Gabriel Wilson-Otto
Gabriel Wilson-Otto is the Head of Sustainable Investing Strategy at Fidelity International, responsible for the global development of sustainable investment frameworks, policies, tools, and products. He joined Fidelity from BNP Paribas Asset Management where he was the Global Head of Sustainability Research and previously held the position of Head of Stewardship, Asia Pacific. Gabriel has a background in finance and economics, holds a CFA charter, and has a Bachelor of Commerce (Finance and Economics) and a Bachelor of Information Systems from the University of Melbourne.
So it was zero focus on Alpha generation or making money. It was more about ensuring that your money is aligned with your own values. And so within the region, the earliest origins of that and around Islamic investing or other Slavic finance and at that level of value alignment. And then also in the West, you've got a lot of their religious endowment funds and whether there's a church based home or other faith based entities which are looking at driving, either supporting the communities or prohibiting investing in specific spaces.
— Gabriel Wilson-Otto
Interview transcript
Can you tell us about yourself and then how you got into your current role?
I am responsible for sustainable investing strategy for Fidelity. Basically what we do is that the role is effectively looking at frameworks structure, product and governance for sustainable investing. So, within that then of relevance to this what does an impact funds mainly for Fidelity and how do we communicate that to clients and other stakeholders? How do we measure impact? Identify, monitor, report and run those funds. It's something that we've historically been very cautious about doing partly because of participation primarily in public markets as opposed to private markets where you've got more control and attribution.
I started out as a fundamental analyst looking at the consumer space, did that for about seven years, then moved into a product with fundamental integration and ESG. And did that for about five years and then into stewardship roles and research scoring before coming over to the policy side at FIL. So that's kind of like the career arc of getting out. But it's from what I'm, I think it's been an interesting transformation in the market of ESG investing moving into mainstream and then I described that the phrase faith the fake citizen, basically moving from ESG integration being seen as a sustainable product to thematic and impact being seen as where you should be allocating money if you actually want to move the dial in the real world as opposed to mitigate risk and generate it. So it's interesting. I think it's an interesting discussion because it is coming at a time when that is becoming more and more important for people to be able to demonstrate and evidence.
Can you share a little bit about the changes you've seen in the last decade or so, how investors are thinking about this globally and in Asia?
There's been a couple major phases of sustainable investing. So the origin is my framing of it anyway, the origin of sustainable investing. I started with more value alignment. So it was zero focus on Alpha generation or making money. It was more about ensuring that your money is aligned with your own values. And so within the region, the earliest origins of that and around Islamic investing or other Slavic finance and at that level of value alignment. And then also in the West, you've got a lot of their religious endowment funds and whether there's a church based home or other faith based entities which are looking at driving, either supporting the communities or prohibiting investing in specific spaces. So that's much more of a negative screening approach. Which is the background of a lot of SI in a lot of parts of the world. Throughout the 90s and early 2000s. There are massive corporate governance scandals in the UK, Australia and a few other markets and the huge catalyst for a shift of it from a negative screen to a part of fundamental due diligence and how you're operating and so that you pay pensions act and a few others and the early 2000s in Australia, there was this push towards ESG as being incorporated as part of fiduciary duty with a primary focus on governance. So it was really the start of late night late in the two in the 90s and into 2000s. Like it was the Cadbury review in the UK which kick started and then that led to pension funds starting to integrate ESG more systematically and explaining how they were considering it. Next step of it becoming more mainstream and less rain driven was after the GFC (Global Financial Crisis) where corporate other requirements became more important and there was a view that if you were able to integrate ESG characteristics you would outperform. And so, that was the growing call for ESG to be integrated as part of fiduciary duty. And from my perspective, that was really the catalyst moving from each part of an investment portfolio or a break and a certain part of a portfolio through to mainstream investing where, if you're thinking about it from a values perspective, that only applies to part of the world that shares your values, if you're thinking about making money than everyone, so that was really started to kick off from around 2010 2015 That was starting to gain traction but was still very nice. And then the changes in Asia and also focus on Asia are some of the drivers just for what we're here so it might as well. So basically some of the changes though there were two big drivers in Asia that were happening at the same time. One was a rig driven reality of people mandating disclosure or minimum standards and, and also lifting environmental standards in China and other markets. So around 2013 and 2015, there was a raft of environmental reform, which started to mean that if you were polluting the environment, it was no longer a good way to save money. It was a liability to your company and you were likely to get caught and fined or shut down. And so things that had previously been seen as non financial data, very quickly became financial data for these companies. So there was that reg driven transition or reality transition. And that's only