Georg Kell: Cyclical Versus Enduring Trends

This month on the Future in Sound podcast we speak to world renowned thought leader on corporate responsibility and sustainability, Georg Kell. Chairman of Arabesque Group, a technology company that uses AI and big data to assess sustainability performance relevant for investment analysis and decision making, Georg also advises business executives worldwide on sustainability and transformation issues. He was also the founding Director of the United Nations Global Compact, the world's largest corporate sustainability initiative.

Drawing on his extensive experience, and almost three decades at the United Nations, Georg discusses the origins and lasting impact of the UN Global Compact, the importance of understanding both cyclical and enduring trends in shaping investment decisions, and the pivotal role of technology, particularly AI, in driving impactful change within businesses and investment strategies.

Related links: 

• Sustainable Investing A Path to a New Horizon, edited by Herman Bril, Georg Kell, Andreas Rasche 
• Strategies of Commitment by Thomans Schelling
• Homo Ludens by Johan Huizinga

Click here for the episode web page.

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This podcast is brought to you by Re:Co, a tech-powered advisory company helping private market investors pursue sustainability objectives and value creation in tandem. 

Produced by Chris Attaway
Artwork by Harriet Richardson
Music by Cody Martin

Transcript

Georg: The key is to separate the cyclical trends that come along from the long term irreversible trends that are ongoing. It's key for CEOs, executives to realize what is here to stay and how do I assess that? And I don't get carried away by the short term cyclical trends.

Jenn: Welcome to the Future in Sound podcast. I'm your host, Jen Wilson. This is a podcast where we discuss people, planet, and profit. In each episode, we'll learn from world leading experts who can help us see the future we want. And our role in it.

This is episode 27, Cyclical Versus Enduring Trends.

Georg Kell is Chairman of Arabesque Group, a technology company that uses AI and big data to assess sustainability performance relevant to investment analysis and decision making. He also advises business executives worldwide on sustainability and transformation issues. He was a founding director of the United Nations Global Compact, the world's largest corporate sustainability initiative.

During his career of almost three decades at the United Nations, he built the UN Global Compact and oversaw the conception and launch of its sister initiatives, including the Principles of Responsible Investing, also known as the PRI, the Principles for Responsible Management Education, the PRME, And the sustainable stock exchange, the SSE, I think I got most of those acronyms, right?

Georg, I'm delighted to have you on the future and sound podcast. Welcome.

Georg: My pleasure to be here with you, Jenn, Hi.

Jenn: So my first question is, you started your career or before you got into the responsible investment and responsible business space, you know, you were working for the secretary general of the UN. And I'm just wondering, what was it that brought you into the space of thinking about sustainability, uh, pertaining to business and responsible investment writ large?

Georg: Well, there are two, two developments actually. One is, when I started working at the United Nations first in Geneva, I noticed that the United Nations at that point in time had no relationship with the private sector. Uh, the UN at this point in time in the late nineties was still a child of the Cold War.

It had to be neutral, you know, Soviet Union, uh, USA. So, my job was under Kofi Annan, who called me into his executive office to find a new way to work with the private sector. Kofi Annan, great man, Secretary General, he felt that all stakeholders should be aligned somehow with the UN. He was a people's person through and through ahead of his time.

And, sustainability has kind of always been in my bloodline, so to speak, growing up in the mountains with nature, having been around the world and seeing also the dark sides of rapid uncontrolled industrialization and pollution in many parts of the world. And I got inspired by the Rio conference in ‘92, in particular, when I was already with the United Nations and this mother of all conferences, as it was called, it generated a lot of innovations, including the UNFCCC, by the way, biodiversity and many other notions that gave me a big boost on thinking, uh, uh, ecology, sustainability, ecology. But all related to the United Nations.

Jenn: That's amazing. And so you were inspired. I'll never forget the Brentlin report and the definition of sustainability and how it still guides us today. Uh, I, I'm really interested in basically, you know, looking at sustainability through the lens of ensuring prosperity for current generations, but not limiting the prosperity of future generations.

And I'm wondering, okay, so, you know, you're inspired by the conference in Rio, how did the UN Global Compact happen?

Georg: It's a very simple answer. I had the privilege of writing a speech for Kofi Annan for the World Economic Forum. And the condition that he said was that it has to be an impactful speech.

