EPISODE S1E6: INTERVIEW OF ERIKA KARP, CHIEF IMPACT OFFICER AT PATHSTONE
Not afraid to be the leading voice, to do the work of investor-company engagement on ESG performance that others freeride behind. It maps to the one word investment philosophy: inclusive. - Erika Karp @YourErikaKarp, Chief Impact Officer at Pathstone @Pathstone in conversation with Graham Sinclair on ESG and Coffee Podcast.
PHOTOCREDIT: ESG and Coffee Podcast, 2021.
OUR GUEST in S1E6: Erika Karp, Chief Impact Officer at Pathstone.
I am pleased to welcome to the ESG and Coffee Podcast my next investor guest, Erika Karp, Chief Impact Officer at Pathstone, in episode 6 of our first series of long form interviews, “The Originals”. I first met Erika in a skyscraper in lower Manhattan while on the global roadshow launching the Access To Nutrition Index in 2013. Erika was heading investment research at UBS and spoke as the institutional investment expert. I respected her experience and candor answering a question on paying investment analysts.
INTRODUCTION
In S1E6 of ESG AND COFFEE PODCAST you will hear Erika’s describe the trade-offs in ESG, with her take on BASF as the “most sustainable chemicals company” and the problem of Apple suppliers with military dual use technology. You will hear of Erika’s willingness to pay the way on engagement with companies, partnering with NGOs like As You Sow in San Francisco.
Erika had her advisory and investment shop Cornerstone acquired by Pathstone Family Office, LLC in Sep 2020 closing March 2021. Pathstone is getting close to $30 billion AuM. This fits the pattern of the whole investment industry trying to bulk up on the missing ESG skills, through “acquihires” if necessary.
There’s complexity of ESG: it takes time, and shifting dimensions of what is material. Erika doubles down on smiting the 4 myths she first explained in Jan 2020 on Wall St Week (see below). And she knows the costs. “What we have done over decades has been an incredibly heavy lift” and an opportunity to look back and to take a minute. Her greatest achievement is growing purpose driven company and merging it.
Erika says ESG starts with G=governance, citing the example of the long shadow of poor governance that gave us the drama of #dieselgate at VW - and other automobile OEMs cheating on their emissions tests like Peugeot, Fiat, BMW and Mercedes Benz. But what German iconic car is Erika’s extravagance?
Our long form interview helps unpack the technicalities but also meet the human making it happen. You will hear Erika’s laugh when using “The Meg” as her investment movie example (spoiler alert!)- and choke up when reflecting how far the field has come and the long haul to get here. That’s the price of experience. I admire Erika’s range of inquiry, pleased she’s not an auto mechanic, and has the energy to raise three teenagers. I did NOT expect Margaret Thatcher to make an appearance! It is live so you will hear the siren from a New York ambulance or police car around 11min…
As this episode drops the Fed is anxiously being watched for news of Fed changes from Jackson Hole WY. Erika says the Fed’s response to the 1998 Russian debt crisis led to her biggest investing mistake (so far!), and a reminder that the Fed and events far away have been shaping investment flows for decades not just since 2009.
It’s interesting to hear Erika’s respect for active investor Cathie Wood of ARK Invest, for Cathie’s two decades of deep research and firm convictions from her unusual analysis, and for being a famous $TSLA bull. Then hear Erika completely sidestep the GOLDILOCKS QUESTION..!
Erika’s definition of “sustainable investment” is the systematic analysis of material ESG factors in any investment process, that sustainability is a discipline, not a style, not a strategy, not an asset class.
Stay after the close for our BONUS TAPE where we kick back with some reflections on the interview. As always at the very end, I summarize in 5min the interview HIGHPOINTS, including what was unexpected. Have a look at the detailed show notes below on https://www.esgandcoffeepodcast.org/ for the details.
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Let us know on Twitter @ESGandCoffee what compelling investment humans we should interview, and to stay posted on upcoming episodes.
Thank you for listening.
Host of @ESGandCoffee podcast.
esgandcoffee[at]gmail.com
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HIGHPOINTS S1E6: 5 MINUTE HIGHLIGHTS
I hope you enjoyed our long form interview with Erika Karp. We covered a lot of ground. A friend calls Erika “a strong cup of coffee”. Now we know she’s a double espresso iced latte!
