Arun Sharma: Advice for Environmentally-Conscious Investing

Although many of us often find ourselves feeling discouraged and helpless in our fight to combat the climate crisis, there are still some reasons to remain optimistic.

One example is the emerging field of ESG investing: the act—and art—of evaluating companies through the lens of their environmental, social, and governance standards.

Today’s guest, Arun Sharma, is a leading advocate of ESG investing. Throughout his career—both as the current President of Grovepike Associates, a global strategic and financial advisory firm, and as the former Chief Investment Officer at the International Finance Corporation—Arun has championed causes and ideas that lead to more sustainable, pragmatic, and forward-thinking businesses.

Listen in as Arun walks us through his career and the lessons he’s learned about ESG investing: from his early experiences with environmental remediation in Poland, to the metrics for measuring success with ESG, to why he thinks humans will increasingly incorporate the ESG approach in the years to come.

ABOUT ARUN SHARMA: Arun Sharma is the President of Grovepike Associates, a financial advisory firm based in Washington DC.

Arun previously served as the Chief Investment Officer at the International Finance Corporation, where he championed climate-friendly finance, particularly in emerging markets. 

Mr. Sharma also serves on the Governing council of Yes Foundation, an advocacy organization in India. He also serves on the Board of Grass Roots Trading Network for Women, which connects entrepreneurs to renewable energy markets on fair and equitable terms.

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Podcast Transcript

Eric Jaffe: We make decisions every day. While some of them are small, others can have a huge impact on our own lives and those around us. But how often do we stop to think about how we make decisions? Welcome to Deciding Factors, a podcast from GLG. I’m your host, Eric Jaffe. In each episode, I’ll talk to world class experts and leaders in government, medicine, business and beyond, who can share their firsthand experiences and explain how they make some of their biggest decisions. We’ll give you fresh insights to help you tackle the tough decisions in your professional life.

Although many of us find ourselves feeling discouraged and helpless in our fight to combat the climate crisis, there are still some reasons to remain optimistic. One example is the emerging field of ESG investing. The act and art of evaluating companies through the lens of their environmental, social and governance standards. My guest today, Arun Sharma, is a leading advocate of ESG investing. Throughout his career, both as the current president of Grovepike Associates, a global strategic and financial advisory firm, and as the former chief investment officer at the International Finance Corporation, Arun has championed causes and ideas that lead to more sustainable, pragmatic and forward thinking businesses. Listen in as Arun and I discuss his career and the lessons he’s learned about ESG investing. From his early experiences with environmental remediation in Poland, to the metrics for measuring success with ESG, to why he thinks humans will increasingly incorporate the ESG approach in the years to come.
Arun, welcome to the podcast. So glad to have you on today.

Arun Sharma: Thank you, it’s a pleasure to be on the podcast and I really appreciate the opportunity.

Eric Jaffe: I thought we could start by you helping explain and define what is ESG investing and how did it come about?

Arun Sharma: ESG is the set of environmental, social and governance standards and behaviors that any business is expected to follow in conducting business that is responsive not only to shareholders, but to the broader stakeholders as set in society. It’s a very interesting and topical question today, but it’s also fundamental to my own career at the IFC. As certainly IFC is one of the pioneers, if not the pioneer of the concept of introducing environmental, social and governance standards as a part of business decision making and business activities globally. But particularly in emerging markets where IFC operates.

It was an uphill battle for us at the IFC over the years to get people to understand that basic principles of capitalism, which is to maximize shareholder value, were not sufficient as business justifications. That the business community and capitalism itself was about building a better world. And that cannot be done only by maximizing shareholder value, but by maximizing what we call stakeholder value, which is really value for everybody on the planet. As we see it, other developments around the world; climate change, global inequalities, the pandemic, a number of other events around the world have demonstrated the importance of this approach.

Eric Jaffe: How do you reconcile the need to rein in some of the bigger players with a focus on helping out emerging markets, if you will?

