#10 Demystifying ESG - Sustainability and Investor Value with Todd Cort

Unlock the secrets of ESG and sustainability investing with Professor Todd Cort from the Yale School of Management. Explore the nuanced differences between ESG investing, impact investing, and corporate sustainability efforts, and understand how they cater to various stakeholder concerns and investor motivations. This episode promises to clarify how corporate sustainability impacts stakeholders like customers and employees, while ESG investing focuses on the financial materiality of environmental, social, and governance factors for investors.

This episode breaks down the empirical evidence linking ESG performance to financial success, referencing comprehensive meta-analytic studies. We explore the world of ESG ratings with agencies like MSCI and Sustainalytics and understand the complexities and criticisms they face. We also get practical advice on identifying the most financially material ESG risks for your investment portfolio and explain why the performance of ESG-labeled funds remains an area of ongoing scrutiny.

Lastly, we delve into the significance of investment fund labels and what they mean for retail investors. Navigate through the financial materiality of pressing ESG topics like climate change, biodiversity, and DEI, and learn how to handle conflicting views in the ESG space.

Todd also recommends essential reads such as "Net Positive" and "Beaverland" to equip aspiring sustainable business leaders with the knowledge they need. This episode is packed with valuable insights to help you align your investments with your values and understand the skills needed for leading in today’s evolving business landscape.

More inspirations from Todd: https://som.yale.edu/faculty-research/faculty-directory/todd-cort
Follow him on LinkedIn: https://www.linkedin.com/in/todd-cort/

Please visit our website, www.businessandsociety.net, for more inspiration.

Chapters

• 1:35 Difference between ESG investing, impact investing and corporate sustainability efforts
• 4:33 Typical ESG investors
• 8:17 Criticisms of ESG
• 11:55 Do sustainable investments outperform?
• 15:39 ESG Fund Ratings
• 25:04 Advice to retail investors to identify sustainable companies
• 27:56 Issues that the investor community really cares about
• 31:23 Managing differences of opinion
• 33:00 Book recommendation
• 35:37 Essential skills required for leaders working to build a sustainable business

Transcript

Senthil

00:03

Hey, it's Senthil here. Welcome to the Business and Society podcast. Every fortnight we speak to a world-leading thinker to better understand the role of business and society. Joining me today is Professor Todd Cort of the Yale School of Management. Todd works at the intersection of sustainability and investor value. Over his 20 years in consulting and academia, he has applied a scientific economic lens to corporate sustainability to identify tools, mechanisms, metrics and indicators that create value for investors, businesses and society. At Yale, Todd is also Faculty Co-Director of the Center for Business and the Environment and the Faculty Director for the Sustainability Focus Area of the Yale Executive MBA. Todd also serves on advisory committees on sustainability and impact of various firms, including Azola Ventures and the German Merck. I've been a student of Todd. He's exceptional at explaining complex frameworks. In today's episode, I sit with Todd to ask some basic questions about sustainability and investor value and unpack some of the jargon in the ESG world, which confuses even seasoned professionals. Todd, thanks so much for joining me today and it's great to talk to you again.

Todd

Thank you. It's a real honor to be here and it's great to see you again. I know it's been many years, but it's wonderful to be in touch again.

Senthil

01:34

Thank you, Todd. In simple terms, could you help our audience understand the difference between ESG investing, impact investing and corporate sustainability efforts?

Todd

01:46

Yeah, there is a great deal of confusion between these terms. You might even throw in corporate citizenship, corporate responsibility, corporate social responsibility, etc. There's a number of these terms that we use interchangeably. Let me start. The reason we see them as interchangeable is because the topic areas that underlie all these different terms are roughly the same. On the environmental side, we're talking about climate change and biodiversity and water stress, and on the social side, we're talking about human rights and labor rights. Those topics cross these different categories that we define, and so the difference then is really about the stakeholder that is trying to assess something from those topic areas. So corporate sustainability is really about corporate corporations and their stakeholders. So, whether it's their customers or suppliers or their employees, those are the people that are defining what material issues are in corporate responsibility or corporate sustainability.

