Putting Sustainability at the Core of Investment – Hari Balasubramanian

Peter Perri 0:00

All right, and we’re live on Energy Superheroes with Hari Balasubramanian. He is the Managing Partner at Eco Advisors, which is a consulting firm. He is also the Founder of Eco Investors, which is an investment platform. He has a nonprofit background, moved into finance to have a bigger impact. And he’s helped advise on the deployment of more than 4 billion in capital across the sustainability value chain. We’re excited to have you Hari, thanks for coming on the podcast.

Hari Balasubramanian 0:33

Thanks so much, Peter, lovely to be here and looking forward to this conversation.

Peter Perri 0:37

Absolutely. So you’re the first that we’ve had on the podcast that started with a nonprofit background? Could you go into that a little bit? I think that’s interesting to the audience.

Hari Balasubramanian 0:49

Sure. Yeah. So as you described, I come from a kind of a purist environmental background, I started off as a tropical marine conservationist living and working in Southeast Asia, the Indian Ocean, Southern Europe and the Caribbean, primarily at the interface between coastal communities and the resources underwater. So I spent my time living on beaches and scuba diving, but also interacting very closely with those communities that are so closely associated with nature. After initial projects in the tropical marine space, I worked for Conservation International, which is a large environmental nonprofit, one of the largest in the world. And I thought that the way they addressed sustainability challenges was primarily through philanthropic efforts or voluntary efforts. And CI and The Nature Conservancy and WWF are those organizations that do the biggest and broadest scale work in emerging markets in particular. What I did find, though, is that while there was a tremendous amount of good work happening, support two great organizations, local communities and indigenous people around the world, there just wasn’t enough money. So how do we address the fiscal gap between what’s needed to solve these problems? And what’s available in the philanthropic and public sector budgets?

Peter Perri 1:56

Makes a lot of sense. So you scuba dive? Do you still scuba dive today? Or have you given it up completely?

Hari Balasubramanian 2:05

Well, I did. I do say in my bio somewhere that I traded my scuba seat for a business seat when I go to Wall Street these days. But I still keep my regulator. So I do go scuba diving whenever I can. And we do have a large kind of ocean sustainable investment, focus and lens in our work. And in fact, we just published and we’re releasing periodically through this month in the next couple of months, a review of sustainable blue economy financing from the last 20 years. And that was funded by the Walton Family Foundation. And we try to use that as instigation for more investment into the sustainable blue economy. But also, it helps me get back to those coastal communities and underwater and scuba dive whenever I can.

Peter Perri 2:47

And now very cool, I’m down here in Jupiter, Florida. And we do a good bit of scuba diving here. It’s one of the only places a little plug for our area that where you can you can dive without a cage with sharks. So super cool. Including, the bad ones. We’ve got bull sharks, and tiger sharks and all that stuff. But a lot of people don’t realize that, you know, sharks are not something to be feared, and that they’re an amazing part of the ecosystem. So a little bit of a diversion there. We’ll definitely get into the finance, but I had to touch on something that I think we both share in common, a love of scuba diving and underwater community. So very cool. So then tell me how you made the transition into finance. And you started with consulting as eco advisors. And now you’re moving into building an investment platform. We’d love to hear about both your consulting work and your vision for the investment platform.

