An Interview with Pierre Lenders, CFM

15 Jan

Introduction

Pierre Lenders heads ESG and Sustainability initiatives at CFM. This includes voting and engaging through various collaborative platforms as well as leading research and integration of financially material sustainability factors into all equity programs.

Following a discussion at the PRI in Person conference this year, we caught up with Pierre on the topic of who should drive the ESG agenda – governments and regulators or investors and private companies. The opinions he expresses here are solely his own:

What is your view on the idea (expressed by the FCA’s Sacha Sadan at the PRI conference) that we don’t have to wait for regulators to make things happen but actually investors, ESG ratings, and companies can push things to happen quicker?

I have for many years professed the same, but I’ve now come to the (almost) opposite conclusion.

My main conviction is that we’ll make no serious progress until regulators and governments talk to consumers as adults. We need to see them working out socially acceptable and credible plans for making polluters pay, for upgrading grids, for banning pesticides, for devoting money to public research, for repurposing the 1.3 trillion USD of subsidies that today go in the wrong places, and for forcing more transparency into lobbying practices. Without proper regulations and government-wide transition plans there will never be a full, market-wide transition.

My fear is that the more some do without involvement from regulators, the less regulators feel compelled to mandate anything. They can effectively leave these issues to be taken care of by someone else.

How do you think we got to this point?

From 2004 to 2012, some started seeing that investment had a role to play, and quantitative studies demonstrated that it wouldn’t necessarily cost investors much to introduce ESG.

From 2012 to 2020, discussions on ESG integration morphed from “you won’t lose money doing it” to “you’ll make money doing it”. Unsurprisingly, ESG integration became mainstream. From there, things would have been quite different if governments had played their role and delivered what this colossal shift in investor behavior was calling for, Unfortunately, they focused too much on anti-green washing regulations and not enough on actually greening the economic level playfield. The opportunity to vindicate the shift towards a fast transition was wasted when we exited COVID and when fresh cash (9 trillion) was injected into our economies, less than 4% of that money having any “green” conditionality. Drill baby drill, back to the old world.

Since early 2021, we’re back to economics 101. Either a business makes money within a reasonably short time frame, and investors buy, or it doesn’t, and investors pass. From the planet’s perspective, this is too risky. What if interest rates rise again? What if Trump does what he promises, to help brown and scrap green? Relying on investors’ good conscience is only going to bring the responsible investment movement back to where it started - a small ghetto movement where about 5% of the universe of sacrificial die-hards feel good about themselves even though they make little impact on the world.

Another example is carbon accounting which is just absurd. Imagine living in an economy where no company provides their financials, where you would have to rely on “rating agencies” and “models using sector averages or product coefficients” to estimate which company earns what. Without proper, quantitative, company specific data, how are we ever going to create a virtuous circle towards the internalization of externalities?

And that’s before we get to calculating biodiversity impacts, which are much harder than carbon emissions. The fascinating thing is that much better ideas have been floated, like the e-liability institute idea, but people aren’t talking about them. Why weren’t Professors Robert Kaplan and Karthik Ramanna invited to speak about their E-liability Institute proposal at PRI in Person?

What do you think should be our immediate priorities?

I think it’s urgent we have a better understanding of:

Which are the effective levers of change to focus on;
Which theory of change should be mobilized;
What are the transmission mechanisms from investors decisions to the real world needed to dissociate financed emissions from endorsed emissions; and
What “better” engagement looks like as a result.

Until we properly understand these elements and start to encourage proper, action-based, change from governments and regulators, I’m personally terrified we’ll keep failing at having any real impact.

Finally, how do you think these issues will be affected by the change in US government?

I think this election marks an acceleration of entrenched anti-ESG trends, on at least three dimensions: the role of institutions and regulations, the prominence of the shareholder, and the end of the distinction between facts and opinions.

We’ve now reached the moment of truth for ESG. It’s time to get priorities and responsibilities right to ensure we still have a properly functioning biosphere that can support 9 billion humans. We now must find socially acceptable ways to embrace sobriety or identify sources of joy beyond GDP growth. This will happen through political processes, not through investment decisions.

As investors, it’s not our job to define laws but we should scrutinize corporate lobbying, when it delays positive action, and urge policy-makers not to dismiss scientific evidence. It is the voice of science, of hard undisputable facts, that should be promoted by investors, disentangled from other “social” considerations, if we want it to be heard.

Please get in touch if you’d like to know more about this or any other ESG topic.