HIGHPOINT1: E vs S vs G: ESG starts with governance. If company is not looking at environmental and social factors (ES), they’re not well-governed. Lack of ESG data speaks volumes. She is pushing to find predictive insights from ESG into strategies. And I respect her reflection on how investment ideas get rewarded (or not); how analysts will try and game the rewards system. How would Professor Deming recommend setting a system where analysts are properly rewarded for the long term impact of their analysis recommendations? In the show notes I include a link to Pathstone’s new “Regenerative Agriculture” work, “Investing in Regenerative Agriculture: Voices from the Field.”
HIGHPOINT2: Active stewards: some larger active managers who do not talk much about engagement, they are quietly doing it. Pure play ESG shops are very targeted. Engagement can be victorious when proxy vote shareholder resolution is withdrawn. Erika is not afraid to be the leading voice, to do the work that others free ride. It maps to her one word investment philosophy: inclusive. Now as Chief Impact Officer, she has close to $30 billion in AuM to work for. “If you care where your money works while you sleep at night...You don’t have to sacrifice investment returns. Getting those investments that align with your hopes do for global economy.” [@13:21]. Erika spoke of the shifting demand for ESG and impact describing the $50bn intergenerational transfer of wealth [see “Cerulli Associates projection that nearly 45 million U.S. households will transfer a total of $68.4 trillion in wealth to heirs and charity over the course of the next 25 years.”]
HIGHPOINT3: There’s complexity of ESG: it takes time, and shifting dimensions of what is material. Erika doubles down on smiting the 4 myths she first explained in Jan 2020 on Wall St Week. And she knows the costs. “What we have done over decades has been an incredibly heavy lift” and an opportunity to look back and to take a minute. Greatest achievement is growing purpose driven company and merging it. However tough it gets, you have a family, she reminded me. “I know we’ve got this right, and I’ve known for years.” On the future of ESG, Erika expects the US SEC will be clear on expecting from companies, and much more portfolio and company disclosure standards by 2030. SEC is moving faster than she expected, and that’s a good thing.
HIGHPOINT4: Since we did the interview the SEC has indicated ESG disclosure standards are coming. That timeline is faster than Erika expected. Increased demand that fund managers stop greenwashing. Erika wrote me a note yesterday that warned of the greenwashing threat. “Pure product creation and marketing will undermine everything we are trying to accomplish in impact investing. We need skilled managers with real expertise in the discipline of ESG analysis…And skilled Investment Advisors who can sort through the noise.”
Back in Dec 2018 I wrote from @esgarchitect:
UNEXPECTED?: I admire Erika’s range of inquiry, pleased she’s not an auto mechanic, and has the energy to raise three teenagers. I did NOT expect Margaret Thatcher to make an appearance! Maybe you also laughed at Erika’s Megalodon eating a shark and sustainable investment: [spoiler alert!] warning - don’t be the little meg.
Erika was side-stepping questions like Cheslin Kolbe and the Springboks winning the Rugby World Cup in 2019 for South Africa. We had to wing the “Tragedy of the Horizons” questions right at the beginning without Erika’s precise answers (for 1991), and I’m still not clear on how many of the 220 staff at Pathstone work directly on ESG. I had expected a tighter answer on the ESG performance of Pathstone’s own operations.
And are you one of the humans who makes “enormity” her least favorite word? Erika lives in New York and namedrops Sag Harbor in the Hamptons when describing her favorite pie, from Cromers Market. For a moment I felt like Alec Baldwin on “Heres The Thing”Podcast (!) [and yes, HTT podcast is a partial inspiration for ESG and Coffee Podcast format].
DISCLAIMER: Our lawyer wants to remind the audience that this podcast is for enlightenment, not investment advice. Do your own investment research.
COMPANY/ ORGANIZATION NAMES MENTIONED
SHOW NOTES AND SOUNDPOSTS S1E6
Tragedy of Horizons. 1991
10:09 NYC police siren.