Hari Balasubramanian 3:47

Absolutely, Peter. So as I said, my thought in the beginning was that philanthropic work is what’s going to drive the changes that we needed for sustainability. And those fundamentally were the solutions for climate change and biodiversity loss that I was most interested in. Now, Conservation International has an interesting background and legacy. Our founder, Peter Seligman, and he was tremendously, well he still is, he’s tremendously passionate, charismatic, and is able to draw a lot of people into the tent for sustainability action. He was also able to build an amazing blue chip corporate board with a lot of senior executives from major companies in the US and around the world. People like Rob Walton and Howard Schultz and Bob Fisher of GAAP and Byron Trot and the list goes on and on and on. What I found, though, is that while we had a focus on business development, and engaging the corporate sector and engaging the public sector, we didn’t drive as much action and dollars towards sustainability as I thought was possible. So the transition from the nonprofit world to the for-profit consulting world was primarily premised on the notion that we weren’t generating enough resources to solve these problems. We know that we need quite a lot of resources on an annual basis to fix issues like climate change and biodiversity loss. And the philanthropic and public sectors just don’t provide enough of the capital. So the notion of building eco investor eco advisors in the first instance was really to understand and communicate the benefits of acting with purpose and sustainability, for all investment decision-making and operational decision-making. Because fundamentally, what we were seeing is that there, there wasn’t enough awareness around the fact that you didn’t have to choose between either having a positive impact on the planet, or generating profitability and increase revenues. But you could do both at the same time. Now, Eco Investors is an evolution of that of that thesis, which is that, you know, 10 years ago, when we founded Eco Advisors, there was still a gap in knowledge and understanding how to connect these two things. Now we have a lot of people making commitments to net zero, we have a lot of investors and institutional investors in particular, understanding that it’s not a trade off anymore. But the challenge they have today is in allocation and finding products that are credible that drive sustainability solutions and are consistent with the fiduciary responsibility of investors. So the notion and the reason for building Eco Investors capital is really to address that supply gap in investment product. So we’re building right now is a one-stop shop for all of your environmental allocation needs, across from philanthropic to concessionary and commercial investing, but across asset classes, as well, and really is trying to sift through two fundamental gaps. One is the supply gap in product and two is the knowledge gap and understanding how to make investments in this realm. Because it’s somewhat different from a sourcing diligence and oversight perspective than conventional investing.

Peter Perri 6:41

Very, very good. Let’s dive deeper into that. How do you see that? What do you see the differences with a, with an environmentally conscious are an impact investment compared to a more traditional investment? Around just what you said, the diligence area and sourcing and the whole process?

Hari Balasubramanian 6:59

Yeah, so it’s a great question. There’s a lot of there’s a lot of subtle differences. I’ll talk about a few of the large ones. So I think one of the largest ones is just understanding what the solution set looks like for the problems that we’re facing. And conventional investment managers don’t quite understand the solution set and the challenges from an environmental perspective, to the degree necessary to understand what is actually going to solve those problems. So when we think about challenges like climate change, it’s really hard to wrap your hands around in your head around the whole global problem of climate change. But when you downscale it to specific industries and specific sectors, you can see that there’s solution pathways that make sense. Now, at the same time, if you don’t have a sound understanding of the science behind climate change, certain things that look appealing or attractive, because someone else might have brought it up or invested in it, or it’s the sexy darling of the of the venture community today may not actually materially influence the pathway to a sustainable future. I think that’s fundamentally the most important piece that we bring to the table, which is a solid understanding of the environmental problems and challenges. And then what solutions are actually materially going to influence a pathway to productivity. From there it’s sourcing the right deals that fit into the pathways necessary for emission reductions on the climate side, and biodiversity preservation and water security on other environmental variables. And then the diligence kind of is, is different as well. So the deals that we see that are addressing real solutions to the problems and sustainability may require sort of a little bit more oversight on management teams on processes, on the scaling potential and commercialization potential of the entrepreneurs. And often, what we see is that conventional managers view those as risky attributes. And then those deals don’t get financed.

Peter Perri 8:53

Understand what sort of metrics hard metrics are you looking at? Or do you think that today, maybe those metrics are missing? And is creating new metrics part of your what you guys plan to do? Or do you plan to lean on other sort of metrics, providers that are out there? You know, we look at one called Sustainalytics, that’s out there. But there are many others that are trying to provide bring metrics to the table, but it still seems to be, you know, a bit fuzzy.

