josh co-founded (and is a Board member of) The ImPact, a member network whose mission is to inspire families to make impact investments more effectively.
The discussion centered on the need for ongoing, lifelong learning, and the different forms that may need to take in order to better enable the workforce of tomorrow (and today, in fact) to better adapt as technology changes and new skills become key to success.
Cornerstone recently held the third in our series of calls to discuss the effect of the coronavirus pandemic on the markets, the economy and impact investing. CEO Erika Karp and CIO Craig Metrick answered questions posed by Alison Smith, Managing Director, Relationship Management, on behalf of the audience. The discussion focused on the need for innovation in business models as we seek to restart economic activity.
Recently, CEO Erika Karp moderated a panel discussion on behalf of the Jewish Federation of North America (JFNA), an organization that brings together Jewish foundations and non-profit organizations in support of shared goals and values. The panel focused on how foundations can incorporate mission-aligned investing in the endowment portfolios as well as through Program Related Investments. Suzanne Barton Grant from JFNA framed the discussion with an audience poll that revealed that a lack of knowledge among investment committees is a key barrier to adopting mission-aligned practices.
Erika spoke with Joel Wittenberg of the W.K. Kellogg Foundation and Ned Rosenman of Blackrock. They explore the variety of forms mission-aligned investments can take, the intersectionality of issues that can multiply impact, and the challenges of measuring impact.
On May 5th, Cornerstone Capital hosted a webinar about Covid-19 and its disproportionate impact on some communities. Race, income, ZIP Code – all are factors that influence one’s chances of making it through the crisis personally and financially. In New York City, black and Hispanic/Latinx residents are twice as likely as white residents to die from the disease caused by the novel coronavirus. This fact is directly related to the lack of economic opportunity in some communities, especially communities of color anywhere in the US, as well as other structural issues including who has access to investment capital.
How can investors address the inequitable impact of COVID-19?
Katherine Pease, Managing Director, Head of Impact Investing at Cornerstone moderated our call with three investors and entrepreneurs with expertise in venture capital and investing for impact for women, communities of color and social justice:
NATHALIE MOLINA NIÑO is an entrepreneur, an investor (at O cubed) and tech globalization veteran focused on high-growth businesses that benefit women and the planet. She is the author of LEAPFROG, The New Revolution for Women Entrepreneurs (Penguin Random House, Tarcher Perigee) and serves as a Venture Partner at Connectivity Capital Partners. Molina Niño launched her first tech startup at the age of twenty and is the co-founder of Entrepreneurs@Athena at the Athena Center for Leadership Studies of Barnard College at Columbia University.
PRIYA PARRISH is the Managing Partner of Private Equity at Impact Engine. Prior to joining Impact Engine, she served as Chief Investment Officer at Schwartz Capital Group, a single-family office investing across global markets. Priya currently serves as Adjunct Assistant Professor of Strategy and Impact Investor in Residence at the University of Chicago Booth School of Business.
MORGAN SIMON is co-founder of Candide Group. She has close to two decades of experience making finance a tool for social justice. Morgan has influenced over $150B in investments and is a regularly sought out expert on impact investing. Her first book, Real Impact: The New Economics of Social Change, has been featured widely. Prior to Candide Group, Morgan was the founding CEO of Toniic, a global impact investment network.
The link between health and the economy
Nathalie began the webinar by noting that the existential danger facing black and brown businesses is directly correlated to their communities’ economy and health. She noted that banks have a long history of rejecting people of color for loans. They are often asked for more qualifying material compared to white borrowers. If loans are received, they are typically issued at higher interest rates that whites obtain. As a result, Nathalie was not surprised that $559 billion in PPP (paycheck protection program) loan money which was deployed through banks went to borrowers with whom the banks already had existing relationships vs. black and brown business owners. As a further barrier, the program excluded people with prison records, which disproportionately impacts entrepreneurs of color.
Morgan noted that $30 billion of the PPP has been designated to be disseminated through Community Development Financial Institutions (CDFIs) and smaller community banks (under $10 billion in asset size). She is angry that this relatively small amount is dwarfed by the $500 billion-plus being targeted at large companies, including $17 billion to Boeing. She believes that this policy failure should be addressed by investors and noted that her organization, Candide, publicly makes political contributions to advocate for broader access to capital for all. Candide has 75 women-owned companies in its portfolio, of which 18 successfully applied and were approved for PPP, in part because they had investors that advocated for them. Candide leveraged its financial connections to help business owners, including some who are not in their portfolio, to gain access to funds.
Priya voiced a somewhat optimistic outlook on the economy. She noted that PPP is not an economic stimulus plan per se but rather a relief package. She sees a long road ahead with actual fiscal stimulus and investor tax incentives. She expects a larger amount of capital to be deployed going forward.
Access to capital a challenge to black and brown communities
But with regards to access to capital, networks or key. Those who have access to a managing director at a venture capital (VC) firm are typically people from privilege, not just a particular race or gender. Priya noted that VC is a high risk/reward asset class and most who invest in venture can afford to take those risks. If you do not come from money, you’re an outsider. The VC firms tend to look for larger, high tech firms that can have big returns. Those firms’ founders/owners tend to be white and male (as are most VC partners).
Priya also noted that venture firms with female and diverse partners may be open to a variety of investments, not just the high-risk, high-reward kind. As an example, the firm invests in a telemedicine company that provides mental health services to 50% of the counties in the U.S. that do not have access to a mental facility. That is impact, in Priya’s estimation.
Nathalie said it’s likely that half of businesses owned by people of color will be gone soon. She believes there must be policy solutions at the municipal and state level. She hopes some policies will be initiated quickly by both the public and private sectors to try to save some of these businesses. Nathalie notes that the needs of both black and brown main street and high-growth companies should be addressed. With people of color a growing US demographic, the needs of main street companies need to be addressed to support near term and future economic health of the US. High growth companies with Black and Brown founders also need access to capital. The challenge is that there are few asset managers of color running funds. Nathalie proposed that governments, corporations and limited partnerships should allocate 30% of money to managers who are people of color to address the growing need for capital by companies run by people of color. Priya agreed but went further by suggesting that managers and investors need to look at who the company is serving and to invest in companies whose products and services support underserved communities.
Finally, during the discussion, both panelists and attendees shared a variety of articles and links to additional resources regarding small business relief, impacts on communities of color, and philanthropic opportunities:
On April 22, Earth Day, Cornerstone hosted a webinar titled “Every Day Must Be Earth Day: Climate, Coronavirus and Complexity. CEO Erika Karp was joined by Karl Burkart, Managing Director of One Earth, a project of Rockefeller Philanthropy, and former Director of Science & Technology at the Leonardo DiCaprio Foundation. One Earth is dedicated to advancing cutting-edge science to address the climate crisis. The organization funded a breakthrough climate model (published as Achieving the Paris Climate Agreement Goals by Springer Nature) which shows how the world can achieve the ambitious 1.5°C goal through currently available technologies at a lower cost than our current energy system.
In a wide-ranging discussion, Erika and Karl tackled these questions:
- Is the COVID-19 pandemic related to climate change?
- Will the pandemic-related drop in carbon emissions lead to lasting changes?
- Will the oil market collapse slow the pace of transition to alternative energies?
- What is the impact of the current crisis on social and economic justice?
- What can people do to move the needle on climate justice?
In preparation for our call, Karl provided a written assessment of the questions we used to shape our discussion. Below are his responses.
Is the COVID-19 pandemic related to climate change?
There is a large and growing body of scientific literature linking climate change to the spread of vector-borne disease. Studies have focused mostly on insect carriers such as mosquitos (malaria) and ticks (Lyme). There is a general consensus that increased warming will drive increased vector-borne diseases, but no one knows exactly where and by how much.
It’s also possible that vertebrate animals are being exposed to more vector-borne diseases, making them carriers of novel diseases to humans. These ‘zoonotic’ diseases — pathogens that jump between species — include the COVID-19 outbreak, but it’s very hard to make a direct link to climate change. What we do know is that deforestation and encroachment of human activity on wildlands is creating greater risks for both humans and animals, as edge effects increase. We need to retain our current footprint of wildlands (approximately 50% of the terrestrial surface) in order to save biodiversity, preserve priceless carbon sinks, and reduce the risk of future zoonotic diseases.