You know, we really have to make a mark there. Otherwise, I don't go there. So I had plenty of time and I have long been working on the subject of the United Nations, universal values, you know, which sound great on paper where governments actually have agreed to implement it. The Universal Declaration of Human Rights, great document, you know, the Rio Conference on Environment and Development, great outcome document, the Fundamental Principles and Rights at Work, all great documents.

And, knowing that business was under pressure in the late nineties because of globalization, backlash, and debates, supply chain issues and so forth. It was an opportunistic move to basically position the universal principles of the United Nations as part of the solution to take off the hard edges of globalization and to win over business to align with simple, uh, nine and then later on 10 principles, the anti corruption was added 2004 once there was a convention against corruption, which took so long to be produced 10 principles and for CEOs to embrace them and to disclose progress on them on an annual basis and to collaborate.

On themes on issues at country networks. That was the idea. It was a very opportunistic idea to put the U. N. In the center stage of the globalization dilemmas. The speech was a huge success, made actually the front pages of all international papers and I, it was just meant to be a speech, but in response to the speech, a lot of CEOs and ambassadors then approached Kofi Annan and said, look, great to have this nice speech, but you should actually do it.

And then Kofi Annan asked me, build something on, on the basis of the speech, and that's where the real work started, building networks, building engagement platforms, uh, and so forth. Academics call it a speech act, you know, when, when a respected international leader or president as FDR did frequently to during the Great Depression, giving speeches somewhere, you know, would it be nice to have this or that in place and then the public institutions thought that this was an indirect order and actually did it.

So through speeches. You can promote, provoke massive action if your speech is heard, and that speech actually was heard.

Jenn: It's so interesting because, you know, at Re:Co, we work with private equity firms and the questions that they're getting from their limited partners and their investors, one of the major questions is, you know, are you in line with the UN Global Compact, you know, 10 principles. And so it is very much entrenched. Um, not only in, you know, publicly traded companies, but also the private markets. And I guess I have many questions about this because it's a really fascinating global phenomenon that, you know, you were at the helm of, uh, steering. And the first one is. Because we're seeing right now a lot of industry associations and thinking through how do we become more sustainable, say as a consumer goods industry or luxury goods industry.

I'm really interested in as executive director of the UN Global Compact, what were the most important elements that were crucial to success going from the idea and the speech and the global headlines to an actual organization that engaged and. You know, brought business leaders together to do something different.

Georg: The key was building country networks. I traveled basically for 15 years of my life, almost nonstop around the world, nurturing what we called networks. It was the time of building and creating and cultivating networks, but networks need incentives and they need a structure to, to develop a self growing dynamism.

So it was a combination of, uh, Incentive creation at the global level and also obviously some, uh, integrity measures to deal with situations that are adverse. So good governance engagement principles had to be designed at the global level, brand management and so forth, but at the local level, the key was really mobilizing the growth of networks and making sure that these incentives are in line with local priorities.

Today, the Global Compact has 20,000 members, roughly. My successor, she's doing a great job, Sanda, uh, there are 60 country networks up and running, six zero. Uh, I was just recently in Brazil and I was amazed that the local Brazilian network alone employs 200 people just to manage the private sector engagement in this various issue platforms from woman empowerment to biodiversity, anti corruption and so forth.

So the local networks were really the secret sauce in this. And the beautiful dynamic evolved over time with the local networks, uh, meeting at regional level, across regional. So that was the key to go to scale fast.

Jenn: It's almost like a decentralized approach, you know, empowering different groups so that they can take the principles and make them really relevant to the context rather than trying to be too centralized.

Georg: Right, but you leverage globally the strength of the brand and, uh, the UN brand is still strong in many parts of the world, even if its actions are not always compelling. I always used to argue to my staff, make sure you stand for the best of what the UN stands for, not necessarily what the UN is doing.

The UN at its core is an idea. It's the idea of peace. It's the idea of human rights. It's the idea of sustainable development. And these are conceptual ideas. Uh, and those are evergreen, so to speak. The real world then is messy, obviously, and complicated. 

Jenn: And that goes perfectly into my next question, which is of course, you know, difficult to ask because of course, you know, I'm in this space, uh, as well and, you know, pushing for sustainability in business.

