Note: Daniel Klier’s title has been changed since the recording of this interview.

Prickett: Hello members and friends of World Environment Center; this is Glenn Prickett, WEC’s President and CEO, and I am very pleased to be here today with Daniel Klier, the Chief Executive Officer of Arabesque S-Ray. Arabesque is one of WEC’s member companies—very interesting company with an exciting new product they have launched that’s very relevant to some of the challenges that our members and other companies are facing in sustainability. So Daniel, thank you for taking some time to tell us about ESG Book, the new product that you’re launching now; and before we dive into that, maybe tell us a little bit about the company, about Arabesque, the role you play in the sustainability arena, and also tell us  a bit about yourself, your career before this and how you came to be CEO at Arabesque S-Ray.

Klier: Glenn, thank you for having me on this program today. So, Arabesque S-Ray is a company that is trying to fix one very fundamental problem. We know capital markets need good ESG data to allocate capital efficiently to more sustainable outcomes, but we also know that what we have at the moment is not good enough. We don’t have enough transparency; we don’t have enough data, and many investors don’t have the tools to really assess how sustainable a company is—how much of it is true versus story, how much is good on the top level, but when you look into the details, you may find a different story. And that’s really what our Arabesque S-Ray does; we provide ESG data and tools to investors to make the right capital allocation choices. We use people and technology to get that through our data, and I think that’s what, also for, probably for this group or the members, is interesting. We’re doing it in an incredibly transparent way, because we believe sustainability would only be successful if we all sort of trust the data and the underlying metrics.

I came to this because I spent the last ten years at one of the largest banks in the world, at HSBC I’ve built HSBC sustainable finance offerings—I wrote my own job profile many, many years ago when this was a very, very young topic. Now it’s everywhere, and frankly, I found myself on too many panel discussions, complaining about the lack of data. You would always say, “We could do so much more if we had better data.” And it was just very, very clear to me, there is space to improve; there is space to make a contribution. And so I joined Arabesque, as the CEO, middle of last year to help the company grow. We are a three and a half year old company, have a hundred and fifty people around the world, dedicated to, to do this topic.

Prickett: Great, thanks Daniel. And Arabesque last year, and WEC together put on a roundtable on the rise of ESG investing, what it means for companies, and it’s certainly, then, one of the big stories of business, in general, and finance, in general, of the last several years. And as you just described, ESG Book may solve or help to solve two big problems we identified in that round table. One, the companies themselves are overwhelmed with a lot of competing requests for information, from investors and analysts. And number two, that a lot of the analysis that comes out of that is maybe not so useful to investors, because it’s not very transparent, the underlying methods aren’t very clear, and in many cases there are still data gaps. So I think, from what I understand, ESG Book is trying to deal with both of those problems. So, let’s make it a little more practical. Let’s first think from the perspective of the companies; so I’m a sustainability executive at a company that is trying to provide data on my company’s performance to the markets. How will ESG Book help me in that role?

Klier: Yeah, so I think that both observations are absolutely right. We have quite opaque ESG metrics that tell you, frankly, not enough. And second, if you’re the chief sustainability officer, and increasingly, the CFO, Head of Investor Relations of a company, you get bombarded with forty, fifty different Excel questionnaires. You also get bombarded with a new acronym everyday, right, because the moment, the solution to a problem is to create a new coalition to create the new standard. The good news in all of this is, everybody is asking you for the same information, maybe slightly different terminology, maybe slightly different way of presenting, but we’re all interested in the carbon footprint. We’re all interested in the measures companies are taking to achievement zero. We’re all interested in how diverse management teams are and how diverse boards are. We’re all interested in how companies deal with human rights issues—whether the chairman is an independent chairman or not because it’s a good sign of good governance.

And so what we do, we collect a fairly large number of ESG raw data points, and we also enable companies to disclose relevant ESG, we call it raw data, so the real underlying drivers of environmental, social, and governance performance. And then we allow companies to express it in different standards. There’s obviously SASB, there’s GRI, and then the WEF metrics, and the, the UN Global Compact assessments, but all they are asking you is a slightly different type of the same questions. And so the way to think about ESG Book for a company is: it replaces forty different Excel questionnaires; it puts in place a central data architecture for ESG information, where you host essentially your ESG data; and then it allows you to present your data in all the different frameworks. We’ve integrated something called the reporting exchange; it was developed by the World Business Council for Sustainable Development, and essentially, it’s a unique piece of IP because it has mapped all the different KPIs. So, when you’ve filled SASB, you’ve answered ninety percent of the WEF metrics, and if you’ve filled GRI, you have most of what you need for TCFD. It’s just not presented in that way, and that’s what ESG Book allows you to do.

The other thing that ESG Book then allows you to do is you can share it. You can share it with the stakeholders that need it, those are sometimes investors, that are increasingly banks that are often now your customers because if you are in a supply chain, you’ll become part of a bigger net zero commitment of somebody that you work with. And so, instead of answering forty different Excel questionnaires, it’s like, let’s call it the LinkedIn profile of a company, and you can share it with the relevant stakeholders that you deal with.

Prickett: Terrific, and now let’s go to the other side of the table. I’m an investor. How will ESG Book help me as an investor?

