Investing for the Long-Term in a Short-Term World

KECK: Thank you, Alexis, and welcome to today's Council on Foreign Relations virtual meeting on balancing long-term growth with short-term business demands. My name is Beth Keck. I'm the Volkswagen visiting chair in sustainability with Schwarzman College at Tsinghua University.

For climate stability, we need to keep our global temperature rise under 1.5 degrees centigrade from preindustrial times. But global trade and our economic activity have accelerated in the past fifty years and we are exceeding our Earth's boundaries, particularly with greenhouse gas emissions, and we are far from meeting our social indicators of the Sustainable Development Goals. Today, our topic is sustainable capitalism. We will have a conversation with three outstanding thought leaders in this field, who I'd like to introduce. First, we have Sandy Boss. Hello, Sandy.

BOSS: Hi, very nice to see you and nice to be here.

KECK: Great to have you. And Sandy is the global head of investment stewardship with BlackRock, and you're in London I believe?

BOSS: Yes.

KECK: Great. And then in New York, we have Zachary Karabell. Zachary is a well-known writer. He has a new book coming out, which is Inside Money: Brown Brothers Harriman and the American Way of Power. You're in New York. Is that right, Zachary?

KARABELL: I am in New York.

KECK: Great welcome. And then our third panelist is Sarah Williamson. And Sarah is the chief executive officer of a nonprofit called FCLTGlobal. And I believe, Sarah, you're coming from Boston today.

WILLIAMSON: I am, I'm normally in Boston. Actually, today, I'm in New York. But normally in Boston.

KECK: Great. And I'm in Bentonville, Arkansas in the mid-South.

Our objectives today are to explore how companies can focus on long-term value creation, and we also need to explore what needs to change in our global economic system so that we have, quote, the possibility that humans and other life will flourish on the earth forever. I'm quoting the sustainability thought leader, John Ehrenfeld. In the first half hour, our panelists will share their perspectives on this topic, and the second half hour will be open to your questions. So please get those ready. And just another reminder is that we are on the record today.

So let's begin with a historical viewpoint or historical perspective. Zachary, I think that we turn to you for that with the book that you are coming out with on Brown Brothers Harriman. Tell us about your research. You contend in your book that the firm is a beacon of sustainable capitalism. So tell us about this.

KARABELL: So I use the word, and thank you for that, sustainable capitalism not in the patois of sustainability. I've had a whole other career in sustainability and managing money in that, and also helping set up investment funds that are more oriented around our current notion of sustainability in a more ESG [Environmental, Social, and Corporate Governance] sense. That was decidedly not the Brown Brothers' sense. But I thought it was important to both revive and integrate the idea of sustainability in a more broad sense than purely the ESG sense that is more understood within this community.

The point about Brown Brothers, and the last chapter of it is called “When Is Enough, Enough,” —and the book is right there, the irony of a book about men who made money being supported by the Buddha notwithstanding—it was a way in which capitalism as a more maximizer is, I think, how most people understand finance capitalism and capitalism in general over the past X number of decades. And what's interesting about this more traditional partnership firm that I write about over the course of two hundred years, I think there are two lessons to be gleaned from this as it applies to this discussion. One is that, to the degree that another idea of capitalism is both somewhat forgotten, and if anything overlooked, is part of the problem of the more maximizers. So when I tell people I was writing about Brown Brothers Harriman, a lot of people initially reacted saying, it's funny, are they still around? Or, huh, they were once so great. And surviving for two hundred plus years is not in and of itself a virtue, and would not be the reason to write something. But the living and surviving well is.

And I think this idea of capitalism at an earlier time, had more variety of how it was defined than simply producing more money and more stuff for the people at the apex, or more money and more stuff for all of us. That there was a more bounded idea of enough. And some of that was bounded by risk management, right? If you're a partnership and you're running a firm, the way Brown Brothers was for centuries, any deal you do is money you can lose yourself. So it's not just reputational harm, it's if this goes sour I may lose my home, I may lose my income, and therefore I have to be mindful of the destructive capacity of money and not just the constructive capacity of money.

But it also led to a different notion of public and private good. We live in a world today where risks have been brought onto the public balance sheet and gains have been privatized. And again, when it's your own money, the two are much more interlinked. There was also a culture that understood that you cannot endlessly beggar the commons. That your own private good is ultimately tethered toward public affluence. And that if the world around you isn't thriving, that will put an absolute limit on how much you can thrive. And again, those are cultural attitudes, not regulatory, and there's to some degree in which they were structural because it was a partnership. And I know there's no going back. But I think that idea of sustainable capitalism, a capitalism that understands that only if you take inordinate risk can you make inordinate gains, and sometimes that's not worth it and that sometimes enough is in fact enough. That the relentless pursuit for more, which is part of why, points to the whole issue today of capitalism. At some point more becomes untenable if it's so detached from what's tenable. And I think that's a lot of the lesson of Brown Brothers Harriman. So that's the historical idea.

KECK: I think that's a really great basis for our conversation today. Because you point out the obvious, that if a company is not financially viable, then there's no good that the company can do as well. And it comes down to a long-term financial viability of the organization. And I particularly liked how you pointed out this conversion of risk going to the public sector, and the gains being privatized. And that's a really, I think, a cogent, coherent way to think about some of the issues that we are talking about here today. So thank you, Zachary.