Arun Sharma: Business comes in all shapes and sizes. Yes, the big players play a large role, but they’re not necessarily the only players and they may not even be majority contributors to a country’s GDP. Or for that matter, a majority contributor to pollution levels. A large part of the world’s climate impacts come say from agriculture, from the small holder farmers, from dairy farmers, from small individuals working in fragile forest geographies, for example. In degraded lands and so on and so forth. So it’s not only the big players, it is everyone. It is you and I in our daily lives on how much waste we create by our consumption patterns, on how we create various impacts in the way we conduct our lives, in our lifestyles. I think the important thing on ESG is that it is not one segment’s responsibility. I think it is everybody’s responsibility.

Eric Jaffe: I do want to talk more about how ESG works in practice, but actually before we get there, I’d love to hear a little bit more about your personal story. How did you get involved with the International Finance Corporation and what about the IFC, and in general ESG, drew you to that line of work?

Arun Sharma: Yeah, I joined IFC really as an accident of history, I don’t know if I can call it that. But I was a summer intern at IFC, I’m going to business school and I guess I must have done something to please them, so they asked me to come back. But the reason I chose to come back was it was an absolutely fascinating place to work. My first project was actually privatization of a furniture company in Poland called Fabric Medley. I still remember that, although it was way back in 1990, I was still a summer intern.
The ESG connect there was already obvious from day one. Poznan, which is a medium sized town in Poland, was a center of coal mining and it was swamped with coal dust. It was highly polluted and the area was very, very challenged from an environmental perspective. One of the things, even at that time, we are talking now close to 30 years ago, little more than 30 years ago, IFC was already and my colleagues at the IFC, our environmental specialist was already looking at that and saying, “Wow, we need to do something about this.” Being in an organization that cared about such things and being exposed to situations where the impacts of commercial activities on the environment was so stark, drove home that message of the importance of the work that I could be doing in this place. That really spurred me on to pursue a career in an organization that was trying to really make a better world on the one side and do it in a responsible way on the other.
In terms of stakeholders, it’s also important that how it’s creating, as I said, its own people, its workers, its suppliers, its customers, its consumers, members of its supply chain. Governance very much is a matter of treating everybody right, including your shareholders. Are you transparent? Are you telling the truth to people who have invested money in your company? Are the decisions being made in the best interest of all the stakeholders? Are you telling the truth to the regulators? Are you telling the truth to other people who are buying your products, for example? All those things really fall under the G part of the discussion, which is the governance part of it. The move from what I would say, shareholders to stakeholders is really a change in perspective.

Eric Jaffe: Can you help us understand how companies measure their output essentially on the ESG side? I know there is a surplus of potential data that can be considered. So which ones are the key ones in assessing a company’s ESG performance?

Arun Sharma: For the environment part, the most common metric is what we call the GHG, or greenhouse gas emission, or the carbon emissions. Another metric that is very commonly used is how efficient is their energy usage? Another metric that is common to a lot of companies is their waste intensity. That means per unit of production, how much waste are you producing? Another metric which is also commonly used, it’s a little more difficult to measure, but increasingly popular in these assessments is what we call the circularity of the product life cycle. How much recycling is used in your production process, for example, and how recyclable are your products down the line?

Then we have a whole series of metrics around the S, or what we call the social metrics. What is your product safety track record and what are your processes to ensure product safety? Then what is your a record around fair labor practices? Have you got into any litigation? Have you ever been fined? What is your attitude towards employee health and safety? What is the quality of your gender balance and diversity policies? These are the key metrics when it comes to the S part of it, the social metrics.

Then similarly, the governance end of it, the G end of it also has I think, fairly well established metrics now. Again, they are also I think, quite standardizable across different businesses. There are things like accounting transparency and disclosure, which we all know. What are your internal audit processes and practices? What is the level of your transparency in terms of your ability of your employees to have a say, and how is that documented, say in whistleblower rules and protections? What are the arrangements you have for people to complain about you or ombudsman arrangements or complaint and the like so that if somebody has an issue with how things are not progressing, then these can be brought to the attention of management and there is a way of recording that.
It’s very important to remember that every metric is not relevant for every business and there’s a need for intelligent calibration to make a determination as to ensure a fair comparison. It’s still a bit of an art as compared to a science.