And as you. Point out it can sometimes be messy. There are trade offs involved. And I'm just wondering from your perspective, Georg, what you wrote in the speech for Kofi Annan, um, and you know, what you, the principles that were guiding the creation of the UN Global Compact, as you look at what's been possible in practice.

Of course there've been many wins, but what have been some of the challenges as well? 

Georg: I think in business is very important, obviously, but it's always part of society. So if business has to operate within certain framework conditions. And those framework conditions are the outcome of many actions and activities and different players.

Business, of course, itself is a shaper in that regard, too. So the challenge was always how do you work in adverse environments where systemic corruption prevails? How do you culture or nurture good performances that are transparent and that reduce corruption? Corruption because at the core, corruption is bad for business and most CEOs big and small would tell you that it's a real problem. It's a headache. But once it's ingrained, it's very hard to get rid off. So what are the measures? So I think the biggest challenge was always dealing with the framework conditions around business because in an ideal world, we have clear rules that are universally applied. Uh, everybody sticks to the rules and then the best performers when, uh, it's like a game, but in reality, uh, the policy frameworks, uh, are very, uh, how should I say different from region to country to country.

And sometimes you, you deal in, you know, very awful situations, not to mention conflict situations. So we did many workshops and initiatives on business and peace and what can businesses contribute to conflict? Uh, anti corruption was a huge issue and still is, uh, in many parts. And then of course the ecology, uh, from climate change to water, but also social issues, very important women empowerment principles. Uh, usually successful and saw great progress in many parts of the world. But overall, I would say, you know, the political context ultimately shapes the market framework conditions. So at the end of the day, and this is where we are today, power and politics trump markets at the end of the day, because the power notion is more powerful than the market notion.

Sadly, I would argue, but that's how it is. So the short answer to your question is the framework conditions were always the most critical element in this equation. You always found willing, uh, CEOs. And business people who are actually given the choice want to do the right thing because they are humans and the employees are humans.

So if we have a choice. Between right and wrong, uh, we tend to go for the right one, hopefully, especially if the incentives are right. But if the framework conditions are at worst, then you have to be more creative.

Jenn: Hey, it's Jen. I just wanted to take a quick moment to let you know a bit about Rico and what we do. We're a tech enabled advisory firm that helps private market investors and companies measure sustainability metrics using our software platform. We also help you to set targets. And focus your efforts on sustainability areas that really matter for your business. And finally, we help clients to translate all of this work into your core value creation strategy or your business model. Check us out at reed. co. com to get in touch. All right, now back to our conversation. 

It's interesting. I remember 2000s. Maybe mid, mid 2005, leading up to the financial crisis, there's almost a parallel between then and now in terms of the terms of washing, you know, green washing, blue washing, all of these washings.

Um, and you know, cynics would say, Oh yes, well. It's one thing to sign up to, uh, an initiative, but are you just covering your tracks? And of course, today we have a conversation going on that's not too, not too dissimilar, right? Oh, well, you know, are, is, um, ESG just about making pronouncements and then continuing to do things just as you always did?

I'm going to be biased against that, but I'm, I'm interested in what, uh, what you think of sort of the, the blue washing and green washing comments.

Georg: I think the issue is in principle a more serious one for the world of investment and finance than it is for business. Uh, the reason being that business has always been ahead of finance when it comes to, uh, such behavior and principles.

It's a long history, a long track record, goes back to the dark ages. I could talk for hours about it in India, in China, everywhere. You have a very unique history of Corporate responsibility, uh, business and society. It's long traditions finance more in the modern sense. Uh, it's more fluid. It has more short term notion.

Uh, and it tends to be more opportunistic, obviously, uh, and less concerned about the contextual societal long term dimensions that any person CEO has to deal with from recruiting to, and so forth. When we had this working group, who cares wins with finance. Which created the term ESG in 2004. Uh, we were fully aware that winning over finance is not so easy. And they insisted on materiality from the beginning. Whereas for CEOs, it was always clear. Yes, materiality, the business case for sustainability, we understand. It's like an insurance policy against disaster. And if you get it right, you know, our brand may not be enhanced motivation of employees. So for real world executives, it was fairly easy to understand. For finance, they needed to get rid of the materiality context. Exclusively in the focus. So the ethical dimension, you can't quantify. So you can't put a dime on it. So, uh, don't bother us with that. Uh, so we noticed that difference, but in the ESG term, just, they loved it. Because it's simple. It puts it in three dimensions, whereas corporate sustainability is a more fluid thing.