strengthened with climate change, geopolitical challenge, data privacy submission going on ahead. It's one pillar on the pillar. So that's kind of like your alpha focus even if you don't believe in saving the world and are doing the right thing. You will do these things to make money because it's just the reality in which you're operating. On the other hand, the values based side of things has increased significantly as well. And so this is a younger generation, millennials, second third generation family officers. Also consumers are starting to shift behaviour to align with values. And so again, that reinforced some of the financial arguments because if your consumers don't want plastic straws, some straw factory or you're in trouble so there's part of that reinforcing component but also increasing demand for ESG funds in other markets, and European investors actually drove a lot of that in Asia. So when MSCI (index) added China to global indexes, suddenly, local fund managers in the mainland could differentiate themselves through ESG management. And there were investors coming down saying we won't buy your fund unless we integrate ESG. And so they were like, sure we can do that for you. No problem. We might think you're crazy, but we can do it. So I thought that was also part of the drive. So for me, there were two big buckets. 2018 was when it really accelerated. So it was a bit of a tipping point. It was growing in the background, but a lot of managers that you'd speak to in Asia still thought that ESG was philanthropy. It wasn't associated with making money or mainstream investments or anything to do with what you do with your business. It's kind of what you do on the side. So 2018 was a bit of a tipping point where more and more people thought it was partly reg driven, climate change COVID But a lot of people started focusing on social and environmental issues as being really important. And so it was quite interesting. So if we look at the 2000s It was all about governance. If we look at 2010s It was tilting more to ans and now its governance is kind of kicking back in as well or attaining its rightful places in the focus that of God. But there was really that pivot towards and over sort of like from 2019 with COVID and, and the focus on looking after employees' social contract social licence, and other sorts of areas. So it's now at a point where a lot of the regulation has come in looking at product labelling structures requirements. So the regulation historically has been framework oriented around disclosure with limited disclosure, limited regulations targeting fund labelling or fund names. It was all optional. There were industry standards, not government or reg standards, the amount of assets that had moved into sustainable investing. It basically became the top item on every regulator's wishlist around limiting greenwashing consumer protection because these funds have risen so quickly. Um, so it's an inevitable consequence of the mainstreaming of ESG is that it faces more regulation, and SFDR, SDR and the local regs really started kicking in in the last couple of years, and then that's led led to almost a transformation of the industry's product range and activities and responses. And out of that, we're seeing the shift from a risk based approach as being a definition of ESG and sustainable or responsible management. So that being mainstream, you're just doing your job as a manager. And then clients increasingly demand a darker green version of impact of thematic investing, and that more they're going back to more of that value alignment. Where you are willing to potentially sacrifice exposure to a category such as oil and gas, with the view that that's part of your value alignment and you're having more of a thematic focus. So instead of investing in the best companies across all sectors, you're selecting sectors or themes or topics that you want to invest in, but on your own can do preferences. It's still the minority of assets. And part of that is because the core funds where you do SG integration or risk mitigation can be relevant everywhere. So you can have every fund in that space. So the assets can grow really quickly. Somatic funds or dark green funds will necessarily have more tracking area for a benchmark or an index. And so they may not be appropriate to be your core holding for all of your assets because they'll be far more volatile because of that lack of diversification or the potential exposure to an individual theme which could under or outperform. So there's still a small amount of assets but they're growing really quickly. And there's an increasing focus on how managers can provide clients with an appropriate range in that space.
How do investors navigate the kind of volatility you mentioned?
It depends on what you're doing. So there's a spectrum within it. So if you're looking purely at exclusions, you can knock off a handful of sectors 10% of the universe pretty easily without introducing a massive amount of volatility or exposure. There are challenges whether this is thermal coal or others where you could have short periods where it might rally, but over a longer term timeframe, it's unlikely to have a huge impact on what you're doing. So yes, it results in volatility, but the areas where you see more of an impact is where you have a narrower theme or your impact focused as a fund. So if you're focused hypothetically, on renewable energy, I think it's 2020 when the sector outperformed by 75% and then massively underperformed the next year. So if you decided to put your life savings into renewable energy in 2021, it'd be very unhappy. If you'd done it then 2020 You'd be laughing. So again, is that an appropriate product for a retail investor to put all their money in? Or is it something that you might say, Hey, I've got my core version of Best in Class ESG companies but then where I have a few exclusions, but then I really care about social housing. I really care about education, health care and climate change. So I'm going to invest in these themes, but with the view that that part of the portfolio could be way more volatile than the rest because it will depend on the performance of that individual sector in any given market.