Klier: Yeah, so investors at the moment have been through a journey of, let’s call it ESG integration, ESG commitments. And in the first instance, it’s very often meant using a single ESG metric, an ESG score, and ESG rating to integrate it into your investment process. And while there was a really nice logic following sort of the idea of a credit rating, it has quite a few downfalls. The biggest downfall is that a credit rating essentially has a single purpose. A credit rating wants to tell you how likely is it that you will ever get your money back. An ESG rating doesn’t have that single purpose because people use ESG date for very different use cases.

Some people want to use ESG information to identify the next up-performer, the next company that’s just really good in managing non-financial metrics, and that’s actually, that actually is a good manager. Other people want to use ESG data to identify risks. Where’s the next corruption problem? Where’s the next human rights scandal? Where’s the next environmental damage that I would want to avoid? Other people will want to use ESG data to deliver outcomes—net zero is an example, right? “How do I construct a portfolio that aligns with the Glasgow commitments, with COP26, the Paris goals?” And very other people want to use ESG information to measure impact. “What’s the carbon reduction I’ve achieved?” “How many jobs have I created?” And so you see the four very, very different use cases that want to use the same data but in very different ways, and trying to put that all into a single score that you can’t untangle is really not very useful.

And so, what ESG Book allows you to do, is you get to see your score, but you can double-click and double-click and you get to your actual raw data items. So, you go from ESG to environmental social governance, you go to what we call twenty-six drivers of ESG performance, and then you get to four hundred and fifty ESG raw data points. And that’s, I think, what most investors really appreciate. You’re not stuck with something that is hard to explain, hard to understand, and you always get into discussions: “Is this now greenwashing?” or “Is it real?” You actually see the carbon emissions, the number of women on the board, the human rights profile of your portfolio, and you can double-click in the underlying drivers. And that’s the beauty of ESG Book, and modern technology makes it possible. Because you can put it on the cloud; you make it available for everyone. It’s a resource that is free and everybody can sign up to it.

Prickett: Great, so you’re opening up the black box that many have complained about in terms of ESG ratings. You know, Daniel, one thing that struck me when I saw the announcement of ESG Book was that you were partnering not only with private financial institutions but with some public agencies, like the World Bank’s International Finance Corporation. At WEC, our mission is to advance sustainable development through corporate business practices. So, we’re very mindful of the global development picture. Tell us why you partnered with public agencies, in what would seem to be of, kind of a strictly commercial undertaking. What’s going on there?

Klier: Yeah, brilliant. I have to give a lot of the credit of ESG Book to the World Bank and the IFC. They were really sort of the core, founding fathers of the platform. And, why? Because if you’re the World Bank or the IFC, your main exposure sits in emerging markets. You give money to companies in the emerging markets. And frankly, if you look at ESG information and even the awareness for these topics in emerging markets, it is quite limited. You also see a very significant correlation between ESG ratings and the state of development of a nation. And sometimes that is driven by companies in more developed markets just pay more attention to this, but frankly, often though, it’s just companies in more developed markets do better disclosure, provide more information. And so, if you’re the World Bank, your main worry actually is that with ESG integration, if we don’t do it well, capital moves away from emerging markets. Because capital over-indices companies that disclose really good stuff.

And so the idea of ESG Book was initially, “How do I create a platform when companies that currently don’t provide enough information, companies that don’t understand what all the acronyms mean—How do I encourage them, and help them to be part of the international financial system? And therefore, attract money probably in the geographies that need it most.” So that whole history that was the original spirit of ESG Book, we then meet as a much broader initiative with about twenty-five very large institutions, the United Nations, Swiss Re, HSBC, Bridgewater. They all came together to create this, but all the credit goes really to the World Bank.

Prickett: I love that. Democratizing ESG investing and making it more accessible to companies in emerging markets which is where a lot of the effort is going to be needed in the future. So, let’s talk a little about where this sits within Arabesque’s business. As I understand Arabesque’s business model, you both provide data, freely and publicly, but you also do your own proprietary analysis for paying customers. If I’m a user of ESG Book, how can I be confident that this isn’t skewed to benefit your own advisory business? And vice versa. If I’m a customer of your advisory business, why are you better than others in terms of having ESG Book at your disposal?

Klier: So, the reason why we’re pushing ESG Book as a free resource of ESG data, is because we have the very strong belief that at the moment everybody argues that there isn’t enough ESG data, very soon, we’ll be in a world where people have too much data. ESG data essentially is any non-financial data. It’s what’s in the news, in social media, in NGO datas, in satellite information, and what companies disclose themselves. And so the challenge that we see, is that most investors, but also companies that want to understand their supply chains actually face the problem, there’s way too much information. You can drown yourself in data, and you’ll still have no idea of what you’re looking at. And so our philosophy is, you make the data available for free, but commercialize the analytics that you put on top of data. So, in sort of our technology analogy mindset, we wanted to create a Spotify of ESG data. Why? The music is free, but if you want to create your own playlist, then we would like to have a contribution. But the idea is that the data should be free, because that’s the only way to create transparency, to create trust in this whole ESG topic, and we will help people that make the right investment choices.

Prickett: Very good, very good. So, Daniel, I have one more question for you, and that’s to, you know, put on your futurist glasses and tell us, this ESG investing movement came very quickly to the mainstream; it’s very dynamic. Where do you see it heading? And what does the world of ESG investing look like five years from now?