Climate change will certainly increase risks to public health, and we’re only just starting to learn about the ways this could happen. An emerging body of science is looking at “zombie pathogens” that have been frozen, sometimes for centuries, but are thawing due to climate change. One anecdotal example of this, an outbreak of anthrax in Siberia in 2016, was caused by increased temperatures thawing permafrost and an anthrax-infected reindeer carcass from 1941. Whether this will happen at larger scale is a very controversial topic and the science is new, but it’s clear there are strong linkages.
Will the pandemic-related drop in carbon emissions lead to lasting changes?
It’s hard to talk about the silver lining to such a horrible pandemic, but it is true that emissions will likely drop 5-10% or more as a result of COVID-19. This is essentially exactly what was needed to get us on track to 1.5°C — a net reduction of 56% of global emissions by 2030 (or roughly 6.5% per year).
I myself had a pretty bad carbon footprint due to my travel and speaking engagements, and I’m seeing many of these venues events now going online, including Climate Week, which is normally held in New York concurrent with the UN General Assembly in September. The irony of Climate Week is that you have the whole world gathered in one place talking about solving the climate crisis while emitting enormous amounts of CO2. We’re now being forced to learn how to do many things virtually, with a much-reduced carbon footprint.
This could be a tipping point when virtual working becomes the standard, rather than the exception. A study in 2018 showed that 70% of people were able to work remotely on occasion. What if that were reversed – with physical officing being the exception rather than the rule? The permanent reduction of carbon emissions implicit in such a transformation of our work lives would be a game-changer. But I think many are rightfully skeptical that this will turn into permanent behavior change. And behavior change is only a piece of the climate change puzzle…
There’s only so much we can do as individuals to help. We need permanent policy shifts. We need to stop subsidizing fossil fuels (at a whopping $4.7 trillion per year according to the IMF) and start subsidizing clean, renewable energy. To make that shift happen, we will need a different kind of behavior change… VOTING. People need to start voting for candidates in much larger numbers at all levels of government of they care about clean air, clean water, and a balanced climate. Perhaps if we get nationwide mail-in voting, this could be the beginning of more civic engagement, which will drive the policy changes needed to solve the climate crisis.
Will the oil market collapse slow the pace of transition to alternative energies?
This is an excellent question and a very complicated subject. In my opinion, COVID-19 is “sinking all boats” — fossil fuel energy and renewable energy. I was in Riyadh for G20 meetings in late February, and prior to COVID-19 breaking out there was already a brewing conflict with OPEC+ nations balancing whether or not to cut production to stimulate falling prices. The fact of the matter is, the oil industry was already heading for a rough year. We supported research by Carbon Tracker, a think tank in the UK that has been analyzing data from many of the Oil & Gas majors, and they predicted a major decline in the sector in the early 2020s, as more and more people switch to electric and hydrogen modes of transport.
Then COVID-19 hit. The oil markets are now in a freefall, with negative trades for the first time in history. This will put a lot of oil and gas companies out of business, including the oil services industry (companies that manage, build, and maintain the production pipeline). Massive layoffs are happening right now, and when the economy comes back to life, hopefully in a year or two, it will be a huge and difficult ramp-up for the fossil fuel industry. There will be many, many losers and only a few winners. And some of the losers need to lose, like the tar sands in Alberta, which produce 25% more supply chain emissions per barrel of oil than the global average. Then there is increased demand for electric vehicles. Just last month, Tesla had record sales in China.
I’m almost brave enough to predict that COVID-19 will be the beginning of the end of the fossil fuel era as we’ve come to know it. We will have to rebuild our economy, and I think clean economy will win out, with solar and wind power now heading to 4 cents per kilowatt hour (c/kWh) on average and one solar hybrid project last summer bidding below 2c/kWh. Renewables also make the most sense as a stimulus for economic recovery, creating jobs at a ratio of 3 to 1 per dollar invested versus fossil fuels. This is not to say the renewable energy industry isn’t also being pummeled. This was set to be the biggest year in history for solar deployment, and now there are massive layoffs. We’ll just have to see how bad it will be on both sides and hope for a realignment of subsidies to promote a clean future.
What is the impact of the current crisis on social and economic justice?
First let’s consider health. Before COVID-19 hit, there were an estimated 4.2 million deaths per year due to ambient air pollution, according to the World Health Organization. Low-income communities constitute by far the majority of those deaths. And this isn’t the case just in the developing world. A recent study in California shows that black and brown people are exposed to 40% more emissions than white people. This is often due to the location of low-income communities in proximity to fossil fuel plants — land that wealthier (and historically whiter) people didn’t want to build on.
So we need to acknowledge that low-income communities were already struggling with lung disease and other diseases at a higher rate. Now, according to a new study, those same communities are experiencing many more COVID-related deaths than the national average. In Michigan and Illinois, for example, black people make up 41% of Covid-19 deaths, despite being less than 15% of the population. And in Louisiana, nearly 60% of the people who died of coronavirus in the state are black, while the demographic is just a third of the state’s population. Top all that off with the lack of socialized healthcare in the US, and you have a recipe for disaster.
There’s blame to share in many directions, but first let’s point a finger at the fossil fuel industry, and the lack of regulations to protect communities from pollution. Second, let’s look at our healthcare system in the US. Many European countries last month called citizens home who were on visas in the US because they deemed our country as lacking sufficient medical infrastructure. Post-COVID, these two problems have to be addressed to even begin a conversation about social justice. In the global context, I shudder to think about the impacts of so many people losing their jobs and livelihoods. But one thing that does appear to be emerging is a growing movement to tackle climate injustice head-on. I think COVID-19 is going to add fuel to that fire as these great inequalities in our economic system are revealed.
What can people do to move the needle on climate justice?
It shouldn’t take a global pandemic for us to see clear blue skies and breathe in clean fresh air. We deserve better. If anything good can be said of COVID-19, it is this momentary glimpse of what the sky should look like and some space to think about the future we want to create.
So what is the future we want to live in post-COVID? I think that’s the question we all need to be asking. Are we going to let the fossil fuel industry come roaring back to life? Or are we going to finally start to build the clean energy future we all need? We could have an opportunity to start righting the wrongs, provide low-income communities with access to clean energy while providing job training and income opportunities for a clean energy future. This is what a Green New Deal should focus on – pivoting subsidies away from the ailing fossil fuel sector and towards investments in renewable energy, along with a major jobs program to transition coal, oil and gas workers to good, long-term jobs in solar, wind, and energy efficiency.
Internationally, we know developing countries are going to be hard hit by the pandemic and one initiative, Sunfunder, is working to bring energy access to rural areas of Africa where it’s needed most. There is a risk of default for many community solar projects across Africa due to the pandemic, which would be a horrible loss to the people there, derailing more than a decade of progress to bring clean, affordable energy in the region. So these are the types of efforts that need to be supported now more than ever.
One thing we do at One Earth is to identify key initiatives that are strategically important in creating a green future and achieving the 1.5°C goal of the Paris Climate Agreement. If you’re interested, please feel free to visit our website OneEarth.org and sign up for a monthly briefing of projects around the globe that are working towards a green, and sustainable future.
Editor’s Note: From an investment perspective, there are numerous ways to deploy capital in support of climate justice. Cornerstone Capital Group works with to clients to identify their financial goals and impact interests, and recommends appropriate investment solutions. Our recommendations reflect rigorous research into investment opportunities to understand their risk and return profile, their environmental, social and governance characteristics, and the degree to which an investment facilitates access to the products, services and systems needed to achieve the United Nations Sustainable Development Goals. If you would like to explore how Cornerstone may be able to serve you, click here.
We recently hosted a second discussion on the near-term impact and longer-term implications of the current coronavirus pandemic. Cornerstone Managing Director Alison Smith moderated a Q&A session with CEO Erika Karp and CIO Craig Metrick, based on questions submitted by attendees. The dialogue focused on asset allocation, implications for various sectors and asset classes, and the role of environmental, social and governance analysis in crafting resilient portfolios. We hope you find this replay helpful, and welcome your feedback at email@example.com or via our website Contact Form.
There has been tremendous volatility in the price of most asset classes since the onset of the coronavirus-related financial crisis. That includes the price of sustainable equity funds. Given that much of the growth of sustainable investing has taken place in the past five years, many environmental, social, and governance (ESG) strategies have experienced relatively few periods of market volatility. What can we expect in terms of the performance of ESG funds in this period of extreme volatility?
