Forests are an important biological resource with a critical role to play in carbon sequestration. In this webinar replay, Cornerstone CEO Erika Karp talks with Bettina von Hagen, CEO of EFM, which specializes in implementing ecological forestry principles within an investment context. They discuss the role of forestry investing in limiting global warming, potential risks from timber harvesting and how to mitigate them, and the potential for investments to foster rural and tribal economic development in the Pacific Northwest. Erika and Bettina are joined by Cornerstone’s Jennifer Leonard, Executive Director of Market Strategy & Manager Research.
During the webinar we received several questions that our speakers couldn’t get to during the session. The team at EFM have kindly provided answers below.
How can we incentive our communities to plant more trees and how can we reinforce ‘greening’ of our urban areas?
Supporting carbon policies and markets that finance and reward reforestation and forest protection is one of the most powerful mechanisms to incentivize tree planting The California regulatory carbon market has spurred significant reforestation projects, especially in the Mississippi Delta. There are also emerging carbon protocols for urban forests. In addition to carbon markets, land use and development codes that include trees and other natural infrastructure are also significant catalysts for increasing urban tree cover.
In terms of urban forestry, there are local non-profits that advocate and take action on urban greening and advocate for sound urban policies to preserve trees and pay for ecosystem services generated by our urban tree canopy. For example, in EFM’s Portland location, Friend of the Trees https://friendsoftrees.org/ is one option.
How does this intersect with the 1 Trillion Trees project?
EFM’s actions to create greater value in native forests, increase standing volume, and to keep forests as forests, support the goals of the Trillion Trees project. While our goals are similar, we differ in that The Trillion Trees is a non-profit project that focuses on the important work of forest landscape restoration globally, while EFM is a for-profit business that demonstrates the commercial viability of natural climate solutions to generate returns for investors and focuses on the carbon-rich forests of the western U.S. In the context of our investments, we restore and protect forested landscapes for the benefit of local communities and generate positive biodiversity, water and climate outcomes.
Do any of the panel members have high level product development/product approval contacts at governmental agencies?
At EFM our team is dedicated to developing relationships with the USFS and other governmental agencies that are focused on land acquisition and restoration in the Western US. We work closely with both federal and state forest agencies, as well as the forest products industry and nonprofits, on products that contribute to healthy and intact forests and restoration. There are a number of products – existing and new – derived from wood fiber and other forest resources that support forest restoration and forest health, from biofuel to cross-laminated timber to biochar, and we are engaged with a number of partners on further developing and building supply networks for these products.
What is the experience of EFM in implementing forestry management strategies in national/state/local open space or urban forested lands?
While EFM focuses on the acquisition and management of private lands, many of our forests are designated to be acquired by public owners – State, Federal and Local. We are currently working on enabling several community forests, and are engaged in a few federal land sales. After decades of efforts through multiple administrations, the Great American Outdoors Act was passed by Congress and signed into law on August 4, 2020. This bill has two components – funding $9.5 billion of delayed maintenance for national parks and other federal lands and, very significantly for EFM’s strategy – fully funding the Land and Water Conservation Fund (LWCF) at $900 million per year in perpetuity. The LWCF is the source used by the US Forest Service, national parks, and other federal land agencies to acquire land for recreation and conservation. It is relevant to our Funds’ strategy as there are properties in the portfolio that we want to sell to federal agencies as part of the long-term ecological uplift plan for the property. In addition, many of our forests are located adjacent to federal, state and other public forests. We work collaboratively with these public landowners on forest health, fire risk reduction, and improving public access to forestlands.
Is there an intention to invest in forests in Brazil?
EFM’s current funds are focused on restoring the natural forests of the western United States. EFM does offer natural climate solutions advisory services across North and South America and Brazil presents an interesting opportunity for climate-smart forestry investments. We are able to discuss specific opportunities on a one-on-one basis based on desired investor outcomes.
What is Bettina’s view on how to handle invasive species such as the ash borer in the context of sustainable forestry?