Yeah, the Global Compact has 10 principles. Yes, it has human rights, workplace issues, environmental issues, and then you can argue governance issues, anti corruption. So ESG somehow, of course, you can, you can put it in the same pocket, but it's not the same. Sustainability is wider and has more fluidity. The ESG then was narrowed down, then the ratings come, came in and the rating agencies love to think in boxes.

Then the accountants come in who measure things at the end and think they can change the world by measuring what's coming out at the end, which I think is a fatal mistake. The world is always shaped by forward looking strategic investment decision making. not by micromanaging the outcome and its accountability measurement at the end.

So I always had a little issue with the reporting community, so to speak, about their self believed importance. And I never really thought that blue washing, green washing for the corporate world was a really big issue. And it wasn't really, because once a business states something, stakeholders will push it.

We documented many instances of social dialogue and social vetting. We actually experimented with social vetting on a massive scale, where NGOs picked up on claims made by companies and then pushed them to go a step further. It did work. Actually, so I never really thought it's a big issue and Schelling, the economist, wrote a beautiful book about the nature of commitment, and I really advise everybody who really wants to dig into it, have a read of that book, because he explains why voluntary commitments are very, very important, even if they cannot be enforced.

They're part of our soft, uh, contextual, uh, infrastructure that is essential. Finance, more complicated. And I think it's important that we get some guidelines now on, uh, uh, to avoid blue washing. Uh, yes. But I don't think it's the main issue, quite frankly. I wouldn't jump on that bandwagon. I regret it that some newspapers such as the Financial Times blew it up into a big story.

The real story, the real scandals are different ones, I would say. It's policy failure, it's corruption. It's, uh, this, these are the scans, uh, so I put it into perspectives.

Jenn: It makes a lot of sense. And, and just, I realized that I hadn't defined what blue washing is. So that's, you know, using the UN label to improve one's brand and green washing more related to, you know, ESG.

So thank you for walking us through that, uh, Georg, I guess. Just listening to you speak, it's really interesting where we find ourselves now. So I want to shift gears a little bit to, we've been talking a bit about the past. I want to, you know, speak to where we are today and where we're going and maybe put on the Arabesque hat, uh, looking forward.

Before we get to looking forward, I'm really interested in this point around the importance of making a commitment. And then once you've made the commitment, you know, we've heard Paul Pullman, a former CEO of Unilever talk about this, you know, making bold commitments and then even if you get to 90%, that's still a massive step forward.

And by making that commitment in business, often say it's a sales commitment. Or there's a commitment to going into new markets. It's almost like we want to land on the moon and you sort of have to state the commitment before, you know, it can possibly happen. You have to first stand in that possibility.

And what's interesting now, uh, with various regulatory developments, especially in Europe that are looking at labeling funds as sustainable or not, uh, looking at the degree to which objectives are aligned with impact or not. The term green hushing has really come to the fore where more and more, especially in finance, there's hesitation to say we want to get to net zero, or we're going to be aligned with net zero until it's almost until you're there, uh, for fear of any kind of litigation or reputational damage.

And I just, I'd love to hear from you, what you think of this latest trend, maybe the pendulum is swinging a bit too far in the other direction. Uh, do you have any advice for leaders in finance on how to navigate this?

Georg: Yeah, I think the key is to separate the cyclical trends. That come along from the long term, irreversible trends that are ongoing, and, uh, I didn't mention before, but I should add that I've always felt and known as an engineer by background that technology is indeed, you know, one of the most fundamental forces that propels humanity forward full stop always has been or will be technological changes, arguably a long term irreversible force.

We have to keep that in mind. Very important. The second one is the degradation off the natural environment. It's no doubt that we are heading into major problems moving forward, uh, water, physical risk, climate change and so forth. And these have all serious implications. This is another long term irreversible trend.

