Paul: Hello, everyone, and welcome to the Sustainable Finance Podcast. My name is Paul Ellis, and I'm your host for these programs about developments in this fast-growing industry. Today's guest on the Sustainable Finance Podcast believes that we are in the early stages of a persistent global investment megatrend driven by a massive disruptive event, climate change. Dr. Julie Anderson is Program Director for the Master of Science in Sustainability Management at American University's Kogod School of Business. She previously held senior leadership roles at top investment firms, including serving as Director and Head of iShares US Sustainable ETFs at BlackRock, where she managed $58 billion in assets and led strategic initiatives across the business. She believes this global megatrend is an incredible opportunity to change the way we think about and choose sustainable investments. Investors should engage with and support companies that produce products in a responsible way that also create healthy environments. We should focus on creating companies that are more sustainable, more profitable, and more competitive because they are managing the climate risks and opportunities better. Hello, Julie, and welcome to the Sustainable Finance Podcast. 

Julie: Hi, Paul. Thanks so much for having me on your show. 

Paul: Yes, we're glad that you could join us today. And we're going to jump right in with some questions for you about the past, to begin with, your past. You managed $58 billion in sustainable ETFs during your time at BlackRock, and you worked on mutual funds in both the fixed income and equity investment markets. What lessons did these experiences teach you about how sustainability and profitability can work hand in hand? And how do sustainable strategies differ across asset classes? 

Julie:  Well, thanks for that. Thanks for the intro and the starting question. So I've been an investor since the very beginning days of my career in the mid-90s, but I didn't transition into sustainability until, call it around 2016. And what I've learned over the last 10 years now, the most important thing I've learned is that the distinction between values and value has now merged. Investors used to think of ESG or sustainable investing from either one of those perspectives. Either it was focused on an investor's personal values, what they held true or their beliefs, or how they wanted to personally invest, or the search for value. Where would future returns come from? But now we see that these two concepts are very tightly linked. Essentially, it's because people have values, and they value, in particular, environmental issues and social issues, that these non-financial factors will affect value, asset value, over the long term. So, because of this, a company now has to address both environmental and social issues

if they want to maintain their long-term profitability. This is what you said in the introduction, that I believe is a massive shift in both how companies create business strategies and how investors deploy that capital. Your second question was on asset classes. And I think that's a little bit of an easier answer, but things are still evolving there. So some asset classes are more suitable to thematic investing. Think public or private equities or infrastructure funds. What is the theme that an investor is looking for in a particular slice in a portfolio? And then other things, such as environmental or social values, can be expressed in things like green, social, or blue bonds. So in the fixed income space. And then, of course, I have to touch on passive versus active management. So passive ETFs, which is what I predominantly worked with at BlackRock,

are a great choice for strategies such as best-in-class or negative screening. These are very rules-based and are suited well to passive. Whereas impact investing, I believe, is predominantly in the realm of active management. You need somebody actively looking at a company or an investment opportunity to find out and determine if they are actually creating impact.

Paul: So, Julie, let's talk about today's advisors and how they need to think about and incorporate a focus on sustainability in their clients' portfolios. How has sustainable investing changed for them over time? And how should they be approaching this whole process today? 

Julie:  That is a great question. And again, I think your audience in particular wants to make this actionable for them. And I would emphasize that we're still in the earlier transitional phase here. So I recognize that it is still difficult for many advisors to have these types of conversations with their clients. The first thing they should do is definitely ask their clients about their level of interest in ESG or sustainability-related issues. Get a temperature check on their client. This is very similar to what they've always done in regard to risk, for example. Asking questions that get at risk from a different angle. But here it's really understanding what values they have or how they might want those values expressed in their portfolio. But then the second thing I think that they need to do is educate their clients about sustainability. And this, again, is something that advisors and asset managers have always done. So that requires them to stay on top of this megatrend and really understand the dynamics. But what you hinted at in the beginning of the introduction is climate change. And that can be a difficult topic these days. One of the things that I always say and gets a lot of press attention or raised eyebrows is that believing in climate change is not required. And I think it's a great starting point for these conversations because it helps to reduce the polarization of what is your view versus someone else's view. And the idea is that, whether you believe in climate change or not, most of the world believes that we need to transition away from heavy usage of fossil fuels. They cause pollution. These are words that most clients are used to hearing. People are against pollution. So if you focus on the idea that companies need to transition towards less polluting ways of doing business and hopefully more economical ways of doing business, lower cost inputs, you can talk about the idea that what other people hold as values are actually affecting company value. And this is really about business strategy and how the advisor can help their client invest in those companies that are managing this transition best. 

