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Transcript: Podship Earth Episode 49: MATERIAL GIRL

JARED BLUMENFELD: Welcome to Podship Earth. This is your host Jared Blumenfeld.  About 55 billion shares of companies listed on stock exchanges from New York to Shenzhen are traded every day in large measure. The health of the planet depends on investment flowing to companies that are doing their best to tackle environmental and social issues from climate change to reducing toxins to paying a fair wage. The only problem is how do we determine clear standards to measure environmental performance. The story begins back in 1972 when the environmental group The Natural Resources Defense Council sued the Securities and Exchange Commission to require companies to disclose their environmental impacts to investors. Nearly 50 years later, the promise of that action is being realized. I meet up with Jean Rogers, who in 2011 founded the Sustainable Accounting Standards Board and although SASB may not have the catchiest name, it is fundamentally changing the way we look at environmental investing. Jean has a PHD in environmental engineering from the Illinois Institute of Technology and was a Loeb fellow at Harvard University before diving headfirst into investing. Jean and I worked together on the master plan to turn Treasure Island, which sits between San Francisco and Oakland, into the world's most sustainable community. At that time, Jean was an engineer for ARUP. So, Jean, the last time I saw you, we were on Treasure Island being interviewed for popular mechanics. The first and only time I'll be in popular mechanics. I mean you, you have a PHD in environmental engineering, so you could be in again. But for me, I was like so excited.  

JEAN ROGERS: In fact, after that interview, I started getting letters from prison, which is apparently the only place that they read Popular Mechanics.


JARED BLUMENFELD: What did the prisoners want to know? 


JEAN ROGERS: They wanted to know about sustainability in Treasure Island. 


JARED BLUMENFELD: How cool is that? 


JEAN ROGERS: It was actually very, very cool, except that the person who is writing the letters was in for life. But other than that -


JARED BLUMENFELD: Just that they had an interest is amazing. 


JEAN ROGERS: Absolutely. Absolutely. No, very, very cool.


JARED BLUMENFELD: So, how did you make the career switch from being an environmental engineer to a financial guru?


JEAN ROGERS: I started to learn about investing myself and was researching companies.


JARED BLUMENFELD: So, you wanted to invest money that you had?


JEAN ROGERS: Yes, my retirement, my 401 k, and learning about investing and learning about stocks and I was comparing some tech stocks actually at the time. It was around 2000.


JARED BLUMENFELD: At that time, couldn't you just invest in funds that were like labeled green?


JEAN ROGERS: A lot of that is actually greenwashing. Unless you really know what's in those funds. 

JARED BLUMENFELD: So, anyone can call anything green. 


JEAN ROGERS: Anyone can call anything green. There are no standards which is part of the reason why I got really interested in this. 




JEAN ROGERS: I wanted to know data on companies like resource efficiency on their greenhouse gas emissions and their water use and how they're managing their waste because I knew from my past life and doing project work that this was really important and could really affect how companies would perform. I approached it more like the engineer that I am, which is where's the data? I would like to have a Dataset to compare companies on performance other than just their financial performance. I'd like to understand their environmental performance, their social performance. Why can't I get that data? I know it's out there. I'd like to be able to benchmark and compare and then make a decision about who's positioned well. So, I sort of set out to learn why don't we have this kind of data?


JARED BLUMENFELD: And did we not have the data because the companies didn't want us to have it or because no one was really that interested in getting it?


JEAN ROGERS: We didn't have that data because there were no standards for that kind of data. The unsung hero of the capital markets in the US is the financial accounting standards board. There is such an organization and probably nobody writes them holiday cards or says thank you for what they do, but they are responsible for all of the financial data that we rely upon to make investment decisions. The quality of the data depends on their standards. And so, when I was learning to invest, I said, wow, why don't we have this data? Oh, we need standards. Well, who does this? Well, we have a financial accounting standards board, but we have no sustainability accounting standards board. And that's really where the idea began. And instead of just focusing on financial information, give us the environmental information, the social information that we need, which really helps us understand not just how companies are doing today or really how they did last quarter, but how they're going to do in the future, how well they're going to be positioned to deal with these big risks that we know are coming. Climate risk and social unrest and inequality. The companies that are really well positioned to outperform over time are the ones that are

managing the non -financial risks. And that's the data that we can't get. And that's the data that we didn't have standards for until now.