02:52

ESG is a little bit different because it's a term that arose out of the investor population. So there is an inherent lens on ESG or environment, social, governance, there's an inherent lens of financial materiality for those topics, under the presumption that most investors want to maximize returns and they see that as a fiduciary duty. So the ESG term typically refers to those sustainability topics that have potential or actual financial repercussions on the investment. And then the last category you brought up impact investing.

03:30

There's also some confusing between that and ESG. An impact investor is an investor that wants to understand the impact on the environment, society from their investment. So that could be they're only interested in impacts that have financial repercussions, which would essentially make them an ESG investor that is looking for additional data. But there are also impact investors that want to make their investments based on that information that environmental and social impact information and that would make them, by definition, concessionary investors, because they're using non-financial data to make their decision. So you could be an impact investor that is the exact same as an ESG investor. Or you could be an impact investor that is looking to maximize or create environmental and social benefit in addition to financial returns. That's why we've got all this confusion, because it depends who we're talking to and it depends what they're trying to get out of the world.

Senthil

04:33

Who are the typical ESG investors, Todd? Are they big institutions or individual investors? Sovereign funds, private equity firms, venture capitalists? Who has a sizable say in this entire ESG investment spectrum?

Todd

04:48

I actually went on the record many, many years ago to the Wall Street Journal that the answer to that question is yes, and my argument is that every investor in the world today considers some environmental or social factors in their investment decision, and it could be really obvious ones, ones that we would look at and say, well, of course we would think of that..that's just financial, and I'll give some examples. If you are a company that uses a lot of electricity, electricity is a cost, so any investor that is looking for returns would be interested in the amount that you pay for electricity. But the ESG investor is looking for the exact same information, just in the form of energy. They want to know how much energy you use, but the two are inherently tied together energy and operational costs. There's other examples, like health and safety. Any investor in the world today that has an asset that has health and safety risk wants to know health and safety performance. They want to know if you've had any fatalities. They want to know what your lost time incident rate is or the days away rate is, because those things cost money, they create liability risk, they create cost of capital risk.

05:56

So I always argue or say that every investor in the world, doesn't matter the type could be a real estate investor considers environmental and social factors. However, not all environmental and social factors are treated equal when it comes to financial impact. So some ESG investors are willing to expand their understanding of risk and opportunity to say there are some environmental and social factors that I am willing to consider for my investment decision that perhaps another investor is not willing to consider, and that's not because I believe in protecting the environment or society, it's because I have a broader lens on risk than that other investor. And that's the distinction across the range of ESG investors is how much do you consider environmental and social factors to be financially material risks and opportunities to your portfolio? So that was a very long answer, but every investor considers some aspects. What people usually mean when they ask me that question is which investor types are pushing the envelope of environmental and social risks and saying things like I believe that, for example, climate change is a material financial risk to my investment portfolio.

07:13

Where we see that mostly is in large institutional investors pension funds because they tend to have a longer term horizon and because they usually have a remit from their asset owners to consider environmental and social aspects, which means they have a policy term horizon, and because they usually have a remit from their asset owners to consider environmental and social aspects, which means they have a policy in place. That's on the institutional side. That's where we see it the most. Really large asset managers like State Street and BlackRock they will consider ESG factors, but they are always looking for the ones that have financial materiality and they're very, very focused on that. So that's on the institutional side.

07:47

On the non-institutional side, insurance companies are pushing the boundaries of risk. They're very interested in risks that are not priced well right now. Hedge funds that is essentially what they do. They're trying to outperform the market and therefore they have to take unpriced information into account. Venture capitalists, private equity they all have the time horizon and the wherewithal to assess risks that are not traditionally financially priced. So that's probably where you see most of that risk envelope being pushed.

Senthil

08:17

So what I understand is, when you say ESG investing, it's not just one group or one intention that drives it, but there is a wider spectrum of intentions, expectations on financial returns, etc. It seems beautiful, but I'm keen to understand what's going wrong with ESG investing. The Economist had a special edition some time back and they said the three-letter word that won't save the planet. And they wrote about ESG. And you talked about Wall Street Journal. I was recently reading one of their columns. They said Wall Street's ESG craze is fading. What's happening there, Todd?