The Benefits of ESG Discipline in Times of Market Volatility
In theory, the performance of ESG funds should hold up well in times of market volatility. At the company level, the managers of a sustainable business will likely have given plenty of thought to contingencies. They will focus on risk issues and make business continuity plans. While even the best-governed companies likely wouldn’t have prepared sufficiently for a pandemic of this scale, they are still in a relatively strong position to act decisively given their strong leadership.
Risk management is an important factor at the portfolio level, and here too ESG provides an edge. When the CFA Institute conducted a survey of portfolio managers and asked, “why do you take ESG issues into consideration in your investment analysis/decisions?” the vast majority replied, “to help manage investment risks.”
In addition, many ESG funds completely avoid or limit their exposure to fossil fuels and other industries heavily reliant on oil and gas (e.g., airlines and cruise ships), which has insulated them from the recent volatility associated with the collapse in the price of oil.
ESG and Market Volatility: Some Studies
There have been several studies of the performance of ESG funds in times of market volatility.
- An April 3, 2020 analysis by Morningstar entitled “Sustainable Funds Weather the First Quarter Better Than Conventional Funds” found that 24 of 26 ESG-tilted index funds outperformed their closest conventional counterparts. The author of that analysis, Jon Hale, head of sustainability research for Morningstar, was quoted as saying “it’s not like a massive outperformance, but it’s consistently better than average… that’s a great sign that ESG investing is not just some kind of bull market phenomenon, and it’s more and more of an all-weather type of approach.”
- A March 13, 2020 analysis by Bloomberg revealed that, in the current volatility, the average ESG fund declined less than the S&P 500 and, also, that older ESG funds have been outperforming newer ESG funds in the current volatility. The fact that ESG investment funds with longer track records are outperforming their newer rivals suggests that managers at older ESG funds have more experience investing through an ESG lens than do the newcomers, and so are able to execute more effectively.
- In 2018, Arabesque, an asset management and research firm that focuses on ESG issues, did an analysis of all U.S. stocks using data going back to 2007. It found that stocks that finished in the top quintile based on their ESG metrics outperformed those in the bottom quintile in the four worst years for the stock market in that period: the financial-crisis years of 2007-08, as well as 2011, and 2015. The margin ranged from 1.8 percentage points in 2007 13.5 points in 2008.
- A 2016 academic study concluded that, during the 2008 financial crisis, firms with high social capital, measured as corporate social responsibility (CSR) intensity, had stock returns that were four to seven percentage points higher than firms with low social capital. The authors observed “this evidence suggests that the trust between the firm and both its stakeholders and investors…pays off when the overall level of trust in corporations and markets suffers a negative shock.”
The evidence strongly suggests that ESG funds are performing relatively well during the current period of market volatility, and this is consistent with their performance in prior periods of volatility. As Cornerstone’s CEO Erika Karp notes, “In the final analysis, when considering ESG factors, ‘Governance’ is first among equals. It is a proxy for quality, a proxy for innovation, and a proxy for resilience. In times of volatility, when there is a vacuum of information, those companies that consistently embrace their principles, their workforces, and their unique competitive advantages will outperform.”
As a firm dedicated to a vision of a more inclusive and regenerative world, we at Cornerstone wonder, will humanity look back at this season of fear and be proud of how we responded? Will we appreciate those who gave more than their fair share to fight the pandemic? Will we recognize the synchronicity in which much of humanity comes together to observe traditions marking rebirth, recommitment to faith, family and community, and humble recognition of our role in healing the world?
As we observe the holidays of Passover, Easter, and Ramadan this month, there is another notable eternal connection between us. Abraham Lincoln’s death, marked in the Hebrew calendar, coincides with Passover every year. And Lincoln said, as if to us today, that “My great concern is not whether you have failed, but whether you are content with your failure.” Have we learned the lessons from past disasters? Have we mitigated the destruction that this virus without borders has caused? Have we eased the spiritual and financial hardship descending upon so many people around the world? Can we move forward?
I am not content with failure. While we know we are in a global health crisis, and we are certainly in an economic crisis, we are also in a crisis of confidence … confidence in our governmental institutions, confidence in our financial institutions, confidence in our capitalist institutions. I am not content to stand by in this very special season and allow confidence to be forever lost. So, right now we need to use our traditions to begin to heal ourselves and our institutions, and to move forward.
So much of the symbolism and tradition across the three major religions describes the same events, just from different points of view. Passover is the story of freedom. It is the story of the liberation of body and spirit. With the storytelling come lessons of humility — the belief in something larger than ourselves. Passover marks our move from slavery to liberation. We commemorate the hardships and the miracles, and we move forward, celebrating our freedom with family and food.
Easter is closely linked to Passover, of course, not just by the (presumed) historical concurrence of the Last Supper with a Passover seder, by also by ancient symbols. As the Seder plate holds an egg to symbolize the cycle of life, rebirth, and renewal, in Christianity the egg became associated with the resurrection. And across the centuries, these stories have never lost the power to inspire the imagination of generations of humankind as we move forward.
And with Ramadan, we have another holy time for families. Ramadan is a time of rededication to core values. It balances the deep introspection of the long day’s fast with gatherings to strengthen the bonds of family and friendship. And what could society need more right now than the pillars of Islam, among them charity and philanthropy, tolerance, justice and honesty?
So, in this very important season, in these very dark days, we move forward. And to Cornerstone Capital Group, moving forward means maintaining our belief that confidence in the capital markets can be restored. That good governance is a proxy for quality. That a long-term commitment to sustainable and impact investing can provide positive social impact as well as strong returns over time. And most importantly, that investments must create solutions to the world’s greatest challenges, must drive innovative, resilient and inclusive growth. And we move forward.
On behalf of the Cornerstone family I wish you peace, health and a renewed sense of hope and determination,
Erika Karp, Founder and CEO, Cornerstone Capital Group
The economic model of our current era is linear. We take resources from nature, make them into a product and then throw the item away when we’re done with it. The result? Overflowing landfills, trash filled waterways and, too often, toxic waste. This rampant waste of resources poses an existential threat to the world as we know it. A circular economy uses as few resources as possible in product creation; keeps resources in circulation for as long as possible, extracting the maximum value from them while in use; then recovers and regenerates products and their components at the end of their service life. Embracing circular economy principles is perhaps the most essential initiative we can undertake as a global society. We believe it is the only way forward if we want to sustain humankind.
–Intentional Design: Embracing the Circular Economy, Cornerstone Capital Group, October 2019
Amidst these difficult times, we are pleased to see that the European Union has moved forward with a bold, comprehensive plan to embrace the circular economy. The new Circular Economy Action Plan, adopted on March 11, 2020, focuses on the design and production of a circular economy. It aims to ensure that the resources used are kept in the EU economy for as long as possible. The introduction of this new framework follows the December 2019 European Green Deal, which set a roadmap towards a climate-neutral circular economy. 
We believe this is an important, proactive policy development that could serve as a model for government entities in other regions. The framework offers some specific guidelines for various economic sectors and lays the groundwork for strong rules and restrictions. We are especially encouraged by the proposals for sectors such as electronics, food and packaging—areas of the economy that tend to generate the most waste.
We recognize that these are recommended guidelines. Actual legislation still needs to be formulated and passed. Given the current coronavirus pandemic, we suspect that implementation of any legislation will likely be delayed due to the pandemic’s negative economic impact globally. Looking out longer term, however, we believe this type of legislation will be beneficial for the economy and the environment.
Executive Vice President for the European Green Deal, Frans Timmermans, said: “To achieve climate neutrality by 2050, to preserve our natural environment, and to strengthen our economic competitiveness, requires a fully circular economy. Today, our economy is still mostly linear, with only 12% of secondary materials and resources being brought back into the economy…With today’s plan we launch action to transform the way products are made and empower consumers to make sustainable choices for their own benefit and that of the environment.”
The EU Circular Economy Action Plan:
1) Propose legislation on a Sustainable Product Policy, to ensure that products placed on the EU market are designed to last longer, are easier to reuse, repair and recycle, and incorporate as much as possible recycled material instead of primary raw material. Single-use will be restricted, premature obsolescence tackled, and the destruction of unsold durable goods banned.
2) Empower consumers so they have access to reliable information on issues such as the reparability and durability of products to help them make environmentally sustainable choices.
3) Focus on the sectors that use the most resources and where the potential for circularity is high. The Commission will launch concrete actions as shown in the table below:
Virginijus Sinkevičius, commissioner for the environment, oceans and fisheries, said. “The new plan will make circularity the mainstream in our lives and speed up the green transition of our economy. We offer decisive action to change the top of the sustainability chain–product design. Future-oriented actions will create business and job opportunities, give new rights to European consumers, harness innovation and digitalization and, just like nature, make sure that nothing is wasted.”
