019 NO ORDINARY BUSINESS with Lorraine Grace

The Highlights

  • Responsible investing used to be all about negative screening, which is all about investing a portfolio that is in alignment with clients’ ethics… The industry has moved on from there.  Today, it’s a lot more about positive screening, searching for companies that embed responsible business conduct, so conducting their business in a way that reflects good environmental, social, and governance factors and also positively screening for companies that are generating products and services that are driving positive social and environmental impact.

  • I’ve seen challenges with philanthropy providing long term sustainable capital to keep philanthropic programmes running because it relies on donors and grants that often has to be constantly reapplied for. Donors are often only willing to give on a one-off basis. I believe that impact investing can offer solutions to solving problems by extending and scaling philanthropic efforts over the long run and providing more sustainable financial solutions by providing more sustainable capital to solve these global problems.

  • The term socially responsible investing now refers to a broader ecosystem of investment strategies that include responsible, sustainable and impact investing. Even within impact investing, different investors may prioritise impact and returns differently depending on their objectives. For investors, it is about seeking out the right type of SRI investment strategy that meets your values and objectives with risk/return/impact. 

  • We need to focus on educating the public. Education is power. I don’t think we’re doing enough around educating the public about the solutions that are out there currently like how to embrace the circular economy, how to recycle properly.

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Gina Pereira: It’s becoming increasingly evident that the domain of solving the world’s greatest sustainability challenges is no longer occupied by any specific sector. It is estimated that the annual cost of reaching its targets will be in the realm of USD 5-7 trillion annually, well beyond the capacity of government and philanthropic capital. What role does the private sector play in impact, particularly the secondary markets? What are the costs of inaction? 

Today’s guest on No Ordinary Business is here to explore these issues with us. Lorraine Grace is the Head of Socially Responsible Investment Research at Close Brothers Asset Management in London. Lorraine is the founder of the My World Project charity, the UK Ambassador for NEXUS, a member of the Wise Foundation New Gen Council, YPO YNG, Women for Women International Junior Leadership Circle, The ImPact’s Next Gen Leadership Council, and a board member of the USC Alumni Association of London. Lorraine, welcome to No Ordinary Business!

 

Lorraine Grace: Hi, thank you for having me. Please note the views expressed are my own and may not reflect the views of my employer.

 

Gina: I am looking forward to getting your insight on the role of private capital and in particular publicly traded companies playing in the impact space.

Before we get into that, would you share a little about your personal story? 

 

Lorraine: My journey really started with philanthropy. Philanthropy has always been rooted in my values and I was lucky to grow up with a family where philanthropy has been embraced for generations. I saw my parents often take entrepreneurial approaches towards causes that they were passionate about and found myself at 17 in the West Bank in a totally isolated village as the official photographer for the opening of the Middle East Children’s Institute. 

The children I photographed were obsessed with the camera and I learned that many of them had never seen or used cameras before so I promised to return and teach them photography. They were very isolated and really wanted their pictures taken and shown to people in the west. That inspired me to start my charity, My World Project. At the time I was also involved with a charity in New York, called Face to Face Faith to Faith, which teaches peaceful conflict resolution techniques to teenagers from conflict areas. I learned that the first step to peaceful conflict resolution is first: learning and understanding the other side of the story and then finding similarities with one another. On that day, I came up with the idea for My World Project, a charity operating in conflict areas that combines peaceful conflict resolution techniques and teaching photography skills to children, connecting them across the world with each other, and helping them to realise that we all share a set of common values no-matter where we are from. 

 From there, I found myself looking at a career in finance after University. I became an equity analyst in London and covered consumer and mining sectors. At that time I became involved with organisations that were focusing on social impact in finance and began serving as the NEXUS UK Ambassador. NEXUS is a global network that focuses on merging the world of wealth and social impact and includes young impact investors, social entrepreneurs, philanthropists and activists from around the world. Through that experience, I learned a lot about impact investing. Simultaneously, in early 2018, Close Brothers launched a new socially responsible investment portfolio service and I came on-board as the head of Socially Responsible Investment Research at Close Brothers.

 

Gina: Would you talk about the evolution of impact in the secondary markets?

 

Lorraine: Responsible investing used to be all about negative screening, which is all about investing a portfolio that is in alignment with clients’ ethics. It’s not actually something that is that new, this started with the Methodist Church more than 100 years ago in America because they didn’t want to invest in tobacco or weapons. From there, the Quakers came on-board with similar restrictions. Religious institutions didn’t want to invest in particular sectors because of their ethics and values. Now, this practice is called negative screening. 

The industry has moved on from there.  Today, it’s a lot more about positive screening, searching for companies that embed responsible business conduct, so conducting their business in a way that reflects good environmental, social, and governance factors and also positively screening for companies that are generating products and services that are driving positive social and environmental impact. There is research showing that companies that conduct themselves responsibly have historically outperformed those that don’t over a long term and by investing in innovative companies proactively addressing social and/or environmental issues, you also are encouraging companies to have a positive influence on the world and work towards sustainability. 

