Interview with Sarah Greenberg

JULIA KENNEDY: Welcome to the Carnegie Council's Global Ethics Forum. I'm Julia Kennedy.

Today we'll hear from Sarah Greenberg. She's the team lead for the Environmental Social and Governance North American Account Management Team at RiskMetrics, a New York City-based risk management firm. In other words, she helps investors weigh social, corporate governance, and environmental risks as they consider where to place their money in global markets.

RiskMetrics had made long strides in its examination of sustainability and carbon emissions among corporations and the banks that invest in them. A series of studies released by the firm argues that carbon risk should be a high priority as investors decide where to put their money. The company makes arguments along ethical as well as financial lines.

I began our conversation by asking Greenberg how she became interested in global society.

SARAH GREENBERG: I first traveled to Northern Ireland right after high school, and I was really struck by how much these issues that seemed very foreign to me—human rights, equality, discrimination—had real effects on people's lives on a day-to-day basis. Everyone from the bricklayer to somebody leading tours had very concrete opinions.

In college I focused on political science and international relations and economics.

JULIA KENNEDY: After college what happened?

SARAH GREENBERG: After college I was really interested in working for a firm that focused on environmental issues. So about a year after moving to New York City I found an advertisement for a position at Innovest Strategic Value Advisors.

JULIA KENNEDY: So what were Innovest's missions when you started there? What kind of work were they doing?

SARAH GREENBERG: Innovest was one of the leading research providers focusing on nontraditional drivers of risk and return, specifically looking at how environmental, social, and governance (ESG) issues impacted companies' share price performance. So essentially, they supplied investment research from an environmental, social, and governance lens.

JULIA KENNEDY: And have they changed at all since being acquired by RiskMetrics?

SARAH GREENBERG: Well, RiskMetrics is a really interesting company. They're a risk management business and a governance business. The governance business does proxy voting, helping shareholders vote proxies according to their investment strategies or their mandates.

Innovest was incorporated into the governance business, but has also pulled in elements of the risk business. So what's happened is we have a larger infrastructure and there's more support for the financial evaluation of these issues. We have a larger data collection staff and more IT support for our analysts, which they always appreciate.

JULIA KENNEDY: Do you find that it's a growing concern among investors to look at these areas of risk, looking more at transparency, sustainability, issues like that?

SARAH GREENBERG: It's really interesting. When I first started working with Innovest, I didn't know much about the field. I had some sense that corporations have really significant impacts on the environment, on the societies in which they operate, on the labor force which they employ, but I didn't really understand what that meant from an investor perspective. My understanding of it has really developed.

At the same time, I think the field is developing. Certainly there has been since the early 1990s a movement called socially responsible investing. That was really initiated by people who had moral or ethical investment mandates—the religious community, the ethical investors who were very deeply committed to environmental issues.

Certainly the field has developed since then. We are now better able to quantify how some of these issues impact companies' financial performance. We've seen a change in some of the issues.

As tobacco has become regulated, it's not really an ethical issue; it's an investment/financial issue. Companies who are producing products that kill their consumers aren't able to sell them the same way as companies that produce sustainable products, or even products that might not be sustainable but are not actually hurting the people who use them.

JULIA KENNEDY: Do you think some of this improvement in financial correlation has to do with consumer concern or with industry and investor concern? Where do you think that pressure is coming from?

SARAH GREENBERG: I think that's a really interesting question because I think there's a lot of pressure coming from many different angles.

Certainly there's a consumer concern. Certainly there are public relations concerns. If we look at Nike and/or Reebok, those are really great examples. There were huge public efforts to make these retailers enact basic human rights and labor rights standards in their business practices. They were experiencing boycotts from their consumer demographic because their labor and human rights standards weren't adequate.

I think another driving force in this change is the public policy element. We see increasing regulation around climate change, around the environment, around human rights issues, and that regulation has significant financial implications and affects companies within sectors and across sectors and across the globe very differently.

JULIA KENNEDY: Give me some examples.

SARAH GREENBERG: Sure.

Well, one of the types of research that RiskMetrics puts out is around carbon, around climate change regulation and climate change investment. What we do is we say companies can have a broad range of carbon emissions. Depending on where they operate, they are going to be subject to different regulations. For a company that emits a ton of carbon in Peru, it's going to cost them a different amount of money than a company that produces a ton of carbon in Norway. What RiskMetrics has done is try to quantify how much it will cost companies to comply with regulations depending on where they operate.