What do investors think about long term investment views with this level of volatility?
They say part of it depends on what you're using the product for and the way it sits in your portfolio. So there's this champion. So the liquidity can be a problem if you're a fund that could face drawdowns, which again is a challenge for impact. So if you're a closed end fund where you know you've got it, for example. then you don't have to worry about the volatility of the underlying asset class within that period. It's not like you can't say redemptions, you can just be patient with the capital. If it's and this is enough, one reason why it's been predominantly in private assets, because they typically have those sorts of structures. Whereas if you're in a listed equities space, for example, your list of Traded Funds, hypothetically halfway through your project if you're massively underperforming, you could get people wanting to have redemption. So the level of volatility can be an issue for some strategies. It also depends on the manager and whether they're, like I know when, previously, when I was on, sell side talking to a lot of side clients, a lot of people would say that they are long term managers, but they would have quarterly performance reviews. And if they underperformed for a few quarters, they'd be held to account. And so the question is great, how, how aligned are your incentives with what you're trying to achieve? And so that can be a massive issue for a lot of managers that have a shorter term focus in Asia, that's a huge issue. The vast majority of performance measurement of local companies is really short term. My favourite anecdote was one of the first meetings I went to here, I was told someone was a long term investor, because they invest for a month. Think that that sort of that that sort of difference in mindset around a month is a long time versus five to 10 years is a decent time horizon. You have a huge disconnect and so so again, depending on who the investor is, what their objective is, what the asset class and what they're trying to achieve, and then where it sits in your portfolio. So, if it's, again, if it's that simple of a portfolio where it's for values alignment, and you could have a core part of the portfolio where you can facilitate income or draw downs or other areas on it, so again, it just highlights that it can be part of like asset allocation, but it's unlikely to be 100% of an allocation that someone makes given the challenges and then volatility or lack of liquidity.
Why do you think there's such a, I guess, mentality, especially for Asian investors compared to, you know, global investors on the type of timeframe horizon that they're looking at?
I'm gonna say part of it. In part, there is a less developed institutional and pension market in Asia. And so you have a if you look at mainland China, their percentage of assets held by institutions versus retail is very, very different. And then this arises in the same sort of established funds market or long term investment product market, and a lot of people therefore are retail investors trading on momentum or trading on shorter term things within the market. It's the mentality, approach and structure of the market. I think it is a big difference. And so if you're looking for a rapid return and you see your family go down, then you can quickly trade out of that and then trade into one that you think is performing better. Whereas if it's mentioned funds or Australian superannuation funds, it's locked up, but it's patient capital, they're investing over a lifecycle of their beneficiaries. So I think that it will start to converge towards a more long term focus as that institutional pillar builds out and especially as Mainland China builds out that sort of stuff. Family Offices are probably the best example of potentially more patient capital with some of the topics, but again, it depends on the manager. It depends on the individual like them again, they could have a quarterly review where if they haven't made money in that quarter, they get fired. So it's not a unique factor for Asia. I think that the US average holding periods globally have been falling massively towards short, normal short termism and trading. It's more pronounced in the region than in other markets.
Why do you think that it's happening globally? That doesn't seem to align with all these conversations about climate change. We need to think about the long term, but if your holding period is actually getting shorter, then…?
Yes, yeah. It's difficult. I haven't looked into it enough to have a good answer. We did some research on it years ago. And part of it is the increasing so it's the increasing access availability and lower transaction costs. So historically, if you had to go to your broker and write them a check that you had to get from your bank, and then they executed a trade, which was hugely expensive. You weren't going to be a day trader. The average retail investor isn't going to be sitting there trading whereas now if you're sitting on a train, and you're on Reddit and you read about a great meme and stock that's gone up 50% You jump into Robin Hood, you put 20 bucks on it, and then you look at when you get home and see whether you've made money There's this like, there's a huge change in the structure and access to the market, as well as a lower trading costs and more information and more ability to trade. So I think that's part of it. but I'm not sure if there's been like I'm not definitely not qualified to say whether there's been a fundamental shift in people's outlooks or corporate outlooks. I think that the average CEO tenure has been falling, which could be influenced and there's more stock based compensation, which is short term in nature. So I think that some of these elements could be built for more structural reasons.