Hari Balasubramanian 9:27

There’s a fuzziness, Peter. But there’s also just a proliferation of types of metrics. And it comes back to this idea of what we mean by sustainability. So the first and most fundamental piece that we need to understand is, is what exactly are we trying to solve for? And how can we capture information and data that drives us to the solutions that make the most sense? So you’re absolutely right, that there is a proliferation of metrics. There’s a proliferation of data inputs and sources. There’s a wide variety of what that data looks like how clean it is, how useful it is in interpretation and analysis. Our view on this as well quite simple, it’s that there are a variety of metrics that exists today, the environment is a little bit easier from our perspective than the broader SDG set and social indicators in particular, in that we can find quantitative indicators for most environmental attributes. And we don’t have to rely solely on qualitative information, which is very subjective. So if we can tie both quantitative measures and qualitative measures to environmental attributes, we feel that like we have a verifiable, authentic way to look at environmental performance. Now the challenge and it’s a great time for this discussion, because the challenge of what that fundamental set of indicators and metrics looks like is still being debated. And you mentioned a couple of tools that are available today, there are more tools that are coming online. And there’s actually bigger efforts through the UN and the SDGs. The Sustainable Development Goals program, a program called the imp, so the impact management project, which is really trying to look at and consolidate information across all of these metrics, providers and standards, bodies, into a core set that really respond against the 17 SDGs. And then the targets under the SDGs. Under the UN framework. Now we’re not all the way there. As a society, there’s a lot of work being done in consolidating the right information. There’s also some interpretation that’s necessary to understand what you’re doing with the information. So Sustainalytics is very good, delink kind of activities with the Sustainable Development Goals. But it doesn’t get you to the point of understanding and managing risks associated with sustainability or opportunities that you could benefit from a sustainability perspective. And it doesn’t go further along to the outcomes and kind of results of what sustainability looks like both from a positive perspective and a negative perspective. Other tools are helping us do that. But we need a clear taxonomy, a clear language set the clear accounting standard, and all of these things to move forward in a cohesive way for the industry. Now, regulators are coming on board to help guide this we have SFDR. In Europe, we have the European taxonomy on impact investing that was established a couple of years ago, there’s the SEC right now who, which has an impact investing framework and rubric that’s open for public commentary at the moment. Here in Canada, where I live, our regulators are looking at impact investing and coming up with the construct and a common language as well. And we’re seeing voluntary efforts like the taskforce on climate related financial disclosure, the taskforce on nature related financial disclosure, that are aligning with standards bodies in order to develop a rubric and framework around these themes. In the next two or three years, I imagine we’re going to have a lot more clarity on what the language is, what the indicators are, and how we can track progress in a collective sense.

Peter Perri 12:42

It’s very well said. And of course, once we get these rubrics and actual metrics in place, I think where we all know where this is going is ultimately they’ll have to be, I think, some sort of regulation, both from an investor standpoint, as well as just various government driven, you know, and we don’t like to use the bad word, but we’ll have to sort of carrots and sticks right to be able to drive accountability and behavior, both at the at the corporate level. And at the personal level around some of these metrics. How do you think we can strike a good balance where the public will embrace and companies will embrace these types of incentive structures? You know, that we can continue to grow our economies and be successful and thrive, while at the same time getting a fair amount of buy in? And avoiding sort of the free rider problem, which I think we’ve had since the start of the industrial age, getting to a place where we do put those incentives out there that that are embraced and that that help us all get to the end goal?

Hari Balasubramanian 13:55

Well, it’s a great question. And this is this is the big work that we have in front of us, I think the next three years are going to be absolutely critical for understanding how regulators can come in with both the carrots and sticks incentives and, and punishments. I will say another thing, though, Peter, in that, you know, it’s a mind mindset shift as well, in that the way that you frame the question harkens back to sort of a conventional mindset that we may need to make a trade off when we’re making sort of sustainability decisions within a company. I think what we need to remember is what Mark Carney keeps telling us, which is that the future successful businesses on this planet are going to be those that embed sustainability principles into their core operations. And if we think about places like the tcfd, the taskforce on climate related financial disclosure, it’s not talking about climate benefits as a standalone kind of moral obligation that companies have to work towards. It’s talking about the material financial implications of climate related data and information and similarly for the task force and nature related financial disclosure. So it’s tying climate and nature materially to share responsibility, both from a downside risk perspective and an upside opportunity and value creation perspective. So I think we need to fundamentally rethink our relationship with sustainability and say, look, it’s not a matter of adding it on as a moral obligation, because we want this planet to sustain humanity over time, in fact, has been treated as an externality, which has not captured the true monetary and economic and fiduciary responsibility of investors by not considering climate and nature previously. So not incorporating it is not is not the role of regulators and sort of our moral compass to just add on because we think it’s a good idea. We’re fundamentally disvaluing most things if we don’t consider climate in nature in the underlying principles of the economic valuation.

