Episode 19: Sustainable Investing and Divestment

Claire Veuthey (left), Mike Fiorio (right)

Claire Veuthey (left), Mike Fiorio (right)

Guests:
Claire Veuthey
Director of ESG & Impact
OpenInvest

Mike Fiorio
Trustee
Northland College Board of Trustees

Host: Dave Karlsgodt
Principal, Fovea, LLC

Remember the old adage, Put your money where your mouth is? Or maybe, vote with your wallet? No matter which way you say it, money talks. In this episode, Claire Veuthey of OpenInvest and Mike Fiorio of Northland College’s Board of Trustees discuss sustainable investments and how to make financial choices that reflect planet-forward values. Claire, the director of ESG & Impact at OpenInvest, a startup devoted to socially responsible investing, walks through the management of funds and investments and how they can become more sustainable. Mike discusses how Northland’s Board of Trustees reached their decision to divest from fossil fuels, and the importance of listening to student voices in balance with the university’s financial interests.

Production Assistant: Kaia Findlay

Resources:

Episode Transcript:

The following is an automated transcription of this episode which will include errors and omissions. You can listen and follow along with the text here:

https://otter.ai/s/KuRXkxBVRcGIQwk06U5E-A

Dave Karlsgodt 0:00

Welcome to the campus energy and sustainability podcast. In each episode, we'll talk with leading campus professionals, thought leaders and engineers and innovators addressing the unique challenges and opportunities facing higher ed and corporate campuses. Our discussions will range from energy conservation and efficiency to planning and finance, from building science to social science, from energy systems to food systems, we hope you're ready to learn, share and ultimately accelerate your institution towards solutions. I'm your host, Dave Karlsgodt. I'm a principal at Fovea an energy, carbon and business planning firm.

Claire Veuthey 0:33

If your business is so extractive that you're going to lose all your customers, and you're not going to gain any new customers, that's not good for your business over time, it might be great this quarter, but in a couple of years, no one's going to be coming to you if

Mike Fiorio 0:44

you if our ultimate objective is to attract good students who want to be difference makers, change makers in the world, and make this place a better planet. The fact that we are divesting from fossil fuels, helps to college go out into the world and shout it out from the mountaintops and attract good students. And once they understood that, it was an easy transition.

Claire Veuthey 1:12

I think we've gotten to the point where it's more normal for folks to think about their purchasing decisions, like what they eat, what they were, what they drive or don't drive, but it's a little bit less common for folks to think about that in their investment portfolio.

Dave Karlsgodt 1:27

In this episode, I talked with two financial professionals about the concept of sustainable investing. My guests are Claire Veuthey of open invest, a public benefit corporation dedicated to making socially responsible investing easier and more accessible. And Mike Fioriro, a current member of the Board of Trustees at Northland college, a private liberal arts college in Ashland, Wisconsin. In our conversation, we talked through the various ways that individuals and institutional investors can promote sustainable business practices through their investments. We also discuss the Northland College Board of Trustees decision, divest from fossil fuels through their endowment. One quick update from our team. As I mentioned, in the last episode, we had a great response to our recent job posting about our summer internship program, we're excited to announce that we hired not just one but two interns. In addition to helping me out you'll hear from each of them individually as they produce their own episode over the summer. For now, I hope you enjoyed this may 2019 conversation with Claire Veuthey and Mike Fiorio.

So Claire and Mike, it's great to have you on the podcast today.

Claire Veuthey 2:32

Happy to be here. Thanks, Dave.

Mike Fiorio 2:33

Thanks. Dave agreed.

Dave Karlsgodt 2:36

Well, we've got a full plate of topics to get into today, some institutional investing 101 we might say and, and hopefully some real world experience around divestment. But before we dive in, maybe each of you can give a few minutes just to introduce yourself and how you found yourself working in and around this topic. Claire, maybe we'll start with you.

Claire Veuthey 2:55

Sure. So my day job is as director of ESG and impact at open invests and we're a pretty early stage startup in the socially responsible investing space. I also have a second job as a student. I'm a part time student in the Berkeley Hoss MBA for executives program.

Dave Karlsgodt 3:15

Great. Yeah. Mike, you want to give us a little introduction, please?

Mike Fiorio 3:18

Sure. I'm Mike Florio, I am He recently retired 60 year old man, who for the past 33 years, was a principal in a financial advisory firm in northern Wisconsin. over my career spanning four decades, I helped numerous investors individually as well as institutional wrestling with the concept of socially responsible and ESG investing. I'm also a trustee. Now going into my fourth year with a small liberal arts environmental college with a sustainable bent Northland, Northland college, and through my involvement at Northland, and my chairmanship of the business affairs committee and investment committee have helped the college wrestle with the notion of divestiture from fossil fuels, and through that relationship with Northland, and in an effort to get some good information, became acquainted with the intentional endowments network. Northland is now a member, I believe now for its third consecutive year. Normal college is 125 year old institution that is situated on the south shore of Lake Superior Northland is fairly unique in that it intertwines the liberal arts with the sciences, environmental sciences, natural resources and sustainability. Majority students at Northland, go there for the natural resources, environmental studies, outdoor education and sustainability course offerings.

Dave Karlsgodt 5:11

So I'd like to start with just some basics. I think most of our listeners know, you know, what a pension is, or what an endowment is, we don't need to get that basic. But I know for most people that have been in and around campuses, and they've heard of this divestment campaign, led by students are, like, you know, students storming the offices of the President, for example, demanding that the university divest of fossil fuels. But I know there's a lot of passion around this, but there isn't necessarily from my experience, a lot of deep understanding about how endowments work, how institutional investing works, etc. So Claire, I know you have a pretty good solid history of, of just institutional investing in general. So maybe you can give us a little bit of a background, who are the people making these decisions, or what or who even talking about here.