Klier: Yeah, for me there are two very important trends. The first one is we’re moving from what I would call ESG 1.0 to ESG 2.0. We spent the last five to ten years in building awareness for the importance of environmental, social and governance issues, but we put it in as sort of one umbrella of ESG, alright. So, a lot of people have launched products, have launched commitments, that essentially brand everything ESG. As we mentioned a little bit before, I think that next phase is a lot more nuanced because what investors really want is understand this: “Is my portfolio actually aligned with net zero? How is the diversity and inclusion policy across my portfolios? What’s my exposure to human rights? And so, I think we see a lot more themetatic fragmentation of the topic, which makes it a lot more relevant to actual investment choices because you can actually relate to each of these topics. I think that’s one big trend.

A second big trend, and that’s true for companies and financial markets is that regulation plays a much bigger role. The increase in regulatory intervention on this topic is very, very significant, both on the side of companies and what kind of information they need to provide. And in terms of financial markets, what is required to integrate ESG information into risk management, into investment choices, into the advisory processes. So, in Europe you now need to evidence that you actually ask your customers how sustainable their portfolio is supposed to be, rather than just ask them for their risk appetite. So, I think it clearly, this is becoming a license to operate. This is no longer a, just positive differentiator; it is also a minimum hurdle you need to jump over.

So, I think the next two to three years will be quite exciting, because it is moving from the few that believed in this early to a topic that everybody has to comply with. And it also moves into an area where I think investments become a lot more emotional, suddenly. Because you can actually put your own values and your own beliefs into a portfolio construction, something that we haven’t seen for a very long time. And I think that’s actually a quite exciting development for the next few years. Companies will need to answer, suddenly, very different questions, right. Because people go beyond traditional financial analysis, there’s an element of climate, and many other non-financial metrics. Your members notice, but this is becoming our global, a global license to operate.

Prickett: Fascinating. It’ll be interesting to see how it plays out in the role technology, and your technology in particular will play. So, Daniel, I’m gonna let you get back to your business at Arabesque S-Ray. Let me add for WEC members, you’ve been invited to a webinar coming up on March 23rd, so that you can dig in a little deeper into ESG Book with Daniel and his colleagues. Later in the year, Arabesque will sponsor a roundtable on ESG investing more generally, where it is today and where it is going. You’ll hear more on that soon. Thank you so much, Daniel, for your time today and for bringing us all ESG Book. We wish you very well.

Klier: Thank you very much.

Prickett: Okay, take care.

Note: Daniel Klier’s title has been changed since the recording of this interview.

Prickett: Hello members and friends of World Environment Center; this is Glenn Prickett, WEC’s President and CEO, and I am very pleased to be here today with Daniel Klier, the Chief Executive Officer of Arabesque S-Ray. Arabesque is one of WEC’s member companies—very interesting company with an exciting new product they have launched that’s very relevant to some of the challenges that our members and other companies are facing in sustainability. So Daniel, thank you for taking some time to tell us about ESG Book, the new product that you’re launching now; and before we dive into that, maybe tell us a little bit about the company, about Arabesque, the role you play in the sustainability arena, and also tell us  a bit about yourself, your career before this and how you came to be CEO at Arabesque S-Ray.

Klier: Glenn, thank you for having me on this program today. So, Arabesque S-Ray is a company that is trying to fix one very fundamental problem. We know capital markets need good ESG data to allocate capital efficiently to more sustainable outcomes, but we also know that what we have at the moment is not good enough. We don’t have enough transparency; we don’t have enough data, and many investors don’t have the tools to really assess how sustainable a company is—how much of it is true versus story, how much is good on the top level, but when you look into the details, you may find a different story. And that’s really what our Arabesque S-Ray does; we provide ESG data and tools to investors to make the right capital allocation choices. We use people and technology to get that through our data, and I think that’s what, also for, probably for this group or the members, is interesting. We’re doing it in an incredibly transparent way, because we believe sustainability would only be successful if we all sort of trust the data and the underlying metrics.

I came to this because I spent the last ten years at one of the largest banks in the world, at HSBC I’ve built HSBC sustainable finance offerings—I wrote my own job profile many, many years ago when this was a very, very young topic. Now it’s everywhere, and frankly, I found myself on too many panel discussions, complaining about the lack of data. You would always say, “We could do so much more if we had better data.” And it was just very, very clear to me, there is space to improve; there is space to make a contribution. And so I joined Arabesque, as the CEO, middle of last year to help the company grow. We are a three and a half year old company, have a hundred and fifty people around the world, dedicated to, to do this topic.

Prickett: Great, thanks Daniel. And Arabesque last year, and WEC together put on a roundtable on the rise of ESG investing, what it means for companies, and it’s certainly, then, one of the big stories of business, in general, and finance, in general, of the last several years. And as you just described, ESG Book may solve or help to solve two big problems we identified in that round table. One, the companies themselves are overwhelmed with a lot of competing requests for information, from investors and analysts. And number two, that a lot of the analysis that comes out of that is maybe not so useful to investors, because it’s not very transparent, the underlying methods aren’t very clear, and in many cases there are still data gaps. So I think, from what I understand, ESG Book is trying to deal with both of those problems. So, let’s make it a little more practical. Let’s first think from the perspective of the companies; so I’m a sustainability executive at a company that is trying to provide data on my company’s performance to the markets. How will ESG Book help me in that role?

