This month’s interview is with Patrick Ghali, co-founder and Managing Partner of Sussex Partners, an independent global investment advisory firm that specialises in investor allocation to hedge funds and alternative assets strategies. He is a frequent writer for the investment press and conference speaker.
How significantly have investors’ mindsets changed around sustainability and what’s driving that change?
Patrick: It’s a once-in-a-lifetime megatrend. We have a problem which we need to solve, otherwise we don’t have a future. There are also changes in law - European fund managers have to classify themselves around their environmental considerations and impact, which is really important. And there are murmurings that in future you might end up with worse taxation regimes if you don’t consider ESG in your investments.
Then there are also whole sectors of the economy that could get penalised because of the emissions they generate. I had a conversation in a family office about this recently. The younger generation wanted to start looking at environmental factors, while the older generation said they just wanted to make money. When the younger guys explained that actually we’ll lose money because of orphaned and stranded assets, the older generation listened because now it’s a risk management issue.
But the amount of capital that’s being deployed towards solving this problem is also creating an incredible amount of opportunities. Like the Gettys and the Middle Eastern royalty who did so well out of carbon in the old days, you can see new fortunes being made in hydrogen and solar and all kinds of technologies. Think about how much work will be required to replace all the gas heating in Europe - it’s astounding.
How do you see the reputational risks for private wealth from failing to engage with sustainability, or falling into the greenwashing trap?
Patrick: The main challenge for family offices is more in risk management. You could miss out on opportunities, and if you’ve made your money in polluting industries, it could become difficult. We’ve even seen it in the meme stock trading trend, with day traders turning against companies, stopping using their products, driving the stock price down. If you’re in the wrong industries, companies can lose a lot of money pretty quickly now.
If you’re a private bank or a multi-family office with lots of external clients, you don’t have much choice. People want to know where their money is invested and that you’ve done your due diligence. And disclosures are coming by law - you’re not going to be able to hide.
What are the main obstacles for investors who want to align to net zero?
Patrick: One of the big issues is measurement. If you invest in a company do you just look at the impact it has manufacturing its product or providing its service, or do you go down the supply chain? For electric cars, do you just look at what it takes to make the car and the battery or do you take into consideration where the electricity comes from? Everyone has a different way of measuring it - there are no standards. Even the EU has provided guidance on only some of the factors they consider to be important.
At Sussex Partners, we signed up to the UN principles of responsible investing a month ago. We’re looking at incorporating these much more into our advisory processes and into creating products for our clients, and we have thought about hiring an outside ESG consultant to help assess the impact that companies have but not a single one had the same approach.
That’s very challenging, especially when you’re trying to put together a portfolio and every party has their own way of measuring impact. But the risk of not hiring an ESG advisor to check your process is that capital owners, managers and advisers alike leave themselves open to the criticism of greenwashing. You end up in this situation where you think your portfolio is clean, but then you look one level down and it doesn’t look so good.
Is it best to see ESG in the round, or to focus on particular issues?
Patrick: We don’t actually look at ESG, we look at the UN Sustainable Development Goals (SDGs). ESG is very broad. It’s very difficult if the criteria you are focussing on are too broad and unspecific to really measure what you’re doing, so the risk of greenwashing is much bigger.
Whereas SDGs are much more precise, so you can find investment opportunities that are much more closely aligned to your green ambitions and goals and where it’s easier to measure the real impact. It’s also easier to find fund managers that are specialised in specific aspects of ESG investing.
Which investment strategy do you favour for aligning with these goals - exclusion, integration or impact?
Patrick: Pure exclusion we’re not so keen on, but it depends on what you’re trying to achieve. It’s often a liquidity question, because impact investing tends to be private equity with longer duration, whereas you can find liquid investments with integration.
When you study finance or business at university, you’re taught about the negative externalities of the companies you invest in, but no one’s ever really had to pay for them. That’s changing now. There will be impact specialists, but generally speaking, if you look at where regulation is going, particularly in Europe, integration will eventually just become part of the process.
How far are we through this change towards sustainable investment, in your view?
Patrick: It feels like we’re somewhere at the beginning, and I think it’s going to go pretty quickly because of legislation. This is not a voluntary situation any more, people are getting pushed pretty hard. But you also see this big uptake of sustainable investing because people are realising that if we don’t deal with this, we will have a much bigger problem.
About Patrick Ghali
Patrick Ghali is co-founder and Managing Partner of Sussex Partners, an independent global investment advisory firm that specialises in investor allocation to hedge funds and alternative assets strategies. He is a frequent writer for the investment press and conference speaker.
About The Lede
This article was originally published in The Lede, Transmission Private’s monthly newsletter that tracks the future of reputation management. Featuring interviews with leading private client advisers from the worlds of law, finance, and accountancy, sign up today to receive the newsletter in your inbox every month.