So let's move on from that historical perspective to what's going on today. And Sandy, you are in the midst of this. As the head of stewardship for BlackRock, you have a lot of assets under your management. And, as we've talked about, as Zachary mentioned, ESG, environment, social and governance, that's the shorthand for sustainable investing. So tell us about how you're influencing companies to have a longer-term view and be more sustainable.

BOSS: Thanks, Beth. And first of all, I should say that I thought Zachary's description of Brown Brothers is very erudite and fascinating. Look, the reason we care about sustainability at BlackRock is because our clients are invested for the long-term. So all of what we do is on behalf of clients, it's their money. It's not ours, we're managing it for them. And they are looking toward long-term goals. So they're invested for decades in order to meet savings goals like retirement, and therefore we are working on their behalf.

Importantly, 90 percent of the listed equities that we oversee on behalf of clients are index assets. So that means that we might be invested on behalf of a client, as long as twenty times more than we would be if it was an active strategy. So that means then individual companies are in our clients' portfolios for decades. And this does mean that therefore, we're very much in for that systemic risk that affects all companies. So it's not just about navigating amongst the idiosyncratic risks that individual companies might have. The index companies do have to weather systemic storms. And so we're very interested in how they're doing that.

Larry Fink, our CEO, when he wrote his first letter it was very much about not just being short-term oriented. He saw so much pressure about short-term market performance and felt that was just not consistent with the long-term strategies that companies needed. So then if you ask, what do we care about, what are we worried about? Well, obviously my function, grew up interested in governance, sound governance, a strong board. That is essential to what any company does in order to navigate its opportunities and its risks.

But there are two pressing issues that, it doesn't take a genius to think about what they might be, but that are central to our investment convictions. So the first of that is, in the context of the pandemic, I think that has strengthened our investment conviction around how important stakeholder capitalism and valuing the stakeholders in the round is to long-term value. So, at the beginning of the pandemic, obviously companies just needed to survive. Beth, as you said, the company goes out of business, and I think it was a Zachary reference, it can't be of any good to anyone. So that is the first job of any company. But then in the context of the pandemic, what we found is, we were speaking with so many companies that were going so far beyond that. They were looking out after the safety of their workers and their customers, they were thinking about how to shore up their suppliers, how to give back to their communities.

There was a time when those type of social support activities might have been considered nice to have or window dressing. That's just not true today, we think that's really essential to companies' social license to operate. And you've seen, Just Capital for example, did research. Currently 89 percent last year of Americans said companies should do right by their workers, their customers, their communities, and the environment. So this is not just our idea. In our experience, the companies that are thinking about their stakeholders have much more resiliency strategically, they're closer to their customers, they're closer to adapting to key trends. And that generates better returns for shareholders and more patient capital.

And then obviously, the other, and you mentioned at the beginning, the other key issue is climate risk. Climate risk is central to our investment convictions. We absolutely believe, and it's embedded in our analytics, that there is a tremendous growth opportunity associated with managing a just transition effectively. So we see twenty-five cumulative points in economic growth over a twenty year period, due to managing a climate transition well versus the alternative. And that, at this point, we don't see that asset prices or portfolio risks yet reflect this fundamental belief. Sustainability risk is becoming a critical factor in investing for many firms and many asset owners, but it's not yet where we think it will be. We are seeing just a tremendous movement of money.

Let me just finish by saying what are we doing in my function in terms of engaging with companies. So my function is sort of the link between the clients who own these companies and the companies themselves. We are very, very hands-on in the way that we do this, in the sense that when we are seeking to go out and to promote what we think are good governance or other sustainable practices, we're doing that led by engagement. So we've got a sixty-five person team around the world, working with and meeting with over two thousand companies, fifty-five different markets, because we think that engagement with companies, year in year out, is very conducive to helping attain the goals of our clients. That is a discussion about sustainability, it's a discussion about governance. And ultimately, that work is focused in on ensuring that we get not only, hopefully, companies inspired to manage their businesses well, but also to disclose the information that our investors need so that they can form strategies and make investment decisions. Because that comes back to where I started at the beginning. Our goal is ultimately to be investing in the companies that we believe are going to have the most value long-term for our clients. And that gets back to this long-term, multi-decade, goal that we have, and it is our client's money.

KECK: That's a great overview. And you're really sharing with us this transition from just thinking about shareholder value to stakeholder capitalism and stakeholder values, and the integration of climate risk as well. Thank you for that overview.

Sarah, let's turn to you. I think what you bring to us is really this broader view, because you're working with multiple asset managers and companies, and thinking about together, how to make this transition to longer-term value creation. Tell us about your approach, and how can we accelerate change?

WILLIAMSON: Great, thank you. Well, thank you for having me today. And I really appreciate a conversation with everyone here. So FCLTGlobal or Focusing Capital on the Long-Term is a 501(c)(3) organization. So we're a charitable organization, whose mission is to rebalance capital markets to support a long-term sustainable economy. So our approach is to work closely with our members, and as you said our members tend to be very large asset owners. So big pension plans, like the Canada Pension Plan or the Sovereign Wealth Fund of Singapore; big asset managers, like Wellington, where I was for more than twenty years, which is a partnership, Zachary; BlackRock, Carlyle on the private side, so very large asset managers; and then companies like Unilever and Walmart, and many others.