Claire Veuthey 5:59

So this really two major players, and then a whole ecosystem that has emerged around those players you have with the industry, cos asset owners, and they are, at the end of the day responsible for the assets and the funds that we're talking about. So that will be endowments, family foundations, often and at the small scale, it'll be individual people in their and their own personal funds. Then you have asset managers. So they're the professional investment folks like my company, for example, who are hired to manage assets on behalf of asset owners. And between asset owners and asset managers, you have a whole host of other service players, so many large asset owners will work with investment consultants, for example, who helped them find asset managers. In earlier parts of my career, I worked with a number of service providers that worked provided research for asset managers that we would rate listed companies on environmental, social and governance issues, for example, and there's a whole host of other providers that help both of those actors do their jobs better.

Dave Karlsgodt 7:04

Got it so that the like a university endowment, for example, would need to work with an asset manager or would leverage the work of a firm like the one you just described.

Claire Veuthey 7:13

Exactly. Yeah. And it would likely work with quite a few asset managers, actually, it would work with one for the fixed income, depending on the size of the endowment, one for fixed income, maybe a couple in the equity space, some in in real estate and private assets. Yeah, I could work with a whole stable of asset managers.

Dave Karlsgodt 7:29

So Mike, it sounds like you have done some of this work as well, in your career. Anything to add here, just ton of mechanics, the basics of what we're talking about, who are the players? And

Mike Fiorio 7:38

that's a good question. I would just add to what Claire said, Yes, from a perspective of both a past financial advisor and also current trustee of Norfolk college, I think you start with the fact that anybody who is charged with fiduciary responsibility of managing money, whether that be the trustee of the organization, an officer of the organization, or the actual asset managers, we are all trustees, or fiduciary, as I should say, and fiduciary duty of care to manage that money with lots of prudence. And there is a federal Act, which euphemistically, is called a myth, uniform prudent management of institutional funds act that has been adopted by 49 states, the District of Columbia, and the US Virgin Islands. And it's a enact that requires a duty of care for people like myself and Claire, that requires us to create a roadmap for the institution. And those of us in the industry refer to that as an investor the policy statement. And it's nothing more than a roadmap that lays out what the institution's goals are asset allocations, and expected return over the long haul, benchmarking of returns on the institutions portfolio to indexes. And as trustees, producers, officers of the organization, we use that roadmap and live and die by it. Part of an investment policy statement can include ESG and that's kind of the starting point for conversation of every organization with respect to inclusion or exclusion of investments that relate to the mission of the institution, such as divested or fossil fuels.

Dave Karlsgodt 9:52

So is that similar to like, I know, as a personal investor, you know, have a retirement fund. And they, they always make you fill out the form that says, you know, how aggressive Do you want your investments to be? You know, when do you expect to retire, things like that? Some of those seem to be just communication with the investment professional that I work with, but some of it seems to be they need to justify why they're making certain investments. Is that kind of similar to what you're talking about? But in this case, with an institution rather with an individual?

Mike Fiorio 10:20

Yes, yes, absolutely. And, you know, names and faces on, officers and trustees of organizations come and go, but the investment policy statement remains the same unless it is amended. And it truly is a roadmap. It's a living document, and over time, it can be changed and often is

Dave Karlsgodt 10:42

by a member. Okay, so if if you are in an institution, and you get to the point where you can amend that type of a document to say, okay, we'd like to increase the sustainability of our investments in some way, whether that's, you know, getting out of fossil fuels or or, you know, some other sustained ability goal, what are the different ways that that that can be pursued then? So maybe, Claire, I'll throw this one to you. I mean, like, what, what are the tools available to the institution at that point, or to the investment manager, asset manager, as you alluded to a second ago?

Claire Veuthey 11:17

Yeah, absolutely. There's really three methods, if you will, that sustainable investing can be implemented. The first is the one that's best understood, and that people really think about first when I think about socially responsible investing or sustainable investing, and that's exclusion. Right. So traditionally, Quakers, for example, when they started thinking about responsible investing, they said, Well, we don't want to own defense companies, that's just not in line with our passive, its values, it doesn't make sense for us to have a company that's really primarily manufacturing the products of war in our investment portfolios. So you can avoid companies whose activities you don't agree with or you don't think are sustainable in the financial sense or, and any other sense, really, there's a corollary to that which some people call positive screening, which is the opposite, right? You seek out companies that you think are doing good, and that fit your mission as an organization, and you can overweight those or include them when they wouldn't naturally be included, depending on your investment style. So that's the first method. The second method is a little bit more nuanced, and, and really aligned with how traditional investment managers work. And that's what I would call integration. So it's really looking at environmental, social, and governance factors as factors in the valuation work and in the calculations that go into figuring out a terminal multiple for a stock, for example, so when a fundamental analysts will peel through all the financials of a public company and say, Okay, well, we think the stock is worth x, but the market is pricing at why. And we think it's worth buying, because the stock will go up, we believe in business, part of how they can make that evaluation is based on environmental, social and governance issues. For example, if the company is creating products that allow people to reduce their energy use or replacements for energy intensive products, for example, beyond meat, just IPOs. And I think much of the interest around that stock has to do with folks choosing plant based options instead of meat based options. So that would be integration. Yeah, just

Dave Karlsgodt 13:19

to stop you there. So that would be an example. Like, it's not just that they're not doing bad, it's that what they're doing has a market for it, people are excited about their product, because it's something that hasn't been done before. But it also has, you know, environmental benefits to it that you could argue as well,

Claire Veuthey 13:35

exactly. Okay. And the third method is called engagement. So if you sit on the investor side, you'll call it company engagement. And if you sit on the company side, often it's called shareholder engagement. And that's really when those two parties talk. It can be very formal, but it's not a scripted or process that has really formal channels, like proxy voting, for example, it really has has to do with developing a trusted relationship. And the there's a number of ways to do that. But it's really about a conversation between shareholders and management or representatives of management, with the shareholders often counseling, pressuring, badgering, you know, depending on the conversation, the company to do more, or at minimum, disclose more about its impact on the environment or on social issues. Its plans to manage risk to its business based on climate change, for example, or changing societal norms, things like that. So that would be engagement. That's kind of a third way that investment managers can implement and integrate environmental, social and governance issues into their investment process.