Klier: Yeah, so I think that both observations are absolutely right. We have quite opaque ESG metrics that tell you, frankly, not enough. And second, if you’re the chief sustainability officer, and increasingly, the CFO, Head of Investor Relations of a company, you get bombarded with forty, fifty different Excel questionnaires. You also get bombarded with a new acronym everyday, right, because the moment, the solution to a problem is to create a new coalition to create the new standard. The good news in all of this is, everybody is asking you for the same information, maybe slightly different terminology, maybe slightly different way of presenting, but we’re all interested in the carbon footprint. We’re all interested in the measures companies are taking to achievement zero. We’re all interested in how diverse management teams are and how diverse boards are. We’re all interested in how companies deal with human rights issues—whether the chairman is an independent chairman or not because it’s a good sign of good governance.

And so what we do, we collect a fairly large number of ESG raw data points, and we also enable companies to disclose relevant ESG, we call it raw data, so the real underlying drivers of environmental, social, and governance performance. And then we allow companies to express it in different standards. There’s obviously SASB, there’s GRI, and then the WEF metrics, and the, the UN Global Compact assessments, but all they are asking you is a slightly different type of the same questions. And so the way to think about ESG Book for a company is: it replaces forty different Excel questionnaires; it puts in place a central data architecture for ESG information, where you host essentially your ESG data; and then it allows you to present your data in all the different frameworks. We’ve integrated something called the reporting exchange; it was developed by the World Business Council for Sustainable Development, and essentially, it’s a unique piece of IP because it has mapped all the different KPIs. So, when you’ve filled SASB, you’ve answered ninety percent of the WEF metrics, and if you’ve filled GRI, you have most of what you need for TCFD. It’s just not presented in that way, and that’s what ESG Book allows you to do.

The other thing that ESG Book then allows you to do is you can share it. You can share it with the stakeholders that need it, those are sometimes investors, that are increasingly banks that are often now your customers because if you are in a supply chain, you’ll become part of a bigger net zero commitment of somebody that you work with. And so, instead of answering forty different Excel questionnaires, it’s like, let’s call it the LinkedIn profile of a company, and you can share it with the relevant stakeholders that you deal with.

Prickett: Terrific, and now let’s go to the other side of the table. I’m an investor. How will ESG Book help me as an investor?

Klier: Yeah, so investors at the moment have been through a journey of, let’s call it ESG integration, ESG commitments. And in the first instance, it’s very often meant using a single ESG metric, an ESG score, and ESG rating to integrate it into your investment process. And while there was a really nice logic following sort of the idea of a credit rating, it has quite a few downfalls. The biggest downfall is that a credit rating essentially has a single purpose. A credit rating wants to tell you how likely is it that you will ever get your money back. An ESG rating doesn’t have that single purpose because people use ESG date for very different use cases.

Some people want to use ESG information to identify the next up-performer, the next company that’s just really good in managing non-financial metrics, and that’s actually, that actually is a good manager. Other people want to use ESG data to identify risks. Where’s the next corruption problem? Where’s the next human rights scandal? Where’s the next environmental damage that I would want to avoid? Other people will want to use ESG data to deliver outcomes—net zero is an example, right? “How do I construct a portfolio that aligns with the Glasgow commitments, with COP26, the Paris goals?” And very other people want to use ESG information to measure impact. “What’s the carbon reduction I’ve achieved?” “How many jobs have I created?” And so you see the four very, very different use cases that want to use the same data but in very different ways, and trying to put that all into a single score that you can’t untangle is really not very useful.

And so, what ESG Book allows you to do, is you get to see your score, but you can double-click and double-click and you get to your actual raw data items. So, you go from ESG to environmental social governance, you go to what we call twenty-six drivers of ESG performance, and then you get to four hundred and fifty ESG raw data points. And that’s, I think, what most investors really appreciate. You’re not stuck with something that is hard to explain, hard to understand, and you always get into discussions: “Is this now greenwashing?” or “Is it real?” You actually see the carbon emissions, the number of women on the board, the human rights profile of your portfolio, and you can double-click in the underlying drivers. And that’s the beauty of ESG Book, and modern technology makes it possible. Because you can put it on the cloud; you make it available for everyone. It’s a resource that is free and everybody can sign up to it.

Prickett: Great, so you’re opening up the black box that many have complained about in terms of ESG ratings. You know, Daniel, one thing that struck me when I saw the announcement of ESG Book was that you were partnering not only with private financial institutions but with some public agencies, like the World Bank’s International Finance Corporation. At WEC, our mission is to advance sustainable development through corporate business practices. So, we’re very mindful of the global development picture. Tell us why you partnered with public agencies, in what would seem to be of, kind of a strictly commercial undertaking. What’s going on there?

Klier: Yeah, brilliant. I have to give a lot of the credit of ESG Book to the World Bank and the IFC. They were really sort of the core, founding fathers of the platform. And, why? Because if you’re the World Bank or the IFC, your main exposure sits in emerging markets. You give money to companies in the emerging markets. And frankly, if you look at ESG information and even the awareness for these topics in emerging markets, it is quite limited. You also see a very significant correlation between ESG ratings and the state of development of a nation. And sometimes that is driven by companies in more developed markets just pay more attention to this, but frankly, often though, it’s just companies in more developed markets do better disclosure, provide more information. And so, if you’re the World Bank, your main worry actually is that with ESG integration, if we don’t do it well, capital moves away from emerging markets. Because capital over-indices companies that disclose really good stuff.