Paul: You know, Julie, in my experience as a financial advisor, one of the things that my clients were always interested in was me staying ahead of them in terms of expectations and changes within the marketplace. That's why they hired us all in the first place, right? That's why they hire asset managers. So, how are sustainable investing strategies evolving so that financial advisors are able to stay just a little bit ahead of their clients and set good expectations for the markets? 

Julie: So in this respect, I see three major shifts. It’s easy also when educating advisors first and how they can keep the message simple in talking to their clients. And so I learned this in my experience, too. It's always good to start with three things. So if you focus on these three major shifts, I think that can help advance the dialogue and demonstrate that they do understand how things are changing. 

So the first one is, I believe, that negative screening has reached its limit. And I believe that it will continue to wane as an area of focus. And this includes divesting of fossil fuels. So I mentioned earlier the transition to a low-carbon, global economy. And that is the first thing. No longer does an investor just say, “I don't want to own fossil fuels, and therefore I feel better”. That's not actually changing the world or changing materially the flow of capital. Plus, there is a widespread understanding that the entire economy is still dependent on fossil fuels. We cannot simply cut off the flow of capital to these needed assets. It would have massive social and economic impacts. So there is no longer a real stigma around owning fossil fuel-based companies. You want to own those that are innovating and going to lead at change, but simply divesting or negative screening from certain products is no longer an area of focus, in my opinion. 

The second one, BlackRock's biggest book of business, is in their AWARE suite. And this group of ETFs deploys what's called a tilted or optimized strategy. So the way these strategies work, or how funds are investing, is they tilt towards or lean into or overweight those companies that have a higher ESG rating. And they underweight those companies that have a weaker ESG rating. And I also believe that these types of investments are starting to have a decline. Why is that? That's because they're designed to look and feel just like the regular index, like the S&P 500, but they slightly tilt into ESG factors and away from poor ESG qualities. And in the end, you don't end up with anything that's materially different from the actual S&P. So these don't seem to generate excess returns that we're hoping for from those companies that are doing better or avoiding losses from other companies. So it's just, I would call it “sustainable investing light” or “101.” What we are seeing is a shift from those types of tilted strategies into both thematic and impact. So that is where I see the most amount of growth. If you're going to look for a labeled fund, it would be a thematic fund, call it clean energy, clean tech, or impact investing, that aims to have a specific impact or outcome. 

And then the third one is related. I think there's going to be fewer funds that are specifically named ESG or sustainable. We are moving rapidly towards a period of time where sustainable investing becomes business as usual. So why do I say that? So most investors love data. They view data as an informational advantage. If you can mine data, you can pick those stocks that will outperform the benchmark or your peers and competitors. So it's becoming business as usual. Because I was a former trader and an investor, any bit of information that can lead to an advantage is one that I'm going to look at. So I would argue that almost all investors, whether they're investing in a sustainable labeled fund or a traditional mutual fund or ETF, are still looking at these factors. So that's an important thing to tell your clients is that this is becoming so global and such a megatrend that all investors are starting to look at these nonfinancial factors as potential sources of risk and return.

Paul: Okay. Now, so we've been essentially focusing on the public markets up to this point in time. What role do you see private sector innovation playing versus the regulatory infrastructure that is already in place and has been for a long time with the public markets, when it comes to driving meaningful sustainability outcomes? And how should investors weigh both forces that are affecting both the public and private markets?