There are a host of both introduced and native pest species that pose a risk to forests, from introduced species like the ash borer to native pests like bark beetles and Swiss needle cast (caused by a fungal pathogen, which, despite its name, is native to the western US). While introduced pests are uniquely troublesome as there are (at least initially) no established predators or controls, native pests can also become invasive in the right conditions. The best defense against pests, whether introduced or native, is to foster a healthy, structurally complex, species-diverse forest. Pests thrive on same-age plantations and on trees weakened by excessive density and competition. Active management also plays a role, by immediately removing pest-affected trees and taking appropriate control measures. In all cases, a holistic perspective is helpful, including tolerance for a background level of pests that may be an important part of the food chain and creation of habitat such as standing dead trees that are so critical for nesting and foraging habitat for hundreds of species.
This is not to minimize the seriousness of introduced aggressive invasive species, where a public-private mobilization of active prevention and control measures is called for.
In terms of introduced tree species, forest health is seriously compromised when non-native species become established and aggressively expand into native forests. Invasive species can persist for decades and may drive out native species, reduce wildlife habitat, and alter soil moisture regimes. Our policies generally include:
- maintaining invasive species populations at a controllable level across EFM’s ownership
- focusing control efforts as soon as new populations are detected and attempt control before populations become well established.
- leaving an undisturbed soil buffer around populations of exotics to slow their rate of spread.
- focusing primarily on mechanical control methods
How do you engage with those who have had a long history of resisting forest management?
We believe that timberland investing has changed and in today’s market requires a differentiated approach to investing, one that includes the kind of climate-smart forestry that creates value for investors, stores carbon and helps mitigate the impact of climate change. Since 2004 EFM has been developing climate-smart approaches to natural forest management that are the keys to unlocking value in a carbon-constrained future. Our approach allows us to create value beyond producing logs and wood fiber, including improved carbon storage, habitat, soil formation, climate regulation, and water storage and purification. Additional benefits include community enhancement by creating locally based employment opportunities alongside the economic contributions of timber harvests and forest management and restoration activities.
How do you factor the risk of value destruction from wildfires that might start elsewhere then encroach on your properties?
Fire and weather events (such as high winds) are risks inherent to forestland investment and management and can be part of the natural cycle of renewal and regeneration for natural forests. Fire incidence can be infrequent to frequent depending on the forest type but is generally increasing as a result of climate change. EFM moderates fire risk through the development of a detailed fire plan for each property, coordination with agencies and neighboring land owners on early detection and fire suppression, joining land-owner collaboratives that detect and suppress fire and through silvicultural treatments such as thinning and introducing physical fire breaks, all of which substantially reduce fire risk. We primarily self-insure through geographic diversification which is weighted (by value) towards the coastal, temperate region. This region is very wet, and the incidence of historical fires is so low that commercial insurance is not efficient given the cost of insurance and the potential incidence of loss from fire. However, we do seek insurance (although it is not consistently available) for properties that lie in drier regions where the incidence of fire is higher. Finally, should a fire occur in a merchantable stand of timber, generally 70-80% of the timber value of the merchantable stands can be captured through salvage harvesting in the first two years after a fire. With regard to fire risk from neighboring properties, one of our strategies is to create a shaded fuel break along our property borders. These fuel breaks provide a place to stop or slow down a fire that starts on an adjoining property, and is usually built next to a road that provides access for fire suppression.
Cornerstone’s Chief Impact Strategist, Katherine Pease, moderated a panel at The Exchange 2020, the annual conference organized by Social Impact Exchange (SIE). For the past ten years SIE has hosted the nation’s only annual conference exclusively focused on scaling social impact. At this year’s event the focus was “Unifying Leadership.”
The session “Financing Change and Financial Inclusion explored innovative and promising financing strategies that support systems change efforts over the long haul and at the appropriate levels. The panel discussed how to increase effective capital flow into low income communities and what it takes to build the field infrastructure to do this well and at scale, such as the necessary structural adaptations and firms that are driving different investment models to shift the system.
