Karen Karniol-Tambour, Co-CIO for Sustainability at Bridgewater, and Nathanael Benzaken, Lyxor’s Chief Client Officer discuss the two firms’ commitment to driving change through sustainable investment, how Bridgewater is weaving sustainable criteria into its investment approach as well as different visions of sustainable investment globally.
NB: How does Bridgewater integrate a sustainable approach into its investment philosophy?
K K-T: We’ve all spent decades of our professional careers thinking how to maximize return relative to risk and Bridgewater has done that for decades. Now, the world is changing and many of us want to have another dimension to how we think about the world, which is sustainability. For me that is truly a revolution: it is moving from just thinking two-dimensionally about risk and return to thinking about this third dimension, sustainability, in everything that you do.
What we have done is apply the same improvement that we have for decades, moving from a traditional portfolio to a Bridgewater All Weather portfolio, but we have embedded sustainability every step of the way. We have done that with our investment philosophy which is fundamental, meaning that we want to deeply understand how the different assets that we hold impact the world. And at the same time our investment philosophy is systematic, meaning we look at thousands of securities around the world and assess them for sustainability and then apply the same quality time-tested portfolio engineering to build a balanced portfolio holding those sustainable assets.
NB: What differences do you expect between the Bridgewater’s All Weather investment strategy and the a sustainable strategy, in terms of performance, risk and implementation?
K K-B: The first thing to say is that they are much more similar than they are different. When you look at the All Weather strategy, the significant improvement on a traditional portfolio really comes from the portfolio construction methodology and the way we balance risks. Most of the financial improvement of the All Weather strategy stems from putting together in risk-matched terms two types of assets that do well in opposing environments – for example stocks and inflation-linked bonds; when inflation goes up, inflation-linked bonds do well and stocks do poorly and vice versa.
The differences come from what it means to embed sustainability within that framework: once you are choosing assets for sustainability, you are running slightly higher risks relative to return, because your diversification ability has gone down a little bit. Our view, however, is that this has a very small effect. For example when it comes to companies, we’re only picking companies that meet the SDG criteria: the move from thousands of companies to even a couple of hundreds of companies is not that significant in terms of diversification. While you can see differences at the individual company level in terms of sustainability, when you step back and look at the strategy as a whole, it is very similar in terms of performance, albeit slightly less diversified.
NB: How do you reconcile investing in commodities with sustainability? It can be argued that commodity investing is anything but sustainable.
K K-T: That’s a very important question. When you look at the Sustainable Development Goals and the vision of the world they describe, you see that there’s actually no way to achieve that vision without doing a lot more commodity mining. The most obvious case relates to all the commodities required to build the infrastructure needed to move to cleaner energy: when you shift to electric cars, what you need to build the charging stations; you need a lot of steel, a lot of copper, a lot of commodities to enable that transition.
We see a lot of distinctions between the commodities whose utilization has to be phased out and those that are a critical input to the future we are trying to build. The unfortunate thing is that even for those commodities, a lot of the mining is not done responsibly. In most extreme cases, if you create a lot of emissions while mining copper out, you might get nothing out of switching to an electric car. There are also social issues, like child labor or modern slavery, that are happening in mining. The responsible investor can’t try to ignore these commodities: the important thing to do is to try and incentivize the right type of commodity mining, and this is why we’ve taken the approach of picking the most responsible miners.
NB: How do you see gold fitting into a sustainable portfolio?
K K-T: We don’t really think of gold as a commodity because almost all of the gold being traded hasn’t been mined: it is pretty much bars of gold that are already out of the ground which are being traded between existing people. That’s why we think of gold almost as a currency, as a way of protecting yourself against inflation by having a real asset. In some ways, gold is the most sustainable commodity because it is so recyclable, you are always re-using gold over and over again as a storehouse of wealth. We think an important part of the portfolio is getting inflation protection in this environment.
NB: We’re witnessing in Europe the unstoppable wave of ESG investment. Would you agree that Europe is ahead of the curve in this space and how do you see the US catching up, especially through the efforts of the new Biden administration?
K K-T: Europe is absolutely ahead of the curve. Even if you just look at climate stress tests, the European central banks are way further ahead, while the Fed has only started thinking about doing such stress tests. I think the world is copying the way Europe is thinking about this and that the shift we’ve seen as a global asset manager in the interest and thinking about sustainable investment has been very rapid. While investors may have varying opinions as to what element of sustainability matters the most to them, we see the United Nations’ Sustainable Development Goals as a really broad framework to consider sustainability in a way that doesn’t exclude one aspect of sustainability at the expense of another. I think this is the way things are going to evolve in the field of sustainability, with investors looking at it from a holistic perspective.