The goal is to focus on long-term value creation across that investment value chain, because what we often find is that each company or each investor understands that it wants to build and should build a long-term sustainable business, but they tend to feel like they're getting pressure from somebody else. They're getting pressure from the other guy. So the way that we try to think about this, and to your point about stakeholders, is to build long-term shareholder value in a multi-stakeholder context. So even though companies recognize that is the way they're working, they understand that there's often pressure to take a shortcut.

So the way that we're thinking about this is that the shift that's happening right now, in sustainable capitalism, is from this trade-off mindset. I think Sandy referred to the corporate social responsibility. So away from that corporate social responsibility mindset, to much more of an investment mindset. So rather than thinking of sustainability as a check-a-box exercise, or just something that's nice, the best companies are thinking about investing in sustainability as part of their core strategy. Whether that's to attract talent, to build their brands, or to meet changing customer demands. And so these companies understand that by investing in sustainability, and treating investment and sustainability no different than you might invest in technology, or R&D, or even a physical plant, they can make smart investment decisions that will create value for a range of stakeholders, and therefore create value for the long-term shareholder.

So I think one of the things that, at least for us, coming from an investment background, is important is a little bit reframing this discussion from this trade-off mindset to an investment mindset. And thinking of it just like you make, logical people can make different trade-offs between risk and return, you can also make logical trade-offs among risk, return, and impact. Think about the sort of efficient frontier, if you will, and think about companies that are not making the right decisions in terms of sustainability as being inefficient, as being essentially inside that efficient frontier, if you will. And so there are often opportunities for companies to earn a better return or lower their risk and have a better impact. There are also times when you're at that efficient level, and you can't quite do that. So again, what we're trying to do is think about how do you create that long-term value for the shareholders in a multi-stakeholder context.

KARABELL: I just want to–there's a great story about this. As you said earlier, Sarah, that individual companies often are on board, but they feel the competitive pressure to be something other, certainly for public companies. That's an even harder issue, which Sandy knows about.

There's a moment in the 1980s, where Brown Brothers is starting to get huge amounts of business. So again, they continue to exist today, they have $2 billion in revenue, and $500 million in profits. And yet within the kind of financial behemoths world, because they're private and a partnership, they're either forgotten or overlooked by their own intent. And they're getting huge business, clearing a lot of foreign exchange and trades from the likes of Citi, and Lloyds, and all these, and they were getting so much business, they weren't set up to handle the volume. And as one of the partners told me, instead of doing what kind of the typical model would be, which is how do we staff up? How do we build a larger enterprise to meet more business? They just fired their clients. They turned around and they said, I'm sorry, we can't do this. Because they didn't want to get bigger. They didn't either want the risks or they didn't want the size.

And the only reason I tell that story is, there are cultural choices about what amount of profit is enough, or at what cost that profit will come with. I do think we kind of forget that today. And finally, look, I mean, even though I'm talking about this, I'm not lionizing another time, right? In a world dominated by Brown Brothers, none of us would be having this discussion. I by virtue of race and ethnicity and you all by virtue of gender, so we wouldn't have been in the room. I'm not saying oh, this is like a great period of time. Let's go back to a white WASP elite establishment. But I am trying to say there are some, there are some forgotten virtues within that world that could be reintegrated.

KECK: So you're really bringing out cultural choices as well and values, individual values, of the individuals as well as the firm's and bringing that forward. Thank you, Zachary. Thanks to all of you for, I think, laying this out in a very succinct manner.

One of the questions I wanted to put forward is that with all of the progress, the change in expectations for business that's happened, and all the progress that we see, we're still in a voluntary system. What are the limitations to that? What incentives or governance structures would be helpful to facilitate a more even transition? And what are you seeing around the world? And let's start with Sandy. Tell us about the limitations that you are encountering.

BOSS: Well, first of all, Beth, I think it's worthwhile noting that whether its nobility of spirit, or self-interest, the voluntary system is working in many ways. So we do have one hundred twenty-seven governments who have voluntarily committed to net zero by 2050. And that's representing 60 percent of greenhouse gas emissions. There's more than eleven hundred large companies that have committed to net zero. And we are seeing some kind of amazing race to the net zero. It's becoming a competitive advantage. Companies want to differentiate for their customers, they want to actually get rewarded by investors and be in ESG indices well-placed. So, I mean, I think about like an American technology conglomerate that's reduced their GHG emissions in fifteen years by 90 percent. A Danish renewable power company that has virtually eliminated emissions. So even the Chinese company I'm thinking of that's way ahead of national commitments, because they want to be a low-carbon steel producer. And it's about opportunities. It's not just risk management, but also big bets. I mean, think about one U.S. airline has committed a billion dollars to their transition to low carbon fuel, a European company that spent $10 billion on an acquisition to transform their business model around sustainable goals that they had. Obviously, they thought it was strategically important, not just about sustainability.