Let's take Exxon, one of the largest carbon footprints of any company globally. Yet if you look at how much it is going to cost them to comply with carbon regulations, you're looking at about 1 percent of their earnings before taxes, which for a company that huge isn't a very significant impact. With other companies within the same sector, you're looking at a much more material percentage of earnings before taxes, getting up to 15-20 percent.

JULIA KENNEDY: And that's mostly based on where they're doing their work?

SARAH GREENBERG: Where they're doing their work and how much carbon they're emitting now.

JULIA KENNEDY: How much does that augur for a consistent carbon emissions policy?

SARAH GREENBERG: Well, I think that we are seeing more standardization of carbon policy, certainly with the change of administration in the United States. I think the U.S. was one of the holdouts in the developed world, and we're starting to catch up.

The financial crisis throws a loop into the development, but you're seeing the movement globally. The Investor Network on Climate Risk now represents, I think, over $7 trillion of assets under management, and those are specific investors who are trying to understand how this regulation impacts companies financially.

JULIA KENNEDY: Are you finding those impacts growing, or do you think you're getting better at figuring out where the impacts lie?

SARAH GREENBERG: I think part of what's happening is that there's more pressure on companies to disclose both their emissions and their risk management policies.

A really great effort was the Carbon Disclosure Project, which was a nonprofit group in the United Kingdom that started asking corporations to simply disclose their carbon emissions—not to agree to change them, but simply to disclose them. Since that effort started, I think eight years ago, the number of assets surrounding that effort is now over I think it's $55 trillion, which is just kind of mind-boggling how much that represents. So there are more companies who are starting to engage in this dialogue and disclose their emissions.

On the investment analysis side, we are getting better at understanding what that means for investors and what that means for the companies' financial performance. We have better models for estimating for companies who don't disclose their emissions what their emissions actually are.

We use something called an input/output model. That means we essentially look at a company's revenues and we say, "Well, if this percentage of their revenues for a company of this market cap comes from these types of business activities, we can guess what your carbon emissions are, and then have a verification process that goes along with that." It's really interesting how precise that can be.

JULIA KENNEDY: What's the process you go through with most investors? Take me from the beginning to the end in assessing a potential investment.

SARAH GREENBERG: It depends on the investment strategy. We have investors who still operate under the SRI, socially responsible investment, genre. They focus on divesting from companies that have business revenues coming from activities that are controversial.

This might be the religious demographic. They don't want to invest in companies that generate revenues from alcohol or tobacco or abortifacients. We've even seen movement in that demographic more towards these larger issues, like human rights, economic justice, labor rights. I think that's interesting, that even what we consider maybe a more conservative demographic is integrating these more progressive ideas, because there is a synergy between them.

We then have clients who are interested in investing only in companies that meet certain global standards around these larger issues: human rights, labor rights, governance, and anti-corruption. Those clients also incorporate some kind of negative screening process where they don't want to invest in companies that have been flagged for egregious violations of these international standards. The way we deliver the information is they can pull it from our website or we can help them come up with a set of queries that will help them identify companies that don't meet those standards.

Then there is a slightly more comprehensive approach, meaning that investors look to the research to help them identify risks in their portfolios, financial risks.

So you can have a portfolio that is diverse, that is invested across different sectors, that's a global portfolio, that has a very high exposure to climate risk—meaning that the companies that they have invested in both will have to spend a larger percent of their revenues to comply with carbon regulation, that their management isn't prepared to do that, hasn't been proactive in investing in technology, and therefore that portfolio manager might say, "Rather than pull all of my investments out of utilities, I'm going to try to find utility companies that have less exposure." We can help them do that.

JULIA KENNEDY: Which of those groups that you described do you see growing?

SARAH GREENBERG: Well, I think certainly as we see increasing global regulation around these issues, the active strategy, understanding how these environmental, social, and governance non-traditional issues impact companies financially.

I think the chemical sector is a really great example. Europe is working on a package of regulation called REACH, which is putting forth certain chemicals that will not be able to be sold within the European Union. It's really interesting when you look at how it's going to affect companies, because you have chemical companies whose product line is comprised almost entirely of these chemicals. The chemical companies sell primarily to Europe. They don't have alternative markets to sell to. So you question, "Okay, this regulation is coming in two to four years; what does it mean for these companies? Can they create sustainable products?"

By "sustainable," yes, I mean products that aren't as toxic, but I don't mean sustainable as in eco-friendly; I mean sustainable as in they're allowed to sell them to their market.