Dave Karlsgodt 14:42

Okay, but that's real humans talking to each other. That's not just people buying or selling the stocks. It's not a market signal. It's real conversations.

Claire Veuthey 14:50

Exactly. each other. Yeah, exactly.

Dave Karlsgodt 14:53

And when that happens, who is who's at the table there? I mean, how, like, describe an example of what that looks like, in your more in a real sense, not in the general sense.

Claire Veuthey 15:02

Yeah, there's a huge range. I think, from the environmental, social and governance side, the folks who have been really good at this are long standing asset managers who've really at and they don't necessarily hold a huge piece of the stock, it really helps to get a meeting with management if you hold a big piece of the company's shares. And to be clear, these are publicly listed companies they are that means they're owned by the public, and very big asset managers will own a relatively big piece, which was often just a couple of percentage points. Right, BlackRock, just a gigantic asset manager, I think it's 6 trillion in assets under management often won't hold more than 15, or 20%, of a listed company. And for really big companies, it's more like 234 percent. So big, really big asset managers can easily get those meetings, but they're not always as informed about the environmental social governance issues. Smaller managers who really made their name in yesterday, engagements will will have developed deep relationships internally on not only with Investor Relations, but often also with the sustainability folks at the companies they're speaking to. And they'll overtime, you know, have a quarterly or bi annual call saying, Well, how are you doing on this issue? We asked you about last quarter. What about now we know you have other stuff to focus on. But keep keep this in mind. This is one of those important but not urgent issues. Eventually, what happens if the conversation isn't fruitful, shareholders will put together shareholder resolution and then try to put together a coalition of investors who will vote for that resolution and and try to get management attention that way.

Dave Karlsgodt 16:37

Okay, so that's more of a nuclear option at that point, because then it's more of a formal process versus just a conversation.

Claire Veuthey 16:43

That's right, exactly.

Dave Karlsgodt 16:45

Okay. I didn't fully appreciate that, when we were, you know, kind of prepping for this call. So thanks for that clarification. Is that something then that, like, say, if you're thinking about a university? I mean, is it conceivable that representatives of the University are every university endowment would be involved in a conversation like that? Or is it just the people that they would hire their asset managers that would do that?

Claire Veuthey 17:06

Either, or, we found that big asset owners who have the teams and the capacity to think about this deeply will do it themselves. So calipers, for example, like really big entities will often do the engagement themselves. I think the reality is that most asset owners don't have the ability to have a big team that's, you know, constantly really informed about these issues, and needs to rely they need to rely on their asset managers. Sometimes they'll split the difference, they'll say, Okay, well, we really know a lot about these issues. And we're going to keep engaging companies on climate change in corporate governance, but all the other issues, which are important, but are, you know, the issues of the day, for example, or that that kind of come and go or that are more technical, maybe they'll push those to the asset managers. But by and large, I think asset owners should feel free to push their asset managers to engage on their behalf. That's part of the investment process.

Dave Karlsgodt 17:57

Yeah. That you may not know the answer sort of this. I mean, I assume you don't sit you're not a CEO. But what would be the motivation of the senior leadership of these businesses to take these meetings? Is it because it gives them insight into what their shareholders are thinking? Or is it? You know, it's, I mean, if it's just a few percentage points, I can't imagine that it's not like they can take control of the company. Talk me through that? What would be the motivation?

Claire Veuthey 18:21

Now? Good question, uh, all of the above. And I think the most productive conversations like that, that I've been part of, generally, the CEO gets it, they know that this is an issue for their company, and they generally appreciate that shareholders will, will flag it, it's not just Oh, those pesky shareholders, we kind of need to do something to make them happy. I think the the CEOs that are the most engaged and and frankly, where you see the most change in the company is when they get that it's a long term issue that they need to think about. And they appreciate the nudge from their shoulders, I was on a call with a couple of years ago, and it's pretty unusual to have a CEO doing the cost, and it's an IR Investor Relations representative, maybe, you know, you really work at right, the corporate secretary or someone from the board. But in this case, the CEO was there was really active, really informed really knew a lot about the issue we're talking about, and really on the same page, and it was just about the kind of information shareholders want to disclose about work the board was already doing and the management was already doing so often. You know, in the best of cases, that's a situation the board says, look, we already have views on all of us, we just didn't feel the need to make it public. Because that's a threshold of particular scrutiny that companies tread carefully, which I understand, I think, to your point, CEOs, give those shareholders the time of day because they're like, Oh, wait, maybe there's something here that we either haven't been thinking about enough or that is going to get bigger, and we'd like to understand it better before it becomes a resolution in a couple of years time.

Dave Karlsgodt 19:49

Got it. In other words, they they may be doing good work and having lots of internal conversations. But making it public is both a lot of work, you know, you have to message it right. But also opens you up to risk and terms of talking about things either, you know, maybe competitive advantage is gone. Or there's other aspects of that, why they wouldn't say those things, but shareholders pushing them might. It opens the door for others to see. Okay, this, our competitors are doing this, so we should too.

Claire Veuthey 20:15

Absolutely. Yeah, exactly.

Dave Karlsgodt 20:18

Got it. Um, one thing I forgot to ask you, can you explain what it is that your firm does? I mean, where do you fit in this ecosystem you just described?