Todd

08:52

This conversation has reached the absurd to me. So there's actually backlash on both sides of a political spectrum. On the conservative right we see the backlash to ESG and the argument is that if you consider environmental and social factors, then you're violating your fiduciary duty. And the premise behind that argument would be that environmental and social factors do not create financial risks to the portfolio. And that is patently incorrect. But we all know it's incorrect. We've known it for 150 years that it's incorrect. The question is not does it impact? It's how much does it impact and how much risk are you willing to accept in your portfolio from environmental and social aspects? On the political left, the pushback has come from this marketing by ESG firms and asset managers that somehow ESG will save the planet, and that's not true either. An ESG investor is not out to save the planet. It's not out to save society, it's out to maximize return. And if environmental and social harm create financial harm, then they will solve that through their investment. They will try to minimize that risk. But if they can get by with externalizing environmental and social costs with no cost to their investment portfolio, then that investor will cruise right along with that investment thesis. So both sides are incorrect on this topic.

10:15

But we have all these headlines about ESG is either misleading and greenwashing or ESG is a red herring and it's against fiduciary duty, and that's where this was called a backlash, but I think the better terminology I've heard recently was the ESG recession. There's been this reduction in the interest amongst investors to ESG factors in their portfolio analysis because of this backlash. That's on the face of it. When you look behind the data, it's actually fairly interesting. What we've seen is that the amount of assets under management that consider environmental and social factors has either stayed steady or has increased over the last couple of years, but the number of labeled funds has decreased. So that just means that I used to have a fund that I called an ESG fund.

11:02

Now I have a fund that I'm not calling an ESG fund, but I'm going to assess the same aspects. I'm just not going to advertise it. I'm still looking at risk. I'm still trying to maximize financial return. That's where we are today. There's good and there's bad about that. The good is obviously that the capital is still flowing to the same risks or away from the same risks and towards the same opportunities. The downside is that there could be some slowing in the political arena to try and pull back from environmental and social factors, but I'm pretty confident that the market is stronger than those factors and that market players will continue to use any risk and opportunity information they can for financial performance and integrate that into their portfolio. So this whole conversation is essentially a moot topic to me. I don't think it's had much of an effect at all. It's really a political topic that hasn't had much effect on markets.

Senthil

11:55

You talked about ESG label schemes. I'll come to that in a moment. But do sustainable investments outperform non-ESG funds for an investor? If not, what are the other incentives, beyond financial returns, that ESG investors look for?

Todd

12:11

It's a really interesting question because the data is really interesting. So let me start with some of the empirical data that's out there in the academic literature and a lot of your listeners will be familiar with some of the big meta-analytic studies that have been conducted. So there's a large study from 2005 that looked at this is Flammer et al, and they looked at some 1,000 to 2,000 empirical studies that tested some aspect of ESG performance against some aspect of financial performance and they found that roughly 50%-ish of funds showed a… or empirical data showed a positive correlation between the two, meaning if I integrate environmental and social factors into my investment thinking, I will tend to make money or do better than if I did not consider them. And only about 10% of that empirical data suggested a negative impact and the rest was mixed or neutral. Then in 2020, I might have that date wrong, might be 2021, New York University came out with another set of empirical meta-analytic data essentially tested the same thing for studies since 2015, found essentially the same thing and very similar percentages across the board. So, there is this bulk of data that suggests that there is the ability to outperform. I know you can't see me I'm putting that in air quotes, because outperformance here has to be something that we think a little bit more deeply about. But the takeaway from that for investors was I better think about ESG factors in order to make money or not lose money.

13:53

So let me pause there and then talk about the other side, which is do ESG-labeled funds outperform non-ESG-labeled funds? Because, remember, all funds consider environmental and social factors. There's no distinction that we could draw in the market to say one versus the other. So, looking at labeled funds, the data is very murky and suggests that there's not much outperformance, and there's a couple of reasons for that.