And so the idea of ESG Book was initially, “How do I create a platform when companies that currently don’t provide enough information, companies that don’t understand what all the acronyms mean—How do I encourage them, and help them to be part of the international financial system? And therefore, attract money probably in the geographies that need it most.” So that whole history that was the original spirit of ESG Book, we then meet as a much broader initiative with about twenty-five very large institutions, the United Nations, Swiss Re, HSBC, Bridgewater. They all came together to create this, but all the credit goes really to the World Bank.

Prickett: I love that. Democratizing ESG investing and making it more accessible to companies in emerging markets which is where a lot of the effort is going to be needed in the future. So, let’s talk a little about where this sits within Arabesque’s business. As I understand Arabesque’s business model, you both provide data, freely and publicly, but you also do your own proprietary analysis for paying customers. If I’m a user of ESG Book, how can I be confident that this isn’t skewed to benefit your own advisory business? And vice versa. If I’m a customer of your advisory business, why are you better than others in terms of having ESG Book at your disposal?

Klier: So, the reason why we’re pushing ESG Book as a free resource of ESG data, is because we have the very strong belief that at the moment everybody argues that there isn’t enough ESG data, very soon, we’ll be in a world where people have too much data. ESG data essentially is any non-financial data. It’s what’s in the news, in social media, in NGO datas, in satellite information, and what companies disclose themselves. And so the challenge that we see, is that most investors, but also companies that want to understand their supply chains actually face the problem, there’s way too much information. You can drown yourself in data, and you’ll still have no idea of what you’re looking at. And so our philosophy is, you make the data available for free, but commercialize the analytics that you put on top of data. So, in sort of our technology analogy mindset, we wanted to create a Spotify of ESG data. Why? The music is free, but if you want to create your own playlist, then we would like to have a contribution. But the idea is that the data should be free, because that’s the only way to create transparency, to create trust in this whole ESG topic, and we will help people that make the right investment choices.

Prickett: Very good, very good. So, Daniel, I have one more question for you, and that’s to, you know, put on your futurist glasses and tell us, this ESG investing movement came very quickly to the mainstream; it’s very dynamic. Where do you see it heading? And what does the world of ESG investing look like five years from now?

Klier: Yeah, for me there are two very important trends. The first one is we’re moving from what I would call ESG 1.0 to ESG 2.0. We spent the last five to ten years in building awareness for the importance of environmental, social and governance issues, but we put it in as sort of one umbrella of ESG, alright. So, a lot of people have launched products, have launched commitments, that essentially brand everything ESG. As we mentioned a little bit before, I think that next phase is a lot more nuanced because what investors really want is understand this: “Is my portfolio actually aligned with net zero? How is the diversity and inclusion policy across my portfolios? What’s my exposure to human rights? And so, I think we see a lot more themetatic fragmentation of the topic, which makes it a lot more relevant to actual investment choices because you can actually relate to each of these topics. I think that’s one big trend.

A second big trend, and that’s true for companies and financial markets is that regulation plays a much bigger role. The increase in regulatory intervention on this topic is very, very significant, both on the side of companies and what kind of information they need to provide. And in terms of financial markets, what is required to integrate ESG information into risk management, into investment choices, into the advisory processes. So, in Europe you now need to evidence that you actually ask your customers how sustainable their portfolio is supposed to be, rather than just ask them for their risk appetite. So, I think it clearly, this is becoming a license to operate. This is no longer a, just positive differentiator; it is also a minimum hurdle you need to jump over.

So, I think the next two to three years will be quite exciting, because it is moving from the few that believed in this early to a topic that everybody has to comply with. And it also moves into an area where I think investments become a lot more emotional, suddenly. Because you can actually put your own values and your own beliefs into a portfolio construction, something that we haven’t seen for a very long time. And I think that’s actually a quite exciting development for the next few years. Companies will need to answer, suddenly, very different questions, right. Because people go beyond traditional financial analysis, there’s an element of climate, and many other non-financial metrics. Your members notice, but this is becoming our global, a global license to operate.

Prickett: Fascinating. It’ll be interesting to see how it plays out in the role technology, and your technology in particular will play. So, Daniel, I’m gonna let you get back to your business at Arabesque S-Ray. Let me add for WEC members, you’ve been invited to a webinar coming up on March 23rd, so that you can dig in a little deeper into ESG Book with Daniel and his colleagues. Later in the year, Arabesque will sponsor a roundtable on ESG investing more generally, where it is today and where it is going. You’ll hear more on that soon. Thank you so much, Daniel, for your time today and for bringing us all ESG Book. We wish you very well.

Klier: Thank you very much.

Prickett: Okay, take care.

INTERVIEW TRANSCRIPT

Prickett: I’m thrilled to be speaking today with Georg Kell, Chairman of Arabesque, longtime friend and member of the World Environment Center. Georg has a new book that he has co-edited with others on the topic of sustainable investing. Georg, welcome and thank you for joining us.

Kell: Thank you, Glenn.

Prickett: Tell us about the book. What is it about, and why should we read it?