Claire Veuthey 20:26

Yeah, absolutely. So open investors, we use all three methods. So the portfolios we put together are designed to track benchmark indices very carefully. So they're really passive investments. But they're customized individuals and endowments values, right. So if you're a Family Foundation, really concerned about conservation, and you can make sure that your endowment In addition, for example, to your programmatic funds, are really aligned with your overall organized organizational mission. And what we'll do put together a portfolio that, for example, avoids companies that are the worst on deforestation practices, and overwhelms the companies that are the best. So that would be the positive and negative stream screening or exclusion and inclusion method that I described first. Because we're a passive shop, actually, we don't use that second tool, because we're not building individual evaluations for the companies, we really rely on the benchmark index provider to have a view on the way each company should have in a portfolio. And we use that as our baseline. The third method, and this is really novel, actually, we have a pending patent on this process. We've really distill down proxy voting. So that is simple and intelligible. Because it's a highly regulated process, it can get quite technical. And it's a little tricky to understand if you're not thinking about corporate governance all day, which most people, understandably, are not. So what we do is really distill down there often, but not always shareholder resolutions, but anything that needs to be voted on at a company annual meeting, that shareholders have the right to vote on will will distill the ones that are relevant to sustainability concerns down to a pretty simple question, provide our clients and investors with all the context they need, if they want to dig in more deeply, and then allow them to vote on their phones literally with a swipe. Yes or no on on on a proxy vote on those resolutions. So yeah, I'll take it back. We don't use the second tool, but we do use the investment divestment tool and the shareholder engagement piece of it.

Dave Karlsgodt 22:31

Well, two questions there. So one, part of the reason you don't use that second is because I assume you need enough scale or enough like if you're calipers, you if you have enough scale that you can absorb the administrative costs of taking on that engagement process. Yeah,

Claire Veuthey 22:44

that's right. Absolutely, we are looking to partnerships, and that's something I'm working on actively is working with other investors who are like minded and have similar views on the same issues. And this happens a lot actually, in the space investors will band together, aggregate the waist of the shares that they all collectively own, to push a particular point of view. So we are small, still on the asset side. But that really hasn't stopped other proponents and other asset managers from really making a difference. And really having the ear of some big companies on some important issues that they were, you know, conveniently ignoring before, there's actually a great story, a woman named Natasha Lamb who works at a company called agenda capital, who's led a series of really remarkable campaigns, particularly on gender pay equity over the last couple of years. And she's been engaging with a number of companies for years. And then I think when she just didn't see enough progress, submitted resolutions, shareholder resolutions at a bunch of financial services, companies and a bunch of tech companies, encouraging them to disclose on the gender pay gap and the gender pay difference within their employee base. And she's she's gotten a lot of attention, I think, really raised the issue in a way that hadn't been raised properly before.

Dave Karlsgodt 23:58

Basically, you don't have to do that, because you've got people that are focused on that. And you can pay attention to them and join forces with them. Maybe take the lead on other aspects of, of making them exactly,

Claire Veuthey 24:08

yeah, and I think that's the way these Coalition's work best because, you know, companies know their businesses really well, you can't just ask them to do things differently without being really informed, which is which is right. And it's pretty hard for investors who own even just 100 stocks, much less than, you know, thousand different different stocks to be as informed on all the issues as the management representatives are speaking to. So I think the best way for investor Coalition's to work is this divide and conquer approach, say, Okay, well, you asset manager x really focus on the climate issues and will really focus on the social issues will make sure that we're in sync, so where we agree on the position the other has taken, or we don't, you know, we don't join when we don't agree, or we have a different take, but it really allows for more traction and better quality discussions, frankly, between shareholders and companies, when you have that kind of structure.

Dave Karlsgodt 24:58

Okay, that helps in it. And then back to your proxy, you know, I guess it's like Tinder for proxy voting or like, the, you're simplifying it down so people know what they're voting on and giving them a chance, because I imagine that a lot of people just don't vote on stuff. Exactly. They just never take the time. So it's it's sort of like midterm elections that a few people get to make a bigger impact with their voting because they take the time to do it, or is or is it? Or is it structured such that the big shareholders have more sway, so

Claire Veuthey 25:31

it's not structured such but if you're an asset manager, you need to vote on behalf of your clients, so they are your asset owner, what happens most of the time is the default position is to vote with management. So you can see the how this becomes a little bit of a circus, right management puts together the agenda, all the points that need to be voted on the board says we recommend you vote x and most asset managers vote x, they don't even look at what the issue is. They just say management knows company best. We're just going to vote x. But okay, yes, sometimes. So there's obviously a lot of accountability, I have to say getting a shareholder resolution on on the ballot is pretty tricky. Already. There's a whole number of hurdles, you can't just file whatever you want, you need to own a certain number of shares, you need to have on them for a certain number of a certain number of years. It can't be considered meddling in the company's business. Since that not, that's not the investors role. It's usually about more information for investors from the company. And then even if a resolution were to pass and get over 50% of the vote, they're not those resolutions are not binding. So it and this has happened. Unfortunately, management can just choose to ignore the results, it behooves management to take a closer look and say, Okay, well 20% of our shareholder base thinks is an important question. Maybe we should take a look. It's just it's just not a great look to totally ignore that kind of results when you have a vote like that. But it but it definitely happens.

Dave Karlsgodt 26:54

Got it, maybe a way of putting it would be a resolution would be effective at getting things like disclosure, the, you know, gender pay gap example you gave a second ago, not necessarily saying we think you should go into this market, or we think you should try this product or something like that. That's that's management's job. So that's not

Claire Veuthey 27:10

correct. That's exactly yeah, investors generally shouldn't be making that kind of recommendation. But they can ask for more information. That's pretty standard. And you can see how it's a bit of a Trojan horse, right? The idea is, make sure you one, do if you don't have the data on gender pay gap within your company, you probably should. So please go set up those controls, and then report back to us on what the results are. And then you know, once the report is out there, because it's it will be made public. The expectation or the you'd expected company to do something about it, the numbers are really bad. Of course, they don't have to, but you'd hope that they would, that's part of the the point of asking for more information is then you know, acting on it?