14:21

It appears there's a couple of reasons. One is that the funds don't exactly know what risks are going to materialize over a certain period of time, and so investing against a particular risk that occurs over, say, five years or 10 years or 30 years, can be hard to track and therefore hard to predict. The second reason was there was a big bandwagon effect that happened in the ESG labeled fund space. These asset managers created ESG labeled funds. Everyone was thinking I need ESG integration in my portfolio, so they bought into those funds and the fund price went up, and that bandwagoning has more or less evaporated.

15:02

So there's a couple of confounding factors in assessing whether ESG labeled funds outperform or not, but right now it looks like they did not. So where does that leave us? It leaves us kind of right back where we started before. We had a lot of ESG labeled funds, which was it is up to investors to figure out what the most financially material risks are, and all the evidence suggests that environmental and social risks are financially material. Now the trick is to figure out which factors are financially material to your portfolio over what time period. That's where we are.

Senthil

15:39

I have a few questions on the ESG label funds, particularly on the ratings. It seems that's the engine that makes that label funds function. Esg ratings have lately attracted a lot of criticism. Who are these agencies that provide the ratings? How do they measure it?

Todd

15:58

There's a handful of very large data analytic firms that do these ratings and then hundreds of other ones. Examples of these would be MSCI, sustainalytics, refinitiv, which is now the London Stock Exchange Group. So these are data analytic firms that are pulling data. Then they do analysis on that ESG data and they create rankings. They also create risk assessments, they create kind of red flags, and then they sell that information to investors and to companies that are interested in risk analysis. So where do they get that? It's kind of two questions here where do they get that information and why are people so upset about these ratings? The data that they pull actually comes from a number of different sources and with the rise of machine learning and artificial intelligence that those data sources are actually growing exponentially. But the basic places are they go to the companies themselves publicly traded companies. They can go to private companies if they'll respond, but public companies generally have a higher bar of disclosure. They'll go to those companies and they'll send out questionnaires around. You know what is your performance? What kind of risk processes do you have in place? Do you have someone who's accountable for performing? Do you have targets? Do you have management systems, et cetera? They ask in those questionnaires. They'll also scrape information from those companies or information that the company has put into the public domain, like sustainability reports or annual financial reports or quarterly financial reports, websites, et cetera and they'll scrape that information and they'll pull that information down into their scorecards, and that is a big source of information for those data analytic firms is the companies themselves.

17:39

Most of them will then source what I'll call third-party data, and there are some really big sources of third-party data. For example, RepRisk is a third-party data source. RepRisk scans media headlines around the world and they're looking for either positive or negative sentiment associated with a given company or company affiliate and then they'll ping it. If something comes up in the media, they'll ping it and they'll give a scorecard. They'll sell that scorecard to MSCI, for example, and MSCI then integrates that into their risk analysis. So there's a variety of third-party data sources that they'll pull and then sometimes they'll even scrape raw data themselves, and increasingly with AI they'll do that. And then the third source is what I'll call curated data sources. So this is things like government data sources. Here in the United States you can scrape toxic release inventory data from the Environmental Protection Agency. There's regulated carbon emission data to the federal government. There's a number of curated data sources that the data analytic firms will also pull. This all sounds great and it is, in fact, an amazing service that we have in terms of all the data that we can pull.

18:58

Where people start to get up in arms, where people start to get angry or upset about the data analytic firms, is two things. One is that the data is not perfect. In fact, a lot of the times the data is quite terrible and so the data analytic firm is in this position of having to either fill gaps because there's no data, make assessments based on data that is not validated, that is 12 to 18 months old, that is not comparable, hasn't been reported against any standard, is qualitative, could have been cherry picked by the organization, might be greenwashing, et cetera. The data can be terrible and the premise is that if they collect enough data from enough firms, from enough sources that they can cut through some of the terribleness of that data and in aggregate they're getting you the more or less the right picture. But that's the first challenge.

19:51

The second challenge they had is that a couple of empirical studies in the academic literature compared ratings of these different firms and found very little correlation between them. And these are now a few years old, and what that tells investors or any buyer of that information is that they have no idea what they're doing right. If you can't even agree on environmental score for oil and gas industries, then what are we even asking for or buying from you?