— Ben Bynum, M.D., Portfolio Director, Program Related Investments, Colorado Health Foundation
— Eleni Delimpaltadaki Janis, Chief Capital Markets Officer, National Community Reinvestment Coalition
— Jake Segal, Vice President of Advisory Services, Social Finance
— Ebony Thomas, Racial Equality and Economic Opportunity Initiative Program Executive, Bank of America
On September 23, 2020, the Securities and Exchange Commission (SEC) announced amendments to the rule that determines eligibility requirements for a shareholder proposal to be included in the proxy statement of a public company.[i] It took this decision despite vocal opposition from asset managers and asset owners, shareholder advocacy and financial industry organizations.
In our opinion, these amendments to Rule 14a-8 will significantly hinder the ability of shareholders to advocate for positive changes in corporate governance and practices. While these amendments will affect all resolutions, we are especially concerned that shareholders will find it significantly harder to raise critical environmental, social and governance (ESG) issues with companies.
More specifically, in our opinion, the amendments will greatly hinder the ability of investors to gain access to data that helps them assess corporate ESG performance. Shareholder resolutions are one of the only tools available to concerned shareholders who want to understand what companies are doing in relation to various ESG issues and ultimately to help improve corporate practices. Examples of successful shareholder initiatives in recent years includes:
- Barclays PLC is the largest fossil fuel financier in Europe and among the largest globally. In 2020, investors identified Barclays as having weaker climate policy vs. some of its European peers. The campaign group, ShareAction, spearheaded the shareholder vote with support from As You Sow and various other shareholder advocates. Following this investor engagement, Barclays said it will implement measures to reduce its carbon footprint to net zero by 2050 beginning with its power and energy portfolios, which it plans to reduce in carbon-dioxide intensity by 30% and 15%, respectively, by 2025. [ii]
- In 2017, a coalition of 71 investors issued a warning regarding the overuse of antibiotics by food and restaurant companies. The concern focused on how overuse of antibiotics in meat and poultry builds resistance in humans. [iii] As of 2019, 13 of the biggest restaurant chains have made progress putting responsible antibiotic use policies into place including Burger King, Chipotle, McDonald’s and others. More are making headway to improve, e.g., Applebee’s and Pizza Hut. Action to eliminate and or reduce the use of antibiotics in beef is lagging behind poultry but some progress has been made thanks to shareholder engagement and action.[iv]
Ultimately, shareholders are the biggest losers in this change to SEC regulations. Resolutions often raise critical issues and provide companies with important information that can be used by management to prevent future financial and reputational risks related to ESG factors.
The amendments to SEC rule won’t end shareholder engagement, though they will make the process more drawn-out and costly. Nonetheless, we strongly encourage investors to continue engaging with the companies they are invested in and to work with their asset managers, investment advisors and/or nonprofit intermediaries and actively vote their proxies and support important resolutions on the issues they care about. The results may prove to be worth the effort.
Download a PDF of SEC Setback for Shareholders.
On October 5, Cornerstone CEO Erika Karp joined Mark Van Ness, Founder of Real Leaders, and Margret Trilli, CEO & CIO of ImpactAssets, for a discussion on the challenges and opportunities of leadership at a time of crisis. The Ethical Finance 2020 conference is hosted by Global Ethical Finance.
During Climate Week NYC 2020, Cornerstone Capital Group hosted eminent climate scientist Sir David King, Founder of the Centre for Climate Repair at Cambridge University. The Centre is a cross-disciplinary research institution, aiming to develop and understand the solutions that will safeguard our planet from the disastrous consequences of global warming. Climate Week NYC, the annual climate summit held in association with the United Nations and New York City, brings together business and government leaders to share developments in climate action and find areas of future collaboration.
Sir David possesses a wealth of experience in climate science, having served as the UK’s Special Envoy on Climate Change, and as the UK Government’s Chief Scientific Adviser. He has published over 500 scientific papers, covering policy, climate change, and physical chemistry.
Cornerstone CEO Erika Karp hosted this opportunity to hear from one of the most distinguished leaders in the field. Chief Impact Strategist Katherine Pease shared perspectives on how to embed climate action as a component of one’s investments.
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.
Investment News, June 12: Erika Karp sits down with Investment News for a brief conversation about impact investing and social issues. View the video here:
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 firstname.lastname@example.org 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.