JARED BLUMENFELD: So, what does the sustainable investing world look like today, Jean?


JEAN ROGERS: Right now, it's chaos. It's the wild west, which means that there was a lot of interest now in investing in a way that's aligned with your personal values and the infrastructure that is our capital markets has to catch up with that interest. People want to know that if in their 401k they're investing their retirement savings, that they don't necessarily own tobacco stocks or gun stocks. It's actually easy to exclude companies that you don't want to hold. 


JARED BLUMENFELD: Yeah. We got like this big divestment. Exactly. Exactly. What people don't want is clear, precise. And then the question, it begs the question, well what do you want to invest in?


JEAN ROGERS: So, with everything that's left to invest in, and good investment practices tell us that you want to actually be fairly diversified across a different range of sectors. It's harder to know how well those companies are actually managing environmental and social issues. That takes research and digging, reading sustainability reports that companies put out. Nobody has time to do that kind of research every time you want to actually make an investment decision or make a change to your 401k.


JARED BLUMENFELD: And if no one's watching the really, I mean if it's not reported until you came up with the accounting standards, I mean if no one's watching, then no one's really measuring. No one's really taking notice of it. There were all these sustainability reports and it seems like a cottage industry producing all these reports telling people how green they are. I always just wondering like what the hell happens with those reports? Like whose ground truth in them.


JEAN ROGERS: That's exactly right. And can you imagine if as an investor for your 401k you didn't have any type of data, financial data on companies, you had to go read an annual report or God forbid a form 10k, which is what companies file with the Securities and Exchange Commission about their financials. If you had to read individual reports to make investment decisions, no one would invest, no one would be in the capital markets. We take that for granted that there are standards that serve up that information and a really useful way to compare performance. 


JARED BLUMENFELD:  So how did you go through, you know, this kind of complex question around where you invest to a much, much larger step of founding the sustainability accounting standards or SASB?


JEAN ROGERS: So, so when I first realized that standards were really the missing link between me and the information that I wanted to be able to invest, I started to research, well, what would it take to actually develop standards industry by industry?


JARED BLUMENFELD:  I mean like you went home one day and you're just like, hmm. You know what? Yeah, I wonder about these standards. I mean like how did that happen?


JEAN ROGERS: Well, I literally, you know, googled financial standards. I learned about the Financial Accounting Standards Board. They are a nonprofit, they're actually not a government agency. So, they do standards, for say, revenue recognition, profit and loss. So how a company puts out their financial statements and so that you can rely and know what Apple's market cap is at any given time. 


JARED BLUMENFELD:  So, your goal was to do a similar thing for the environment?

JEAN ROGERS: That's exactly right. For both environmental and social data. That was material. And this is a really important concept in what I learned around developing standards. 


JARED BLUMENFELD:  We're not talking about cloth here.


JEAN ROGERS: We're not talking about cloth, we're not talking about Madonna, though we could be. She is the original material girl. But materiality is the idea that environmental and social issues can in fact affect the financial performance of companies. And that is really important because that's what makes companies pay attention to it and want to manage the issues. That's what makes investors pay attention and want to adjust their investment portfolios accordingly. And there's one more really key player here, which is the Securities and Exchange Commission. They actually oversee this whole capital markets extravaganza of investors and companies and so forth. They oversee the flow of information and data and they actually require material information to be disclosed to investors. And so, when I learned that, a little kind of light bulb went off in my head. Oh, if it's material, then it already has to be disclosed. We just need the standards. So, I thought if we can just show that environmental issues are actually financially material to companies and social issues can be financially material, there you go. The law says it has to be disclosed. So, we're helping. We're doing standards to help the ICC investors and companies to understand what is material so that then became the challenge.