For chemical companies that produce this alternative product line, they simply can't do it in two to four years. The technology takes longer than that to develop.

So we can help identify companies that we think maybe don't have a sustainable business model through the environmental, social, and governance lens.

JULIA KENNEDY: What kinds of difficulties do emerging markets pose in doing some of this kind of risk analysis work?

SARAH GREENBERG: Well, there are quite a few difficulties. Emerging market companies are much less likely to engage.

Part of the research process that we use—and there are other firms who do this kind of work who use different methodologies and processes—but part of the methodology that RiskMetrics uses is engaging with the corporate issuer. So we use public information that they have, we use alternative databases, and then we go back and we interview companies. We find that emerging market companies are, for one, much less likely to engage in that process. So it's harder to give investors the data that they need to make their decisions.

The other thing that's very interesting is that we see a positive correlation between quantifying how much it's going to cost companies to comply with carbon regulations in the developed world but a negative correlation in the developing world, in the emerging markets world. So actually as companies have more emissions but are not subject to the same regulations, they actually are outperforming their peers.

JULIA KENNEDY: How do you see the current climate affecting investors' interest in sustainability? Has it really shifted away from sustainability, or is there sustained interest?

SARAH GREENBERG: Well, I think right when the financial crisis happened people's first thought was, what does this mean for sustainability? What does it mean for ESG, environmental, social, and governance investment research? Shouldn't we be primarily concerned with fundamentals?

I think what the answer to that question was is: no. Now more than ever you should be trying to look at companies through an alternative lens. The lens you were using, looking at the balance sheet profit and loss, didn't tell you about the risks that those companies faced.

So the banks that are failing and are not doing well now, if we look at their loan portfolio through the ESG lens—and the ESG lens for a financial company is banks themselves don't really produce carbon emissions, but banks invest in corporations, banks invest in projects that do.

So if a bank is invested in a demographic or makes loans to a demographic that can't pay those loans back, that's a social risk. If a bank has invested in a project that is going to fail because eventually its business objectives are going to be regulated to the point they can't sustain the business, the bank is making a bad loan. I think our view is that now more than ever these issues are important to incorporate.

JULIA KENNEDY: And are your clients responding to that?

SARAH GREENBERG: We have certainly seen reaction. I think a lot of asset managers, who make up the bulk of our business—asset managers, institutional investors, pension funds, endowments—asset managers who have seen their portfolios or the assets under management decline by 30 percent perhaps said, "This is a significant impact on our business." I think we're sensitive to that.

I think the area is going to grow. I think that sustainable investing—environmental, social, and governance investing—as a field, is going to become more and more recognized as an important cornerstone of investment analysis.

JULIA KENNEDY: In general, it seems you see this field expanding and the trends are positive. Do you see anything sort of coming down the pike that could be a deterrent or could be a trend that you think the field is moving in the wrong direction?

SARAH GREENBERG: That's a really good question.

I think that it's really interesting as we start to test this information. By "test" I mean can we identify companies who have done well in the ESG investment test and say that they have outperformed their sector peers?

And certainly, as we go through more quantitative rigor in performing that test, we have to be careful of the tendency to become too quantitative, because we're still trying to tell a story. The story is how are these issues impacting this company and impacting these sectors. For some sectors and for some companies, the issues are more relevant. I think we've got to resist the temptation to make it too quantitative and get away from the actual analysis.

JULIA KENNEDY: Beyond RiskMetrics are you seeing these kinds of things emerge? Obviously, you're kind of at the forefront of this ESG analysis. But are you seeing these emerge at other risk analysis firms and throughout the industry?

SARAH GREENBERG: The ESG business at RiskMetrics—we were recently told that we're going to have a new member of that team at the executive level. His background is credit risk.

When I first started working at RiskMetrics, I was able to hear him give a presentation. Understanding credit risk in a portfolio involves identifying the systemic factors that create risk. What he wasn't able to do was understand all of the risk that a portfolio is subject to. He called the things that he couldn't quantify idiosyncratic factors.

As we are better able to quantify those idiosyncratic factors, I think that people will start to see these issues that they haven't looked at in the past fill that space. Not that ESG issues would fill all of the idiosyncratic factors, but they certainly would provide more insight.

JULIA KENNEDY: Great.

Well, Sarah Greenberg, thanks so much for joining me at the Carnegie Council.

SARAH GREENBERG: Thank you so much for having me.