The full EC report can be found here: https://ec.europa.eu/environment/circular-economy/pdf/new_circular_economy_action_plan.pdf
On March 19, 2020, Cornerstone Capital Group held a conference call addressing concerns about the current coronavirus pandemic and its impact on the markets, the economy, and importantly, the changes in how we think about the infrastructure of our society over the longer term. Cornerstone’s Erika Karp, Craig Metrick and Michael Geraghty were joined by two equity managers on the Cornerstone platform: Cathie Wood of Ark Investment Management, and Garvin Jabusch of Green Alpha Advisors. The full call replay can be accessed here.
Managing Portfolio Risk Through Integrated Analysis
The participants on the call focused on the benefits of integrating environmental, social and governance (ESG) factors into the investment process in an effort to de-risk long term portfolios and identify critical growth opportunities. Both Ark and Green Alpha look at multiple risk factors at a systemic level to minimize exposure to threats such as climate change. This extends to investing in methods to address risk — such as pandemic crisis. In their view, by focusing on innovation and the future while considering all stakeholders instead of only shareholders, investors may experience better long-term returns with lower volatility.
Kicking off the discussion, Erika highlighted that “sustainable investing is a proxy for quality. It’s a proxy for innovation and a proxy for resilience. And that is precisely what we need right now.” She asked whether, when we emerge from this current crisis, we would be forever changed:
“We have to think about issues like distance learning, telecommuting, distributed health systems. We have to think about supply chain logistics. We have to think about surge capacity. We have to think about virtual entertainment, emergency service centralization, obviously food safety, water quality, hygiene standards. We have to think about mental health provision. We have to think more proactively and in an innovative way about investing. Going forward to attack these challenges, we remind everyone that impact and sustainable investing is just investing. But a more conscious, predictive way to invest. Impact investing is the new cornerstone of capitalism.”
Michael Geraghty, Cornerstone’s market strategist, discussed the volatility of the markets under the current coronavirus situation. He doesn’t believe the markets will stabilize until the virus is either contained or a vaccination is developed and made available to the public. Michael notes, however, that this is a short-term shock to the system and not a structural one. That’s not to say that this pandemic won’t have a profound effect on the economy or the markets near term. The consumer accounts for 70% of U.S. Gross Domestic Product (GDP). If consumers are staying home and hunkering down, a cut in rates by the Federal Reserve and a payroll tax cut by the Federal government won’t have a strong impact on consumer behavior.
Craig Metrick noted that Cornerstone focuses on long term investment objectives while creating an investment plan which is designed to achieve social and environmental impact. He then interviewed Cathie and Garvin as to their views on the longer-term implications of the current crisis.
Investing in Disruptive Innovation and Strong Governance
Ark Investment Management focuses on investing in disruptive innovation over a five-year time frame. Its five core themes are: DNA sequencing, robotics, artificial intelligence, energy storage and blockchain technologies. Cathie Wood noted that the companies her firm invest in are not typically in any indices. Other managers are selling these names while buying names in the indices, such as the S&P 500, giving firms like hers an opportunity to buy these innovative company stocks at lower valuations. Over the long haul, she believes these investments should outperform older economy names that still dominate the indices.
Garvin Jabusch noted that a recession is already priced into the markets and his firm is looking for companies that will perform well out of the downturn. Bottom-up analysis is key, in his view. He looks for companies that are good stewards of capital, are innovative and create solutions that will make the economy more productive. Green Alpha is a long term buy and hold manager. The firm focuses on innovative companies that can help de-risk the economy such as those engaged in decarbonization, biotech and electrification.
Summing up the discussion, which included a very lively Q&A, Erika noted: “When it comes to ESG analysis, the “G,” governance, is first among equals. Because if we’re talking about a well-governed company, then by definition it is looking at environmental and social issues. And if a company is not looking at environmental and social issues, it is by definition not well-governed. It’s tautological.”
Ark Investment Management and Green Alpha are two of the strategies included in the Cornerstone Capital Access Impact Fund. Click the link to view standardized performance and the Fund’s top ten holdings: https://cornerstonecapitalfunds.com/quarterly-commentary
You should carefully consider the investment objectives, risks, and charges and expenses of the Fund before investing. The prospectus contains this and other information about the Fund, and it should be read carefully before investing. You may obtain a copy of the prospectus by calling 800.986.6187. The Fund is distributed by Ultimus Fund Distributors, LLC. Cornerstone Capital Group is the adviser to the Fund. Investing involves risk, including loss of principal. Applying ESG and sustainability criteria to the investment process may exclude securities of certain issuers for both investment and non-investment reasons and therefore the Fund may forgo some market opportunities available to funds that do not use ESG or sustainability criteria. Securities of companies with certain focused ESG practices may shift into and out of favor depending on market and economic conditions, and the Fund’s performance may at times be better or worse than the performance of funds that do not use ESG or sustainability criteria.
COVID-19, more commonly known as the coronavirus, emerged in late 2019. It was first identified in Wuhan, the capital of Hubei, China. Infection is primarily through human-to-human transmission via exhalation, such as sneezing or coughing. Symptoms may include flu-like symptoms, such as fever, coughing, breathing difficulties, fatigue, and muscle pain. No vaccine currently exists. Thus far, the fatality rate has been estimated at around 2–3% of cases, with older people particularly vulnerable.
In this note we assess the coronavirus in terms of its impact on humans, economic activity, corporations, and financial markets.
Coronavirus: The Human Impact
Thus far there have been close to 3,000 deaths caused by the coronavirus — the majority of those in China — in addition to around 80,000 officially recorded cases globally. Worryingly, pockets of the virus have popped up in a range of geographically dispersed countries, most notably Japan, Italy, Iran and South Korea. As of now, some of the infections in those countries have no known connection to China. The World Health Organization (WHO) has said the increase in the number of cases in Italy, Iran and South Korea is “deeply concerning.” However, the WHO has not yet declared the spread of the virus to be a pandemic, which is defined as an uncontrollable geographical spread.
Restriction of movement is the primary method authorities are using to control the spread of the virus. In China, tens of millions of people are under some form of quarantine, curfew, or lockdown. Italy’s government recently imposed a lockdown on an area of 50,000 people near Milan, which is the epicenter of the virus in Italy. It has been reported that South Korean officials are drawing up plans for a quarantine in affected areas.
Coronavirus: The Economic Impact
Quarantines, curfews, and lockdowns don’t just impact day-to-day activities, they also limit the number of workers able to get to work. So, for example, reflecting restrictions in China, Bloomberg Economics has estimated that the country’s economy is running at just 50-60% of its normal capacity. That was underscored by the fact that domestic car sales plunged by 92% in the first half of February.
The coronavirus outbreak in Italy centered around Milan is threatening to shut down the richest segment of the economy. Milan alone accounts for 10% of the Italian economy, and the Lombardy region more than double that. The New York Times recently reported that “Milan is not a closed city, but it is a drastically slowed one, after a spike of cases in the region, raising anxiety about a broader slowdown.”
Coronavirus: The Corporate Impact
The day after President’s Day, Apple warned it would not meet its first quarter 2020 revenue guidance because of the effects of the coronavirus. The company pointed to demand and supply issues in China. On the demand side, all its retail stores were closed at some point, although some are now open. The stores that have reopened are operating in a limited way, and with very low customer traffic. On the supply side, Apple said all its manufacturing facilities have reopened in China but were “ramping up more slowly than we had anticipated,” leading to iPhone supply shortages.
Supply chain disruptions because of the coronavirus in China have been impacting companies across the globe. China is a supplier of key components essential to a range of industries, particularly electronics and automobiles. However, as noted above, it’s estimated that China’s economy is only running at 50‑60% of its normal capacity.
It’s likely that supply-chain disruptions associated with past crises — such as the 2003 outbreak of severe acute respiratory syndrome (SARS) that swept across Asia, or the 2011 Fukushima nuclear disaster — are not good benchmarks for the current epidemic. For a start, today’s supply chains are global and more complex than they were in 2003, which was before China established itself as a manufacturing powerhouse. And during that period China’s growth represented a much smaller portion of global GDP growth than it does now. Second, the Fukushima nuclear disaster greatly impacted the global supply chain for auto parts, but not many other sectors were affected. Moreover, the damage to the supply chain was relatively short term.