12:17. “ESG and Impact: What matters most to you? We can help you align your investment portfolio with your values without sacrificing results”
13:21. If you care where your money works while you sleep at night...You don’t have to sacrifice investment returns. Getting those investments that align with your hopes do for global economy.”
15:00. what you have to go is to the pragmatism… ESG as enhanced analytical lens…
16:09 “with Gen 3 or Gen 4… authenticity...their future mortgaged…
17:01 “this is the discipline of the future of finance”.
18:06 “demand is all over the map but there is groundswell of demand.
18:54 is the nextgen that is asking for it.”
19:09 $50bn intergenerational transfer of wealth… “$68 Trillion Assets in Motion. Cerulli Associates projects that nearly 45 million U.S. households will transfer a total of $68.4 trillion in wealth to heirs and charity over the course of the next 25 years.” Cerulli’s latest report, U.S. High-Net-Worth and Ultra-High-Net-Worth Markets 2018: Shifting Demographics of Private Wealth report “provides a comprehensive analysis of the high-net-worth (HNW) (investable assets greater than $5 million) and ultra-high-net-worth (UHNW) (investable assets greater than $20 million) marketplaces in the United States. Specific focus is given to the UHNW segment.” https://info.cerulli.com/HNW-Transfer-of-Wealth-Cerulli.html
26:40 EK interview https://twitter.com/Pathstone/status/1329178644074405889?s=20 Bettina von Hagen, CEO at EFM. @EFMInvest. Forestry. Real assets. https://youtu.be/7_aVp09ez54.
30:00 Women entrepreneur. AfDB lending to women practice. Margaret Thatcher. Something done give it to a woman. Phil Hahn CTVNews.ca Producer @PhilipHahn https://www.ctvnews.ca/world/want-something-done-then-ask-a-woman-famous-margaret-thatcher-quotes-1.1228577
31:50. “Still completely holds up…” > 32:43 “...and measurability.”
SASB. GRI. SEC paying attention.
34:08 In queue, working smartphone emails or YouTube.
34:20 Re-read Blink Malcolm Gladwell. @Gladwell https://www.littlebrown.com/titles/malcolm-gladwell/blink/9780316172325/
35:08 Cromers Market fruit of the forest pie. https://www.cromersmarket.com/photo-gallery/
35:41 Spoiler alert… “There’s a movie called The Meg…” [starring Jason Statham, Bingbing Li, Rainn Wilson.] Trailer. https://www.youtube.com/watch?v=udm5jUA-2bs . Big meg eats meg scene. https://youtu.be/sVfmACBWnIY?t=100
36:39 “sustainable impact investing...”
36:57 “they’re going to be the little meg.”
38:37 Investment ideas come from everywhere… Praxair tanks.
40:05 Vinnie the impromptu special [dog] guest.
“Vinnie -A handsome and important dog…”
42:36 “I have to preface this with...Cathie Wood” > 43:30 “she holds to her convictions”
44:22 “portfolio is doing what we thought it would be doing…”
46:29 Do not talk about good or bad company…
47:50 BASF “We Create Chemistry® - & Foster Global Sustainability”
48:05 Apple component made by company also doing defense military manufacturer. Apple “Supplier Responsibility” https://www.apple.com/supplier-responsibility/
48:45 it's about momentum, ESG performance affects profitability.
49:17 “greenwashing is real and quite problematic…”
50:30 “91% of funds introduced as ESG are re-labelled.” [citation required]
52:07 TEAZ tea jasmine green tea. Japanese company Ito En. https://itoen.com/products/ito-en-jasmine-green. https://twitter.com/ito_en
53:35 Art of War. http://classics.mit.edu/Tzu/artwar.html: “Tactics vs strategy. 27. All men can see the tactics whereby I conquer, but what none can see is the strategy out of which victory is evolved. 5. Security against defeat implies defensive tactics; ability to defeat the enemy means taking the offensive.”
56:05 “Advice to self…” 3 teenage girls. “Wonder rather than doubt is the root of all knowledge.” - Abraham Joshua Heschel (January 11, 1907 - December 23, 1972) was a Warsaw-born American rabbi and one of the leading Jewish theologians of the 20th century. https://www.quotes.net/quote/53339 . https://twitter.com/NatlAquarium/status/1076494937653432320?s=20
57:50 Lisa Woll @LisaWoll_USSIF. home baked choc-chip cookies. US SIF.