Julie: I may be the only sustainability-focused leader and academic who is in favor of the recent pause and even reverse in the pace and the adoption of ESG regulations globally. So why do I say this? I think that regulation was getting ahead of both our knowledge on these issues and our ability to quantify true risks related to them. So, when you demand regulation and it is pressuring companies to come up to speed and report on something, it risks becoming a meaningless and burdensome accounting or reporting activity, versus one that would have a real, meaningful impact on how risk is assessed or how valuations are determined, and ultimately the flow of capital. So it was, again, forcing companies to quickly come up with the skills, ability, and workforce to quantify things like their carbon emissions on scope one, two, and three. And it was becoming a mandated exercise for reporting. But how valuable that information was, and therefore the company's value of disclosing that information for an investor, was debatable. Would this materially change the flow of capital or influence how an investor can assess the potential risk and return of that company? So, in my opinion, it's far better at this stage if companies are responding to both customer demands but also investor demands for more transparency and data. This, I think, highlights somewhat the difference between the European way, which is put the regulation in place so that we're all on the same playing field, and it's a very even playing field. We all understand, and we're following the rules, rules-based. Whereas, I would argue, in the U.S., we are much more innovative and entrepreneurial. And I think that the absence of regulation at this stage will allow leading companies to innovate and to drive change. So those companies that have the resources and understand that this is a fundamental business strategic opportunity will continue to find innovative ways to answer their customers and their investors. There will be other companies that don't have the resources, don't have the technology or capabilities, or the understanding yet, that will take a backseat. They will stop innovating. They will stop reporting. And they will fall. They will take a backseat because there is no regulation demanding them do this. So that's a great situation, actually. Again, as an investor, this is going to create differentiation. There will be leaders and there will be laggers. And this is where money can be made when you're investing. So I really think that this time to allow companies to innovate, what type of information do I need to disclose that would be of value to my investors, is important, and will ultimately influence the flow of capital better than what I call “rushed regulations”.

Paul: Julie, I think you're talking about the core strategic imperative that you focus on in your sustainability skills survey that you led recently, that reveals a major shift in how organizations view sustainability. And the strategic imperative, rather than compliance, based on your findings, what are the top sustainability skills that businesses should prioritize for driving future success? And how can advisors and investors best support companies in developing a workforce with those skills? 

Julie: Well, I appreciate you bringing up that research. So I did conduct a survey of over 200 companies across a variety of industries and also different levels and different parts of each organization. And the results were recently published in the Kogod Sustainability Review. And what we found, as you alluded to, is that sustainability is now widely viewed as fundamentally reshaping how organizations operate, compete, and create value. So this, of course, is important across every aspect of the business. But because this recognition is in its early stages, as is the sustainable investing movement, companies identified that they need help in managing this massive and fundamental shift in what they are doing through all aspects of their company. So they're looking at it from a risk and opportunity set, but also fundamentally changing many aspects of their organization. 

So in particular, they identified that these business objectives that were predominantly being changed are first and foremost risk management, second operational efficiency, and innovation, and then also talent attraction and retention. So they understand that the incoming younger generation of employees that they need in their workforce are also prioritizing these things. So it's, again, across the entire organization. But when we asked them where did they specifically need help, in what area did they need help, the answer was, the bar chart is practically flat, meaning that they answered they need help across everything. So if I were to list them, I would say that the first thing is setting and managing their sustainability strategy. Companies are still figuring this out. And they said that in particular, they need help engaging with stakeholders to prioritize what sustainability areas of focus they should, areas they should focus on. So it's, we know we have to change our strategy and include sustainability, but we want to hear from our stakeholders directly where they think we should focus. The third thing after this is driving that sustainability implementation. So they need people throughout their organization to help drive this change. It is ultimately change management. And then others, I think, are more obvious, gathering and reporting sustainability data. We just mentioned that it's not going to be mandated, but they still want to disclose. I believe a full 98% of the S&P 500 does disclose an ESG report with some data in it. They also want to help in measuring the impact of these sustainability efforts. Of course, management wants to know if they're going to make a strategic change, deploy resources to effect that change, and they need to be able to measure the outcome of their efforts because they're putting internal capital towards that. And the last one would be embedding sustainability into marketing and branding. They know that their customers are looking for this, so they want to make sure that it's embedded in how they communicate their brand. 

Paul: Julie, let's talk finally about the way your experience in the corporate world has enriched your approach to designing the Master’s of Science in Sustainability Management program at American University's Kogod School of Business. And how are you preparing students through this program for careers at the intersection of business and sustainability? 