In terms of market reaction to these events, in the six months after the first occurrence of SARS, the S&P 500 posted a gain of 15% (using April 2003 as a base); after 12 months, it was up 21%. In 2011, the year of the Fukushima nuclear disaster, the S&P 500 ended flat for the year.
For the moment, U.S. corporations remain sanguine. A recent Bloomberg study of corporate transcripts of S&P 500 companies revealed that about half said it was too early to gauge how the virus might play out, about a third said the virus would have some impact, and only 5% anticipated a severe blow from the virus.
Coronavirus: The Financial Markets Impact
Financial markets dislike uncertainty. So far, the cases of the virus in the U.S. have all been traceable to overseas travel. However, if cases not linked to travel start to emerge, that could lead to quarantines in the U.S., business shutdowns, and negative earnings estimate revisions. These factors would undoubtedly weigh on financial markets. Even with the recent selloff, U.S. stocks still remain at the high end of the historical range in terms of valuations.
At this time Cornerstone is not recommending tactical shifts in asset allocation resulting from the virus, because it’s still too early to gauge the impact. However, we are closely monitoring potential economic impacts related to the spread of the virus.
Shortly following trips to Davos during the World Economic Forum in late January, Erika Karp sat down with Juliet Scott-Croxford of Worth Media to compare notes on their experiences and most meaningful takeaways from the week. Below is a transcript of that conversation, which we captured via video.
JSC: Hi everyone. I’m Juliet Scott-Croxford, CEO of Worth Media. And I’m excited to be joined by Erika Karp, CEO of Cornerstone Capital, to talk about our shared experience at Davos in the end of January.
EK: I’m Erika Karp, the Founder and CEO of the Cornerstone Capital Group. As we think about investing for impact we’re here to talk about Davos, what happened at the World Economic Forum last week and some of the most interesting takeaways.
JSC: What was your biggest takeaway from the event on based on what you attended and some of the conversations that you heard?
EK: For me, the biggest takeaway is the extent to which we need more systems thinking if we’re going to meet these huge challenges. Because it seemed like there were a lot of events going on — whether it was about climate, whether it was about health or whether it was about technology and blockchain or women or LGBTQ events — each of these events touches on way more than it might seem.
JSC: And, and how do we take action on creating big systems thinking around those types of challenges?
EK: Well, it’s really hard. I think that that kind of thinking can’t just happen at the top. That is not just a high-level conversation. That conversation needs to go down to the grassroots level. And so I wonder … if everyone who needs to be in the room sometimes is in the room.
JSC: Hmm. So just playing on that point a bit, I think there was 24% female attendance at Davos this year. Last year it was 23%. What were your takeaways around the sort of notion around diversity and inclusion?
EK: By the way, that’s a big jump for Davos, because I know in many past years it’s been stuck at kind of 20% or even below. And that’s challenging. So the idea of women not just having more power but more influence is hugely important. And I think women’s voices, diverse voices are not being heard to the extent to which they need to be.
JSC: I attended a lot of the sessions that were done at the Equality Lounge [hosted] by the Female Quotient and a big part of their focus was on UN Sustainable Development Goal 5, around closing the gender gap. What conversations did you hear around gender and diversity outside of perhaps one of those areas?
EK: Unfortunately, very little. And here’s what I think we have to get to… people might talk about SDG 5 and women’s economic empowerment. But when you think of how you actually get there, you have to talk about all the other SDGs. So we think at Cornerstone in terms of the idea of access. Women will not be really empowered until we have access to water, to healthcare, to education, to broadband, to capital. And so that intersectionality, that systems thinking around diversity, I don’t think we’re there yet.
Capitalism and Sustainability
JSC: The main sort of focal point for the event or the big theme was around better capitalism and sustainability. How encouraged or not were you by that kind of conversation and thinking?
EK: There was a lot of talk about stakeholder capitalism, what we’ve seen the Business Roundtable talking about. And I think that’s great, but it’s so much more than talk that we need to get it done. When we go back to those Sustainable Development Goals, that systems thinking, that’s what you really need to see. So we need data, we need accountability, we need measurability, we need intentionality — all the things that we talk about with impact investing. And if you think about it, any board of directors, you know, yes, they need to serve their shareholders. They need to serve their employees. They need to serve their customers. You can’t optimize profitability without doing all three. But the issue is, it has to be about long-term profitability. We have to stop [the impact of] externalities from not being accepted by the users of capital. We have to think about financial capital, but also human capital, natural capital. We have a long way to go, I think.
JSC: Well, one of the key takeaways for me was that the business community is awake to the climate crisis. That was encouraging for me, whilst it’s possibly a little too late. I did feel like the conversation around that was baked into every conversation or session that I had. And perhaps more so outside of North America as well. I think there’s an interesting conversation coming out of a lot of the European businesses. I think that the key challenge is how do we take it beyond conversation and into real action. Seeing the letter that Larry Fink put out and, and some of the conversations around the Business Roundtable, what do you think the next steps are? How do we take that and. to your point, build that sort of systems thinking into —
EK: Action? Well, one of the big next steps is to facilitate tangible information, data, decision-useful information. I think that kind of push for real information, real data accountability is the starting point. And so that’s one of the things that I take away from it. Because when you have real information, real data that data providers and index providers and ETFs and fund managers and ultimately investors can have, not flawed information all through that system, then I think we have a better start.
JSC: And what about the sense of having a common language around how we’re describing this? So a common way to describe it, a common way to measure it, a common way to hold each other accountable to it. How important do you see that?
EK: Hugely important and that leads on from what I talked about with regard to data. We don’t have a common language when it comes to the whole idea of sustainable investing. Cornerstone uses a very clear definition. We think sustainable investing is the systematic integration of material, environmental, social and governance factors into the investment process. That is sustainable investing. It’s not ideological, it’s not political, it’s not divisive. It is about pragmatism and enhanced analytics. It is a discipline. And that discipline in finance, I mean ultimately it’s just going to be called investing and investment research, but we’re not there yet. Sometimes you’ll hear people say ESG investing. There is no such thing as ESG investing. There’s ESG analysis. We have to bring this into the realm of finance, not ideology.
JSC: And how important is partnerships and this notion of stakeholding when it comes to taking this to the next step?
EK: It’s, it’s just critical. This goes exactly to what we’re talking about, with systems thinking and going from not just the top down but from the bottom up to have this interdisciplinary discussion about getting things done. Partnerships are a must-have if we go back to talking about achieving the Sustainable Development Goals, which, by the way, in and of themselves are not investible. So again, when we frame things at Cornerstone, we think about the idea of access, giving the world access to each of those SDGs, giving investors access to each of those SDGs. And that implies you’ve got to have partnerships. SDG 17, right?
JSC: Yeah, absolutely. And people like Greta [Thunberg], who I personally think is so essential to helping hold businesses and key influences accountable to make progress. What what were your thoughts on her speech?
EK: Oh my God. The idea of, you know, this young person talking about what is blindingly obvious to almost the whole world, except certain administrations. I think it’s tremendous. I think she represents, you know, basically the whole world that’s not at Davos.
JSC: Playing that forward to the point around inclusivity … she has such a loud voice, a voice that is so important to people that aren’t able to be at something like [Davos]. I just think her presence is so poignant.
The Davos Experience
JSC: So this was your first and my first Davos. I’m still processing it a bit ’cause there’s so many different layers and elements to it. It’s a place of many contradictions, and it has been and is under scrutiny. Having been there and come away, what are your sort of overall thoughts on the importance of it? The challenges with it?
EK: You know, the biggest challenge is clearly the perception of eliteism, the few, the very few making decisions for everyone else. And so that’s a huge challenge now with regard to how Davos comes together.
For a number of years I worked on the Global Agenda Council which leads up to Davos — what should be included, what are the pivotal questions that we’re going to address at Davos? The question I have is whether the hard work done on the agenda councils and the work that becomes you know, very specific, [does that] get right into the Davos conversations? I’m not sure of that. So that’s something I think we have to be very thoughtful about, because I think that innovation and ideas come from everywhere. Are those [ideas] making their way into any decisions or actions that might be taken over that one week? I’m not sure.
JSC: What were some of the most interesting sessions you attended?
EK: Obviously the ones that I worked on! The Green Debate was about action. What I felt that was so interesting was the extent of the earnestness of that group, which really wants to get something done. The other [event] that I was involved with, which I’m really excited about is called the World Benchmarking Alliance, the WBA. And the reason I love this initiative is because it is really about a systems-based approach: Let’s look at the keystone companies in the global economy, those that potentially can have more impact than other companies by virtue of where they’re situated in the system. And let’s keep raising the bar for the industries.