Dave Karlsgodt 27:53

Well, it's interesting to hear you describe it from your perspective, as a consultant, we have been getting more inquiries from for profit company, most of our work has traditionally been just higher ed, where there does seem to be a little more of a mission link to, you know, the sustainability goals. Maybe they're being pushed by their students or faculty, as Mike alluded to earlier. But we're starting to see that in some for profit companies, and largely it is coming from shareholders. So I guess, good work, you know, on that front, but turning the conversation back to higher ed. Mike, I guess I would be interested in getting your perspective on those three methods that Claire just laid out, as a trustee or as a board of trustees, how have you interacted with those tools?

Mike Fiorio 28:33

Well, I would say that, in my experience over the past 33 years in the industry as an advisor, and now in the last three, as a trustee, it's been an evolution. Early on, there were a few money management investment companies out there that did socially responsible investing, you know, internally, they were charging a bit of quite a bit of money for what they did. Now, over the decades, things have come along, and it really isn't rocket science anymore. institutions. And individuals can invest money in a plethora of investment products that are sliced and diced to meet consumer demands. And it can be anything from, you know, plain vanilla mutual funds to exchange traded funds to separately managed accounts that will screen out specific industries, companies or search out companies that leave no, no mark on the planet with respect to carbon or humanity. With respect to north from college, I can say with certainty that Northland’s journey probably started easily 20 years ago, like you said, early on, we have demands from both students and faculty to divest from fossil fuels, the likes of AOC, and young people in general, who aren't afraid of the establishment, they're leading the charge and demanding change. The end of the day, this vision of higher learning its mission is to educate students. And in the absence of students, you know, there is no mission. And the objective of every institution of higher learning is to get students and if you're not listening to your audience, they'll go somewhere else, if you're not going to do your job, someone else is going to do it for you. So, you know, maybe this is a good segue into processes. But the process by which Northland ultimately went from essentially no holds barred, our objective is to earn as much money as we are fiduciary capable with the least amount of risk to doing that, with some attention to the planet, part of that journey led to the intentional endowments network, and me behind the scenes seeking some of the data that would help me go to, you know, 60, and 70, and 80 year old people who have spent their lives in business, in business, the ultimate objective is profit, any business whose objective is profit, you know, without it, they're out of business. So in the effort to make that case, in touch on the dominance network, provided me with some empirical evidence that would help me understand my fiduciary duty. And then from there, I always try to keep it simple. You know, Frank Luntz, who is a marketing guru in the car industry and now with the the Republican Party, says that it's not what you say, it's what they hear. And, you know, my goal in leading the conversation with trustees about divest from fossil fuels, was to help them understand that a as a fiduciary by divesting from fossil fuels, we are going to sacrifice returns necessarily on our underlying endowment portfolio. And be if our ultimate objective is to attract good students who want to be difference makers, change makers in the world, and make this place a better planet. The fact that we are divesting from fossil fuels, helps the college go out into the world and shouted out from the mountaintops and attract good students. And once they understood that, it was an easy transition, you know, divest from fossil fuels, in my view is a beginning. It's a starting point.

Dave Karlsgodt 33:06

Well, let's get into the specific process of this a little bit. Maybe, Mike, you could speak specifically to what did you guys actually do like, well, how did you actually get fossil fuels out of your investments and interest, an ongoing process? What did you actually go through? You had these conversations? At what point did you pull a trigger on a policy change or process or, you know, when did money start flowing from one account to another?

Mike Fiorio 33:32

Well, it was, like I say, this process, I think, started 20 years ago, and I came in as a trustee, I would say maybe a year into a conversation, trustees, collectively meet at our institution, just four times a year, quarterly. And it took, I would say, two years to go from starting the conversation myself, that is to having the conversation I just had with you about you know, it's not about sacrificing returns necessarily. But it is about doing what's right. being consistent with our mission. We do those things, the rest of the challenges of attracting good students. We're going in the right direction. After tabling the divesting of fossil fuels from our endowment over the course of several quarters. Finally, they got it they understood. You know, from a business persons perspective, climate change, Frank Luntz is the one that coined the term climate change. You said, global warming is not a warm and fuzzy. But climate change can be palatable. And that goes to it's not what you say, it's, it's what they hear. If you start conversations with if we don't start changing our ways, the planet is going to spin out of control, and we're all dead meat, you have to begin with maybe somebody those those ideas, but what about those ideas? And how can we change them, while at the same time not affecting our bottom line on the endowment, but our bottom line, in terms of attracting more and better students is a good conversation to have. And that's when they understood that we could do this, and then it was tabled for one more quarter. And we came in with a a motion resolution that said, we're going to do this, we're going to divest will give ourselves up to five years to make it happen. You know, your wheels are in motion. Our investment manager is essentially we're in private, separately managed accounts. And we're screaming out the fossil fuels. You know, again, that's a starting place. And I can see going forward into the future, you know, maybe not only screaming out fossil fuels, but tempting to start to look at, you know, carbon footprints of companies. And even beyond that. And again, it's not rocket science, there's a million in one ways of easily doing these things. And in terms of costs, which are part and parcel of a producer is responsibility to keep them low. Costs are compressing all the time. It's very competitive.

Dave Karlsgodt 36:24

Yeah. So let me just summarize what I've heard then. So first and foremost, it was expensive initially, because nobody really knew how to do it. And it was basically a boutique service offering at that point, but the costs have come down. The second part was the conversation with the rest of the trustees really had to focus on how does this help us be better trustees and be better stewards of the money that we're being trustees of promoting the mission of the institution and things like that? Maybe with the backdrop of climate change, but not certainly not? We're going to save the world through our dollar investment. It's really more about we're going to make a great university because we're investing in a smart way. Is that a fair way? To summarize it?