JARED BLUMENFELD: So, Jean, let me get this straight. So if there's a mining company with a huge amount of waste and tailings piles and all the other things

that are polluting rivers, lakes, streams, your point is that those emissions could lead to penalties that are a liability that's material enough that it warrants reporting to the Securities and Exchange Commission.


JEAN ROGERS: Mining companies engage in activities that are very impactful in a negative way to the environment and also to the communities in which they mine unless those impacts are being managed well by the company. And those impacts can include the loss of biodiversity, the loss of ecological habitat. They can include a water management issues, waste management issues, as well as emissions. Any one of those issues can be financially material if it's not being managed well by that mining company. And in theory, they should be disclosed. The performance should be disclosed for investors and companies should be working to improve performance and really manage them. And so, that's at the heart of what SASB does, which is to try to understand what issues are likely to be material. Which ones can really come back and bite the company if they're not managing it well? And set a standard for how they should report it.


JARED BLUMENFELD: Aren’t there already enough of these sustainability reports? 


JEAN ROGERS: Yes, the earth and our society doesn't need another report. It doesn't need another reporting standard. It needs better performance on those issues that really mattered.


JARED BLUMENFELD: Okay. So do your standards change for each industry?


JEAN ROGERS: It looks very different from industry to industry. And that was, I think a really huge breakthrough at SASB, which was understanding the difference between financial accounting standards, which are actually the same for every company in every industry, and sustainability accounting, which the type of issues, environmental and social issues, they look really unique. They are different for a healthcare company versus a banking company versus a mining company. But it's not rocket science.


JARED BLUMENFELD: That’s a different standard.


JEAN ROGERS: Exactly, you just have to be thoughtful about what are the issues.


JARED BLUMENFELD: So, you ended up doing 79 different industry types, 11 different sectors. Did you ever think it would get so large and complex, so many different moving parts?


JEAN ROGERS: When I was thinking about starting SASB, everybody said to me, you're crazy. There are too many issues, there's too many industries, it's impossible. And that just kind of made me think, is it really impossible? I mean I think we could maybe do this if we broke it down by sector, looked at industries that have similar issues and kind of grouped them. I had the good fortune of being exposed to the work of another incredible standard setting organization, the US Green Building Council, and they did just one industry- the real estate industry. And they actually defined what a green building was, and for the first time all these different actors, building owners, policy makers and architects, engineers, everybody involved in the building industry knew what a green building was and just got everybody on the same page working together. And you wouldn't think of doing a new building now without getting it Leeds certified.


JARED BLUMENFELD: Because you're not saying it is or isn't green, you'll just saying this is the measurement of whatever you think is material for that particular sector and then comparing it to kind of best in class for the same sector.


JEAN ROGERS: That's right. I watched what the US Green Building Council did for the green building industry and thought we just need to do that for 79 other industries. We need to sit down with stake holders, articulate what's material and the act of doing that brings clarity of what really matters, what should we be focused on here? When you define it an industry specific terms, it becomes really actionable and there's really just a few key things. So that's what makes the whole system manageable. Doing it by industry, defining what's material, and realizing that if we want companies to focus on actually improving performance and not just being a reporting exercise, we have to get it down to just a few things that really matter that they should be putting resources into.


JARED BLUMENFELD: Tell me about what it was like sitting down with these different industry groups from forestry to airlines to, you know, mining, agriculture. It must have been fascinating.


JEAN ROGERS: It was, it is fascinating. I mean every single industry has material sustainability issues, every single one. But they really look different and that is the fascinating part. The industries themselves really do know the issues deeply and they are often managing them or at least identifying them and starting to think about what needs to be done.


JARED BLUMENFELD: How does climate risk fit into all of this?

JEAN ROGERS: The scary thing about climate risk is that you actually can't diversify away from it. So, in other words, you can't start eliminating companies from your investment portfolio that are affected by climate risk, because there would be nothing left to invest in. Climate risk affects about 78% of companies that are in the capital markets. 


JARED BLUMENFELD: Which is incredible, right?


JEAN ROGERS: Which is incredible. You can't get away from it even if you wanted to, which means that you need to be identifying companies within industries that are managing it well. 