20:25

So there's a huge amount of skepticism or has been in the past that these ratings are really measuring anything interesting, and my take, kind of my wrap-up of this is that you just have to be really honest about what you can get from these ratings. They give you insight into the data and the risk, but they do not answer the question for you. If you were to go to MSCI data and say, should I invest $100 into this company because I think that their price is going to go up in the next six months because they have strong environmental performance, that is a terrible question to ask of MSCI's rating. What you should be asking is what are the biggest risks that I should be concerned about for this company and what kind of research do I need to do on that company to figure out whether they've got that risk under control.

Senthil

21:13

Interesting. So what I understand from your answer, it seems you also implicitly refer to MIT Sloan's Aggregate Confusion Project, which said that the ESG ratings of various service providers differ and disagree substantially. My follow-up question is, is there any body that is getting into shape to set the rules of ESG investment, to standardise what defines as ESG investment?

Todd

21:39

So the one that everyone is familiar with is regulation in key markets right now and I need to back up a little bit. So these regulations are like the Corporate Sustainability Reporting Directive in the EU. The Securities Exchange Commission here in the US has a rule out on climate emissions. California has two state assembly bills excuse me now they're regulations around climate disclosure and climate risk assessment. So those are just some that I'm more familiar with, but there's a number of regulations around the world. So, backing up just from those regulations a little bit, why is regulation kind of the solution? All of a sudden, over the last three years and the reason is because of that data question. A lot of investors were looking at their portfolio say, 3,000 companies in a large portfolio and we're asking questions like is there water risk within my portfolio?

22:34

But even more specifically is are there pockets of my portfolio where that risk might be covariant, where I might see a lot of water risk in one aspect or in one sector or in one region? And if I have covariant risk, then I can balance my portfolio, I can diversify accordingly. It doesn't mean I'm going to divest. It means I'm going to wait and diversify. But in order to do that I have all 3,000 of those companies… they have to give me roughly the same information. They have to do it the same scope, the same boundary, using the same metrics, ideally over the same time period and at the same time. That is a regulatory question. And so these regulations we see California, sec, then the EU they're really catering to a very specific type of investor, which is an investor that has a large portfolio that needs standard information on a very small number of risks across a large amount of companies. So that's one of the solutions that we have that is coming out is that regulation targeted at those investor types. And the only reason I highlight those investor types kind of large portfolio investors is because there's earlier in our conversation we talked about hedge funds, we talked about private equity, venture capital, etc. 

23:58

Those investors actually want unpriced information environmental and social information. If the information is priced, they cannot outperform the market. So they want unpriced information. They want information that nobody else is getting. So they're after a completely different type of standardization of data. They're looking for large number sets, so big, messy data sets, but that cover a wide swath of the economy so they can pick and choose. So the data sets they're looking at to try and standardize to say you know, is your performance really this good or not? They're looking for these data sets like satellite data. They're looking for insurance model data. They're looking for sea level rise data. They're looking for truck traffic in and out of facility data. They're looking for huge, unpriced, messy data sets in order to try and standardize their vision of whether a company has a risk or not. So really, different approaches on how different investors are trying to standardize their approach to risk assessment.

Senthil

25:04

For a retail investor who's living in the Midwest of the United States or somewhere in Asia. What advice would you give to identify sustainable companies that are creating value to society?

Todd

25:16

Yeah. So the retail investor is they don't have the capacity to dig into all this data. They don't have the capacity to think about what are the environmental risks, let alone whether a company has good processes to mitigate that risk. There's too much data, there's too much information, there's not enough time. So the retail investor has to drop back to kind of the labeling approach. So they need labels to identify whether they are investing against either their values or what they perceive to be important drivers to the economy, and I'll give an example of both.