Peter Perri 15:44

Makes sense. So it should be maybe incorporated directly into GAAP into the way we account for things into the core of business itself?

Hari Balasubramanian 15:54

Well, absolutely. And I’ll give you a couple of data points, which are quite staggering. So one is that I talked about the level of investment in environmentally productive activities. When I came from the nonprofit world, it was roughly $50 billion a year we were spending, actively protecting the environment through philanthropic and public budgets, that number has grown to about 200 billion today, and it’s increasing over time. At the same time, in 2010 2011, the amount of money we were spending, actively destroying the planet was staggering. It was over half of global GDP. And at that time, that was roughly $45 trillion a year. So we were spending 1000 times more actively destroying the planet, then actively protecting it. And a further data point, that’s really interesting that comes back to this notion of tying climate and sustainability back to fiduciary responsibility is that the World Economic Forum in 2020, released a report talking about how much of our global economy is dependent on nature. And very interestingly, on an annual basis, they say, at least half of our global economy is dependent on the fundamental building blocks are dependent upon nature. So take that in context, for a second Peter, we spend the value created in this world, roughly half or more than half of it is reliant on nature, it’s it’s fundamental building blocks. At the same time, we spend half of our global GDP actively destroying that that core value. So there’s no future in which sustainability if we don’t consider sustainability in in investment decisions and business decisions. There’s no future in which businesses continue unless we fix that problem. Because if we continue to erode the underlying value of our planet, there’s nothing left to create value upon.

Peter Perri 17:33

I think that’s, that’s a pretty amazing paradigm shift. I think that what you just laid out there, in a single slide, I think it fundamentally could could reorient the way people think about it. Because when you do consider the fact that are, we are fun, fundamentally spending that amount of money in destroying the planet, that when you look at it, through that lens, it completely changes the way you look at, look at the problem. So And it’d be difficult, but I think you could quantify the total amount of resources that are left and if we continue to deplete them. If the GDP is dependent on those at some point, we get to the end game, and there’s just not enough. And then you create a negative feedback loop to where GD GDP negatively spirals downward. So yeah, I do think that makes a lot of sense.

Hari Balasubramanian 18:28

And absolutely, it’s and it’s not just the fall of sort of the economies of our planet. But fundamentally, we rely on nature as individuals, right? Yeah, we talked about the ocean previously, we all have saltwater running through our veins, we come from the oceans. And if we continue to trash them, we’re destroying ourselves and, and beyond sort of where we come from, and where we’re going. Now, without nature, humans don’t exist. So we’re actively eroding the basis of kind of the future possibility of humanity to exist on this planet.

Peter Perri 18:58

That makes a lot of sense. A lot of our listeners are private equity funds, venture capital funds, those type of folks. And they do have similarities with the nonprofit world and that they have to go to limited partners or other stakeholders to raise capital in that world of, of pools of capital, where do you see deficiencies in terms of types of funds or types of pools of capital that could be deployed into the marketplace to have the biggest impact on these types of challenges that we’ve outlined?