By the way, the second one. The third one, I would argue is. Uh, the generational shifts. It always in history is that younger people demand new values and impose a shift in preferences on that is good. So that is like renewing ourselves from within us as humans. And that shift is clearly going into the sustainability.

And now I mentioned all these three fundamental irreversible shifts because the backlash is very cyclical. It has to do with the election cycle in the U. S. In particular, I live here in the U. S. for a few decades and a little bit involved or I know follow quite closely. Also, Europe, the Ukraine war obviously has derailed many long term intentions and has played both as an advantage and as a disadvantage on the sustainability front.

So there are these cyclical trends that play counter to the long term trends. And it's key for CEOs, executives to realize what is here to stay and how do I assess that. And I don't get carried away by the short term cyclical trends, uh, I think would be a fatal mistake to argue recently with the executive of a big asset manager that it would be wrong to bet now just on oil and gas just because they performed so well last year.

That is a typical sign of a cyclical reaction. So, That would be my advice. Separate the long term irreversible trends from the short term cyclical trends and then continuously reassess and then obviously the time horizon you apply for your investment decision is key because if your time horizon is very short term, if you're a day trader, you don't really care much about long term trends, obviously.

If you think only a week ahead, well, long term trends may not be that relevant for listening. But if you have stakes in a company, which you want to prosper over a certain amount of time, you better take on a long term perspective. And I personally believe, uh, what Mark Carney said, so it's all true. You know, the tragedy of the horizon, one of the biggest challenges in economics and in decision making is the time horizon.

Uh, uh, it's the most fundamental. If you all had a long term. perspective on decision making, many of the problems we are facing today wouldn't exist in the first place.

Jenn: It's interesting. I mean, first of all, kudos to you for, uh, mentioning fellow Canadian Mark Carney, uh, and tragedy of the horizons. I think that was a really eloquent, uh, speech and, um, you know, we see it in our business all the time.

Uh, especially actually private equity is interesting because, um, With a three to seven year time horizon, there is a little bit more of a longer term focus, which can be very helpful, not just in terms of how long you'll be owning a business, but also the next buyer and their time horizon. So then all of a sudden it tends to align with more sustainability principles, but really appreciate the points around, you know, what cyclical and to do with politics versus what's sort of the enduring trend.

And speaking of which I'd love to sort of talk a little bit about Arabesque for a couple of minutes, you know, where are we going? Obviously in 2020, we saw a huge uplift and interest in ESG. There was, you know, full court press amongst investors, business leaders, you know, net zero commitments were. Uh, proliferating and now there's a, to a certain extent, a couple of things are happening where I think seeing that, you know, it's one thing to have a high level strategy and now we're getting to sort of the next layer of, okay, what are the actions to take on net zero or to ensure that our strategies really are taken to the next level, not just a high level target.

Let's make sure that we get deeper and we keep momentum. And I think that we're also seeing, I mean, you're in the United States, we're seeing in red states, you know, some, some pushback and politicization, uh, of ESG. However, when you're talking to a lot of leaders about ESG, there's this point that's often made, well, we want more information when we're making investment decisions.

We don't want to give up this information. I mean, it might not be that we're solely investing based on ESG data, but it's important for us to have a wider, wider lens. And I just wonder from your perspective, Georg, as [00:28:00] chairman of the board for Arabesque, you know, how do you think about the medium to long term trends on sustainable investment.

Georg: Yeah. And you hinted at some of the key perspectives already. First of all, the big picture you need. You need a picture of how you analyze situations. That's the human precondition. And we use frameworks we refer to from the past, but we all know that, but the framework conditions are on the move are changing.

We know that valuation concepts are changing. We know that externalities will have to be priced over time and it will come. Nobody knows exactly how and in which shape. Yes, effective carbon pricing has long been a rallying cry, but it has taken off slowly only. But More will come in this domain. We know there will be other major reactions to nature's impact caused by human actions on markets.

Miny Minsky effects, as some refer to it. You see it in the insurance sector already playing out, how private companies are doing. Real estate is uninsurable in certain areas now in the U. S. For example, uh, there will be many scenarios like this unfolding in the future. So I have no doubt that as we move ahead in time.

We have to anticipate much more disruption on that front, and all these disruptions are basically a reflection of the necessity and the responses that will have to come forward in more effective pricing of externalities. First off, it has to happen. That's one way of looking at it. The second one is obviously.