25:52

So one label might be a fund that kind of says they're fossil fuel free. That is, you know. It's pretty specific, even though there's a lot of you know. There's a lot of ambiguity actually in that as to what you can and can't invest in, but what an investor and a retail investor might come to that and say I don't want to invest in fossil fuels. So so a fossil fuel free fund is perfect for me. It meets my values. Or they could also come to that and say I think that fossil fuels are going to diminish over time. I think it's a losing bargain. I would much rather do renewable energy. So fossil fuel free works for me. Two different reasons, but same thing, same result is to go after that label.

26:32

That label is, like I said, relatively specific. It says this is what we will not do. There are other labels that are less specific, like an ESG fund, for example. It's very difficult to suss out what an ESG fund can and cannot do unless you're willing to take the time to read the prospectus. And then there are some labels that are not the fund label but the fund will label to. So, for example, funds could align to the sustainable development goals and say we will find companies and investments that align to the 17 sustainable development goals and if you're familiar with the SDGs and you like them, then you might go with that label.

27:12

There's always the risk that fund will not perform, that fund will not do what you thought it would do, because you and the fund have a different perspective of what it means to align to the sustainable development goals. But that's why we have, but that’s what the labels are for, so that you can get a sense of it. If you're really concerned, as a retail investor, as to whether the fund is going to align with your values, there are ratings out there that you can look at. So Morningstar, for example, does ratings on ESG. So you can go and look at a third party and say does that fund really address climate change? Well, Morningstar says it's a five-star climate change fund, so I feel more comfortable with that. But at the end of the day, you're relying on the label.

Senthil

27:56

You interact extensively with investors. You teach top executives. What are some of the real-world issues that the investor community really cares about?

Todd

28:07

So the bulk of the investors are those fiduciaries that consider environmental social factors as risks. So what they're really interested in is what environmental and social risks are going to both become large in magnitude but also likely accrue to their investment portfolio. So really the question is not so much what ESG topics are interested in, but which ESG topics are most financially material in the timeframe that they're investing under, and there's a handful that seems to bear higher correlation to financial risk. So climate adaptation is the first. There's enormous pressure on climate risk, assessment of climate risk, mitigation of climate risk, modeling of climate risk, determining the scenarios under which climate risk will manifest. Lots and lots and lots of effort by investors to figure out climate adaptation risk. The second is climate mitigation risk, which is essentially that carbon will cost companies money sometime in the future or is costing them money right now. So how much greenhouse gases does your company emit and, more importantly, how many of those tons of greenhouse gases will you have to pay for in some way, shape or form, now or in the future? Biodiversity is the next one, or ecosystems collapse. So there, what investors are interested in is how much exposure does a company have to ecosystem services that, if those services collapse or are diminished, they will have to pay to replace. So the big ones are like pharmaceutical companies. Agricultural companies. Companies that depend on natural systems to create their products or create their raw materials. They're increasingly concerned about biodiversity risks.

30:04

Water is probably number four, particularly where price of water is going up or the scarcity of water is going up and the scarcity has to get really bad before it becomes really financially material, it turns out. But there are areas of the world where that's becoming the case, so water is probably the next one. On the social side, human rights, human trafficking. The reason for those is because there's increasing regulations, particularly there's trade regulations around human rights. So, for example, some regions of the world may not be able to trade with the United States because of human rights allegations in those regions.

30:34

That becomes financially material to a company Human trafficking same idea, regulations are really pushing the financial materiality of those. And then here in the United States we have a diversity, equity and inclusion, because we're a fairly diverse society here in the United States and diversity, equity, inclusion has become a political hot topic over the last 10 years or so. So the politics of DEI is making it financially material to companies, so that is becoming of an interest to investors, either good or bad. By the way, it's not a one-way risk, but anything that, where there's some lever that is creating financial risk, is where those ESG investors are focusing.

Senthil

31:15

Todd, let's move to the segment how I Did it, where we ask all our guests three personal questions to draw lessons from their life and career. How do you handle conflicting views or differences of opinion?

Todd

31:29

I run away. It's a good question. I think my first answer, and maybe my ideal answer, is data that data is usually the solution to a conflict of opinion in ESG matters. The reason I say it's a bit of an ideal answer is because, as I mentioned before, the data is really messy, and so it can be very difficult to form concrete conclusions from data sets. The example that I frequently use is, is human rights a fiscal risk or financial risk to companies around the world? Some data suggests that it is. A lot of data suggests that it's not, so the data is not necessarily going to resolve the conflict and opinion.