Hari Balasubramanian 19:33

It’s a great question. So I think I’ll address this in a couple of different ways. I think there’s a stage portion of this the answer to this question. There’s also a sector portion to the answer to this question. So first of all, what I’d say is as an investor in private markets, you have more luxury to influence impact than you do in public markets. And that’s just the nature of investing in public equities versus private businesses and your ability as an investor to control kind of how the private businesses operate over time and how they can integrate sustainability and how they frankly how they disclose and report to you as an investor. In private markets, though, we have a mismatch in terms of where there’s capital available for impact and where there’s need. And I would say that we’ve had an evolution of venture money in the impact space over the last 20 years. The idea and the notion being that we need to seed new innovation and opportunities to address the sustainability challenges in a meaningful way. And there’s a lot of silver looking for silver bullets in that space. There’s a lot of there’s a lot of different segments of venture investing that makes sense from a sustainability perspective. However, what we haven’t spent enough time focusing on is later stage, so late venture into growth, equity, and then private equity and beyond. And how do we find values Aligned Capital that can go alongside these deals and entrepreneurs once they graduate from that early venture space? There’s a couple of reasons for why this is the case. I mean, it’s easier to raise smaller venture focus funds than it is to raise mid market growth equity and private equity funds. There’s a more systemic and fundamental problem, which is that the folks with access to larger pools of capital in later stage rounds tend to be legacy institutions that have worked through a lot of conventional investing. And it’s hard to move those legacy institutions into a more impact oriented approach. So we’re seeing a lot of growth stage companies is struggling in the impact space, either because they’re going along with partners in capital partners that don’t share the values and impact orientation are, they’re getting pushed into making decisions that are inconsistent with the with the underlying impact pieces of the entrepreneurs in the businesses themselves. And a third route that we see entrepreneurs take is just stopping and saying, Look, rather than grow even further, and potentially risk squeezing the impact out of our business, we’ll just maintain it a level that we’re comfortable with, but we don’t need to, we don’t need to graduate into other sources and rounds of financing. And all of those scenarios are subpar. Right, what we want to do is to is to find those opportunities that are ready to grow and scale to solve and reduce the Delta in terms of achieving our SDGs by 2030. And if we don’t have values Aligned Capital to take these ideas from kind of the venture stage into the scaling and growth stage and beyond, then we’re not we’re not going to be able to address these challenges. I think there’s still room for venture, there’s still room for innovation, but we have so many solutions that exist today, that can really make a dent if we just helped scale them. But we don’t have enough values aligned dollars to help scale those solutions.

Peter Perri 22:39

That’s a really good point, one of the challenges we see is that in comparison to say the internet companies of the last 20 years, once they get to a certain level, they can scale on their own, really to unicorn status, because the distribution channel is direct to consumer. And it’s based on software that can be scaled very rapidly across communication channels. However, in the in the nature and sustainability space, many of the incumbent players control the value chain in terms of physical distribution of resources, or sales channels. A lot of these new technologies have to be implemented with boots on the ground at existing industrial plants that are very, very conservative, and would prefer to work with incumbent players. So from an investment standpoint, you have the challenge, I think of taking a company from say 50 or 100 million up to that billion multi billion dollar unicorn state status without essentially looking to an incumbent player for an acquisition. So you run into some of these challenges there. And I don’t know what the solution is, maybe it’s to work through some of the incumbent players to help transform them. Or maybe it’s as you say, we have to bring more capital to the late stage venture. And hopefully, that capital can be patient because it takes a long time to put these boots on the ground, say much different from scaling a company like Google, it’s, I think more like an Amazon where you have to physically build this this distribution and physical infrastructure to be able to support the deployment of a lot of those new technologies. So that’s really,

Hari Balasubramanian 24:21

That’s really well said, Peter, what I would say on that front, though, is that that’s the hypothesis behind us combining an advisory consulting business with a with an investment platform concept, which is that we don’t believe that investment alone is going to solve this problem. A lot of what’s needed is the is the supporting infrastructure to allow that investment to succeed. And part of what we think our advisory business does is because we work with a lot of incumbents in in traditionally sort of unsustainable sectors in the resource extraction kind of space or energy space, or even infrastructure and, and waste management. So a variety of how emitting industries. But we have a client base that is looking for more positive solutions. So if we can in advisory mandate on operational sustainability point people towards solutions that make sense from a from a fundamental cost curve perspective and within their core operations, then that transition and that inertia is a little bit lower to get across. However, if you’re just focusing from the from the investment perspective, and you don’t have access to those potential customers in the same way, it makes it much more challenging. So we’re trying to work on both sides, like the demand is there, but it’s the inertia is still very real as you point out, but we can try to lower that inertia a little bit by, by by playing that bridge in between kind of the supply and demand.