Kell: The book tries to take stock of where ESG investing is today and what the prospects for the future are. We discovered two, three years ago that existing textbooks on finance are kind of outdated, not taking into consideration the changes that have actually happened already in the cooperate world, in regards to sustainability, and the many changes (incremental changes) that corporations  have introduced over the past two decades or more. And at the same time, taking stock of the rapidly changing landscape in the world of finance, which has now started (probably in 2014, 2015) to take ESG Investing seriously. So the book really tells the story of a convergence between cooperate responsibility (and its drivers) and sustainable investing. We are convinced that this will open up new opportunities for market-led changes enabled by technology. It’s a big evolutionary step, so to speak, because in the past we looked at cooperate sustainability in isolation. We looked at impact investing, sustainable investing in isolation. We are bringing this together. We brought together leading voices, practitioners, executives from the cooperate world and from the world of finance, and of  young thought leaders to tell that story with the attempt to also look a little bit ahead of where does this lead us to.

I think we have three big insights that ring through most of the chapters. One is that the pace of change in the framework conditions within which markets operate is accelerating.  This is largely because of technology, but also because of planetary boundaries and the feedback loops we increasingly have to deal with as well as social changes, social movements, and governance changes. This insight should be helpful for executives and for students of finance.

The second big insight is that we have to look at finance in a systemic way now, from the technology angle, from the social angle, from the environmental angle, and even from the political angle. In today’s world, we need a horizontal, systemic understanding of change, in order to make sense out of it, and to adapt strategies and operations for a “future-fit” model.

And the third deep conclusion of the book, that is probably a bit more daring, is that much more work needs to be done, including on the theoretical foundations of finance, because some of the old assumptions just no longer hold. We are not in an equilibrium state of well-being; we are in a state of constant disruption. We are moving into uncharted waters. So, we need a new understanding of the forces That are disrupting the economy.  This means sustainability has to become a part of leadership, no longer relegated to some communications department, or reporting department. It’s about strategy; it’s about the future; and that message is very clear. For finance, we also have very concrete contributions—how to bring this change about. Many financial institutions have started the journey, but they haven’t really embraced the sustainability agenda yet. They ask the question, “How do I change my institution to become future-fit?” The book gives some answers.

Prickett: Your point that the theoretical basis of markets and investing needs to be updated, I think 2020 shows how true that is. This is such a disruptive year in every way. To look at markets the way we have in the past is out of date. What kind of reaction do you get to that message? Do you get agreement? Do you get disagreement? Blank stares? How are people reacting to that more fundamental message in the book?

Kell: Well I’m just back from a trip, and I met a couple of top executives, and I’m actually quite confident that this message resonates very well. All executives now face the challenge of re-inventing themselves. Many are discovering only now that these slow moving changes add up to a huge momentum, and you better be prepared. COVID-19, as you hinted at, has clearly brought home the message that being prepared is essential for survival, and these slow moving risks and opportunities add up to enormous new landscapes. Our subtitle of the book is “A Path to a New Horizon,” and we are playing on Mark Carney’s famous quote “the tragedy of the horizon,” which speaks to the dilemma of the short-term versus the long-term. Basically, what it also means, is that as an executive, you have to survive in the day-to-day battle, yes, but you no longer can afford ignoring the long-term trends. Someone has to basically build up the ability to think in multi-time scales simultaneously, and prepare the ground for the future today already.

Prickett: Let’s talk a little bit about the underlying phenomenon—sustainable investing, or ESG Investing as it’s come to be known. You’ve been in this field of sustainability for a long time., How did this phenomenon arise so fast, ESG Investing? And for the cynics out there, is it real? Or is it just window-dressing? Is this a real change in investors’ attitudes or is it just green-washing?

Kell: Let me give a brief historical review of this issue. In 2005, I had the privilege of convincing Kofi Annan and convening a working group with asset owners, called “Who Cares Wins” and they coined the term ESG. We then launched PRI the next year at the New York Stock Exchange, and the issue didn’t really take off, frankly. Yes, some big asset owners, pension funds understood intuitively that negative externalities anywhere affect their portfolios. But it wasn’t really translated into strategies for new investment. Then came the financial crisis; the big story was overregulation, survival, easy money . . . not much happened either. It wasn’t until 2014 that the issue really started to take off with the first meta-studies confirming there is a correlation between good ESG integration at the cooperate level and long-term valuation. At Oxford University one of the meta-studies, was called “From the stockholder to the stakeholder.” Now many more studies have come out now, from Harvard, Singapore, and all over the world, hinting at the relationship. And the debate is still ongoing—Is ESG Investing just a fig leaf or not? I’m convinced now with one-third of global available investment, over thirty trillion dollars, using some kind of ESG filter or selection criteria already—it’s unstoppable.

And what’s behind it is something very basic  our current price signals do not reflect the full extent of both risks and opportunities, because they’re short-term in design, and they behave in a herd movement. ESG, basically, is looking a little bit around the corner,  trying to put valuation on non-traditional financial issues, which we know have relevance financially, over time, but are not yet fully reflected in the price signal. So, it’s like a bridge into the future, not a guarantee, but a bridge, a soft bridge. We do not argue that you should do away with the efficient market hypothesis. No, the price-signaling system is the most effective resource allocator ever invented by humanity. What’s needed is that the price signals more fully reflect the real threats and opportunities around the corner. And that’s what ESG delivers, and that’s what financial institutions increasingly understand. And all over the world now, from Asia to the U.S., from Finland to South Africa, financial institutions are  developing capabilities to better integrate ESG into decision-making and allocations. Yes, the landscape is still very fuzzy out there; there’s a data challenge, there’s an alphabet soup of standards and protocols, but they’re important building blocks: the materiality notion, the SASB definitions in the U.S., integrated reporting in Europe as it’s called, the TCFD framework for financial institutions, the science-based target initiative for the cooperate world (with almost one thousand companies already in it).