Going back to the earlier comment you made, you said that in 2018, you saw a shift in people's mentalities, especially in this region, to think about sustainable investing. How did Covid play a role in this?
Because if we look at history, so if we look at their 2000s and governance scandals, that was a great watershed moment for saying governance matters, because people have just lost millions or billions of dollars because of the governance scandal. So then everyone starts looking at governance issues and saying, Where can I avoid that happening again, we saw that in the early 2000s. And sorry, in the early 2010s, with some mainland Chinese companies, where there were scandals that vaccine makers and a few others, people were interested in ESG as a way of protecting from this sort of risk. And COVID was, and then environmental changes shifted to the pillar in terms of what are the environmental risks or climate change risks that I can avoid? For COVID It was a really interesting one because you sort of started to see the impact of s. So if you're looking at Sovereign sustainability ratings or sovereign performance this is a hilarious anecdote. But I had a discussion with a client who was saying that we were silly for having hospital beds and the strength of the basic healthcare system as a factor in a sovereign's performance or ESG rating. They were saying it's irrelevant. Why does that matter? And then, a year later, you've got COVID here and then clearly the strength of the healthcare system, the strength of the s pillar for a country starts massively. So as to the quality of life impacts on sorts of elements is at the input a spotlight on a lot of practices that have been previously seen as okay or not gotten the same level of focus. So for example, the gig economy and is that actually an ethical way of employing people with zero protection is effectively like Bill as a way of providing flexibility, access, rolling thumbs, all those sorts of things, but at the same time, you're stripping away rights of health care plans, like it was your job and COVID suddenly going to zero income zero benefits. And so there was a question of how do different companies respond to this? Do they immediately cycle their employees? Do they start trying to provide different levels of support? And then the public started responding to that and championing companies that were offering appropriate support that were being flexible that were trying to support their workforces through a challenging period, so that they'd also saw a shift from green bonds to social bonds be hitting the market. So social bonds are trying to address challenges from COVID started really hitting. So again, that sort of thing was a reflection of people see, SJ issues have been really important and the need for resilience. The other element to it was that during that period, companies with high ESG scores significantly outperformed and there was a lot of inflow into those funds. So people during a period where social issues are front of mind will bring money to social bonds to ESG funds, and those better financial results because they had better structured systems infrastructure for treatment of employees. Resilience and blockchains. So resilience, and as well as being at the front of everyone's mind. So I think that was one of the reasons why there was a big focus over that period. And at the same time, it coincided with the landmark regulations coming in the EU around SFTR. Regulators in the last year or two have seen the region and started looking at product labelling different requirements. And this effectively meant that a lot of people in Europe will not buy a fund if it's not an ESG fund to some degree. So you've effectively seen a huge change in general appetite for these funds, which have piggybacked off the back of that wave. So I don't but I think that it coincided with a few other areas and basically accelerated a lot of the trends. The other big one was the building back green or building back better plans that were being floated around the world, and everyone saw them as hugely supportive of a lot of ESG initiatives, which means that even people that didn't leave in ESG, as a values based system, we're looking at the cash they thought would flow into the is projects and starting to position their portfolios accordingly. That would be why the renewable energy sector outperformed so much in 2020. And so there's all these sorts of drivers that kind of hit at the same time.
If you look back in your career and in sustainable investing, have you seen that the metrics shifted from just purely environmental to other more socially driven themes? What has changed from when you first started?
