The GreenBiz Interview

Erika Karp: Sustainable investing goes beyond 'pure imagination'

ShutterstockAndris Sondrol Visdal/AlexMLX

I first saw Erika Karp, CEO of financial services firm Cornerstone Capital Group, when she spoke at the 2016 BSR conference, held last November in New York City. The theme was “Be Bold,” and Karp lived up to the call: She prefaced her speech by playing the song “Pure Imagination,” performed by Gene Wilder in original Willy Wonka movie. “Want to change the world?” the lyrics asked, “There’s nothing to it.”  

Karp then laid out a vision to shift portfolio priorities among capital markets towards environmental, social and governance (ESG) factors. Cornerstone Capital Group — the house that Karp built — is an investment advisor with about $800 million in assets under management. It works with corporations, asset owners and financial institutions to promote research in the field of ESG analysis and facilitate capital introductions for organizations engaged in sustainable business practice. 

More than $8.7 trillion of investment capital is managed using ESG factors in U.S. markets. But Karp, a member of the World Economic Forum (WEF), a founding member of the Sustainability Accounting Standards Board (SASB) and a graduate of both Wharton and Columbia, isn’t resting on her laurels, as work remains to be done. Here, Karp discusses what it takes, besides imagination,  to operationalize a regenerative and inclusive form of capitalism.

Khalamayzer: How does the idea of imagination, of doing things differently, fit into a numbers-driven industry?

Erika Karp, founder and CEO of Cornerstone Capital Group.Karp: We take a systems-level approach to capitalism. The pieces of our business are synergistic with one another and that is unusual. In large financial services firms, you see a lot of siloed individuals and a lot of siloed thinking. We try to break down those silos and find the synergies across the business and client base.

I mentioned it’s a systems level approach because we believe that success breeds success and if we see a lot of money going towards sustainable investments, so will all of the other firms out there. That will accelerate the growth of the discipline.

Khalamayzer: What would you say to somebody who does not think that you can make a profit by investing in a sustainable portfolio?

Karp: I would talk about the reality. Studies by Harvard and Deutsche Bank show that by systematically looking at ESG factors, in the worst case, you’re doing the same as the market. But frankly, in the best case you’re actually outperforming the market.

And we as a firm argue that there is added predictive insight from deeply integrating ESG factors into the investment process. I would go a bit further and I would argue that to not attend to these ESG factors is a breach of fiduciary duty because they are material to the investment outcomes.

The risks of not attending to these critical factors are that a company can lose its license to operate, whereas the benefits are substantial. If you can figure out an innovative approach to serving societal needs, you know that there’s an embedded demand.

There is a demand to rebuild infrastructure. There is demand for health care services. There is demand for a healthy workforce. There’s demand for women’s economic empowerment. And there’s certainly demand for the energy transformation in dealing with climate change.

Khalamayzer:  When in your career did you notice the need to develop a company that’s geared towards sustainable investing?

Karp:  I came to this organically about seven or eight years ago, when I was the chair of the UBS investment review committee. It became obvious that ESG factors are critical for the long-term growth outlook of companies.

When you wear this lens, you ask different questions of analysts and strategists. And I asked myself, can I learn to speak the language of sustainability without using divisive, politicized terms? Can move towards, simply, enhanced analytics? At some point [I lost] patience at the speed of innovation or the speed of progress. And then I saw a very large market opportunity and that’s how I came to Cornerstone.

Khalamayzer: How do you see your role and the role of the impact investing changing during the Trump presidency?

Karp: I think there’s going to be a mobilization of the private sector towards impact for energy transformation and economic empowerment for women and minorities. These trends are already being driven by the private sector and more powerful than any kind of regulatory environment or administration.

When you think about the move towards alternative energy, you look at economics. You look at the cost curves. And that’s a wave that’s happening anyway. We’re talking about a consciousness around investing, a consciousness around critical ESG factors. Once you know it, you can’t unknow something like this.

Khalamayzer:  What are some considerations for the organizations that you work with?

Karp: For us, it’s about capturing the growth opportunity. $52 trillion will be transferring hands to a new generation of investors, millennials who are more demanding of both social returns and investment returns.

There’s a lot going on in terms of the dynamics of the capital market that are driving the investment forward. The immediacy of social media drives incredible transparency to an extent we haven’t seen before. And then also the use of data and the availability of big data allows a more effective analysis. There are new arrangements and standards for corporate disclosure of ESG factors, like SASB and the Global Reporting Initiative.

We’re interested in business models and business practices that contribute to a company’s long-term performance. We press questions about those companies in portfolios of our asset managers. Think about a telecom firm’s need for a client base with  technological literacy. Think about a healthcare company and their drive for health literacy so they can sell their products. Or you think about consumer goods companies, who while selling hand soap educate populations and save lives every day.

Khalamayzer: Are there any specific challenges or changes to the ESG investing legal landscape?

Karp:  With impact investing, the two things that are most critical are intentionality and measurability. The intentionality is a little bit easier: It’s right there in front of you. The measurability is tougher. How do you really measure the impact? Is it the number of jobs created? Is it the emissions avoided?

I would also suggest that the language of impact investing sometimes confuses people. And we think you very much have to leverage the public market to have an impact at scale.

Khalamayzer: What would you say to an asset manager who wants to make sure that their money is going into the right place?

Karp:  I would simply start asking different questions, which is how I got into this field.

Know what the fundamental aspects of sustainability are by sector. If you’re talking about a beverage company, ask about water efficiency and where they have their growth. If they’re in water-challenged areas, could there be a problem with their license to operate?

It’s helpful to look at the materiality map associated with different industries. There’s the Dow Jones Sustainability Index or the Domini Index, where you can see which companies are leaders in their field.

In the auto sector, you think about BMW and the fact that BMW actually offers some metrics in their annual report to highlight some of the good work that they’re doing and their objectives.

Khalamayzer:  What kind of impact do you hope to leave in the next five to ten years?

Karp:  I want to see many, many hundreds of billions of dollars moving towards asset managers that are integrating ESG over the next five years. To get to the two-degree goal of  COP 21, you would need to see about a trillion and a half dollars a year going towards that. I think the number that we had last year was something like $400 billion. So we’re nowhere near moving enough money towards energy impact as we need to be.

From the corporate side, I would like to see a focus on best practices in corporate sustainability. We are seeing the bar being raised all the time by the big companies. I would like to see more benchmarking on best practices by sustainable companies. And then of course I’d like to see all asset managers be fluent in deeply integrating ESG factors.