That said, of course that's tremendous progress, but it's voluntary, and it doesn't mean that it's going to do everything that we need. And I think the fact that I find most startling and staggering: apparently, the OECD has estimated it could take $6.9 trillion investment per year for the next several decades in order for us to achieve, collectively, the climate and sustainability targets that have been sort of agreed by the world. And that is not going to happen with just private money and voluntary efforts. And so when you think about on the public policy side—I won't go into the list of things that public policy might do—but clearly, we need incentives and guardrails. We need things that will guide corporate and individual behavior. And also, we need to ensure that transition to net zero is just, not just that it happens, but that it happens in a just fashion.

Now, as a financial services company, I think from our perspective, the one policy intervention that could be most valuable would be mandatory disclosure, because we do believe in the power of the market to play a big role in that shift of capital from less sustainable activities toward more sustainable activities, because of our investment conviction. Right now we and many others have been quite supportive of the Task Force for Climate-Related Financial Disclosures (TCFD). It's taking on a lot of traction. Now we've got beginnings of that potentially going into regulation in certain countries. But at this point on a voluntary basis, for example, only about 40 percent of the companies in the Russell 1000 are currently reporting against all four pillars of the TCFD. So it just gives you a sense of how much work we have to do, even in a country where the voluntary system is frankly making a lot of great progress.

And it's true for other sustainability disclosures as well. So beyond climate, it's really alphabet soup. Many, many different private standards, very hard for companies to know what to do, very hard for investors to get what they might need in order to form products. And so, we've been very pleased to see joint efforts. There's work in International Financial Reporting Standards Foundation (IFRS), to try to bring this all together. There's a lot of momentum there. And we think it's incredibly valuable. We are seeing collaboration between the EU and discussions between the EU and SEC and other leading regulators, IESC was involved. While it sounds kind of funny for a private company to be talking about the joy of regulation, in this case, I do think this is a really momentous opportunity for a joint effort that could be really, really valuable in this transition.

KECK: Thank you. Sarah or Zachary, do you want to add on to Sandy's comments here?

WILLIAMSON: I can add on to that. I mean, we've done a lot of work in the metrics and disclosure space and I would agree with Sandy that we're really very enthusiastic about the momentum that is going on. I think in the policy space clearly an incentive for the market would be some sort of a carbon price. But we don't think that the market and market participants can wait for governments to solve this issue. So one thing that we're seeing that I think works very well is for companies to put an internal carbon price. If they're looking at project A versus project B, if carbon is free maybe project A is better, but if you put in say, $50 a ton, maybe the tables flip and project B is better. So that is something you don't need to wait for. But assuming that, it's particularly for any sort of long-lived asset, assuming that there won't be any sort of carbon price over the life of that asset is probably a bad assumption to make. It's something someone shouldn't certainly back into.

Similarly for investors, clearly a lot of people are thinking about net zero portfolios, and they're thinking about how to add up from the bottom their portfolios, which is admirable and still hard. Another way of thinking about this is, from a top down point of view and asset owners being able to decide which parts of their portfolio, are they going to be silent on climate, for example? I've never seen climate mentioned in a U.S. Treasury mandate. It's just not there, right, you're silent. Or principles-based is the way we think about divestment or impact that may require a concessionary return. People can invest based on principles. And that can be very appropriate.

And third, we think of as a more analytical approach, which is essentially trying to take a good guess at what the future may bring, we may not be right, but try to incorporate that today. So clearly thinking about stranded assets and thinking about carbon prices, thinking about the kind of technology that, and investing in that technology that could really, hopefully get us out of some of these problems that we're in by coming up with solutions.

And then the last we think about is really being catalytic being trying to not just be a price taker in a market, but change the market. And I think that thing Sandy was talking about in terms of engagement with companies are a great example of that, as well as people who are scaling known technologies like green infrastructure and these sorts of things. So there are a lot of things that both companies and investors can do today, that can have a huge impact both on the planet, but also on their long-term returns. And they don't have to wait for the policy. It'd be nice if that were there, but it's not a reason to wait.

KARABELL: I would just say on this, that regulation in the face of no regulation is absolutely vital. Brown Brothers in 1933 supported Glass-Steagall because there was no real regulatory framework and it created more social license to operate, the notion that there was some governing or backstop. As opposed to 2010 where very few people in the financial industry full-throatedly supported Dodd-Frank.

I do think though, the one challenge of regulation is that one, it's inherently adversarial. It may not have to be that way, you could imagine a regulatory framework that was more collaborative. And I think there may be some examples of that happening, but it tends to be adversarial. And while I think increased disclosure is absolutely vital, simply reacting to a regulatory framework doesn't change your internal culture around actually striving creatively to meet these needs and agendas. And that's where, it's sort of the internal culture of sustainability. And some companies like Unilever and others have been much more ahead of the curve on this. But I don't think you ever get there by a regulatory framework, full stop.

I'm not saying either of you are saying that, I'm just saying as a question mark here, you're not going to regulate your way toward a lower carbon future. You may force companies to contain certain activities, but you will not encourage them to come up with creative dynamic solutions, unless they themselves find that's A, within their interests and B, that they have some latitude to do that.

KECK: I think that's a great perspective. And Sandy, I see your hand.

