The opportunity of $36 trillion dollars – Cliff Prior, CEO Global Steering Group for Impact Investing

For those who prefer to read rather than watch, this is a transcript of my recent interview with Cliff Prior, CEO of The Global Steering Group for Impact Investment (GSG), as part of my contributor conversation series for our latest report, which you can get for free by clicking below:

No alt text provided for this image

You can also listen to the full interview on all good podcasts via the link below

https://smarterimpact.buzzsprout.com/1168484/11832380

Transcript follows

Philip:

Greetings, Cliff. Thanks for joining us to contribute to “A Better Way Forwards”, our work on taking the greenwashing out of ESG and Impact Investing. Pleasure to have you here.

Cliff:

Delighted to be joining with you from right across the world.

Philip:

If people don’t know about you, they can look you up because the work you guys are all doing is tremendous. I just want to get straight into it. What’s your take on greenwashing, anecdotally, or personally and professionally?

Cliff:

Well, the greenwashing is mainly around ESG-framed investments, and that’s 36 point something trillion. And that has raced up. ESG started off at least ten years ago. But with small scale, small scale, small scale. And then just in the last few years, it’s jumped right up. The consequences of that: one is that there aren’t enough skilled, trained, talented people to handle all the metrics and reporting and so on. There’s a desperate shortage of people in that field. If you’re thinking of entering that field, now is the time to sign up for sure. So that’s one part of it. 

Another part of it is that ESG is actually two quite different things. The part of ESG, which is risk-reduction for the investors and the companies, and that’s absolutely fine. There’s another piece that is trying to be about sustainability, maybe even claiming impact. And because those two things are together, it’s a right mush, and really, we need two labels for that. And then you’ve got a further question about the balance between burden of regulation and systems and the point at which you lose credibility. And that is a very narrow line. 

Just as an example, if you’re in an ESG investment going into an emerging economy, do you really want to have a whole great list of regulatory requirements, reporting requirements? You’re going to make the small companies in that emerging economy just have such a big burden. So you can get too much burden of regulation. 

On the other hand, you just flip the needle over a little bit and it’s no longer credible. So the third part is standards. Almost every asset management firm, company, etc., has created their own sets of standards. That really does lead to a lack of credibility. Fortunately, we’ve now got a system that’s coming along for global harmonised sets of standards. That’s the International Sustainability Standards Board (ISSB). It’s only just been started. It’s going to be a few years before that comes out fully.

But we really do need that single system of standards to get the credibility to train staff to be able to work towards that standard. 

Just imagine, if you were building railroads and every railroad company has a different gauge, so you couldn’t take a train from one to another. It is like that. There was that crazy thing where NASA ordered some materials from the UK. The UK made them in centimetres, and NASA had wanted them in inches. You’ve got to have single standards. So that’s where I would say… I don’t want to lose the opportunity of 36 trillion dollars doing things that are at least somewhere towards impact. We don’t want to lose that, through… So we want to bolster it. We want that credibility. We want those standards. We want the staffing, and we want the clarity about what kind of ESG you’re doing.

Philip:

And when you speak about that tremendous growth of the sector or the ESG sector from a funding perspective over the last, it only seems like five or so years maybe. That didn’t come along with measurement frameworks or standardisation. It simply came along like, oh, these funds are now this, which is essentially a marketing, it’s a labelling thing, they’re now this because of the way they labelled them. And that, I think, is really the tension with greenwashing. How do we, with that amount of size, at that scale, that scale up… Is it all really ESG orientated or is it a different label on an existing sector of funds? 

Cliff:

Yeah, a lot of people talk about a ‘framework’. You’ve got ESG ‘framed’ investments. Rather than saying it is ESG. But as I say, there’s this big difference between reducing the risks for your investment in the companies that you’re invested in, versus trying to do something positive. And we have to make that separation. They are completely different things. And again, it creates the credibility. 

Philip:

And I hope with this work we’re putting together is really as we get into ESG and look at single and double materiality, and I heard somebody even talking about triple materiality, and first and second and third stage emissions, when we’re looking at carbon footprints of economies and things like that, there’s so many… I just implore the people watching this who are going out and creating this material to really get into “What do you mean by the thing you say?” Because at least for that as a starting point, it’s going to allow somebody who’s looking at your material to pin it to the wall and go, “okay, well that’s what they’re talking about”, rather than just headlining stuff and carrying on. So, brings me to my next question, which is: what is your experience about the gap between funds wanting to contribute to business projects that are seen as environmentally and socially beneficial, or ‘impacts’ if you will, And the people that are creating those projects and requiring capital?

Cliff:

So almost everybody talks about a mismatch between, depending on which side you’re on, if you’re an investor, you say “there’s just not enough material to invest in”. And if you’re a company, “there’s just not enough investment”. I mean, this is not unusual. Investors are very choosy who they invest in, and companies are very desperate for investment. The majority of, certainly for SME funds, develop without inward investment. They develop through their own profits and reinvesting their own profits. And so if you think of the commercial world rather than the impact world, that is the norm, which sort of.. when the impact movement started, there was this view that somehow magically, every investor could find the right companies and companies could find the right investors. Of course not. Why would it be different to the commercial side?

However, there are some some particular areas because you’re not just looking at risk and return. You’re looking at risk, return and impact. You’ve got three categories that you’re going through to make your choices. You’re very often going into new fields of work. And some investors love that. But most investors like somebody to do it first. And then if it works, they’ll pile in.

