74. Jean-Jacques Barrow, Sustainability Within Asset Management

“Climate change is a matter now of extreme urgency.  Our failure to act is a failure of imagination but recent developments suggest the pace is picking up. Within asset management, climate change and specifically carbon emissions are central factors within the broader sustainability/ESG approach.

Finance is a key conduit and asset managers now need to assess the climate risk within their investments.   The need to extract this information from the companies in which they invest will not only create greater transparency in terms of disclosing climate risk but it also  will force change on companies who are not making the necessary adjustments.” Jean-Jacques Barrow

 

Jean-Jacques Barrow, a member of the Harvard and Radcliffe class of 1992, shares his journey since graduating from Harvard. He began his career as an English major and moved to Paris for a four-month contract as an editorial assistant with the International Herald Tribune, which has since been rebranded the International New York Times. He learned about how journalism functions and how it is required that one serves their time on the periphery and provinces. One of his tasks was transcribing key data from the Bloomberg terminal for the financial section, so he began educating himself about the world of finance. After this position ended, he moved back to Geneva during a recession and took many jobs, including working at a construction work removal company. He eventually secured a job as an editor at Capital International, one of the world's largest asset managers where his job was to take minutes and write reports on investment meetings. 

 

Working in Swiss Private Banking

He was initially impatient to secure an opportunity in the investment industry, but eventually landed a job at Swiss private banking. The Swiss private banking industry was built around tax evasion and tax optimization, but over the last 20-25 years, the industry has changed due to pressures from the European Union and the US following many scandals. The industry has become more regulated, open, and legitimate, with a focus on decoding assets and legitimate tax optimization. He believes that the key driver for change in the industry is the pressure from the US around undeclared funds from people who had not survived the Second World War, particularly Jewish, deposited in Switzerland. This pressure has led to a shift in the industry's focus on decoding assets and legitimate tax optimization.

Jean-Jacques shares what he learned about tax evasion when he moved to the investment desk and started his apprenticeship, knowing very little and learning on the job. He worked for Bankers Trust, which was a pivotal moment in his career, but it ended up collapsing due to the Russia bond crisis and Korea's aggressive approach. He learned the basis of implementation and focused on discretionary portfolio management. His experience in private banking was interesting, and he talks about the many interesting developments he witnessed. He was also involved in the world of events and geopolitical forces.  He later moved to the Royal Bank of Canada, where he was assigned to the French Canadian market and North American markets. However, due to the Canadian bank's regulated status, there was limited investment content based in Switzerland. 

 

Investment Management, Social Entrepreneurship, and Microfinance

Jean-Jacques decided to pivot towards investment management and pursued an executive MBA at INSEAD. He became interested in social entrepreneurship and microfinance. After graduating, he found himself in the midst of a potential slowdown in 2008, which was a challenging time for job opportunities. He found a disconnect between what microfinance was supposed to be and the reality. However, the initial concept has evolved, and he was inspired by the business model developed by Bangladeshi economist Muhammad Yunus, who aimed to help the poor with micro loans.

 

Sustainable Investing as a Growing Trend

JJ talks about sustainable investing as a growing trend in the financial sector. This shift has been driven by the changing regulatory environment in Europe, which is becoming more strict about financial reporting on portfolio content. The screening process has evolved, with companies now actively screening companies within sensitive sectors, such as the extraction industry and energy banking. The process has also been refined, with a global climate 2035 portfolio focused on names and companies related to fighting climate change. This  approach is a reaction to the increasing regulatory environment in Europe, which is becoming more strict about financial reporting on portfolio content. He talks about investing in secondary markets and how investing in companies with technology can help support the emergence of technology in the mainstream. However, when investing in secondary markets, the capacity to generate changes may be muted. The regulators are pushing companies to be more explicit about their environmental risks and more detailed about the externalities they generate. This will drive change, if companies are not open about their environmental risk, they may face punishment from shareholders and public challenges in general meetings. In Switzerland, the collapse of a major Swiss bank, Credit Suisse, was a prime example of how minority shareholders pushed companies to exit investment banking to stop funding fossil fuels. This has led to the closure of investment banks and the need for companies to be more transparent about their environmental risks.