JARED BLUMENFELD: And what does managing it well look like?


JEAN ROGERS: Managing it well doesn't look like what most people think, which is eliminating greenhouse gas emissions or at least getting them down-


JARED BLUMENFELD: Because you would think that'd be a good start –


JEAN ROGERS: And it is a good start. But actually, a very small percentage of companies are responsible for the vast majority of greenhouse gas emissions. And we should definitely target those few companies and get the emissions down. Absolutely. The vast majority of companies in the capital markets are actually affected by those emissions. So, they need to be managing the effects of climate risks. So, what that looks like in real estate, managing your portfolio, the resilience of your real estate portfolio to be resilient to climate change.


JARED BLUMENFELD: So, if all your properties around the world were diversified, but they're all in areas that are likely to be subject to sea level rise, like is that level data that you can get?


JEAN ROGERS: And that's exactly how it's framed in the SASB standards for real estate, which is your exposure to climate risk in your portfolio by geographic area so that you can begin to understand that and manage it. In banks for example, it's what kind of things are they financing that are contributing to emissions so they don't particularly have their own emissions, but there are certainly financing things that would have exposure to emissions, coal fired power plants, etc. In healthcare, it's disease migration because we have different disease profiles with climate change. It's also business continuity risk. People don't think about the impact on healthcare delivery facilities during extreme storm events. But it's a hugely significant issue that healthcare delivery facilities need to have a much higher degree of readiness and resiliency in terms of climate related events.


JARED BLUMENFELD: So, if you were working at a mutual fund and you get your reporting data, you'd be able to rank within each different class - healthcare, food, real estate. You'd be able to rank the best in class, like who's dealing with climate risk the best. That will be the net effect of how your data's integrated into decision making. They could then say, this risk is material. We need to notice it, internalize it and make decisions on the basis of it.


JEAN ROGERS: I think the early days of thinking about climate risk in investment portfolios were more exclusionary. We’ll just not invest in oil and gas and we'll be done because those are the higher emissions and increasingly, investors and those who put mutual funds together are starting to realize everything is affected in some way. And so, what we're going to do is look at which companies are managing it well, which are managing it poorly, and we're going to select best in class companies that are really managing the energy transition and managing their exposure to climate risk.


JARED BLUMENFELD: So, when you talk to a mutual fund manager, are they saying to you, thank God you did this Jean. This is really helping us. Are they demonstrating that by putting their dollars in the companies that are best in class? Do you see that migration of money to companies that are taking things like climate risks seriously?


JEAN ROGERS: Yes, we do. And what is really interesting, Jared, is that there's been kind of a sea change in the major money managers, as well as large pension funds. In just the past five years, we've seen sustainable investing embraced by Vanguard, Blackrock, Fidelity. What is key to this shift is that it's now beginning to be understood that these risks actually are financial and material and so anyone with a long-term view that's in the market is now saying we must consider these environmental and social risks in what we're doing and climate risk being the most ubiquitous and the largest impact of really all of the environmental issues that are out there.


JARED BLUMENFELD: So, does that also mean like the folks who may not be managing those risks so well, are they coming to SASB and saying, you've got this wrong, we need to get higher ranked.


JEAN ROGERS: We are starting to get to the point where there's so much scrutiny now on how companies are performing, and there's so much hunger for this data, for really good data, reliable investment grade data on environmental performance and social performance that companies are scrambling to put controls in place for the data to understand how they are doing to benchmark their own performance against their peers.


JARED BLUMENFELD: So, Jean, not everyone is that thrilled with your standards. I remember like there was a lot of kind of frustration with the approach from people who bring shareholder resolutions and others saying, wow, like what are you doing? What was that all about?


JEAN ROGERS: Whenever you're doing, you know, any sort of transformative change, I think there will always be people who will think you're not going far enough. And the approach that SASB took was to work within the legal framing of the capital markets to set up a market institution that could exist right under the Securities and Exchange Commission. And not to be advocates for changing the law, which certainly could have been an approach that we could have taken. The way it exists, you have to disclose only what would be of interest to an investor in your company. So, we set up SASB to work under the law because it could go move faster, gain more traction, be immediately actionable by large mainstream investors. And because changing the laws in this country is for people with more patience than I have. We did get a lot of flack in the early days from socially responsible investors who thought that we were too narrowly defining materiality and that investors should not be the sole beneficiary of this information. So, you think you're going to have natural allies, but sometimes people, you know, think that you can and should be doing more. 