And then of course you’ve got the investment which is deliberately into emerging economies, where then you’ve got the risk on the investment, the risk on the country, the risk because you’re doing something new, and in those fields, you’re almost certainly going to need some kind of blended capital, whether that’s partnering up with a DFI, a Development Finance Institute, or with philanthropy or with government support.

If you look at what’s happening in Indonesia right now with the G20 / B20 discussions, it’s all about blended finance, and where can you get that subsidy for investors to be able to take bigger risks, genuinely bigger risks?

Philip:

And it speaks to that axiom of ‘progress, not perfection’ I mean, anybody who’s looking for the perfect solution, even I imagine as we.. we need to develop canon of these measurement frameworks you get what you measure.. What did we measure over the next 2 to 3 years? Did it work? Do we need to change the measurement systems? And we’re only at the foundational moment of having an international standard for it through the ISSB. It’s just such a fascinating time, really.

Cliff:

It is a fascinating time. It’s a fascinating time where big changes are happening. We’ve got the one point.. a bit trillion dollars of impact, but we’ve also got two and a half trillion of sustainability linked bonds and loans. And that’s come out of almost nowhere, very, very rapidly. Obviously bond issuance you can get much bigger scale. But that’s a really interesting move. On the other hand, impact is just about to step in to its first global recession. We are going into a global recession. We are going into a global inflation era.

The impact movement hasn’t had any of those before because the last big recession, 2008, impact was a tiny little field. So we’ve got a lot to learn out of this. Traditionally, if you’re heading into a recession, things like bonds are very difficult. But innovation, that’s where you get the new ideas. If I was outside of the GSG, and just an individual investor, I think I would be going for tech right now. But, hey, everybody would have their own views on this. But it is really important for us to be able to understand how recessions and inflation eras are going to affect impact. 

There are some other big, big changes. People used to be quite distinct between “I’m a climate investor, I’m a social investor”. And I think what’s happened over the last few years, particularly this last year of one environmental catastrophe after another after another after another in Australia, you’ve had plenty of them. You can’t separate anymore, because these catastrophes hit people right now. And that combination of social and environmental is another thing we’re going to see changes for, and capital is going to want to buy into that. It’s going to have to buy into that.

Philip:

I’ve been noticing, as you’ve been talking, what’s coming up for me is that, will people stick to their mandates for positive social outcomes and positive environmental outcomes when faced with a hard recession? Will that stay there? Will the impact on top of the commercial outcomes stay the course?

Cliff:

Yeah, there’s a question about that or that equally, for example.. Well, let’s take oil and gas. Quite a lot of ESG framed funds are giving up the ESG model because you could make a big profit out of oil and gas right now. On the other hand, if you’re a climate and social oriented investor, renewables are way cheaper than oil and gas now.

So what a great opportunity to invest heavily at this point. So there will be different takes, as there always are. And that’s the nature of the investment field and the investment impact field, now that we‚ are big enough and diverse enough to have both positive things happening and some negative things happening.

Philip:

And when, for instance, in the UK, the Green New Deal is essentially a framework for where a tremendous amount of money is going to be invested or aligned with. To me, that paints a picture that investors can get behind or organisations can get behind to do co-financing and things like that.

Cliff:

That can happen. It requires a credible consistency of public priorities and just at the moment the UK has not been that good on that consistency piece, but many other countries are, and I think, what’s happened with the Russian invasion of Ukraine and the consequence on food and fuel and fertiliser etc., is that people are thinking, ‘How do we get energy self-sufficiency?’ One of the quickest ways to do that is through renewables. Okay, the UK has to sort itself out, but there are plenty of other countries where people know exactly now, they can’t rely on oil and gas coming from countries which are not safe to rely on. So I think that’s a positive.

Philip:

And for those interested in taking Impact Investing measurement seriously, what would you tell them about the GSG? What’s the scale of the work you do? 

Cliff:

GSG really does two things. One is a country network, so it’s 35 countries with national advisory boards for Impact Investing, another 25 that are coming along, including some of your near neighbors in Southeast Asia. Big drive there. Hugely important part of the world. So that’s one part of it.

And those national advisory boards, we have a structure that we offer up, but every country has its own opportunities, its own priorities, its own things that it can’t do. And that diversity is actually a huge virtue because we offer out a great amount of knowledge sharing. So you may be in Israel with a problem, but perhaps it’s Colombia that’s had that problem and solved it previously. So that kind of a approach is really important. The other side of what we do is policy and advocacy with, for example, that International Sustainability Standards Board, with impact transparency, with engagement with the G7, with the G20. And trying to get impact, and impact thinking into these big centres of decision making globally.

Philip:

So just one question in closing. What’s something you’ve changed your mind about recently in your role as the CEO of the GSG?

Cliff:

What a great question! I think I’ve moved from being purist to being ‘now; and actually it came from one person, from Elias Masilela, from South Africa. We were in the middle of a quite complex discussion and Elias, he can channel his inner Nelson Mandela. Very clear, slow, confident discussion. And he said, “I would rather have investment with a bit of greenwashing than no investment at all. I have people who need lives.” And you just think, okay, we can’t be purist. We have to achieve enormous amounts. We’ve only got this 1 trillion out of 120 trillion of listed assets. We have to use that where it’s most useful. And then, yeah, ESG is not perfect, but let’s take the best out of it.

Philip:

Thank you so much.

Cliff:

Thank you Philip.