 

ESG Investing and Shareholder Power

Jean-Jacques mentions the importance of ESG investing and its potential to drive change in the energy sector. He explains that ESG investing has outperformed the broader market over the last five years, with a natural quality bias and exposure to tech. However, the recent increase in enthusiasm for this style of investing in 2022 has led to delays in good intentions. He discusses the evolution of ESG investing in Europe, with companies realizing that stricter regulations will require more disclosure of information. This has led to companies realizing they need to be more open or push back. The energy sector is experiencing a shift towards clean energy from companies like Macau and BP, and moving towards electric generation and grid technologies. Despite the pessimistic mood in Europe, he believes there are reasons to be hopeful about the scale of investment and deployment. He points out that banks can add value by engaging and challenging major companies to change their remuneration policies and CEOs. He also emphasizes the importance of shareholder cooperation and the power of shareholders to influence corporate behavior. He cites the example of a company that failed to listen to dissenting shareholders, but he believes that if shareholders work together, they can make a significant difference in the industry. 

 

The ESG Scorecard and How it Works

JJ explains that analysts typically have a scorecard across ESG, with different industries having different weights. For example, in the mining industry, the environmental side is higher, and there are subset segments in terms of water usage, pollution risk, and other externalities. To have an ESG rating, a company must meet a certain score. The industry has a lot of topsy-turvy stuff going on, and some analysts don't consider Tesla to be eligible because of the GE and Tesla, the government side is diabolical, and Exxon has extraordinarily good governance. Companies with good ESG attract good talent, draw upon a broader pool of talented individuals, and have better employer loyalty. The urgency around emissions has led to a sense of urgency in engagement in company response, investment, fairs, exchanges, and industry discussions. He  explains that he played his cards differently in his first job at Capitol International by keeping his big mouth shut and being less confrontational. He learned to respect rules and respect rules in the American corporate environment, and he learned to source his views from different areas. He also appreciates that he has a different educational and career route, having attended Harvard and a level of intellectual curiosity. He emphasizes the importance of going off the intellectual print, orthodoxy, and looking beyond traditional sources. He advises interns and juniors to listen to other reports and sources, as it helps him understand viewpoints from classmates in different areas and doing different things.

 

Influential Courses and Professors at Harvard

JJ discusses his time at Harvard and the two key takeaways he learned from his time there. He highlights the expository writing course he took as a freshman year and the masters swimming course, which he found to be a valuable source of learning. He also highlights the importance of being clear, concise, and succinct in his daily work, especially when dealing with an audience not necessarily in English. These two key takeaways have shaped his future, particularly in terms of his interests and the core curriculum. He mentions the Behavioral Biology and Evolution courses, as well professor Neil Wilson and professor Raymond Siever's class on geology, which exposed him to the world's cycles of physical life and the impact of man on the planet. 

 

Recommended Reads:

Saving the Plant without the Bullshit, Assaad Rarrock. Don’t let the title put you off, this is good starting point.

How the World Really Works, Vaclav Smil Makes clear the scope of the transition. Great reality check and myth buster. 

Petroleum Papers. Geoff Dembicki  The role of energy companies in the current climate debate. I would not be long oil stocks…

Learning to Die in the Anthropocene, Ray Scranton Bleak but an eye opener on the worst case scenario.

Five Times Faster. Simon Sharpe. The author is active within government, policy making and the COP meetings. Very insightful, and great primer on why we are where we are. There is still time but we need to move five times faster.

Useful Sources:

Bloomberg Green, MSCI ESG. In terms of sustainability disclosure,  ISSB has launched  IFRS Sustainability Disclosure Standard (S1 General disclosures, S2 Climate related).

 

Timestamps:

02:16 The start of his career in finance

09:11 Pursuing a career in social entrepreneurship and micro finance

18:09 The evolution of sustainable investing

21:09 How sustainable investing makes a difference

25:51 ESG reporting requirements

27:42 The current state of the energy sector

30:55 How banks can add value to their shareholders

37:40 The ESG scorecard

 

CONTACT:

LinkedIn: https://www.linkedin.com/in/jean-jacques-barrow-710a606/