JULIA KENNEDY: To wrap up this week's Global Ethics Forum, the Carnegie Council's Devin Stewart is joining me to share a little bit about the organization that puts together the show for you each week.

Devin is director of the Global Policy Innovations Program here at the Carnegie Council. His research interests lie primarily in global business ethics and East Asia. He also runs a variety of programs here, teaches a class on East Asian Politics and Economy at NYU, and keeps so many irons in the fire I'm amazed his eyebrows aren't singed on a regular basis. In fact, my series of interviews here on Global Ethics Forum with Advocates for Ethics in Business is Devin's brainchild.

Devin Stewart, thanks for joining me.

DEVIN STEWART: Thanks a lot, Julia.

JULIA KENNEDY: Devin, the purpose of sitting you down here is to talk about what the Carnegie Council for Ethics in International Affairs is and how it runs.

So, first, why don't you tell me about your programs here at the Carnegie Council?

DEVIN STEWART: Sure.

Generically, the overarching program is called Global Policy Innovations (GPI). That came about around 2006 with the support of Rockefeller Brothers Fund and also through a lot of deliberation between Carnegie Council, Ford Foundation, and the Rockefeller Brothers Fund, to essentially advance this notion of a fair globalization, globalization that looks at the fundamental ethical questions surrounding the global economy, and taking ideas about alternative economic development and highlighting innovations.

What we mean by innovations are ideas, technology, social enterprise grassroots movements, to specifically address the ethical dilemmas or obstacles in the way of a more harmonious world, particularly those innovations that can be scaled up or spread around the world.

JULIA KENNEDY: So then, how do you bring those ideas about innovations to the public?

DEVIN STEWART: Well, we have a series of products, one of which you are listening to right now, which is called the Advocates for Ethics in Business. This series that you're conducting is part of a series that we launched a couple years ago with the support of Booz & Company, called Workshops for Ethics and Business.

The big overarching program, Global Policy Innovations, tries to highlight these innovations coming from civil society around the world.

Now, the idea of Workshops for Ethics and Business is to make companies aware of these ethical problems and basically to put active civil society participants—broadly speaking, from media to activism to think tanks, the whole gamut—and get them to speak in a civilized setting with corporate executives.

The topic of the conversation each quarter is a specific ethical question—for example: What is your human rights policy at your company? What is the proper way to reach out to publics through the Internet? What are the challenges specific to the Chinese market? These types of questions—and bringing these two ostensibly hostile groups—they can be hostile, civil society and corporations, since historically civil society has been a watchdog—we try to bring them together in a very collegial atmosphere downstairs in our conference room.

There's something about this building at Carnegie Council that makes people respect one another. We've had all kinds of great constructive engagements and dialogues with companies like BP, General Electric, Merck, and many others, and great civil society organizations like Accountability, Human Rights Watch, and Realizing Rights.

Essentially, what we're doing here with your interview series is going the same type of learning but on a one-on-one basis. All this we hope will go toward helping—we say "from the classroom to the board room"—these kinds of resources make their way and help to further advance the understanding of ethics in business.

JULIA KENNEDY: What does the future hold?

DEVIN STEWART: We're thinking about doing a book. We have several events planned this summer, in September, around this overarching theme of sustainability.

One of the kinds of messages we want to convey is that business benefits from society, businesses are part of society. And I believe that one way to advance a more ethical way of doing business—"ethical capitalism," as we sometimes call it—is to remind executives and businesses that the first principles of launching corporations decades ago was to advance public interest. So we want to, in a sense, bring businesses up to speed and in some ways make them more futuristic by reminding them about what their origins were.

So the idea is to address these two biggest crises that we face today—not theoretical crises but real crises—of climate change and the financial crisis, both of which had origins in commercial activity and enterprise, and to say to companies: It's great that you're generating wealth, and this is an equity issue. You know, there's "the rise of the rest;" countries and companies and people all around the world are benefiting from the open market, but at the same time there is a responsibility. On one hand, there's equity and development; on the other hand, there is this responsibility to future generations.

The way that companies can play a positive role in thinking about how to help future generations is, in my opinion, to get back to basics, to remember that they have ethical duties and responsibilities, as well as rights, to society, and that they should be operating in a way that benefits society at large.

JULIA KENNEDY: Great.

Devin, thanks so much for sitting down with me and explaining all of this.

DEVIN STEWART: My pleasure, Julia. Thanks a lot.