We are talking here of big systemic movements, both in the world of finance and in the world of business, which are now taking shape. We also expect that the European taxonomy will be a major boost for this movement, because it will probably bring about a bit more coherence in that field. And yes, there is still a lot of inconsistency, incoherence, benchmarks can be really unclear. . . MIT talks about the aggregate confusion in one of their beautiful review articles, but the whole field is moving in the same direction. And with big data analytics and smart analytics, in particular A.I., increasingly it is possible to identify materially relevant information. Both, from what companies themselves disclose but also from unstructured data reliable elsewhere. And that’s clearly here to stay, because the world will increasingly be dependent on the natural environment and social changes. The pace of change is not slowing down, technological change is irreversible, the planetary boundary feedback loops will increasingly manifest themselves, and force a reaction—ready or not. Also the big social changes that are happening, social movements will not stop, if anything, they will accelerate. So, the drivers behind this agenda are not standing still; therefore, ESG Investing will become the new normal, until price signals better or more fully reflect externalities, opportunities, and cost. And then at some point, you can argue, it is just part of the pricing system. But in this transition period, where we are moving towards more sustainable, decarbonized, cleaner environment, ESG plays an important role.

Prickett: So I think a lot of us are believers in the underlying theory. One of the challenges, as you say, is if you’re looking around the corner, you’re looking ahead of where traditional financial accounting allows us to make objective decisions. And you touched in your previous answer on the thicket of different standards, and the fuzziness that’s out there now in terms of analytics. How should we be thinking about that? How long will it takefor there to be generally accepted accounting metrics for this? How will that turn out if I’m an executive at a public company, riding this wave, given that we don’t know exactly where it’s going to break?

Kell: It’s very hard to predict. It took financial accounting a hundred years to get established, right? A friend of mine always says ESG measurement is currently where financial accounting was in 1925, a few years before the big crash. But maybe the world is turning faster, so the evolution will most likely be faster. A lot depends obviously on the regulatory context, and currently we are on a pathway of fragmentation, but that may change. So, once politics aims at more coherence again and comparability, it may fast track almost overnight. It’s very hard to predict now. We are in a very unique space in human history, where Europe seems go its own way, the U.S. seems to go its own way, China goes its own way, and many other countries are forced to align themselves somewhere in between. We are no longer in a multilateral world where global standard by definition is to decide an outcome politically; on the contrary, political power now is driving fragmentation rather than  harmonization. But the market forces won’t stop . . . they are a-political. The market itself will drive the issue forward. If regulators then come together and give it a boost, it will happen much faster. But even in the absence of regulatory pushes, I’m quite optimistic that market forces themselves will bring about practical coherence pretty soon.

Prickett: Let’s shift gears to your journey. Let’s talk about Georg Kell. You’re sort of voting with your feet on that theory that if governments can’t come together and set the course then markets will. You’ve moved from a role at the U.N., a very important role, founding and leading the Global Compact, and now you’re the chairman of a very interesting company called Arabesque. Tell us about Arabesque, what it’s trying to do, and how did Georg Kell end up chairing this really innovative company.

Kell: Well, I used to be very skeptical about finance, as an engineer, I must confess. For me, finance was always the necessary evil as Keynes put it. But when I retired from the U.N., I came across Arabesque, and I was totally impressed. It’s run by investment bankers, former senior bankers from Barclays, who’s brought it out from there. The idea of jumpstarting finance as a cutlass to me was very attractive. I also had a weak spot for technology itself as the fundamental driver of human progress. So it wasn’t a difficult choice for me. And I like the startup business too, you know, building something is fun. And that’s how I ended up with Arabesque, and I have no regrets whatsoever, because Arabesque has three complimentary business models, all of them related to each other.

One is classic ESG Investing, deep integration of ESG data into investment strategies. The second one is big data, we call it S-Ray, the equivalent to the X-Ray on the human is the S-Ray for the corporate. Big data for sustainability assessment of public listed companies. And the third one, which until recently, I didn’t really believe so much into, but now I’m totally convinced of, is A.I. We have one of Europe’s leading A.I. teams, and the machine they have been building just blows your mind. With my engineering background, I couldn’t quite wrap my mind around it anymore quite frankly. But I understand the power of the signals that it can produce and the enormous capacities for signal strength. It’s foreseeable that A.I. will disrupt finance very quickly in the area of portfolio construction management, for example. It will happen very soon, major disruption. To me, it’s a proof point that progress based on technology, together with the new valuation of ESG, is extremely powerful. And that’s what I like about Arabesque, is that this is their exclusive focus, technology and ESG data. It’s a wonderful playground, very exciting, very demanding. We feel confident for the future . . . but the race is on. It’s a good race.

Prickett: Like you, as an aging Gen Xer, I’m a little skeptical about all the claims of A.I. and how it’s going to change the world.  But you’ve become convinced that it will revolutionize investing?