Eric Jaffe: Maybe lastly, there is, of course, as you mentioned, a growing consensus about the importance of ESG and a recognition, I think that as capitalism is currently defined, at least some find it insufficient. Maybe you could talk a bit about that momentum behind ESG and social impact. Where is it going 10, 15, 20 years down the road? What kind of a world will we live in and how will ESG have changed the trajectory of business?

Arun Sharma: At the root of this ESG, as we discussed a moment ago, it lies this tension between the people who are the owners of the company and the people who are not owners, but are impacted by the company in other ways. The question is how do people who are not having a direct, I would say, influence on the company, how do their interests get protected? The providers of capital to businesses around the world at different levels of business certainly have become very strong driver of ESG momentum. The fact that ESG investing has emerged already as a significant asset class, both across debt and across equity has been I think, a fairly revolutionary trend. That trend is I think, going to continue over the next 10 to 15 years.

The next thing that is driving, I would say forward in a positive way, our work towards a more responsible way of doing business that accommodates stakeholder needs as opposed to only shareholder needs, is the digitization of the world. That trend is continuing and where it is actually going to be most I would say telling, is going to be in the business transparency that we will get once blockchain becomes mainstream. Because again, it’s very important to distinguish between blockchain and cryptocurrency. I’m not talking about cryptocurrency.

Although, even cryptocurrency and there I mean central bank digital currencies, they will contribute a huge amount of transparency because it’ll be impossible to do a money laundering deal because everything is recorded in one ledger. Nothing escapes from it. Once that is there, there is no way you can do a transaction that you wish to keep private, period. If the government mandates that everything has to be on a blockchain or on a central bank digital currency, that is the end of the ability to hide a financial transaction.

Similarly, I think once a contract is registered on blockchain, whether the accounting system of a company is registered on blockchain, the operating procedures are registered on blockchain, they become open to everybody. The question will be how does the world balance between privacy and disclosure? That will be an evolving discussion. But again, the ability to control the lack of transparency to ensure proper governance will be hugely enhanced in my view, by these capabilities.

The other, I would say driver towards ESG, so to speak, is going to be the efforts that the world will have to make towards surviving climate change. Those efforts largely can be summarized in one word: de-carbonization. How do you live in a more sustainable way? Whether it is transitioning to more renewable forms of energy, trying to create activities that leave a lower carbon footprint, trying to do activities that somehow undo the damage already done to our oceans, to our forests, to our grazing lands and just changing the relentless pressure on the planet that is created by lifestyles.

My own argument and I’m sometimes unpopular for making that, is the biggest polluter in this world are humans with more money than they actually need. I go back to Mahatma Gandhi’s prescient saying 78 years ago, “The world has enough for man’s need, but not for man’s greed.” I think this will be a trend that will become, I think, more and more the norm in our world 10, 15 years from now. You have a class of the planet that has never experienced these material joys and it’ll be hard to convince them to adopt that. But the fact is that just you probably don’t have the means anyway to waste that much. But I think in this country, which is probably the biggest consumer and the biggest polluter in the world, we will have I think, a lot of the younger people which are changing their mentality towards this type of thinking. Which will be in my view, one of the biggest drivers of more responsible ESG behavior in society, not only companies.

Eric Jaffe: That’s great Arun. Thank you so much for being with us today. I think it was a really great overview of ESG and really, really appreciate you taking the time to come on.

Arun Sharma: That’s my pleasure. Again, thanks for the opportunity and hopefully these inputs are useful to listeners.

Eric Jaffe: That was Arun Sharma, president of Grovepike Associates, and the former chief investment officer at the International Finance Corporation.
We hope you’ll join us next time for a brand new episode of Deciding Factors, featuring another one of GLG’s network members. Every day GLG facilitates conversations with experts across nearly every industry and geography, helping our clients with insight that leads to true clarity. Feel free to leave us a review on Apple Podcasts, we’d love to hear from you. Or email us at decidingfactors@glgroup.com if you have feedback or ideas for future show topics. For Deciding Factors and GLG, I’m Eric Jaffe. Thanks for listening.