There is a larger proportion of environmental and social formatic products, partly because environmental products are way easier. So, the environment has more global acceptance, and it's universal. So if we look at climate change as a great example of energy transition. It's seen as something that everyone knows about, and it's one common topic, and there's one metric you can use to measure it. The challenge with social is that it's way more complex. It's context specific or country specific in order to identify what is the top priority or what you should be focusing on. It can also be seen as super political, environmental Canada's Well, a bit social, more so on certain topics. And so it's and there's also a lack of standardised data to be able to report and demonstrate performance on it. So, a great example here is, like say, Well, we have seen more products leading into this with SDGs and social development, sustainable city isn't just transition and other sorts of areas where there's been healthcare education. Some of these funds, they're probably for demographics, these are some of the ageing demographics. These are some of the more common trends that are present on the S side, but there's definitely a tilt towards a. I think that in part, it's the prevalence of E issues and the ability to affiliate or associate with them more clearly. So climate change is something that everyone can see and see the impacts of it in the news and hits you have and there are a lot of mainstream investments and broad investment opportunities to target. If you look at, for example, modern slavery, hunger, education, there are some companies that are directly targeted towards addressing it, but there aren't the same sort of scalable ways of building a portfolio. So if I want to target access to nutrition in public markets, do I invest in supermarkets? Do I try to look at emerging market convenience stores? Does that count that there's always challenges of where you are actually contributing? What does it mean? Do I look at content and it can be used as a meal substitute for low income households? All those sorts of things. It's sort of like how do you think about building a portfolio around it and demonstrating impact? Whereas if I want to do it on the environment, I can look at deforestation pledges, I can look at water efficiency, I can look at carbon emissions. There's a raft of different metrics and topics and a wide range of industry standards. For social, it's harder to demonstrate thematic alignment. You can do it with SDGs and a broader approach, which is what a lot of people have been doing in the region. But beyond that, people want them but they're much more challenging to build as portfolios.
Yeah, that project sounds really interesting. And to the extent that you can share it, can you talk a little bit about, you know, who they worked with, and the collaborations that they had, and the process? You mentioned that it took them like six to 12 months just to structure it.
It took them ages to get it. So it was going back in memory, so I wasn't directly involved in it. It was the banking side of BNP. So not the asset management side. It's a public deal. I think there's public information about it. I think it's like the Trump ticket. I think it's tail or something like that tropical landscape forestry fund or something like that. I think we're working with WWF on the NGO side, and one or two other NGOs. And they were looking at different people taking different tranches of the debt, someone validating the quality of the project and what they were doing and then a private debt financing company to kind of take the commercial rate of return on it. And a few others, but it was the mental bottom line, the company name here ADM capital, we're the ones that we're partnering with them on. They've got their capital foundation here, that China water risk is part of. And Lisa Lisa Genasci was the one who was kind of structuring it and running it for them as part of that ADM capital foundation, so that they and BNP were the two main parties who were structuring and coordinating. But yeah, it was huge. It was a really good project, but very, very challenging to get off the ground. One thing that I haven't seen in the market, but I would like to see more of it's effectively where you have those sorts of projects that coordinate a broader impact. fund that can invest in similar topics. But without that level of complexity. So if you combine public and private markets, you've got the public markets, for some impact, but not as high quality or attributable, but then that provides the scale for the product which is then anchored or Cornerstone by one or two of these really high quality projects. And so then that allows you to actually Direct Capital more meaningfully towards it and but it effectively makes it a commercial vehicle as opposed to only doing one as sort of like a flagship and then stopping it creates the environment where you could potentially replicate it.
Can you hook me up with anyone from ADM?
I'm gonna say, I know someone there relatively well. Like, David, what is his name? I can put you in touch. But yeah, he's a good bloke from Tassie, very laid back and very involved in a lot of it. I'm not sure if he was directly involved in that, therefore, that'd be a better spokesperson at the firm like it's not one of the partners or anything like that if the firm but he can, yeah, it's a good person to talk to because at ADM, I got to talk to him because through the foundation and through some of the other funds that they've got they do some they do some really interesting work.
That's really good to know. Thanks. And, yeah, I guess like going back to one of the your earlier comments, which is, you know, you said that non financial data suddenly became financial data, like, have you seen any interesting examples of data where you're like, why is this even relevant, but that turns out to be super relevant, in like the investment process.