JARED BLUMENFELD: So, on this crazy journey that you've been on, Jean, have you made any strange bedfellows?


JEAN ROGERS: I actually made a big effort to make securities lawyers, my friends as part of this process because they are actually the gatekeepers for all of the information that you get on any public company. And it is the securities lawyers that really need to understand that environmental and social issues can be just as important and just as financially devastating as any other type of issue and that the information should be in the public eye.


JARED BLUMENFELD: Do you cover the insurance industry? 




JARED BLUMENFELD: Is that an industry sector? 




JARED BLUMENFELD: How are you measuring what is material for them? Cause obviously a lot of the climate disasters we've seen just here in California from fires to mudslides to flooding, there's a lot of fire and other payments that are going out there.


JEAN ROGERS: And that's exactly right. And you've actually hit on the heart of the issue that is the biggest one for the insurance industry, which is, what are they exposed to? And insurance companies are absolutely starting to understand this and to update their models, their actuarial models, which have not been designed to really incorporate climate risk and they are beginning to do that. And the standards for the insurance industry get at both their management and their modeling of climate risk as well as what they're exposed to in their portfolio.


JARED BLUMENFELD: People living in coastal areas like on the East Coast and Florida or the Carolinas, I read that are now unable to get insurance for their mortgage because the heightened risk of flooding and all the other insurance related exposures that they have.


JEAN ROGERS: That's exactly right. You know, insurance, as a model, as a risk abatement mechanism to mitigate risk is only viable up to a certain level of risk.

And then, you know, our planet doesn't care if everybody has insurance. The climate is going to keep on changing and our planet doesn't care if nobody can get insurance anymore. The climate is still going to keep on changing unless of course we deal with the root cause. The insurance field is already starting to recognize that certain risks are simply too expensive and they're not going to be in that game. 


JARED BLUMENFELD: Aren’t there also investors that are just like getting out of areas completely, saying we're just not going to invest in any of these type of things?


JEAN ROGERS: There are absolutely some asset managers and some mutual funds that just say, you know what? We're not going to be in the oil and gas sector to mitigate that risk. SASB has approached every industry by saying, you know what? Every industry has risks. And even in those industries that are high emitters or are significant contributors for example, to global greenhouse gas emissions, they still need standards and they still need to transition. And so, we have set standards for oil and gas and they include things like how they are managing greenhouse gas emissions, but also, for example, their reserves and the carbon content and how they are managing that risk, what we call stranded assets. And that there may not be able to actually bring those assets to market, those reserves to market. Are they understanding this transition and are they, you know, working to make the transition that's needed?


JARED BLUMENFELD: So, before your standards came, kind of the industry model seemed to be for the people who want to invest in green technologies, green industries, whatever those may be, without a lot of verification, you can invest in those and we're just going to leave the rest, the 95% of the capital markets alone. Basically, what you're saying is let's try and lift the tide so all boats in the capital market rise and become green, or at least you'll be able to differentiate between them within any market.


JEAN ROGERS: That's exactly right. In the scale and the magnitude of the problems that we're facing, particularly environmental problems, are such that we really need every industry to be moving in a more sustainable direction. And that's what my hope is for these standards. That they really can articulate what matters, get companies measuring and managing these environmental impacts and moving entire industries in a more sustainable direction because that's actually what's needed. Impact investing now is a new buzzword where you know, investors are basically looking not just to eliminate risk, but to actually do good with their money. And that's awesome by the way. And the scale of that is, you know, a couple of hundred billion dollars, but the scale of the capital markets is fast. You know, in the U.S., it's, it's approximately 30 something trillion. If we look at every industry and moving in a more sustainable direction, we really eclipse what is being done in the impact investing field and the philanthropic field to advance environmental issues. And that's the scale of change that SASB is really trying to support. It's trying to support every single investor and every single decision having the information that they need to make an informed responsible decision about the environmental impacts. And so that no one really has any excuses to not invest for the future, to not take into account these material risks. 