Kell: I actually started at the Fraunhofer Institute in Germany, and in those days  I actually worked in A.I., in 1983. We had the old systems, the best you could produce was expert systems, and you know, diagnostic systems, with very long and complicated algorithms. I just spent two days, not so long ago, with Google, and I understood, for the first time in my life, the power of big data, and what it brings in additional insights, and the ease with which these insights can be generated. I also realized that the cloud business is revolutionary in so many classic business service functions. So, we are already in the new world, we just haven’t realized it yet.  A lot of companies are already plowing ahead, full force; they’re doing it quietly. They don’t want to be too loud about it, because it could create regulatory reactions, and all sorts of political, social debates. But it’s unstoppable. The challenge now is to ensure that technological progress is used for good purposes, like any new invention we have. We also have the choice, how we apply it. We can use a hammer to build a house; we can use a hammer to kill somebody. The more powerful the technology, the greater the potential on both sides. So, I think A.I., for good, for ESG Investing is a wonderful purpose. I feel very good about that, but that battle is still ahead—the purpose of technology. And the various debates that are playing out already are just a precursor of that.

Prickett: H I like your image of “We’re in the future, we’re just realizing it now.” The tremendous shocks we’re feeling this year, a global pandemic and its associated recession, the almost spontaneous global movement for racial and social justice and the frustration of how long that’s been denied, and of course, the climate crisis that’s upon us. All three of these things have been predicted for a long time. Now the world is waking up to them. How does this affect your thesis about where sustainable investing is headed? What do the shocks of 2020 mean for the ESG Investing movement?

Kell: A crisis always brings out both the good and the bad sides of human beings, of organizations, of collective responses. So we have seen the best and the worst at the same time, and the challenge now is to learn all of this, and to translate it into the good lessons learned. I’m a strong believer in human abilities to reinvent themselves under crisis and stress. I’ve seen it many times at the corporate level—when they hit the wall, when a crisis sets in, and the wakeup call is understood. Then when a new innovation from the inside is fairly easy to make in crisis situations; the barriers of resistance are much lower. So that’s why so many more companies, since COVID broke out, now have embraced climate road maps, for example, and are much more serious. It’s really impressive how the Science Based Target Initiative has welcomed record numbers of new companies, for example. To me, that is a signal that during crisis situations you can implement changes much easier. You can prepare for the future. Now, will the world learn the right lessons? The debate is on-going, how the recovery funds are used . . . Will they be invested for future-fit infrastructure? Or will they just be burned in the moment to continue business as usual? That’s one of the big open questions. Will the world come together again, recognize that there are probable threats which only can be tackled through cooperation? No country will be safe, so long as the virus is hiding out somewhere. We all should have, in our national interest, the willingness to collaborate. Climate changedoesn’t respect national boundaries. Even if we do our share, and the neighbors don’t, it doesn’t assure survival. So, we have every reason to rediscover collaboration. That’s the big bottom line, and I hope the world will ultimately arrive at the same conclusion.

Prickett: Collaboration is the modus operandi of the World Environment Center, which I have the privilege to lead, and you’re one of our valued members. What can WEC do to advance the cause of collaboration for sustainability,particularly in this arena of ESG Investing? How can we be most helpful to Arabesque and to others in your field who are trying to advance this mission?

Kell: Your great work is very important because sharing the best practices and stimulating learnings across sectors and industries is the key now. I’m convinced that old lines of divisions are breaking down. Innovation creates new business models across and between established industries. That’s exactly where you are active. So you play a critical role as a cutlass for best practices to spread wide and fast. And the more you can evolve the better, because the faster the learning, the faster the acceleration of change, the better our chance for having a soft landing in the future.

Prickett: For the W.E.C. members out there, you’ll be glad to know that Georg’s colleagues at Arabesque are working with us on a two-day roundtable on this topic of ESG Investing scheduled for January 27-28. We’ll dig deeper into all of these questions. So stay tuned for more on that. Georg, Is there anything else you’d like to share with our members and other viewers?

Kell: Well, the notion of leadership is always important, you know. It never goes away, at the corporate level, everywhere. The questionis how can you generate momentum for change in the absence of a crisis?  A lot of executives now recognize that they have to move faster on these issues, but they have internal resistance. How can we support them in creating the momentum? That’s one area I suggest for your consideration, because you’re basically helping executives to be successful, and they want to create an internal momentum to advance the change faster.  At a macro level, I’m concerned that strategically, we are falling into a trap, that we are abandoning international collaboration. So anything we can do to demonstrate that through working together we can accomplish more, is extremely precious and valuable. I believe that the Transatlantic Relationship will become stronger again. I think what we’ve just seen in the last two or three years will not reflect the future. So investing in that, I think, is also a good thing to do. Building a transatlantic understanding and making sure that the good historical lessons we’ll have learned won’t get lost but carry us into a safe future together.

Prickett: Well, let’s close on those points, and in particular the one about leadership, and what we all can do to generate momentum for change. At the World Environment Center, we can empower our members and partners to take these ideas forward. You’ve done your share with your new book. The book is Sustainable Investing: A Path to a New Horizon, edited by Georg Kell together with Herman Bril and Andrea Rasche. I commend it to everyone as important reading and hopefully it will encourage us all to push harder for more momentum on sustainability and collaboration. Georg, with that, we’ll draw this interview to a close. Thank you for being with us today.

Kell: Thank you, Glenn. All the best.