32:16

The second, probably more realistic answer is that I'm very fortunate to work at a university, and the entire point of a university is that we get to explore conflict, we get to explore conflicting opinions, and so we can set up classroom situations where we can talk about those conflicting opinions, we can test different hypotheses, we can bring different data sets to bear and we can walk out of the room without coming to a resolution, and that is just the nature of the university. That is our purpose. It's not necessarily to solve the challenges, but to explore them and get people to recognize the different factors that go into the conflict. So that's probably the more realistic answer is that we test it, we taste it, but we don't necessarily solve conflict here at the university.

Senthil

33:00

Can you recommend a book or two on ESG investing to our listeners, or sustainable investing, or could be any topic?

Todd

33:07

Yeah, it's a good question. There's so many books out there. I actually have a couple of thoughts here. I have three thoughts, but I'm just going to give you two books. One thought is that people will come into ESG and they actually a lot of people that are interested in ESG finance. They don't actually know finance, and so one thought was to suggest go read a finance book. That's a little pejorative, so I won't go that way. I thought hopefully everyone has their finance 101 before they kind of take on the ESG finance mantle.

33:43

I have an obvious answer, which is there's a book by Paul Polman and Andrew Winston called Net Positive. Everyone knows this is. It's a very popular book. It's incredibly interesting and they've you know Paul Polman is the ex-CEO of Unilever.

33:56

He's been living this life for a long time before he retired from Unilever.

34:00

He knows what he's talking about, and Andrew Winston has also been advising companies for a long time. Their examples are very practical and I think the framework is a really interesting one for anyone that's trying to figure out the context of ESG risk. I have a slightly offbeat answer as well, which is a book called Beaverland, like the rodent beavers by Leila Phillip, and the reason I mentioned that one… it's a science book, like a popular science book, and it is about how beavers were such an integral part of the economics and history of the United States. And the reason I think that's interesting for ESG is because if we're trying to figure out a financial risk to a company, we cannot be one dimensional about it. If I said climate change is a financial risk to your company and all I gave as evidence was that you know that energy costs money, that would be a really myopic view of risk for what are really complicated issues and I think that this kind of treatise on beavers is a really good example of identifying one thing but understanding all the implications that that one thing has on an economy or an ecosystem or an environment, and understanding how to build that context, how to explore the thresholds of risk around the different factors that that concept holds. I think that's a really important skill, and so I think Beaverland is a great example of how can we explore one factor the beaver and all the different implications it had on the financial success of a nation.

Senthil

35:34

That's very unconventional and fascinating to listen. Todd, finally, in your experience, what are one or two essential skills required for leaders working to build a sustainable business?

Todd

35:47

Well, they're the obvious ones Accounting, finance, a little sprinkle of economics, operations management. Those are, I think, the skills that any good manager needs to bring. They have nothing to do with ESG, at least on base value. But in today's world and in the ESG world, where environmental and social factors are really becoming the predominant risk and opportunity in society, you cannot function a successful business today without understanding climate change. You cannot function a successful business without understanding human capital.

36:20

So in today's world, I think the successful business person really needs to understand stakeholder expectations and the natural world. You got to understand what people want from you. You have to understand how they'll respond to you given different stimuli and different decisions, and you have to understand the physical rules of the environment that you will be operating in the future. I give this silly example of if you are expecting, for example, that in your construction company that you'll work 40 hours a week every week, that your employees will be out there, and you're basing your profit and loss models on that expectation, you will not succeed because those people will not be able to work 40 hours a week every week in the future. Extreme heat events will disrupt that. So it's just a new reality and you have to understand that and a business leader is just going to have to figure it out under those natural laws.

Senthil

37:14

Thanks so much, Todd, for joining me and sharing your valuable perspective. It was wonderful talking to you today.

Todd

37:20

Yeah, thank you. It's good to see you again, good to talk to you again. I hope this has all been helpful you.

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