JARED BLUMENFELD: In terms of doing well by doing good, which is kind of the model that you're pursuing, Harvard did an analysis. So, not only is there a liability risk in materiality, there's also a benefit by doing the right thing to your bottom line.


JEAN ROGERS: This is one of the things in the last five years that really became a watershed piece of excellent research that was done out of Harvard University, which really ended up affecting the investment field. Prior to this study that you mentioned, people really thought that to do well by doing good, you had to take a haircut. In other words, you had to sort of invest in good companies and maybe they, you know, they would perform a little bit worse than the rest of the stock market. But that would be okay because you're investing with your values. Three professors at Harvard looked at who was performing well and poorly by industry, just on the issues that were likely to matter in that industry. What they did was they put a filter on the dataset for materiality, and all the previous studies had taken like one parameter, like carbon emissions and said, let's look at carbon emissions for every company under the sun and compare it to financial performance for every company under the sun. And guess what, we don't see a correlation or you know, we see a slight negative correlation. For the first time, putting on this lens of materiality, they found significant outperformance for the companies that performed well on material issues and they found a 6% alpha. It's called chasing alpha in the investment community. 6% performance above the market, how the market has performed, that was due to better performance on these factors. And that study, 6% alpha, got everybody's attention in the market. And so, it was a really wonderful validation that if you do focus on what's material, you actually will see a financial performance. You do see outperformance. There's no haircut. And I think that is really what shifted the focus from the boutique kind of fringe investors to these mainstream big actors who are in fact chasing alpha. And this now became a way to do it. So, perhaps not driven from a values perspective to develop funds that are focused on sustainability, but however it happens, that's okay.


JARED BLUMENFELD: We want the tent as big as big as possible.


JEAN ROGERS: That's exactly right. Everybody in the pool, it's warm. So, and that's, that's okay. 25% of the capital markets invests now today in 2019 with an eye towards environmental and social sustainability. I mean that's a transformative shift in the types of people that are in the capital markets and how they want to invest and what they want to think about.


JARED BLUMENFELD: Okay, so to come full circle Jean, what's in your 401k? How did it change seven years later?


JEAN ROGERS: That is very interesting. So, we are now having a rebalancing in my house and I have a husband and a daughter who are very interested in these issues and we are now looking for funds that are incorporating SASB because now it can be done. So, we are now looking at rebalancing our portfolio.


JARED BLUMENFELD: So, rebalancing with a view towards materiality? 


JEAN ROGERS: I'm actually the material girl, not Madonna. 




JEAN ROGERS:  And that's my Instagram handle.


JARED BLUMENFELD: Material girl is going to be the name of the episode.


JEAN ROGERS:  She’s just Madonna, I’m material girl.


JARED BLUMENFELD: Thank you, Jean. 


JEAN ROGERS: Thank you, Jared. 


JARED BLUMENFELD: A big thank you to Jean Rogers for talking with Podship Earth today. Jean’s quest to develop environmental and social standards that every industry sector required a massive mid-career change and yet within eight years, she raised millions of dollars, brought together securities and exchange experts and investors from around the world and just a few months ago published the first version of the SASB standards. The fact that companies are managing their environmental performance effectively are outperforming those who are not by up to 6% gives me hope that more and more attention will be paid to the material actions of each and every corporation.  And with more attention will come better accountability and performance. Thank you to Jean and all the pioneers and practitioners of sustainable investing who are really moving the needle by moving the money towards companies that are doing the right thing. In the next episode of Podship Earth, we talked to a former coast guard inspector about efforts to use marine protected areas to save the world's dwindling fish populations. Thank you so much for being part of the Podship Earth journey. From the entire Podship Earth crew, sound engineer Rob Speight, executive producer David Kahn and me, Jared Blumenfeld, have a great week of doing well by doing good.

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