Julie: So I am a non-traditional academic. That means that I have a 25 to 30-year career in my field. And while I do have a PhD, I have not been doing academic studies for my entire career.

So that is essentially what I am bringing to this particular program. And I believe why the dean of the Kogod School of Business hired me. Because this is, in a business school, a topic that is fundamentally changing business. So he wanted somebody with business experience. And when I look back at my entire career, how do I summarize what it was that I did? And I would say that I was constantly on the leading edge of change. So to me, I used to tell companies when they were interviewing me, like, if you want me to keep the wheels on the bus or keep things in motion, I'm not your person. I want to build something, change something. I'm a creative who wants to build and change businesses. So, because of that, looking back, I think what I really leaned on was critical thinking. I am inherently a critic, and I enjoy critical thinking, complex analysis. I'm a recovering analyst, for sure. I loved my role as an emerging markets analyst. And then the third one, though, is communication skills. So as I sort of moved up into senior leadership roles, I realized how important communication skills are. So it's interesting in that I have subject matter expertise in both investing and sustainability, which is helpful for a business school master's of sustainability. But when I think about how to educate a master's student, I really want them to focus on those things. I've got to say, somebody from undergraduate experience, how did you get good grades in your undergraduate, which is a lot of summarizing and synthesizing, versus this master's level thinking? Because I want my students to enter back into their field and take on senior leadership roles where they need to effect change. So that's my focus. 

When it comes to managing the program, I really focus on two things. Obviously, I need to keep on the leading edge of this massive change. So that means that the curriculum is in flux more so than, say, accounting or mathematics, or even finance. So it's really important at the Kogod School of Business that we are looking at the curriculum and making sure that it's on the leading edge of what is going on in the field of sustainability. And the second thing, as I alluded to, is I want to embody students with the knowledge and skills where they can become senior leaders to really help companies navigate this change. And what I've heard, I've only been at the university for two years now, students tell me they do appreciate my real-world experience. I tend to embed a lot of corporate examples, what it's like in real corporate decision-making, into the classroom. I bring that in a lot. And then I think they sense that I'm dedicated to helping them develop their unique talents, because in today's world, wow, you really have to prove you can't just have a master's degree. You have to demonstrate how your unique ability to think or decision-make will be a benefit to the company when you're looking to be hired. So it's a big task. But I'm passionate about it and thrilled to be at American. 

Paul: Well, we're thrilled to speak with you today, Julie. This has been a great conversation.

And I'd like for you to tell our followers where online they can go to find out more about the Master’s of Science in Sustainability Management program at American University. And how can they contact you with questions about the topics that we have discussed in today's program? 

Julie: Great. Well, I would absolutely encourage them to look. We do have a website dedicated to what is called the MSSM or the Master’s of Science in Sustainability Management.

It is a STEM program. We also have a completely online version so that working professionals can take it. And we offer the courses in the evening. So I would absolutely encourage them to look at the program and to reach out. They can reach out to kogodgrad@american.edu. They can reach out to myself. It's my first initial, last name at american.edu. And there's two other things that I would emphasize. Number one, the Kogod Sustainability Review. We have a lot of students, academics, and senior business leaders write in our sustainability review. It's very digestible. It's not like a traditional academic journal. It's sort of more along the lines of a Harvard Business Review online. So I would encourage them to read that, to hear about our innovative ideas and the research we're working on. My sustainability skills research is published there. And then lastly, I think it's important to mention that I said that we need to constantly evolve. We have a sustainability advisory council that's about 35 members strong now, who are all senior leaders in global industries. And we meet with them twice a year to get their input as to how we should be developing this program. And I think that we would encourage more collaboration with senior leaders and companies. So it's a great way for companies and investors to interact with academics and students who are trying to figure this out, the same as they are. 

Paul: That's terrific, Julie. If you can provide us with any links to things at your website or any of the studies that you've just mentioned, that would be great. We can post those with the podcast episode. So thanks again to Julie Anderson, Director of the Master’s of Science in Sustainability Management Program at American University's Kogod School of Business. I'm your host, Paul Ellis, and followers of the Sustainable Finance Podcast can join me again next week for another episode.