This transcript of a recent interview first appeared on UBS Wealth Management’s Intellectual Capital Blog. Reprinted with permission.
Many of you may remember Erika Karp, a long-term UBS veteran, who was head of Global Sector Research at UBS Investment Bank until 2013. Already back then, she was a very vocal and influential proponent of sustainable investing. Meanwhile, she has raised the stakes even more by founding Cornerstone Capital Group, a firm with the mission “to apply the principles of sustainable finance across the capital markets enhancing transparency and collaboration”. We continue our interview series with this leading voice in the field of sustainable investing.
Stephen Freedman: Erika, how would you define corporate sustainability?
Erika Karp: At Cornerstone, we have an explicit definition of corporate sustainability. And by the way, we prefer talking about “corporate excellence,” which we think is synonymous. To us, corporate excellence is defined as “the relentless pursuit of material progress towards a more regenerative and inclusive economy.” This is a systems-level and inclusive definition. When we find companies that truly embrace that, then we’ve found something that is really constructive for capitalism.
Why should investors focus on sustainability today?
Seeking corporate excellence (or the lack thereof) is the focus of investors. When you take a broad definition of sustainability, you are doing a systematic analysis of environmental, social and governance (ESG) factors in the business context. You’re bringing transparency to the investment process, and you’re seeking consistency and accountability across an organization. Every investor should be thinking about the most pivotal, structural, economic and business drivers that touch an industry, a company, and ultimately affect corporate profitability. I simply don’t believe that good risk-adjusted-return analysis can be done without systematically looking at ESG factors. In the end, I would argue that sustainable investing should simply be called investing. Sustainable finance is simply finance. It is the next iteration of finance, it represents an enhanced analytical process because, when examining a company, understanding which stakeholders are affected and what major trends are going to influence the company is an absolute economic imperative.
You mentioned the E, S and G factors. Can you expand on Governance and its importance?
Sure. In fact, I would actually argue that it should be the G first; and then the E and the S. If you get the governance right, then you can get the environmental, the social and—of course—the economics right. Good governance comes first. It implies being very conscious of both risks and opportunities in the long run; being very conscious of conflicts that may exist and dealing with them; understanding everything from top to bottom in terms of organizations and the challenges they face; and creating organizations that have a culture of trust, innovation, respect, creativity and accountability.
Can you tell us a bit about your role in the sustainable investing community?
In founding Cornerstone, we believe that a systems-level approach to sustainable capitalism is critical. We look for all kinds of collaborations and partnerships so we can grow the pie together. In figuring out how to truly serve the needs of asset owners, you have to touch multiple pieces of the capital markets and find appropriate synergies. Notwithstanding the challenges and distortions that capitalism has faced, it is still the best system the world has ever known for creating prosperity. So we just have to fix it. Occasionally there needs to be business model innovation for transformation. That’s what we intend to help do … re-orient capitalism towards its best and highest purposes.
What trends are you seeing in the sustainable investing landscape?
There are lots of things shifting at the same time and in the same direction, which is huge and dramatic. Take big data—for example—the ability to turn massive amounts of noise into insight. Social media now provides an unprecedented amount of transparency of information around the world. Transparency can be transformational. The regulatory scrutiny under which corporations have been, post-crisis, is another thing that is unprecedented. And critically, we are finally starting to see standards for disclosure of ESG factors by corporations. Standards are a form of infrastructure that has not existed before. Finally, in the capital markets, asset owners are beginning to take back the ability to act like owners as opposed to delegating their responsibilities. The confluence of all these factors is making me believe that it’s the absolute right time to embrace sustainability.
Stephen Freedman, PhD, CFA, is Head of Thematic and Sustainable Investing Strategy at UBS Wealth Management Americas. He joined UBS as an Economist in 1998.