Mike Fiorio 37:03

Yes, it would be the only other thing I would add is your best friends in effecting these changes are your faculty and your students? And that's where change comes from, ultimately, that they're, they're pushing

Dave Karlsgodt 37:19

for that. Got it? You don't have lots of quippy sayings on T shirts and the Board of Trustees meetings, most people are pretty buttoned up, it sounds like, yes. Okay. Claire what maybe you, go ahead

Claire Veuthey 37:32

I just want to jump on a point that Mike made earlier, I think asset managers and an asset owners actually have a duty of care as a fiduciary duty to maximize shareholder value, and that has increasingly or overtime really been interpreted as maximizing the stock price. But you can see value isn't only an exclusively encompassed by the stock price. There's lots of other components. And lots of investors, and other folks will tell you, it's not the only thing they care about, right? They want the business done, right? They want it to be sustainable again, in the traditional financial sense, if your business is so extractive that you're going to lose all your customers or, and you're not going to gain any new customers, that's not good for your business over time, it might be great this quarter, but in a couple of years, no one's going to be coming to you. And I think that's a pretty easy concept to understand, even if you're only focused on returns. So I just want to be a little bit cautious about this, this idea of fiduciary duty, it's it's super important. But we can be a bit quick to rush to that to the idea that it's just about maximizing the share price and not a slightly more holistic understanding of what value

Dave Karlsgodt 38:41

Yeah, fair enough. I mean, there's both short term value long term value, but there's also societal value. And that's starting to become I mean, those are intertwined. Right. Or another way I've heard that put is, if we really do see massive impacts from climate change, then the economy itself is at risk. It's not about right, choose between one or the other. It's just that it. Yeah, there is no economy at a certain point, if it gets too bad.

Claire Veuthey 39:06

Exactly. There's there's no business on a dead planet.

Dave Karlsgodt 39:09

Fair enough? That's a good way to say it. I want to bring up a question, then I think both of you, I would venture a guess would consider yourselves capitalists in the general sense. You know, basically, the basic idea of Adam Smith's invisible hand saying that as long as you have good information that, you know, markets are the most efficient way to organize your economic system, rather than like a Soviet style command control. But that said, the the key point that I think people often forget is, its access to information is central to that idea. I'm curious how much access there is to this information. I know that, like I mentioned earlier, some there are companies coming to us now and saying, Hey, we need to get this information out there to the world for people to look at. But I would say frankly, most of what I'm seeing out there is not particularly detailed. And there's a lot of you know greenwashing information or just inadequate information, or just people just don't know how to capture this, as investors are from your perspectives? Are you seeing enough information to make these types of decisions? Is that getting better? Or just just talk to me about that, that idea? Or you know, or argue my my premise in the first place?

Mike Fiorio 40:17

day? That's a good question. There's a lot of information out there, I would start by mentioning a study I read, and I'm thinking it's maybe five or six years old now. That was done by Merrill Lynch. The study essentially made an attempt to create a an ethical score for all the larger capital life companies, publicly traded companies in the United States, and then correlated, those ethical scores with long term performance. While behold, those companies that had good ethical scores tended to perform better than those that through out the window, by ethical, I'm talking about companies that don't cook their books, treat their employees respectfully apply best practices, or regulatory hot water. Those are the companies that are the good long term performers. And in recent history, what comes to my mind is balling, you know, bowing his head, it's your issues recently, and course, their stock prices suffered. And it gets down to maybe 11% or so over its highs in recent history. There many, many other examples, Volkswagen, you name it in banking as Wells Fargo, I think there's plenty of information that will give investors and investment companies enough information to make reasonably good choices and who gets into the portfolio and who doesn't.

Dave Karlsgodt 41:58

So Claire, same, same question to you. So how, how does your firm for example, help your clients separate the greenwashing from actual actionable information?

Claire Veuthey 42:08

So let me take a step back and just talk a little bit about sustainability reporting. Sustainability reporting isn't regulated or very lightly. So which means that companies essentially disclose what they want, when they want and how they want. And as you can imagine, they largely disclose what makes them look good when it makes them look good, you know, when it's convenient, and they're not putting out other fires. This makes it really hard for investors to compare that information between companies, which really is how investors make decisions, right? They say, Okay, well, we can own a, we want exposure to the financial sector, we're looking at consumer finance, let's look at these four companies that have relatively similar business models. But I can't compare them on this one issue because they all disclose one of them discloses things on a two year cycle and the other set targets for years ago, but hasn't updated anything or told us how they've done on their targets. And the last one doesn't disclose anything. So it makes it really hard to really make an informed decision based on that kind of data. And I'd say that the big environmental, social and governance data providers have largely built their business on the fact that there wasn't a clear formal standard understanding of what issues which should matter to which companies, I'll just put a little plug in here for an organization called SASB, which is the sustainability Accounting Standards Board. And they really jumped into this yawning gap that existed, I think, back in 2011, which is when the organization was formed, and modeled themselves after the FASB, all right, well, investors say they care about these issues, but companies aren't disclosing them. Well, companies say none of our investors care, or if they do, they're all asking for different things. And we can't disclose everything, please be more directive or more specific about the information you want to see. Issue experts and other stakeholders are generally disappointed with the quality of disclosure or companies are putting out really beautiful reports that aren't made for investors, they're made for their community, maybe their regulator, often they're made for their employees. And they're, they're more story based than database, which again, is an investor would want to see data and stories are great, but only to inform and give a little color on the data. So it says we did was spent four or five years, working closely with big investors, you know, Vanguard, Wells, capital, State Street groups like that big companies that were engaged and interested in working on these issues and a number of subject matter experts. So accountants, securities lawyers, folks who knew the environmental social issues really well, and came up with a set of standards of how sustainability issues should be disclosed. And they came up with very technical disclosure saying, you should disclose this particular metric normalized by sales on a quarterly basis. And here's an example, size, he's been working on this really hard, they finally put out their first set of the first final standards in q3 or q4 2018. So this year, we'll really see whether whether companies step up to the plate and say, Okay, well, now we have the standards that we've been asking about for a long time. Let's see what the numbers look like, let's see if they if they actually use them, of course, this is, it's not mandatory, it's not regulated, yet, for companies to disclose any of this. And under this sec, it's unlikely to be regulated, but companies now have have the tools that they need, they may need a year to set up controls in order to really disclose the data properly. But I think 2020 will be really interesting to see which companies actually use the tools that have now been created for them to disclose sustainable, there's