 

Gina: What are your thoughts on the estimated costs of achieving the United Nations’ Sustainable Development Goals (SDGs)?

 

Lorraine: With that cost, there’s an enormous potential benefit. I’ve read the research that shows that investing in SDGs as these goals are achieved, it could add more than USD 12 trillion to the global economy and that would benefit everybody.

 

Gina: What are your views on the role of the private sector in contributing this capital towards these objectives?

 

Lorraine: I really think that the private sector, public sector, civil society all need to work together in order to tackle the world’s challenges and that’s what we’re seeing more of now with sustainable and impact investing. Philanthropy plays a very important role fundraising can provide capital for solutions to big problems very quickly. When there’s a natural disaster and hundreds, thousands of people are in destitute conditions, philanthropy is a great tool for that kind of situation where you need to raise money fast and just get it to people as fast as possible.  We’ve seen that work. 

I’ve seen challenges with philanthropy providing long term sustainable capital to keep philanthropic programmes running because it relies on donors and grants that often has to be constantly reapplied for. Donors are often only willing to give on a one-off basis. I believe that impact investing can offer solutions to solving problems by extending and scaling philanthropic efforts over the long run and providing more sustainable financial solutions by providing more sustainable capital to solve these global problems.

 

Gina: One of the opportunities that have been identified for philanthropic capital is to support early-stage social enterprises that could be structured as for-profits or hybrids, what are your views?

 

Lorraine: I think that in the beginning, in some cases it makes sense to start with philanthropy to test some ideas, to adapt it, to get the social enterprise model right and then over time, use the social enterprise model to scale it. 

 

Gina: Following from that, based on the research that you’ve seen, would you elaborate on the long term financial performance of companies that not only adopt sustainable practices but also target specific social or environmental challenges through their products and services?

 

Lorraine: With Close SRI, we are targeting strong financial returns with a conscience for social good. For me, social impact, social good, environment sustainability, it’s all aligned with a company also driving good financial performance. The reason why is that as a long term investor, you need to have good environmental, social, and governance factors in order to avoid controversies, prevent high costs associated with new regulation coming in associated to climate change and also retain their employees. We also seek to identify innovative growth companies generating revenues from products and services aligned with the UN Sustainable Development Goals, and therefore have clear growth drivers to drive financial return. 

The term socially responsible investing now refers to a broader ecosystem of investment strategies that include responsible, sustainable and impact investing. Even within impact investing, different investors may prioritise impact and returns differently depending on their objectives. For investors, it is about seeking out the right type of SRI investment strategy that meets your values and objectives with risk/return/impact. 

The companies that I invest in must have strong, embedded values of sustainability into the way they run their business. I believe the values of the SDGs around social and environmental issues though positive impact and prosperity are key to the performance aspect as well. I seek to invest in companies that recognise and can adapt to global change.  For companies that do not embrace this theme, there’s a potential that they could be less sustainable over the long run if they would need a large injection of capital from stakeholders in order to compete in a world demanding sustainable profits.

 

Gina: How does this reconcile with the expectations for short-term returns? Do you feel that investors are willing to be more patient with their capital? 

 

Lorraine: That is one of the hurdles that we need to get past. Sustainable investors seek to benefit from the power of compounding over the long term. But there’s still a portion of the financial community that is focused on short-term returns. I hope that this is shifting and the willingness to embrace a longer-term strategy is growing but it’s definitely still a hurdle. In order to do impact investing and sustainable investing, you need may need a long time horizon to see the benefits from companies investing in sustainability. One think investors can do is be active and engage with companies to use all of your power as an investor to drive sustainability and that goes hand and hand with a long-term approach.

 

Gina: What are the drivers behind the shifts toward sustainable investing practices? 

 

Lorraine: Three main drivers are: climate change, regulation, and also beneficiaries. Climate change is no joke and we are going to need to invest billions, hundreds of billions of dollars into finding solutions to it each year if we are going to tackle this. Regulators are moving towards including ESG screening into fiduciary duties and we’re seeing a lot of countries step up their environmental protection regulations. In terms of beneficiaries, many millennials are saying that this is the only way that they want to invest. They are more focussed on social impact than past generations and want to have a positive impact on the world. There’s the idea of success that they embrace that is not just about getting to the largest salary, but is also about the impact that they’re having in their company and in society. 

 

Gina: What are the themes or the issues that you are focussing on in terms of industry objectives? 

 

Lorraine: Our investment proposition for socially responsible investing here at Close Brothers is focussed on targeting UN SDG themes. As companies have started using the SDGs as a framework to deliver impact that has united the public and private sectors. We see companies creating frameworks around the SDGs mapping out how all the different areas of the business including supply chain and distribution impact and align with the SDGs down to the granularity of the 169 targets. These goals were originally intended for government, for countries, but they have become the most unified framework for impact and are being adopted by companies and investors as well. 