BOSS: I put up my hand, if that's part of rules the game. No, I think Zachary makes an excellent point, which is companies, ultimately, it's the decision of the board and the management to do what they think is in the best interest of all of their stakeholders. And so they definitely need to be thinking about holistically how they run the business. And that includes how they're doing risk management, how they're governing, how they're thinking about their strategy, the scenarios for the future, and then the metrics that fit into that. So it's quite interesting.

We find that if a company starts with disclosure and thinks that it's a reporting exercise, they've got the wrong way around. The right way to think about sustainability like any other big long-term strategic issue is we need to manage toward this change, we need to be proactive. And as we do that, then it will be natural and easy to report out on what we're doing. But yes, it can be led that way. And I agree if its regulation only, yes, you've lost before you start.

KECK: Great. And I think that's a good point is that a role of government is not just regulation, but also incentives that can also change behavior as well, not only for the companies, but the consumers as well.

So we are now half hour into this conversation. And so we'll open it up for questions from our participants. And I believe Alexis, you'll be managing that for us. And do we have any questions at this point in time?

STAFF: (Gives queuing instructions.) At the moment, we don’t currently have any questions, so Ms. Keck, back to you.

KECK: Okay, thank you. Well, I'd like to go a little bit deeper, to talk a little bit about the issue of divestiture and how we have a transition for companies that don't have the greenest assets, for example. So as you're looking at this one way, I as a consumer would want to have an ESG-weighted portfolio, and that's going to give an incentive to a company to potentially get rid of those products or services which are not contributing to a cleaner environment or more social justice. Do you see this happening, this divestiture happening? And how should we be addressing this?

BOSS: Sarah?

WILLIAMSON: Oh, I – Sure.

KECK: Sorry. (Laughs.)

WILLIAMSON: So I think that the point you raised is a really important one, because divestment can be a very, very powerful signal, and it can be a very important way for somebody to align their investments with their own beliefs. But we have to recognize that divestment by definition means, one person's divestment is another person's investment. And so the question is always who is the investor on the other side? And is the investor on the other side somebody who has an incentive to manage that wealth, and manage it out in some way or has an incentive to grow it? So a large investor that I know who is doing a very good job managing infrastructure said recently, well, I can't reduce emissions if I can't buy them. And so you've get into this sort of backwards cycle, which is that people who can be trying to manage them out, can't invest, and they need to divest.

Now, the solution to this is primarily about ensuring that there is a way to transition assets that actually has the appropriate impact on the planet. Because, of course, it's nice for me in my portfolio to clean it up and move those to somebody else. But if it's just a game of moving around, that doesn't actually help the planet at all. So I think that this transition risk, and who transitions assets, and how responsible owners can transition assets is one of the most challenging issues that we will face over the next few years, particularly as momentum for divestment gains steam.

KECK: Thanks, Sarah. And Sandy, do you want to add to that?

BOSS: No, I'd love to, yes. I mean, look, I'd like to compliment what Sarah said that we have a carbon intensive world. Many of our clients’ investments are therefore carbon intensive. And we do firmly believe that the largest companies right now are well-positioned to lead the investment that's required to manage that transition. So I think very much we are supportive of the work that many companies are doing. And for us when we see companies that we don't think they're on the right path, that is when the group that I'm in engages with companies, uses voting as one of the tools that's available to us.

What I would say is important here in thinking about where do assets go is, it's important that regardless of whether it's a private company or a public company, that the same expectations do exist, and that's not true today. Today, our voluntary system focuses a lot on large-listed companies, which creates an incentive to go private or it creates an incentive to distribute assets into the private market. So part of the solution there is a level playing field. We talked a little bit before about regulation as a way of doing that.

But the other thing that I would note, which is quite important, I'm often representing the equity investor. But on the other hand, debt investment really matters, and so does bank lending. And what we hear from companies is, they don't say it quite this way, but I mind what my equity investors think, I pay a lot of attention to what my debt investors think because I have to refinance so frequently, and I'm obsessed with what my bank lending is going to do. So I do think that the role of bank finance is incredibly important as we think about those assets that could go into a private market, because it's very unlikely that companies will be 100 percent equity financed. And that does make an important role for the banks.

KARABELL: I would just, one caveat to all this, which is it's one thing to divest from certain carbon intensive assets in the developed world, it's another thing to do so when your operations are kind of global and multinational. And one of the results, à la Sarah's point is, if you're going to divest yourself of using coal in Pakistan or India, if you happen to have something there or Indonesia, one, it's likely a lead to more disinvestment in those countries, because someone's going to utilize those coal plants anyway. Because unless you're going to build out an entire solar and wind grid, which no one company is going to do.

It just, one has to be careful the zero-sum approach to this and that, if there are alternatives you can do so sometimes those alternatives, unfortunately, are measured in a longer timeframe than some of the urgency of those who want to reach carbon neutrality now would like. But liking it, and the world functioning the way it is currently are not the same thing. And I think part of recognizing enough versus more in this sense is, you sometimes do have to deal with the real and not just with the ideal, particularly when your operations are global and the alternatives are scarce. Having a greater respect for the pragmatic and at times incremental, which, flies in the face of the urgency, but it's also probably the best we could achieve is I think vital.

KECK: Okay, thank you. Let's go back to our audience, our participants today. Do we have any questions in the queue?

STAFF: We will take our first question from Elliot Schrage.