Dave Karlsgodt 45:53

a lot of parallels to the higher ed world, a lot of the reporting, there has also been a challenge. A lot of our work tends to be just cleaning up their reporting data so that we can start talking about what to do about it. You know, there's a lot of just filling in the gaps. But yeah, I mean, how is it? So it sounds like it's getting better? And is it? I mean, could we expect that from every level of company? Or is it just the large companies that will be able to disclose that information? What can we expect?

Claire Veuthey 46:17

Hmm, um, so I've been lucky to work in a couple of regions around the world. I was based in Singapore for a couple of years, and in Amsterdam, Switzerland. And I'd say there's definitely a regional bend. So by and large, Western Europe is very good at this kind of disclosure. And I think it's at least in part because big investors there have been pushing for longer. The US is, is picking up especially the really big companies, but really the defining factor of which companies are, do a good job disclosing environmental, social governance issues or which companies compete at a global level. So you'll have companies like Wipro, in India, or Taiwan, semi based in in Taiwan. So companies firmly based in emerging markets, they compete again at a global scale, and they know that their clients, to some extent, their suppliers, and certainly their investors are interested in these issues. So to answer your question, it's mostly larger companies, though, increasingly, we're seeing it go down the market cap, and smaller companies are kind of getting the picture and realize that they need to have somewhat better answers. To be fair to small companies, often they're already doing some work on the side, they just don't disclose it publicly. So they're, maybe they're new to being listed or smaller companies just get less scrutiny, because they're not generally as widely owned as really big companies. But most of them are sort of getting the memo and realizing that they need to be a little bit more public about what they do on the environmental and social side. Yeah.

Dave Karlsgodt 47:42

And I guess we're talking about publicly traded companies here, not necessarily just companies in general, because the private company doesn't have to do any of this. They don't want to right. I mean, there's no,

Claire Veuthey 47:50

very little That's right. Yeah, that's right, though, again, you'll have some great private companies that will, will disclose but that's strictly because they choose to not because they're required to got it.

Dave Karlsgodt 48:00

Okay. All right. So one other after seeing all of their hearing about all of the tools and and mechanics of this, how big of a stick Do I really have as an investor? It sounds like there are different ways I can engage. But I guess coming back to an institutional investor, so somebody that's involved with, like, like, Mike is with that as a board of trustee. How big of an impact could I or how big of a stick do I have?

Mike Fiorio 48:25

My take on this is we live in an economic democracy. And by that, I mean, both how we spend our money collectively, and how we invest our money speaks to what we're talking about today. And well, perhaps individually as, as individual investors or institutions, we don't have a ton of clout. collectively we do. And in this day and age, with the advent of Facebook and social media, you can getting lots of people on the same page, at the same time, witness various commentators on various networks, losing advertisers, because of what they've said, The same holds true in investing. Every day, what we spend our money on and what we invest our money yen ultimately, has an effect on the direction of what what's important to we the people.

Dave Karlsgodt 49:28

So in other words, from a public relations perspective, there's an outsized impact. So if you can get enough people on board saying the same message to the same company, they'll change their ways. Is that good summary?

Mike Fiorio 49:40

Absolutely. That's Adam Smith.

Dave Karlsgodt 49:43

So Claire, what about logistically, I'm like, if I really want to get a meeting with the CEO, and I am involved with the university pension fund or something like that. I mean, how does that work is I don't imagine that person charged with managing the money directly is, you know, having lunch dates with the CEO, a company they're investing in, but how can they engage? What does that look like?

Claire Veuthey 50:04

There's a couple of interesting ways that investor can make a difference. And we touched a little bit earlier on shareholder engagement, which I think can be very effective, though, to be fair, it's often quite slow. But there are lots of there are lots of other ways. And I think part of the point we're trying to make at open invest in something I really firmly believe in personally is that consumers have a lot of power to, and employees have a lot of power. So if you work for an organization that isn't, you know, really meeting the bar of what you think it should be doing on sustainability, I think you probably have more power than you think, again, going back to your point of all of us being capitalist, I think what you buy also makes a big difference. And that includes in your investment portfolio, I think we've gotten to the point where it's more normal for folks to think about their purchasing decisions, like what they eat, what they were, what they drive or don't drive. But it's a little bit less common for folks to think about that in their investment portfolio, even though it might be you know, one of the biggest parts of their personal net worth or you know, some of the biggest assets they have, they're often just sitting on the shelf in something really standard instead of a little bit more, a little more oriented to how the how the individual sees, sees the future and wants to

Dave Karlsgodt 51:16

In other words, we spend a lot of time thinking about what kind of straw we do or don't use. But meanwhile, we have most of our network tied up in the investments that are really driving the world.

Claire Veuthey 51:26

I think so yeah, I think we have more power than we think in that space. And there's, again, part of what open investors trying to change is activate all of that. Because if you stop someone on the street and ask them, would you if there were no financial trade off? Would you want your assets invested in line with your values in the way that you see the future and the world that you want to exist? I'd like to think most people would say yes. And we can do that. Now. It didn't always used to be the case many of these products were and continue to be really expensive. But increasingly, again, a bit of a plug for my employer. But there's there's other ways to do this. You can get investment products that are standard from the financial point of view and very aligned from an environmental, social and governance point of view.