The policy framework conditions, and they are moving very fast too, and they are unpredictable. Some of them are cyclical, some of them are more medium to long term. And here we see an enormous fragmentation around the world. We talked of the past, Kofi Annan, highlight of globalization, international collaboration in many areas.

Today we have rivalry between the big powers. We have rivalry among the second tier powers. We have regulatory fragmentation. There's a competition who defines the norms now. So we're moving away from the collaborative more to the competitive fragmented environment, which complicates matters, but nevertheless.

The long term trends I referred to before will continue to play out. They will play out in different markets in different shapes now. So there's more necessity to play by local markets to have a better understanding for domestic Policies and framework changes to be more agile on that front. Absolutely. Also political risk assessment is back in, in fashion again, fully the long term trends of technology, sustainability, and people's preference shifts. We continue to play out and forward looking decision making executives or investors are well advised to use these as kind of frameworks looking forward.

And ESG information is getting better every day. There's more and more material information contained. AI allows us to harvest that information increasingly effectively. Uh, we can fill our data voids. We can reduce biases of ESG information and so forth. Uh, so with the help of technology, the sustainability information will become ever more relevant.

And more easy to apply and integrate and whether we call it an ESG or sustainability doesn't really matter. What matters is that we cover increasingly non traditional financial issues that have, or can have material relevance for investment. That's where the trend is going to.

Jenn: That's, I mean, that's very clear and I think that, you know, going from sort of the high level, you know, we don't know what's going to, you know, come in the next US election.

If you were an investor, either in private or public markets, what would you do, you know, on Monday morning differently, uh, if you're just getting into sustainability or you're, you know, you're deepening your skills. Are there any particular, uh, steps or recommendations that, you know, one in that type of position could take, uh, to be more aligned, uh, with some of the trends you've just taken us through?

Georg: Yeah, I would make sure that my portfolios are not overly exposed on the risk side to the contrarian, uh, developments of what I just outlined of what is likely to happen. Because as time passes by, the tail risks are definitely growing. Uh, on that front, so reduce your risk on the negative side. Then secondly, use increasingly smart analytics and technology to do the job.

No longer rely on individual personal views or perspectives. So we all have the right to have a perspective, but at the end of the day, a good analytics needs thorough, uh, uh, background analysis. So biggest progress is now in AI. Our best built up data platform, but now we launched the AI platform for investors.

So I'm very optimistic. I have no doubt. that major revolutions are about to happen in that space because the capabilities are just so much superior to anything that humans can produce that this is something one should also keep an eye on make sure you're up to date on on the technological side how to assess risks, how to align your portfolios, how to assess the external changes that are going on.

So it's an ongoing challenge. There's no single silver bullet. One of the best advices I have given, or I have heard as well from CEOs who are nimble on their feet, constantly on the watch, but clearly have a perspective on where the long term trends are going. That's where you want to invest. Even if the quarter right now is not as stellar as you wish it to be, be on the safe side on that front and make sure you're, you know, investments are going in that direction.

That's probably the best advice one can give.

Jenn: Georg. My final question for you is, you know, listeners will be asking themselves what's shaped the way Georg thinks. And I'm wondering if there, if you had to choose just one book that's really shaped the way you approach your work, what book would that be?

Georg: Maybe, maybe Huizinga, the philosopher and Homo Ludens describing the art of play. Humans love to play. So, I mean, religion tells us, uh, we are evil or good. You know, ethics, uh, cast the world in, in dark and, and light. Uh, but there's actually a third force. It's the playing force. And it's kind of my motto too.

I like to believe that even grownups like to play. Uh, we just don't cultivate it sufficiently. So, and entrepreneurs are at the core or are playing and it's wonderful to see entrepreneurship in action.

Jenn: I think that's a great note to end on. Georg Kell thank you so much for joining us on the Future in Sound.

Georg: You're welcome Jenn, pleasure.

Jenn: The Future in Sound podcast is written and hosted by Jen Wilson and produced by Chris Attaway. This podcast is brought to you by Re:Co, a tech powered advisory company, helping private market investors pursue sustainability objectives and value creation in tandem. If you enjoyed this podcast, don't forget to tell a friend about it.

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