JSC: Fantastic. So you thought the WBA offers a solution to integrate this systems-based analysis?
EK: From what I can see. It’s relatively new initiative. But yes, it is showing us which companies can be most powerful in driving everything forward. And I should say there is no perfect company. You know, every company has challenges, whether it’s upstream or downstream, whether it’s a technology company, consumer company — every company has challenges. But if the WBA can really identify what exactly those keystone companies are doing, what do they touch and how can they be most powerful, I think that’s terrific.
JSC: What do you think the best way of integrating that into future Davos events, to your point and taking it to the grassroots? So it can’t just sit with this sort of small group of incredibly influential people. How much does the World Economic Forum take a lead in ensuring that happens?
EK: I think the WEF really could take the lead. I’ll give you an example as it relates to these keystone companies, or companies that are not keystone companies but sit in industries that have an outsized impact on what’s going on. One of the things that I observed — or didn’t observe — was the extent to which there’s real entrepreneurship, real disruption inside the companies that are part of the WEF. I think a lot of companies have forgotten how to take risk. They have forgotten how to innovate. And I think that’s unfortunate, especially, I would argue, since some of the agenda councils, which over the past decade have come up with interesting solutions, innovative, entrepreneurial solutions. I don’t know that we’re seeing [such solutions] to the extent that we should.
JSC: I think that’s an interesting point. I was surprised that there were quite a lot of young people at the event, more so than I expected, but also more representation from tech companies and data companies and software companies. And I’m surprised that they haven’t taken more of a lead on [creating] more of a systems-based universal way of an analyzing and assessing progress in some of these areas.
EK: Did you feel, ’cause I did a little bit, did you feel that there was more a sense of fear of new technologies, the negative impact of new technologies by one generation than there was by the other? It felt to me like there was a little bit of a focus on the scary stuff.
JSC: Yeah. I think you’re right. And I think, you know, Facebook’s been in the headlines a lot, so I think that there definitely is this sense of, yeah, how much do we embrace these platforms for good? I think that is a challenge both for those companies and for people, but there is this wealth of knowledge and expertise. Let’s apply it in these areas that we need to apply it.
JSC: Are there other conversations or interesting people that you met that have kind of stuck with you a few days later?
EK: There was one particularly interesting woman I spoke to from a health research organization. One of the things she said that just really struck me is that, you know, we can talk about systemic change as much as we want. But when it comes to healthcare and the intersection of healthcare and the technologies we need, she said the funding picture is so off, you know, without government funding of basic research. She says we can talk all we want, but it’s not enough.
JSC: Why do you think that is? Why, what is driving that lack of investment or capital in the area?
EK: I think it does have to do with the short-termism, broadly, whether it’s in the private sector or the public sector. Some in the foundation world are doing wonderful work, but it’s a drop in the bucket compared to what we need. If the foundations are giving a kind of first loss capital [to attract the] private sector that’s great. But again, when it comes to basic research, it’s a drop in the bucket. And then our conversation went on to infrastructure spending and education spending and you know, the things that so need to come first. But it was that healthcare discussion that reminded me this is going to take everyone.
The Role of the Sustainable Development Goals
JSC: Yeah. And, and how integral do you think the Sustainable Development Goals [SDGs] were to the entire conversation? Cause that, that was the other thing I noticed. They were very prominent in certain places, but in other places actually weren’t the lead focus. What can we do to use them as a way to align all of these stakeholders and companies around a way forward?
EK: I was actually surprised that they were included in lots of places because I was expecting nothing. So I was pleased to see the SDGs around and in their own little building that was [colorful]. You know, the fact that the SDGs have branded themselves as eye candy is beautiful — whatever it takes. I wouldn’t call it prominence, but it was clearly there.
I think one of the problems we have, actually, is if companies kind of hang their hats on achieving SDG 5 or whatever. I think that’s really problematic because if you really try to go after one (and we talked about this before), you’re not going to get really much done. Yeah. So I think this was the WEF kind of tiptoeing into the SDGs.
JSC: Yeah, I agree. I’d really love this sense of having a shared set of goals and I do think that’s a really powerful way of bringing different stakeholders together around a common issue and some of the biggest issues that we’re faced with. I think you just, you kind of want to see more of it. And I sense there have been quite a lot of laggards when it comes to adopting these or taking them seriously or thinking actually this is a good way to do it.
EK: I mean with all due respect to the WEF, it’s astonishing that this is the first time that they’ve really tackled climate.
JSC: Yes. And it is sort of slightly contradictory in the fact that the backdrop is the, you know, the mountains and the temperature was quite warm. Yes, there’s snow on the ground, but it, I sort of felt like it was almost quite stark in that the conversation was around climate crisis finally, and we were in the backdrop that we were in.
EK: I put that aside to some degree because had it been snowing and freezing, then somebody would say, ‘Oh look, no climate change.’ I mean, you know this is about volatility, not about any particular day. So it didn’t bother me that much. It was convenient. Walking around was a little easier than it would have been. But you know, getting between all those black cars…
JSC: I was going to say, it takes 20 minutes to walk end to end on the promenade and I would far rather walk. I was surprised at how much traffic there was and they weren’t, I don’t think they were electric.
EK: Well, actually I have a picture of Prince Charles arriving in a fully electric vehicle. Yes. I think, I don’t know where that was published, but we’ve got that right.
JSC: There’s definitely more that they could do there, I think.
EK: I think there’s a little more they can do. Yeah.
JSC: So you saw Prince Charles, who else did he see that kind of made you [perk up].
EK: You know, no one, not really. Maybe I was looking down or doing my work. But I did see some of my favorite people. Nigel Topping, you know, I don’t know if everyone knows Nigel, but he’s amazing. A few other people that I’ve known for a long time that in my view are really the leaders, like Steve Waygood from Aviva. I don’t know if people know Steve, but yeah, he’s one of the leaders. So it was really nice to see those serious people.
Next Year at Davos?
JSC: What would you, a year from now, thinking about Davos next year, what change would you like to see?
EK: I would love for Davos to just take up the issue of entrepreneurship. You know, we know that in a global economy, impact comes from entrepreneurship, new companies revitalizing economic growth. You know, the fact that we have the world’s monetary authorities driving the stock market is not okay, right? Real economic growth comes from entrepreneurship. And I don’t know that there’s been a Davos that’s really taken that up.
JSC: And so how would you, how would you do that?
EK: I’d like to see the conversation truly be a catalyst for growth. Focus on the idea of entrepreneurship, in fact, impact entrepreneurship. That’s where growth comes. That’s where new companies come from. Why don’t we have, you know, a discussion about great companies that know how to disrupt themselves and innovate from inside. And then of course, the outside companies, the innovators, the disruptors that are outside. I think it has to be about entrepreneurship because ultimately that’s how we’re going to face the big challenges of the world.
JSC: So watch this space and we’ll work on impact entrepreneurship as a topic between now and next year. Thank you.
EK: Thank you.
Psychedelic-assisted psychotherapy is seeing a resurgence as a treatment approach for mental health disorders. It melds pharmacology and psychotherapy, using psychedelic substances such as lysergic acid diethylamide (LSD) and psilocybin, under medical supervision, to treat conditions such as post-traumatic stress disorder (PTSD) and extreme depression. Psychedelic therapy was a popular research topic in the 1950s and 1960s; however, it lost favor by 1966 due to backlash around poor research and a growing association with the ‘60s counterculture. In recent years, interest in psychedelic therapy has regained steam. Significant, rigorous research is being funded, and FDA trials are under way for certain treatments.
The old: mid-century experimentation
Movie star Cary Grant, writer Aldous Huxley, movie director Sidney Lumet and playwright Clare Boothe Luce, along with thousands of people globally, were tested and treated with LSD and other psychedelics between 1950 and 1965. More than 1,000 published studies and six international conferences on these studies were produced during this period. However, by 1962 US regulators began to restrict the use of LSD, and possession of the drug was made illegal in 1966.
This shift in attitude was the result of poorly constructed scientific research, reports of “bad trips” and the growing association of LSD with the political counterculture. For example, Harvard psychologist Timothy Leary was accused of giving psychedelics to undergraduates without medical supervision. He was also famous for his counterculture quote, “Turn on. Tune in. Drop out.” This backlash negated some of the past accomplishments in helping individuals cope with chronic depression and other psychological problems. 