59:45 VW had lapse in governance… #dieselgate
60:25 Prof George Serafeim @GeorgeSerafeim [Charles M. Williams Professor, Harvard Business School] paper “first evidence of materiality” see Khan, Mozaffar and Serafeim, George and Yoon, Aaron, Corporate Sustainability: First Evidence on Materiality (November 9, 2016). The Accounting Review, Vol. 91, No. 6, pp. 1697-1724., Available at SSRN: https://ssrn.com/abstract=2575912 or http://dx.doi.org/10.2139/ssrn.2575912
64:29. [on company engagement] “So be it…” > “it serves everybody” 65:00.
66:15 “for the most part…” > “really across the map.” 66:40.
67:29. One of the Board members starting SASB supporting Jean Rogers’ vision for disclosure sector standards working with Prof Eccles early on integrated reporting with ESG and was research director on Wall St who genuinely believed the ESG factors were material. [what was the single photo moment]
71:26. least favorite word…almost everyone uses it improperly. “Enormity”. Enormously terrible. “Enormity. noun. 1. the great or extreme scale, seriousness, or extent of something perceived as bad or morally wrong. "a thorough search disclosed the full enormity of the crime". 2. a grave crime or sin. "the enormities of the regime"
71:40. Would like to be an auto mechanic.
Not want to be a professional bungee jumper.
Investor should be curious.
911 20 years old. Porsche gunmetal grey 2002 Porsche 911 (996) Carrera. Get the Taycan EV? [see Deutsche Welle documentary on “Porsche 911 Legend.” https://youtu.be/mOBl3tcGlLA]
Talent most like to have is “tele-transporting”
Greatest achievement is growing purpose driven company and merging it.
“Do not think there’s perfect happiness, but can be fully content. On the beach with my dog with ear pods playing Cher nice glass of something feeling the breeze and looking at waves and hearing.”
People who are creative and think laterally connect dots and visualize a system an economic system that is more regenerative and inclusive. Rachel Maddow.
Professor Deming: every system does exactly what it was designed to do.
77:24 “I want everyone to think about every dollar they invest…” > “needs to be everyone” 78:09
81:23 “what it has been like over the past decades…It has been an incredibly heavy lift…well done.” 81:45
82:34 “first of all I have a supportive family…” > “got to know I have this right.” 83:15.
84:12 “In 10 years we should have standards for disclosure…”
86:37 “it’s been seven years since I thought about sell side analyst research…” > “it’s pretty messed up.” Need to shift from small salary + big bonus and maybe switch it around?
1:02:30 “we really lean toward asset managers who are very actively engaging…”
1:03:32 “before shareholder proposal put in there” As You Sow.
1:07:29 “you mention Jean Rogers…” Steve Lydenberg
1:08:58 “actually getting a little choked up”. Formation of SASB
ON MYTHS ABOUT ESG: “[T]here's four issues [about sustainability and investing] that we have to think about:
we have to think about data quality
we have to think about the language of sustainability
we have to think about the fear that there is some sort of concessionary return right and then
we have to worry about the fear or the the myth that we're breaking a fiduciary duty
None of those are real but we have to make sure people know that so it's you know that's why Blackrock’s move is so important...” - Erika Karp on "Bloomberg Wall Street Week," Jan 17, 2020.
UPDATE NOTES [correspondence, 25 August 2021]:
1. On latest IPCC report “Code Red”: “The worst is becoming the reality. We must move now!!!”
2. SEC ESG and climate disclosures consultation: “Thank God it’s becoming blindingly obvious that climate risk is a systemic financial crisis. We must have transparency to accelerate progress!”
3. ExxonMobil proxy voting drama with Engine No.1 supported by the index funds on 26 May 2021: “Finally and hopefully we are regaining a sense of stewardship over investment capital.”
4. Increased demand that fund managers stop greenwashing: “Pure product creation and marketing will undermine everything we are trying to accomplish in impact investing. We need skilled managers with real expertise in the discipline of ESG analysis…And skilled Investment Advisors who can sort through the noise.”
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