KECK: Hi, Elliot. You can unmute and join us.

Q: Hi, thanks for thanks for having me, this a fascinating conversation. Although I have to confess, it is not the conversation I was expecting when I saw sustainability and I saw Zachary and his book referenced. So I'm interested, and I hope this doesn't deflect too much, but I'm interested in the broader conception of sustainability and how we come up with financial policies, investment, credit, etc., that reflect our values.

We've talked a lot about values related to environment. But as I think back about Brown Brothers, and the book, Brown Brothers was a financial supporter, investor, lender for the slave trade, which was let's be clear, a great business, but something that we look back on as being a highly inappropriate kind of activity for investment decisions. And I don't mean to put you on the spot. But I think the question is, today's world increasingly puts extraordinary pressures on the private sector to make values decisions, both domestically with respect to issues like voting rights or other things or internationally with respect to countries like China and their social policies as well. And what I'm very interested in is to get, and again not in a gotcha way, but how do you approach these kinds of issues? Where there are clear cultural differences that underlie clear value differences among your stakeholders? And ultimately, how do you decide what stakeholder concerns are legitimate or aren't legitimate in a global economy or in a polarized society?

KARABELL: So I mean, I will say one quick thing on the history part, which is one of the odd stories about a firm that was deeply complicit in the slave trade because they were so important to the cotton trade, is they also hated being complicit in the slave trade. I'm not doing this as an apologue. I'm just saying they were simultaneously deeply complicit in it and then very quickly looking for ways to not be involved in it. It just took them like ten years to shift their business model away from something that was morally untenable and morally inexcusable. And they didn't do the morally purest thing, which is just go, we're done. We're out of here. And that's what I meant before a little bit about the real and the ideal.

That's not satisfactory, I think from a moral framework that demand unequivocal stances against undeniable immoralities. But things don't always allow for overnight decisions, immediate divestiture. It's not, I mean, it's tenable, if someone's going to bear the cost. Everything's tenable if someone's going to bear the cost. And I suppose we could argue that in terms of Paris and climate and sustainability, no one is yet willing to bear the costs that are necessary to achieve the goals that are imperative. And that's a whole other argument. But I do think there is an allowable pathway for getting to a sustainability that sometimes requires both a cultural shift and a literal material one that is not simple, not easy, and can take a little bit of time.

KECK: Thank you. Sarah, you want to add on to this?

WILLIAMSON: I'll add just briefly on to this. I mean, first of all, it's an excellent question. I think that the relative choices of different stakeholders, managing those, whoever, is an extremely hard thing to do. The simple thing that I would say is that there is a difference between value and values, but they do tend to converge over time. So I don't want to use the Brown Brothers example, but if you think about things over time, where they have converged into values.

So let me give you the simple example of asbestos. Asbestos early on was building material, then perhaps it was a health and safety issue, then perhaps it was a liability issue, and then it was bankruptcy. So that was one where you've at some point in that path, you could have argued that was a values issue because it was about safety. But then it became a value issue, because it came right into finances. So I think one of the important questions in thinking about a lot of these things, you can think about tobacco has been a very good business for long periods of time, is that difference between value and values, and how much time you have for your time frame on that, and what kinds of trade-offs each sort of actor is willing to make. And they're not easy decisions.

KECK: Sandy, do you want to add in on this, before we move on?

BOSS: I guess the only observation I would make, I would echo what Sarah said around the fact that over time value and values can converge. I think that when we speak to companies about social issues, first of all, we are focusing on what is material and relevant to that company, and that's a function of the stakeholders that they've identified, but also the stakeholders that identify them. And if you look at certain topics around just taking, for example, a company's impact on the people that they interact with. It is different regionally, it's different by business model.

So if you're a large corporation operating in the U.S. today, the fair treatment of workers from a DEI perspective—from a diversity, equity and inclusion perspective—is enormously important, not just on gender grounds, but also on racial grounds. And that is something that very few large U.S. companies can say, I am yet doing as well as I want to. And so companies are taking accountability and responsibility for encouraging greater opportunity for a diverse population. And there's a series of actions that they're taking, and they're doing that, is it value or values? It might be both, but they're doing it because they are convinced, those companies, that it's the right thing to do.

If I think alternatively, let's say that I'm in a company that relies heavily on extended supply chains for say, government work or the like, in the developing world, then that means that I am in fact also thinking about or should be thinking about what is the impact that my company might be having on the workers in that supply chain? Have I thought about the risk management that I should be doing to make sure that those workers are treated fairly? And when we meet with companies, partly we discuss with them, the right thing to do, because that's in their interests, and they're thinking about it. But partly, it's a function of the practicalities of a global expectation.

More and more consumers are raising questions like the one Elliot raised when they make their product purchasing decisions. While his question might not have been so motivated, they are saying I will vote with my wallet. I will think differently about the companies that I think are considering these issues and favor them with my trade versus those who are indeed not thinking about these issues. So I think that value-values convergence around these social impact issues is really quite a phenomenon of our times. And to Zachary's point, probably was less of a phenomenon of the 1860s than it might be today. But it's certainly something we see in our engagements with companies.

KECK: Thank you and let's move on to the next question please.

STAFF: (Gives queuing instructions.) We will take our next question from Hani Findakly.