 

Gina: Do you think that the SDGs could be the precursor to creating a strong framework for measurement?

 

Lorraine: It’s getting there. There are initiatives around benchmarking sectors around how they’re aligned with the SDGs. Companies are starting to report in alignment with them. So far, this is the most unified framework for impact that we have so far, being widely adopted across sectors.

 

Gina: What are the challenges associated with driving impact through publicly traded companies?

 

Lorraine: One of the challenges with public companies is the distribution of information on impact and environmental metrics is not necessarily consistent so you don’t get the same level of disclosure or alignment between metrics to compare companies with their peers as you would with financial reporting. Some ESG rating agencies reward companies just for disclosure around sustainability and impact, and this means that companies that have more resources to spend on reporting can look better just for that alone, which could be misleading to investors. 

 

Gina: From the shareholder engagement perspective, what opportunities are there in the public markets for different investors to come together to exercise their proxy votes or present shareholder resolutions in a unified or more impactful way?

 

Lorraine: This is an area that we have really ramped up our efforts in this year and there are services out there that help investors to collaborate and engage with companies. We signed up for a service called ISS to help with our shareholder engagement and voting for annual general meetings. 

 

Gina: What are the key challenges that you feel are impeding progress towards sustainability?

 

Lorraine: Cost can be an issue, sometimes the more sustainable solution could be more costly. If  management is incentivised on short-term measures, like quarterly profits and management incentives are not aligned with long term sustainability then they may be driven not to invest in the most sustainable solutions or to driving sustainability through the business operations if it is more costly in the short term. That’s why management incentive structures really need to become more aligned with long-term sustainability because what happens is that if they fix things with subpar measures, such as a quick fix, eventually that breaks and the business has even more cost. 

In terms of the regulations and measures by country and local governments, there tends to be a lack of targeted and efficient measures in place, especially to deal with climate change. One example is on recycling in the UK. You may have companies that are distributing packaging products nationally but then there are different regulations across cities on what’s recyclable. There are a lot of complexities that need to be worked through but it’s really important that governments make sure that new regulation is really efficient and targeted, with long-term plans, beyond putting taxes on ‘bad things’ such as plastic.

 

Gina: Shifting gears to risk, what are the principal risks that you think can hinder progress toward achieving the SDGs and achieving sustainability? Have you given any thoughts as to how we can mitigate those risks?

 

Lorraine: As I was just saying, the lack of targeted and efficient measures by government is a risk. Also time is a factor and we need to mobilise and start working together better. If we don’t work together across sectors, across regions then we’re not going to be able to tackle these challenges especially climate change and time has an exponential effect. 

Also, the lack of education is a risk. We need to focus on educating the public. Education is power. I don’t think we’re doing enough around educating the public about the solutions that are out there currently like how to embrace the circular economy, how to recycle properly. This can be done on a micro level, I’ve suggested recycling training for employees to Close Brothers. It’s in our human nature to want to live, to be healthy and to provide for future generations a good life so the more people that learn about sustainability and really understand what this is all about will naturally want to do it.

 

Gina: How would you define being socially responsible versus impact driven as a company?

 

Lorraine:  It is slightly different and yet one and the same. It is important to have a clear definition.  We see sustainability and investment firms starting up what we call ‘socially responsible investment strategy’ but they have varying definitions. In the beginning of any monumental change, there’s always a lot of confusion around terms. For me, a socially responsible company will embrace good environmental social and governance factors, they will embrace sustainability, drive it through their entire business, how they conduct themselves, and how they present themselves to the world. 

And then in terms of impact, I want to see impact delivered through products and services, and their strategy. That to me shows a company’s real commitment to embracing social impact for the long-term. It is important that impact is measured and reported effectively and tracked over time. 

For me, it’s important that companies are doing both.

  

Gina: If you were to offer any advice to someone who’s trying to decide how to invest their portfolio in a responsible way, how would you suggest that they approach the process?

 

Lorraine: In addition to all of the traditional investment criteria you would typically ask it’s important that their investments reflect their values and to communicate that into your investment manager and find an investment manager that is asking a lot of probing questions to companies about how they measure and define their impact and doesn’t just take the headline for granted. There’s so much behind those headline numbers and it’s important to know exactly what’s driving those headline impact statements to ensure the company is not green washing.

It is becoming harder for companies to keep up with green washing tactics because consumers are becoming better informed, but it still needs to be looked out for and so make sure that you find a manager that really knows their stuff.

 

Gina: I think that’s a great advice. If any of our readers want to reach out to you, how can they do so?

 

Lorraine: Readers can email me at Lorraine.Grace@closebrothers.com.

 

Gina: Thank you so much for your time today, for your insights. Your commitment is commendable.

 

Lorraine: Thank you so much for having me.