That was me teasing traditional finance a little bit, because from an ESG standpoint, a lot of people would have argued that it was always financially material. It's just within different frameworks. So for me, the biggest challenge is that a lot of things besides being a framework is really good at pointing towards materiality of what matters in different sectors. There's also on top of that sector specific materiality. So basically saying that safety is more important for a mining company than a bank, for example, it's less hazardous environment depending on the bank, but usually, so what the other concept for that is that where that will, where these things will top pick up or when it will be an issue or hard to evaluate. So if you're an agricultural company, and you're deforesting the Amazon, under the former president, that was less likely to get any political pushback or any material sanction or restrictions or were doing under the current administration, it's more likely to be at risk. And so that not only sector specific materiality, but there's the sort of the technical is the dynamic materiality. So it matters for the sector, but the point in time at which it will matter and varies. And so I think that a lot of what people were realising was that dynamic materiality element where they previously wrote it off as not being important. Like for example, if you're in a coal business in the early 2000s, you would have said that climate change was not unlikely to materially change asset allocations changes to cost of capital, there's never been any evidence of this or your back testing shows that you're fine and then you fast forward and then you start seeing huge disruption and impact across the sector in a lot of different countries. So it's about trying to pick that inflection point for when there will be a policy change or other shift. And so a lot of the ESG issues are literally about trying to say are there externalities which are not being priced? So am I all my input costs artificially low because I am getting my lumber from a dodgy source which couldn't see regulation or my labour costs too low because I'm sourcing from a country with poor labour protection rules and laterites Am I selling through a dodgy structure which means I have minimised my tax to 2% of my global revenue. All of these sorts of things could be perfectly legal. But if we look at global expectations and a long term trend, that definitely points of vulnerability within your business model where if regulation was to change, it could be impacted. And so it's not that the topics are material. It's more that depending on your investment time horizon, the chance of that policy change or consumer change can be high or low. So if you're trading every week, it's less likely that you'll see a fundamental change to the landscape. If you're holding for five or 10 years, you better be pretty sure that you're not going to see these sorts of dramatic shifts in market expectations or that you understand where these issues are. So that's, I think about it more from that perspective on climate change is a great one. Government policy has changed massively in the region. If we look at netzero commitments across the region versus 510 years ago, and the way that that's changed the reality for a lot of companies operating in the space. The other big ones are data privacy and security and cybersecurity. If we look at the way that that suddenly jumped up everyone's agenda, with all of the breaches in Australia, mountains from monitors from Medicare, some really sensitive data that was stolen. And now suddenly, every company wants to hire a data privacy and security team to come into the business and do analysis and to try and prevent it from happening. And for me, that doesn't mean that that wasn't an issue prior to it. It just means that suddenly the market's pricing is saying oh wow, this can really mess up your company if it goes wrong. So that's, I think that there's a huge number of examples of where it's been seen as being more material all of a sudden.
How do you or your team keep track of all these things? Like where do these data come from? Do they have to disclose it? How do you evaluate all the information?
I would say that there's probably two steps. The first one is about looking at identifying what matters. So the short list or wish list of what you want to get for each sector. So it's that materiality exercise of saying, what do we think we need to look out for for this company? Oh, and it can differ by country, it can differ by sector. Then the next step is trying to say, Okay, where do I get that data from? And what metrics can I use to do it? And at that point, you've got two parts. One is qualitative analysis, where you hire an army of people to look at each company and research the end, including speaking to the company and speaking to stakeholders trying to figure everything out. The other approach is you go for scale and standardisation. And then that's looking at data and trying to come up with a quantum model of scoring it. The problem with the quant model approach is that you are reliant on data. So if they don't disclose anything, you don't know how they're performing. You will be so reliant on that about 70% of the data that's available or policies. So you're trying to say Does having a policy say that you've got a good whistleblower policy and supply chain policy? Does that mean you don't have any issues in your supply chain? Is it enough of a statement or do you actually need more information about what's happened? So there's a problem of can you actually get actionable insights from the data you're getting? The other problem is that even when you've got data, you have to make assumptions around how to get an insight from it. So are you trying to say that disclosing the data is enough? Are you saying that you have to be the best in your sector? Are you saying you have to be the best in your country? What's the relevant benchmark? Can it be measured valid relative to your peers, or is it an absolute measurement? So if everyone in the sector is eight out of 10, and you're