KECK: Hi, Hani, you can unmute.

Q: Thank you so much. Very good discussion, I'm enjoying it very much. On the issue that Zachary spoke about, which is the privatization of profits and the socialization of losses. I'm just wondering whether you have any thoughts about how for a public policy perspective, you could find a way to deter against it or at least reduce its impact. Whether for example, an excess corporate tax on excess profit would be the right way to do it. What mechanisms, because so long as the public policy encourages that people continue to do it. Nobody paid a price for the last financial crisis, and probably nobody will in the future.

KARABELL: I mean, it's obviously an important and trenchant question. Dodd Frank, and the attempt to handcuff large money center banks and then the equivalent regulatory framework in the EU, on the one hand, it did I think, succeed in limiting the amount of risk net that large financial institutions can take. But it didn't eliminate the amount of risk that capital can take in a free flowing system, so that risk quotient simply moved elsewhere within the financial system. Again, some of it is bounded by banks. Hedge funds can only take on a hundred to one leverage if there's some prime brokerage and bank that's willing to allow them to do so.

So I do think there's probably less risk in the financial system, at least of the socialization of risks. And we've had several sort of financial blow ups in the past couple of years, within large money center banks like Credit Suisse and Deutsche Bank, that the shareholders have borne, but governments have not. And that probably is a good example of some of that being modified. The question, of course, which we never faced in the pandemic, because there was such a massive government spending to sort of make sure the entire system was liquid, is what happens if that risk exists in other areas, in a tech firm or in another country? And we have not solved for that. And I'm much more skeptical about the ability of any national framework, which is why Janet Yellen is talking about a global corporate tax rate, i.e. no national framework, even a U.S. national framework is likely to be sufficient, if what you're looking for is global systemic risk, and that's kind of the issue.

KECK: Sandra, or Sarah, do you want to add on to this?

WILLIAMSON: I guess the only thing I would say is that, it seems to me the point of policy, broadly speaking, is not to keep risk away from capitalism, because capitalism will always have risk. It is to try to internalize externalities, so where you can transfer that to somebody else. And so I think of the watchword as policy is let the market do what it wants to do, but make sure that it pays for the things that it's using. And that's where we typically fall down. It's the alignment of incentives. That's important.

KARABELL: Yeah, that's a great point, Sarah. That was well-put.

KECK: Yeah, I want to go back to supporting through the transition. And we've talked about supporting companies, but I'd also like your views on supporting workers. And I can just give you an example that I've seen here in my state in Arkansas. In January, there was the cancellation of the Keystone pipeline. And as somebody who is for a better environment, I was pretty happy with that.

But in Little Rock, the state capitol here, we have a major employer called Welspun Tubular, who had one thousand people employed, very important employer in the state that, we have a lot of social indicators, where we're in the bottom ten in this country. And so it's threatened the employment directly. As you can imagine, this decision received a lot of negative press, because it was very much a job-loss story here in my state, and not a climate victory. And I just would love to hear your views on how do we better handle the structural adjustment that we need toward, in this case, a clean energy transition when we're thinking about workers? Sandra?

BOSS: I'm happy to start on that. I think that the reality is that when you think about E, S, and G, sometimes they are positioned as if they are independent and separate and divisible issues, but in fact they are quite intertwined. And so there is no question that decarbonizing the economy is not just environmental, it is a major social issue. And when we look at it, this is relevant to millions of Americans who are employed in carbon-intensive activities, particularly in certain states. There are countries in the world who are either wholly dependent or largely dependent on low-cost coal for purposes of heating, and they are impoverished and don't have the choice to instantaneously move to a greener solution. At the same time there are countries who have a high dependence on oil revenues. And that's it. So I do think that reality is there.

When I look at this, it is a public-private partnership question at the end of the day, in the sense that individual companies making these transitions, they do have both legal obligations to their workforces. But there is also in our view, a social and economic contract that goes beyond pure legal obligations. And I will say, I sit in Europe and I do see the legal expectations of companies are much higher than they are in some parts of the world, including the U.S., including many countries in the emerging markets. I do think that companies who are thinking about their long-term viability, need to be very, very mindful of how they're investing in that transition, because short-term, financially cruel solutions that might make sense, have lasting ramifications.

 We've all seen companies that exit badly an environment, therefore losing their social license to operate in other places. And that could be a very brutal lesson for a company not thinking about it. But that said, I also think that we will probably find that a big role that the governments will play will be in managing in a more holistic way the transition. I mean, net, the transition to a green economy, as we talked about earlier, I talked about earlier, it should be in aggregate economically beneficial. But aggregate doesn't help you if you're one of the people whose job has been harmed. And so this is where there must be some form of wealth transfer, whether it's through the form of taxation, as discussed earlier, whether it's through explicit programs to support workers, reeducate, and enable them to move into new, different, skilled roles. If those things don't happen, and there is no social safety net, that can be absolutely devastating.

And I know, sitting in England where I live, the social devastation associated with the way that the country exited the coal mining industry in this country has lasted for decades. And it does require significant work for any country, going through these kind of changes. Now, we're contemplating the whole world going through these kind of changes simultaneously.

