In the coming decades,
my generation of millennials and Gen Zers
will inherit the largest amount of wealth humanity has ever created:
some 30 trillion dollars.
That's a huge wallet.
Unluckily for us, we'll also inherit some huge issues:
climate change, geopolitical instability,
inequality.
What we choose to do or not do with this enormous wallet
will define the future of our species.
No pressure, folks.
Why, might you ask, am I talking about my generation's wallet?
Well, the reason why is because I'm an investor,
and the essence of my job is to allocate your savings to build a better future.
Because I'm also a millennial
who doesn't particularly like losing sleep
over the thought of rising global temperatures,
my job also requires me to think about what's good for society.
And from where I sit,
one of the keys to bettering the world is ESG investing.
ESG stands for environmental, social and governance.
Think of ESG as additional little pieces of data that some investors consider
when analyzing the risks or opportunities of an investment.
So, for example, a car company that starts selling more electric vehicles
may be around longer in a future where we can't burn as many fossil fuels.
So an investor might consider that company
to be a safer place to put your money.
In an ideal world, here's what ESG promises.
It promises better investment returns
because money is invested in companies with sustainable practices,
which makes them likelier to be around longer-term.
It promises business leaders who share more and better data
about what their companies are doing.
It promises greater productivity
by allocating money to companies
that maintain strong relationships with customers, employees and suppliers.
That's the vision.
The good news is that some people,
younger generations especially,
have started buying into this vision.
And ESG strategies have gained a ton of momentum over the past years.
That’s the good news. #happy.
The not so good news
is that we're still far away from achieving the full promises of ESG.
Here's a sobering fact.
A recent survey from Kalon, a major investment consulting firm,
suggests that about half of institutional investors
consider the benefits of ESG to be unclear or unproven.
In other words,
many of the people who will allocate millennials' and Gen Zers' money
aren't fully convinced that ESG is relevant
when deciding where to put your money.
Now, I think there are many reasons why this might be the case.
For example, investors focused on short-term outcomes
might not necessarily know the best way to consider longer-term sustainability.
Or there may be a sense that companies can't do well and do good
at the same time.
Whatever the reason may be, this is a problem, folks.
If the people running the investment strategies don't anticipate ESG will work,
how can we achieve its full promises?
The key word in all of this is “expect.”
Let me now tell you something I didn't fully appreciate
until I started working in finance.
We'd all like to think that investment decisions are made with cold,
hard data and nothing else.
But the truth is that investors are people and the economy is made of people.
Which means that, like it or not,
a lot of what happens in financial markets
comes down to psychology and expectations.
And these expectations can be a force for good or bad.
John Maynard Keynes, one of the fathers of modern economics,
once famously described how powerful expectations --
or animal spirits, as he called them --
can play a powerful role in markets.
He also had a pretty sweet mustache.
(Laughter)
Anyway, I digress.
The point is that I've seen the power of what expectations can do.
And here's a firsthand example.
I'm from Venezuela,
and in the late twenty-teens,
my home country experienced one of the worst periods of hyperinflation
ever recorded.
Now, there were many reasons why this hyperinflation took place
and I won't go into all of them here.
But among those reasons was a concept called inflation expectations.
What inflation expectations basically means
is that when people believe prices in the future will go up,
that belief, that animal spirit, can literally cause prices to rise today.
Expectations create reality.
So coming back to ESG,
what Venezuela and Lord Keynes have taught me
is that making ESG and sustainability mainstream
will require us to literally redefine society's expectations
of what ESG is and what it can do.
That might sound like a tall order,
but I think there's a few things you and I can do about it.
One solution investors are working on is to standardize ESG metrics.
So for context, right now,
there are lots of divergent opinions about what metrics matter most
or are material.
And in the middle of this analysis paralysis,
because there's a million things we could be measuring,
it's no surprise why some investors are skeptical.
Standardizing ESG metrics is showing some promise already.
Instead of incentivizing investors to cherry-pick data
that makes companies look good,
they encourage us to measure what matters.
For example, data security is massively important for health care companies
because patient safety and security are paramount.
Although important,
data security might not be as central a consideration
for, say, a kitchen cabinet manufacturer.
There's a cool Harvard Business School study that was released not too long ago,
and it found that companies that address material ESG issues
can outperform companies that don't by as much as nine percent per year.
That's good news.
#cantstopwontstop.
Here's a second solution.
Investors like me are working on literally changing the way
we calculate financial forecasts.
So right now, most investors use
financial models to make educated predictions
about what a company might do in the future
and how much money it's going to make.
Let's just say we also excel at making spreadsheets.
(Laughter)
I'm so thrilled more than zero people laughed at that one.
(Laughter)
What if, though, what if,
in addition to basic financial data,
we built in other pieces of data into our models
that are predictive of how much earnings a company is going to make?
But beyond standardized ESG metrics
or new ways of calculating financial forecasts,
I think the third and most important thing we need is trust.
If we trust and expect that companies that do good will be around longer,
we start to create a future where ESG becomes an indelible part of any company.
We start to create a future where sustainable companies
are less risky to own,
and money managers believe in using the right data to make better decisions.
We start to create a world where you, the personal investor,
leverage the power of expectations to demand even more tools,
even better metrics, and so on and so forth,
where trust in the system improves further.
Economists might call this a virtuous cycle.
I sometimes call this
"the virtuous cycle of how to keep humanity alive
for centuries and eons to come, yay, awesome."
But that might be a little too long.
So for short,
let’s call it “the virtuous cycle of investing in the 21st century.”
Because like it or not,
it represents the future of investing.
If there’s one thing to take away from what I’ve been saying, it’s this:
Fellow millennials and Gen Zers, start thinking about your assets today.
Start thinking about your savings.
What might be passed down to you
and how it can be used to build the world's future.
If you don't invest your own money,
ask your fund manager what they plan to do with your assets,
what metrics they use and why.
Your pension funds, your 401k,
even the money in your savings or checking account,
all can be put to work
to create the virtuous cycle of investing in the 21st century.
And if this sounds like a pie in the sky idea right now,
think about Lord Keynes' mustache for a second
and consider whether it's your expectations
that may need changing.
Thank you.
(Applause)