seven and a half out of 10, is that really bad? Or is that still pretty good? So it depends on what signal you're trying to get and how it's interpreted. So you've got a huge amount of issues on that side. On the qualitative side, you've got problems. So you get rid of all those questions you can kind of answer What are you trying to measure you can set a set of rules. The problem with that is that you have issues of standardisation. What does good look like? And do you have a team of 400 people where everyone has a different interpretation of the rules, or they're in countries with different cultures where you might have an Australian who refuses to give anyone more than a seven out of 10 because no one's perfect. We get people from an American background who like everyone's nine or a 10. So it's sort of how do you balance those sorts of differences and do calibration of expectations? So again, both of them have massive problems. I think that in Asia, the qualitative assessment, I think, is a massive advantage because of the lack of data and the need to be able to interpret things within a local context. So a good example of this is if you look at us, South Korea, it's mandatory for companies to have a majority of independent directors. That is one of the few markets in the region which is mandated so does that mean that South Korea has the best corporate governance in the region? Again, you look at the framework then you look at the reality and it's like, okay, this is a very poor signal about the quality of the board. But then what else do you have to go by? If you're trying to just use data, you don't have any other way of doing it so you fall back on rewarding data that isn't interpreted in this specific context or giving you the appropriate insight? So there's Yeah, So long answer to effectively say that we rely on the quality of analysis more. We have data to inform us that we have an analyst network that scores companies based on what we believe is material and the company's response and management of those issues. And then we also have other tools which look at climate on the alignment to net zero and alignment to contribution to SDGs through activities and products. So we try to slice it a few different ways to look at how companies are performing. Clearly it's not perfect, but in Asia, that is, in my view, a much better approach. To try to bridge some of these data gaps. MSCI and other data providers will typically where they don't have information, they'll say it's a bad company. So you end up with companies that don't disclose in English and get really low rakes. And is that an appropriate reflection of the company's performance or is it a more accurate statement to say we actually don't know how that company was before?
Yeah, that's a really good point. And, you know, obviously, with the qualitative side, you need a lot of manpower to, you know, to go through all these like records and do these like interpretation, right? And do you see that? Do you see a lot of asset managers or impact driven funds really investing in that to go through the qualitative side?
It depends on the size of the firm and focus on impact. So, impact has actually traditionally been more of a boutique focus. So it's been smaller, dedicated impact shops, which do the analysis because they're focused on private markets, individual investments, due diligence and doing the work and the data doesn't exist. So they have to get after us from the management team, to try and figure out a way of reporting to their stakeholders, increasingly, seeing impact funds start being launched in public markets, which is really interesting. It's also one of the categories for impact under SDI in the UK. So there's a chance that we see more and more impact funds being categorised. The problem here is what yardstick to use to demonstrate impact and where do you get the data from? And if you pretend she's a large asset manager, we're one of the few that use strong qualitative assessment. The vast majority of asset managers in the market use a quant approach. So it raises the question as to how do you demonstrate the achievement of your impact objective? Now, Are they consistent metrics the consistent standards that GIIN provides a good approach to it. There's a question around the incremental contribution and whether it's genuine impact is it incremental, is it attributable if it's in public markets, all these sorts of questions so GIIN have one view on that and other NGOs will have other views and more strict and impact and what it means. I think that there's a range of different outcomes here that the vast majority of impact funds that I have spoken to or seen. Do a lot of assets specific dedicated investment, but they're also small in size. So you can have I think it's, one of the insurance companies has an impact investing business which uses their own balance sheet. And I think that they the MAX SIZE OF IT IS 1 billion and again, you look at the scope of assets got and that's absolutely, and if you're looking at it from an asset management size, the idea of capping out a fund at 1 billion is sort of your you've only just reached reasonable scale up I would expect it to get a lot larger than that if it was it was successful fund. So again, it's sort of that that you need and part of the reason why is that they focus predominantly on private markets, so they just you can't you need a massive team if you want to start deploying that many that much capital, especially with the need to monitor to look at stakeholder impacts to look at trying to identify who is being impacted whether there's any potential adverse unforeseen impacts, how can they be mitigated, so to genuinely follow up and have a legitimate impact strategy, it's way more complex than a traditional thematic. So there's, and I think a lot of managers are just grappling with how to how that works and how to have a legitimate strategy in a private space.
I'm conscious of your time. So I have one last question for you. if you had a magic wand, like what would you use it to create impact and what kind of blockers would you try to remove?