The new: mainstream medical research
Starting in the 1990s, academics began a new round of psychedelic psychotherapy research focusing on depression and anxiety in people with cancer. Today research is moving forward and broadening in scope. Several psychedelic drugs, including ketamine, methylenedioxymethamphetamine (MDMA), psilocybin, and the aforementioned LSD, are being studied for use in treating psychiatric disorders including PTSD, depression, drug, tobacco and alcohol addiction, obsessive compulsive disorder (OCD), anxiety disorders and existential anxiety related to life-threatening diseases such as cancer. 
In September 2019, Johns Hopkins announced the launch of the Center for Psychedelic and Consciousness Research. Its goal is to study LSD and psilocybin for various mental health problems, including addiction and depression. The center was established with $17 million in commitments from wealthy private donors and a foundation. This announcement followed the launch of a similar center at Imperial College London in April 2019 with $3.5 million from private sources.
Mental health disorders: demand for better treatments
According to the National Alliance of Mental Illness, a patient advocacy organization, one in five U.S. adults (over 19% of the population, or 47 million people) experience mental illness annually. This figure includes one in 25 adults (11.4 million people) facing serious mental illness each year.
People with mental health issues often do not receive help until they are in crisis. Nearly 60% of those with a mental health disorder did not receive treatment in the previous year. Also, despite the introduction of a variety of medications during the past decades, the rates of mental illness are not declining – in stark contrast to the success of pharmaceutical advances in treating infectious diseases.
Given the scope of the problem and questions regarding the effectiveness of current treatments such as antidepressants, which often entail unpleasant side effects, interest has grown in new areas of treatment. Recent studies have been promising. In psilocybin trials at Johns Hopkins and New York University (NYU), 80 cancer patients suffering from cancer-related anxiety or depression received psilocybin in a session guided by therapists. In the resulting study published December 2016, 80% of the Hopkins volunteer subjects were reported to have experienced significantly reduced depression and anxiety from a single large dose of psilocybin. These improvements continued for six months or more. 
The challenge in considering use of psychedelic therapy is how to obtain FDA approval; the FDA typically focuses on the effectiveness of a medication rather than the effectiveness of a therapy. According to Dr. Thomas Insel, former Director of the National Institute of Mental Health, it is key that researchers focus on safety and medical/psychotherapeutic use, rather than recreational use. One very negative experience can risk derailing the research efficacy.
Promising trial results
In a step forward toward FDA approval, the non-profit Multidisciplinary Association for Psychedelic Studies (MAPS) is studying MDMA-assisted psychotherapy for people with PTSD. The objective is to find out whether MDMA-assisted psychotherapy can help heal the psychological and emotional damage caused by sexual assault, war, violent crime, and other traumas.
In 2017, the FDA granted Breakthrough Therapy Designation for a MAPS Phase 3 clinical trial of MDMA. Phase 3 is the final phase of research required by the FDA before deciding whether to approve a drug as a legal prescription treatment, which in this case involves MMDA to treat PTSD. Prior Phase 2 clinical trials showed that MDMA can reduce fear, enhance communication and introspection, and increase empathy, augmenting the therapeutic process for people suffering from PTSD. In the trial, participants all had suffered chronic PTSD for an average of more than17.8 years. After three sessions, over 60% of participants no longer had PTSD, and in a 12-month follow-up, 68% no longer had PTSD.
The advantage of MMDA-assisted psychotherapy is that MMDA is only administered a few times, unlike most medications for mental illnesses which are often taken daily for years, and sometimes forever. Many of these medications have unpleasant side effects as well.
MAPS also completed a Phase 2 pilot study using LSD-assisted psychotherapy sessions. The completed study found positive trends in reducing anxiety following two LSD-assisted psychotherapy sessions. LSD in these sessions seemed to be safely administered – and may justify further research. 
How and why does psychedelic therapy work?
In psychedelic therapy, neural networks are activated under the influence of LSD or psilocybin. The effect appears to link with the marker most correlated with personal “ego dissolution.” From the patient’s perspective this amounts to a “mystical experience.” 
Michael Pollan, a journalist and author who has written extensively about medical research related to psychedelic drugs, discussed his interviews with cancer patients participating in psychedelic tests using psilocybin at NYU and Johns Hopkins. Several described their guided psychedelic journey as similar to birth or enlightenment. It is important that participants are supervised by a qualified guide in case they have an episode of extreme anxiety, also known as a “bad trip.” The guide is there to ensure the participant has a positive experience while undergoing this type of therapy. 
A common theme that many test participants discussed was finally understanding the secrets of the universe or realizing that “we are all one.” Mysticism, love or unity are recurring themes. Many said that they visually encountered their cancer, and this had the effect of reducing its power over them. One woman who had been diagnosed with ovarian cancer years earlier and was worried about a recurrence said she envisioned a black mass while looking into her rib cage. This mass, she realized, was her fear of cancer and not the cancer itself. She confronted the mass aggressively and said she stopped worrying about a recurrence after the trial. This was one of the objectives of the trial.
Researchers know “how,” but not “why,” psilocybin tends to work in psychedelic therapy. One theory is that the drug interrupts the circuitry of self-absorbed thinking that is prevalent in depressed people, paving the way for a mystical experience. A neuro-imaging study at imperial College in London may explain why this therapy works:
The drugs appear to change “the default mode network” (shown above in (a) where there is heavier traffic over fewer connections) in the brain, which tends to be hyperactive in depression and is subdued when on psilocybin or in deep meditation. Information is usually processed in the brain using various circuits. Some circuits experience a steady stream of informational traffic while others are rarely used. Psychedelics appear to open up different circuits (shown in (b) above where more connections are utilized, freeing up space along the more heavily used ones shown in (a). This may explain the expanded sense of awareness and new perspectives among participants in psychedelic-assisted psychotherapy sessions.
Potential beyond mental health
Chronic low-grade inflammation is at the root of aging and age-related disease. Termed “inflammaging,” this impairment of the immune system contributes to the disease burden in older adults and accelerates the aging process. One notable example of this phenomenon is Alzheimer’s disease.
Studies dating back decades indicated that illnesses ranging from tuberculosis to diabetes responded well to treatments with peyote (taken in low dosages). According to Shlomi Raz, founder of the company Eleusis, which is focused on research in this space, “In 2008, the psychedelic compound related to the primary psychoactive alkaloid in peyote, mainly mescaline, was discovered to exert ‘extraordinarily potent’ anti-inflammatory effects at very low drug concentrations.” Very low dosages of this compound didn’t tend to induce changes in brain function that might alter perception, mood or behavior.
Additional studies have confirmed the capacity of psychedelics to modulate processes that perpetuate chronic low-grade inflammation. The psychedelics seem to exert significant therapeutic effects in a diverse array of preclinical diseases, including asthma, atherosclerosis, inflammatory bowel disease and retinal disease. 
Given the large and growing problem of mental health disorders today, it appears that current standard pharmaceutical options are insufficient to the challenge, especially for treatment-resistant conditions such as PTSD, chronic depression, high anxiety related to terminal illness, and persistent drug or alcohol addiction. A new approach, such as psychedelic-assisted psychotherapy, may offer a solution to a problem that traditional pharmaceuticals haven’t solved.
Currently, with a few exceptions, research in this space is still in the early stages. While near term investment options are very limited, this is a topic that bears watching and may offer some good impact investment options in the near future.
 Paul Summergrad (psychiatrist) & Thomas Insel (neuroscientist): Future of Psychedelic Psychiatry- April 26, 2017 with George Goldsmith – Executive Director of Compass Pathways
As new members of the World Benchmarking Alliance, we have been delving into their work to understand how WBA benchmarks corporate performance in terms of their contribution to the UN Sustainable Development Goals.
WBA’s approach aligns closely with Cornerstone’s thinking: they recognize that transformational, systems-based change across key sectors and issues is critical to achieve a regenerative and inclusive global economy. Recognizing that the private sector has a tremendous role to play in bringing about such change, and that clear and consistent measurements of progress are essential to the effort, WBA is creating benchmarks or indices for key focus areas:
- gender equality and women’s empowerment;
- food and agriculture;
- climate and energy;
- seafood stewardship;
- and digital inclusion.
Below we offer highlights from WBA’s recently released assessment of the automotive industry, part of its climate and energy benchmark.