Dave Karlsgodt 52:09

No, that's good news. Well, let me turn it back to students for a second. I know that a lot of institutions, unlike Northland college, the efforts to pursue divestment in particular have fallen flat. Are there other ways students can get involved? Or you know, Mike, now that you've guys have kind of achieved that? Where are your students getting involved?

Mike Fiorio 52:29

Northland, just recently, some urging from me, the north on college faculty and staff and students just started a fund, they call it the northern college resiliency fund. And it actually, for governance reasons, is just a part of the main downer, but it's a separately managed part of it, they are funding it with some of the fees from students and staff, every reduction, faculty and staff, you know, their goal is to help the college affect change in the world. I'm interested to see how they grapple with the question of making money attempting to make money so that they can fund their desired goals from the spending of some of the income from the fun with the realities of being a fiduciary and all that goes into that. But I can see this small college and its students and faculty, learning about social justice and how they might affect change through, you know, shareholder proxy votes. And I'm just very curious to see how that works. But, you know, I think they're going to make some noise and ultimately, you know, through collective wisdom of all kinds of investors, and consumers out there, you can affect change, you know, companies Listen, and if you're not doing your job, someone else will do it for you.

Dave Karlsgodt 54:02

Okay, well, shifting gears, then, if people listening to this young professionals are interested in getting into this space, what does this look like for them today? What are the different ways they might get involved? And I would say, maybe ranging from, you know, the very business-centric side, maybe the investing side, but also from the activism side, what are some of the opportunities for them, Mike, go ahead first and all that clear, filling?

Mike Fiorio 54:24

Sure, just a basic comment first, and then maybe some advice. I have a son who attends a university, and he's in the sciences. But essentially, what we're talking about here is being well rounded, and leaving your options open. Well, he's a scientist, his minor, is in entrepreneurial ship, and recently had a great conversation with him about a course he took called the business of science. And essentially, a liberal arts background. never heard anybody, whether you're a scientist and mathematician, or what have you, ever, the ability to communicate well is never a bad thing. With respect to maybe some advice on making money saving the world. And I gave my son recently, some advice, who was a senior, and it was draw a Venn diagram, three circles in each circle, right, a question. The first question is, what do you do best? The second question is, What gives you the most joy? And the third question is, how can you best serve? And where those three questions intersect on that Venn diagram is where your career lies. And if you do those things, there's a place for you in this industry, if that's your desire, and your passion.

Claire Veuthey 55:53

So if you're interested in sustainable investing, as a career, I think there's lots of ways to get into it. Right? what I've seen is before looks either come in from the environmental, social and governance side, or from the traditional investment side, and they will parlay the experience they have in one or the other to move into this hybrid space. But to be fair, I did most of my training 10 or 15 years ago, and things have changed. There's a lot more curriculum focused on sustainable business. And there was before and I think folks can come out of higher ed, much better equipped than I was to really contribute productively in the space immediately. I started my career with research providers, I think it was close to my my grad work since I was a kind of a social sciences major. And a lot of the qualitative research I was doing there was very similar to the work that I did in my first job where I rated publicly listed companies on environmental, social and governance issues. You can also start as an investment analyst, and either on your own time or hopefully, with the blessing of your employer, really learn more about sustainability issues and how they might show up in the companies you're analyzing. As we mentioned earlier, there are lots of other roles here. So I know some folks, especially after business school, but not sometimes before business will will go work for an investment consultant. Some like Cambridge associates, will work directly with mission driven organizations and will help them pick asset managers. And that can be a great way to understand the field. There are also other avenues into this world. So one of the co founders of the company I work for now, Josh Levin, spent six years at the WWE on the sustainable finance team, and then met up with some old friends of his and co founder, the company I work with. So there's lots of different avenues. I think you have to be directive, it's not going to happen by accident. But if you have your eye on the ball, you can move into the space.

Dave Karlsgodt 57:45

All right, well, final question. Just to wrap this up. It sounds like there's a lot of change going on in this space. It sounds like it's come a long ways from where it started thinking 1020 years out? What's your vision for what this might look like? Mike, you want to give us our first pass at that

Mike Fiorio 58:01

I looking in the rear view mirror of my career, or the past 30 plus years, I've seen tons of change in this industry. And I see no reason why going forward into the future, the pace of change won't easily equal it or exceed. And I look forward to what might come up.

Dave Karlsgodt 58:22

Great. Claire, last word goes to you.

Claire Veuthey 58:24

So if we do really well, as an industry, if we continue to do well, and frankly, I've seen amazing growth just in the last 10 or 15 years. I think that investing and sustainable investing will essentially be the same thing, at least long term investing. If you're a day trader or a corporate raider and really thinking very short term. I'm not sure ESG issues will matter because they often play out a little bit more slowly. Not always. And there's been some pretty notable examples of that. But hopefully, my ambition would be those two things to be the same and for environmental, social and governance issues just to be part of part of regular investing.

Dave Karlsgodt 59:06

Excellent. Well, I want to thank you both for taking the time today and and digging through the weeds of some of these conversations, as well as some of the higher level background and perspectives that you both bring. So thank you very much for your time. And thanks for coming on the podcast.

Mike Fiorio 59:20

Thanks for having us

Claire Veuthey 59:21

Thanks for having us Dave.

Dave Karlsgodt 59:22

That's it for this episode. I did want to give a big shout out to the staff the intentional endowments network that helped connect me with today's guests. You can learn more about IEN at intentionalendowments.org. To learn more about today's episode or any of our shows. You can visit our website at Campus energy podcast. com. You can follow us on Twitter, we are @energypodcast. If you'd like to support the show, please consider leaving a rating or review on iTunes or sending a link to a friend. As always, thanks for listening.