For me. One of the biggest challenges is trying transparency of information and connecting funding connecting capital that wants to have impact with impactful projects. If you look at the latest, some great stats say that we've got something like anywhere from one and a half to two and a half trillion dollar annual shortfall to meet the SDG goals. So epic amounts of capital if we will get China and environmental goals they need hundreds of billions of dollars of private funding to meet their own climate objectives like picking a country around the world. There's an epic funding shortfall and a huge amount of positive projects that could go forward. The problem is how do you then link People's Pension funds or other sorts of things to these smaller scale projects that require significant due diligence where data isn't available where the right legal structure isn't present? It's very difficult to get access and due diligence on a lot of the assets, identify legitimate players, and then communicate that impact back. And so for me, this is where there's interesting questions around. How do you scale it? That's one of the reasons why I like the idea of putting it into a bigger fund, where you have pockets of these activities. So you can start developing a pipeline of where you need to hire due diligence. But hypothetically, if you had if I had my magic wand, you would have perfect information flow and transparency and identification of these projects. And then a way of basically tokenizing them and creating investment amongst a broad range of retail investors and others. So that would effectively end up with a marketplace for a broad range of impact strategies with verified and vetted transparent impact management, where you can then allocate your capital to it with low transaction costs. So you end up with different ways of pulling capital and putting it in so it's effectively a fancy crowdsourcing, slash structured approach for allocating capital and the magic wand is required to remove the risk and fraud and lack of proper impact and management and project execution. So I think that you need a structure you wouldn't just want the capital to flow directly. You would need an intermediary to run the project and to manage it and to make sure everything's there but it's that kind of structure and capital flow and transparency is in and it's just too labour intensive at the moment to have any of these products at scale.
Yeah, I was gonna add a follow up question, what kind of metrics do you even use to evaluate social impacts?
Right, because it is, it is quite interesting. Yeah. Exactly. Exactly. That's the key problem. So part of it is that, again, comes down to the difference between public and private markets. So if you're in a private market, it's super easy, because if I built that hospital, it wouldn't have been there if I hadn't built it. And you can now see that it's there. It treats this many people or if you're investing in those a great impact project, and I think it's like a blended finance project of running an ambulance system in India. Again, you can highlight the number of vehicles added, people treated, all these sorts of things. All of these sorts of things are really project specific, though. Yeah. If you have a deal, the size is very small. So if you then, like how many hospitals can you realistically build in a specific way, Is that all you're doing? Are you just that fund? Or are you an education product, which is a lot of what the NGOs and development banks and these sorts of things focus on? They just have specific approaches that they do. In private markets, you can do it and you can have project specific metrics or have a tilt. You can typically cap the amount of capital you can deploy in the markets that you can operate within and the speed of deployment. If you want something that is broad based or public markets, it becomes really difficult because there's typically no set metric. Are you targeting gender diversity on boards? That's an easy one. Are you targeting fatality rates within industrial companies and employee training safety lost time injury rates? Other sorts of things like that? So there's some metrics that span across a few different businesses that you can target. But again, what do you do then what's your narrative? What are you actually selling as a product if there are companies that have slightly better employee practices, and that's it? That's not a super story? If you then want to try and look at modern slavery, how do you have to do Do you have a labour practices fund, where you only invest in companies that are doing the best thing, but then again, that's actually counterproductive because you don't just want the best companies you want to invest in companies that currently have dodgy practices, but you can convince them to improve and then you can have real impact as opposed to just saying, I'm only going to invest in companies that don't do bad things and if they find something bad out of it, that's completely the wrong message. So again, there's a huge amount of challenges with trying to have the right metrics. So GINN has a set of metrics.
Yeah, so, so there's been a whole bunch of work to try and standardise metrics to impact reporting that they've done and I think it's like the iris plus set of metrics, which is a good approach. But again, the problem here is that almost none, almost none. Very few of those metrics are available publicly at scale for companies. So, again, helpful for private markets, challenging for public markets, and then that directly relates to the scale of capital that you can deploy. So if you're just talking about private markets, it's typically like there's this great example of this from BNP, where they did her projects where they partnered with a mezzanine debt finance company for I think it's like the tropical landscape Forest Fund or something like that. Where it was like a rubber plantation somewhere where they did this amazing collaboration with like all these different NGOs, local communities, to like doing a shared ownership of the lands for protection and all these sorts of things like absolutely amazing deals. I think it took like six to 12 months to structure and get everyone on board and to sign up all the different parties. And I think it was a couple 100 million in size. And so again, it's like yeah, that's not an insignificant sum, but from an institutional scale. You can't build a fund based on that much resource for that smaller deal. So, it becomes a very niche product where the actual return on time spent in structuring it is not actually good from a commercial standpoint. So the commercials of the deal are good but you'd have to have a ridiculously big team in order to be able to keep rolling them out or keep from executing it.