Measuring the world’s 25 most influential auto manufacturers
Given the transport industry is responsible for 15% of the world’s greenhouse gas emissions, automotive companies play a vital role in decarbonizing our economy. To measure their progress toward reaching the Paris Agreement goal of limiting global warming to well below 2°C, WBA analyzed the world’s leading automotive companies to determine if they can meet that target. We have summarized their key findings below.
Destination Decarbonization: Stuck in the Slow Lane
Companies are stalling in the low-carbon transition. Of the 25 companies, only Groupe PSA, Ford, Renault, and Mazda have established fleet targets that are fully aligned with the pathway required for the low-carbon transition, with only Mazda and Nissan setting long-term targets that reach as far as 2050. In addition to beefing up target emissions reductions, companies need to map out a clear strategic plan to achieve those targets. Groupe PSA is the only one of the 25 companies assessed that has embedded reduction targets into a publicly available low-carbon transition plan.
Driving with the Brakes On
A company’s investment in new battery technologies and electrification is a strong indication of its commitment to decarbonization. Some companies are making progress in boosting their low-carbon vehicle sales. BAIC, for example, boosted its share of low-carbon vehicle sales from less than 1% of total annual sales in 2013 to 7% in 2017. Likewise, BMW grew its low-carbon vehicle sales from less than 1% in 2012 to nearly 6% in 2018.
However, for 16 of the companies assessed, low-carbon vehicles accounted for less than 1% of sales. Several of these laggards have, encouragingly, made quantifiable commitments to rapidly increase their sales to transition to a low-carbon economy.
Sales: Customers Taking the Road Most Travelled
Though the auto sector is renowned for its high-profile marketing campaigns, less than half of the companies benchmarked show noticeable efforts to market low-carbon vehicles as a more favorable option. According to the WBA, there remains significant room for improvement from automotive companies to shift consumers towards low-carbon vehicles to help decarbonize the automotive industry.
Of the 25 companies, Tesla plays a strong role in shifting the passenger vehicle market toward electric vehicles by actively engaging consumers, increasing the number of showrooms, and creating unique customer experiences. BMW and Groupe PSA also actively promote their electric vehicles and encourageconsumer uptake. Efforts to shift the consumer mindset would require automotive companies to actively promote low-carbon models across multiple sales regions through a variety of methods.
Revving up Public Commitments to Climate Policy
There is an industry-wide reluctance for automotive companies to publicly commit to a positive, transparent and proactive approach to climate policy. None of the companies assessed show leadership in engaging with trade associations or regulatory bodies to help mitigate climate change. Nor does the industry as whole systematically safeguard against influencing climate-related regulations in a negative way, directly or indirectly, in consultations with regulators.
Though all of the companies – with the exception of Tesla – show a level of engagement with a trade association or regulatory body, none have a publicly available engagement plan, which is widely considered a best practice. That said, Ford, Groupe PSA, General Motors and Renault have established more defined positions relating to “climate-friendly” policies and what actions to take if an affiliated trade association has climate-negative positions.
Driving Change: The Future of Mobility
To better prepare for a low-carbon economy and remain profitable, auto manufacturers need to identify new business opportunities that move away from traditional passenger vehicle ownership. While automotive companies like Tata Motors, Tesla, BAIC, Honda, Nissan, and Toyota are exploring alternative business activities, they are far from scaling up operations: most companies do not offer a scope of operation, a sense of market share or profitability, and lack expansion plans with a defined timeline. This suggests that these activities may not have been given sufficient consideration in terms of the broader business strategy. To facilitate the transition to a low-carbon economy and help achieve the goals of the Paris Agreement, auto manufacturers could further demonstrate action towards diversifying their business models.
Car companies have a responsibility to current and future generations to change the high-emission mobility culture. Change can only occur if manufacturers proactively increase investments in and marketing of low-carbon vehicles, engage with policymakers on low-carbon solutions, and seek out new business opportunities.
Most companies have a low-carbon vehicle, but there is insufficient investment in this market. There also needs to be a more positive and proactive approach for companies to market low-carbon vehicles to consumers. As a whole, the industry needs to work with trade associations and react to climate policy. In sum, the WBA’s report illustrates that the 25 auto manufacturers are not on track to meet the goal set by the Paris Agreement.
For the full assessment please visit https://climate.worldbenchmarkingalliance.org/
There’s a quote I love from the famed Jewish philosopher Martin Buber: “All journeys have secret destinations of which the traveler is unaware.”
Twenty-five years ago when I started working on Wall Street, I had no idea that my journey would find me running a firm that’s about impact investing, social justice, environmental impact and governance. I also had no idea that my Jewish heritage and its focus on “Tikkun Olam” — repairing the world — would become so intertwined with my professional mission.
There’s another quote that I find so relevant to my work, from an ancient rabbi, Rabbi Tarfon. He said, “It is not incumbent upon us to complete the task, but neither are we at liberty to desist from it.” In other words, we can all do our share. For my share, I think about capitalism and economics and finance every day, and I think they happen to be really powerful tools. I also believe that impact investing, sustainable investing, is entirely consistent — in fact, it’s the same — as practicing Jewish values.
Tools to Righteousness
For example, consider Noah. I think we all know there was an ark and lots of animals and Noah did something good because God asked him to. But was Noah a righteous man? He was certainly blameless; he didn’t partake in the evil that caused God to plan the flood. But was he righteous? According to Rabbi Tarfon’s teaching, if Noah had no power or resources to do fight evil, well then, he was blameless. If he had the tools and the power, and still stood by, he might be blameless but he would not be righteous. That’s the lesson I take from Judaism and apply to my work. We have the tools. Money is a tool. Investing is a tool. We use those tools to bring about as much good as we can, to be as righteous as we can.
The Social Impact of the Private Sector
We’re in a time of unprecedented challenges. Human trafficking, slavery, suffering persists. California is burning, the Arctic is melting, and a number of keystone species such as bees are at risk of extinction. We know that in the next couple of decades there’s going to be more plastic in the ocean than there are fish right now. Income inequality is creating social stress in many areas of the world.
There’s also some unprecedented good, and here’s where the capital markets come in. We’re seeing asset owners, asset managers, investment banks, accounting firms, regulators, exchanges, ratings agencies — all these pieces of the capital markets — start to move in the same direction at the same time, in the direction of seeking sustainability.
When it comes to investing, we need to move not millions, not billions, but trillions of investment dollars towards environmental and social impact. And you cannot move trillions until you engage the whole private sector, the entirety of the capital markets, the private sector. We need collaboration. We need understanding, we need transparency. And the good part is they’re coming. It’s happening.
Words of Economic Wisdom
Here’s another quote worth citing: “To feel much for others and little for ourselves; to restrain our selfishness and exercise our benevolent affections constitute the perfection of human nature.” Another rabbi?
Actually, that’s an economist: Adam Smith. (I think Adam Smith is poetry.) People typically associate Adam Smith with The Wealth of Nations and the concept of “the invisible hand,” which says that markets will work it out themselves. The only thing Adam Smith forgot with regard to the invisible hand is that there are externalities, negative externalities that companies produce when they do their thing.
Milton Friedman is another economist who forgot something. When a board of directors thinks that their job is to solely to maximize shareholder value, they cite his work. They say, that’s all we can do, that’s what we have to do, it’s a fiduciary obligation. Well, two words that Milton Friedman left out were “long term.” We need to maximize shareholder value over the long term. Friedman also said, “Most economic fallacies come from a tendency to assume that there’s a fixed pie, that one party can gain only at the expense of another.” And so Milton Friedman knew what it could, what it should be like when it comes to capitalism and the capitalist system.
Judaism and Capitalism: The Perfect Pair
When it comes to negative externalities created by business activity, and when it comes to creating value over the long term, Jewish values provide a roadmap. In fact, the best quote of all about capitalism actually does come from a rabbi. The great Hillel said, “If I am not for me, then who will be? But if I am only for me, then what am I? And if not now, then when.” To me, this is the essence of Jewish values, and the essence of how capitalism can grow the pie for all. Now is the time.
Erika Karp is the Founder and Chief Executive Officer of Cornerstone Capital Group. This piece was adapted from a speech delivered at a gathering of Cornerstone clients and friends. You can view the video here.
Cornerstone Capital Group recently had the honor of hosting a special evening at Congregation Beit Simchat Torah synagogue. CEO Erika Karp was joined by Robert Bank of the American Jewish World Service, who spoke of the close relationship between impact investing and Jewish values. We are pleased to share this replay for those who could not join us for the event.