Peter Perri 25:43

Absolutely, it makes total sense. And I think, given your long history and background in the space, you’ve been able to thoughtfully identify an area where you can get the most leverage for that knowledge that you bring to the table. So hats off to you, I’m glad to hear that you’re in the market in this in this way. And appreciate all that you’re doing to help further our shared goals of making the making business really more sustainable.

Hari Balasubramanian 26:12

Well, I appreciate that. But it’s it can’t be done alone. Right. So one thing I really want to highlight to the viewers and listeners of your podcast is that it’s not going to be one or a few organizations that lead this charge and are going to be able to make the transition happen. It needs to be all of us they get readjust kind of the mindset of what’s possible, what’s available, and what the future of investing and sustainability look like. And that meshing of social good environmental good and economic productivity is fundamental to advancing not only sustainability on our planet, but future good investment decisions.

Peter Perri 26:47

Agreed. Before we go, Harry, could you Is there anything number one that I that I missed that I should have asked you about? And number two, is there anything you’d like to share with the audience that you’re promoting at this time? Or your website? How can people get in touch with you?

Hari Balasubramanian 27:05

Well, our websites Eco Advisors is that www.ecoadvisors.org. Eco Investors Capital is just that ecoinvestors.capital. The platform is being launched at the moment. So I guess just stay tuned, we’re hoping to have sort of a more material and more fulsome. The description of what the platform is that we’re building by the third quarter of this year. In terms of what I’d like to leave with the group here is that I remain tremendously optimistic about the future of our planet. I think, the last couple of years through the pandemic, we’ve really seen an acceleration of integrating sustainability into at least commitments and decisions. Now we need to move from those commitments into action. And that’s where we’re fundamentally focused is on you know, less talk, I don’t care about the next world economic forum meeting where people are going to make commitments about 2030, or 2040, or 2050. Let’s work hard to deploy some of the money that’s been set aside for sustainability and net zero and actually drive some dollars to action so we can get, we can get moving, we spent a lot of time talking. We know what the challenge is, we know relatively where our solutions lie. There’s a lot of empty space and a wide open space to make really good investment decisions in undercapitalized portions of the emissions reduction pathway that we that we need to accelerate. And there’s a lot of money to be made. So I think the more we can do to mobilize this capital, this interest and this connection between capital and all its sources, right, not only financial capital, but human capital and knowledge, capital, and all the pieces that are necessary to drive this transition, we just need to get after it and do it quickly. I think the next two and a half years are really critical for this, the IPCC, the UNF. Triple C, for example, is talking about more action in the meeting, leading up to the Egypt Conference of the Parties. And I think the next two and a half years, if we can deploy, get more boots on the ground, get more dollars to communities get more of these venture technologies scaled up are the ones that are working to get them scaled up to a sufficient level and deployed across emerging markets in particular, that we can really make a dent and have even more positive stories to share by 2025 and towards our 2030 targets.

Peter Perri 29:26

Now, Hari, I think those are tremendous goals and hats off to you for what you’re doing. I’m happy to have had you on the podcast. We’ve had Hari Balasubramanian. He’s the managing partner of Eco Advisors, which is a consulting firm, and he’s the founder of Eco Investors, which is an emerging investment platform in the sustainability sector. Very thanks for being on energy superheroes. It was a pleasure to have you.

Hari Balasubramanian 29:53

Wonderful to meet you, Peter. And best of luck continuing with this with this journey and it’s really important work. So appreciate being here. Thank you Amen