And I guess the note, I would say, is every single country on the planet has just overextended itself financially, for purposes of addressing the COVID crisis. So we are not starting from a position of great governmental largess. We have very, very high indebtedness in many, many countries. And that is a relevant context as we think about who will bear the cost of these kinds of transitions. So companies, particularly financially successful companies, we observe them being mindful about their need to perform a role here voluntarily, lest they also encounter other requirements down the road. And I think that dynamic is in a way healthy.

KECK: Great. Sarah, do you want to add on to this?

WILLIAMSON: Yeah I would add to that, and I agree with all of that, is that the positive way to get out of this is investment in climate solution. So I don't know this company in Arkansas. But, is there a way to think about redeploying, and not everybody will, if you're a coal miner, you're a coal miner. But if you're doing something else, and if you're a company that's doing something else, thinking forward about how to use the skills, the labor, the skills, the technology, whatever you have, to succeed in a different climate scenario, I think is extremely important. And I think there are many companies that are more short-term oriented and sort of assume the future will be like today. And that is not a good assumption if you're thinking about climate. So I think that having those companies really try to redeploy their assets towards climate solutions is something that we should think more about.

KECK: Yeah, they're making the pipes. And when you think about using hydrogen, hydrogen could be a very good alternative for them of hydrogen pipelines. Which would be a clean energy. Zachary, do you want to add into this?

KARABELL: I would just highlight what's been said. I thought this is one of the great failings of kind of the 90s transition toward a more tech and service economy was, if you're going to embrace the creative destruction of capitalism—kind of as I was saying about Brown Brothers being cognizant of risk—recognize the destruction part of it. It is a short-term one that sometimes is much more viscerally evident to people than the creation part of it. I mean, if you were in Pittsburgh in 1982, you were probably much more aware of the plants shutting down. I mean, I certainly was because I watched Flashdance. And then you were of—that was a little cultural reference to cheesy film at the time—than you were aware of the transition to Pittsburgh as a service, healthcare economy. And, companies, if they are liquid and viable, if the companies are not going out of business, they can do a lot more to make sure that workers are floated during the transition. Governments certainly can. And frankly, the social and political cost of not doing it is way greater than the economic cost of doing it.

Maybe we've learned that from the pandemic, maybe that's one of the great changes, that we're in a world where governments that had not realized the imperative of that have realized it, and it's hard to go back once you've done that. So this may, in fact, be a sea change that we're in the midst of. That would be a good thing, I think. But à la your point Beth, clearly not enough. The liberal Biden administration, which you would have thought would have been the most socially, culturally prepared to go, if a thousand people were gonna go out of work, we're gonna make sure that their incomes are preserved for eighteen, whatever the time is, killed the Keystone pipeline without thinking about that first. So.

Did Beth freeze?

KECK: …or having some way to address that? So we're…now up to the top the end of our…what would be great is if…one more round from each of you, what would be your vision for sustainable capitalism, and just, thirty seconds or a little bit from each of you on…you're each working and looking at this from your different perspectives…

BOSS: Since Beth is frozen, should we each take a shot at this?

KECK: –one final.

WILLIAMSON: Go for it Sandy. (Laughs.)

BOSS: Alrighty, look, I think, as I've discussed before, my vision of sustainable capitalism as you will, would be companies that are mindful of their impact on their stakeholders, they're aware of and cognizant of and taking advantage of the need to manage risk and opportunities in environmental space, including a low carbon transition. And that, our belief is in so doing these companies will, in fact, find much more patient capital is a reward - to Sarah's purpose. Long-term capital, more patient, because we see increasingly the money that, at least our clients have invested, is interested in seeing the companies are attentive to, managing sustainability risks and opportunities. So I'll leave it there.

WILLIAMSON: So I think about sustainable capitalism as a world in which both companies and investors are future oriented, they really look to the long-term future when they're making their decisions. And so sustainable does, I think it was Elliott's question, mean not just climate, but sustainable as a business. And so having that long-term future oriented mindset, where they try to build value creation for their multiple stakeholders. And those stakeholders can be their shareholders, their employees, their communities, the planet, but really understanding that capitalism has brought more people out of poverty than anything else in the history of the world, and that we need that creativity to drive innovation, and a solution-oriented mindset. So that's what I would say.

KECK: And Zachary you have the last word.

KARABELL: Yes. And I would second a lot of what Sarah just said, I think a lot of Brown Brothers partners would have historically done so. Yes, I'm hawking a book. I'm gonna keep going back to that until everyone who's still on the chat buys one. But it's also, there is that cultural attitude of, we do not live in a zero-sum world, but if you act like you're in a zero-sum world you're more likely to help create a zero-sum world. And what that means is, while there is ultimately expansion of both profitability and prosperity in the short-term, those things don't always align equally or well or sustainably in the moment. And I do think that those who have benefited disproportionately and I think, this firm in particular has a responsibility if that is the case, to not only be self-serving, but of service. And those two do not need to be in opposition. They are not contradictory things, but you have to embrace both with equal vigor and equal passion.

KECK: Wonderful. And with this, we'll close out this session today. I want to thank everyone for joining us for this virtual meeting. And in particular, I would like to thank our speakers. Thank you.

WILLIAMSON: Thank you, Beth!

KARABELL: Thank you, Beth.