Jean Raby and Charles Emond oversee more than $1.7 trillion in investments worldwide. They want to see real action on climate change.
Jean Raby and Charles Emond both have a unique perspective on the powerful role that capital can play in driving change. Each worked in corporate and investment banking and on the corporate side of the boardroom table, and now they both oversee major global investment firms.
As the outgoing CEO of Natixis Investment Managers and head of Asset and Wealth Management for Paris-based Natixis, Raby leads a team that manages nearly $1.4 trillion in assets.
Emond is president and CEO of Caisse de dépôt et placement du Québec (CDPQ), which has invested more than $291 billion worldwide in pension funds, insurance plans, and other organizations in Québec. Together, they cochair the Investor Leadership Network (ILN) CEO Council, representing the leaders of 14 global investment firms that want to help drive the transition to a more inclusive and sustainable low-carbon economy. McKinsey senior editor Diane Brady recently spoke with Raby and Emond about their increased focus on addressing climate change through ILN, and how they invest.
McKinsey: What inspired you to take on this leadership role at ILN?
Jean Raby: You have to set the tone at the top. These issues are of increasing importance, not only to our clients but also to our staff and to society as a whole.
Charles Emond: I would echo that and add that, from the pure organizational perspective, this initiative is dear to our hearts. ILN is focused on concrete actions, giving investors tools to assess and incorporate climate risk into their portfolios. Here are the sectors that produce the most carbon and the levers that reduce it. As a portfolio manager, it helps you assess a company’s disclosure. Is it credible? Is it complete? Disclosure is absolutely key to making informed decisions. It helps to drive a conversation.
Jean Raby: I like that ILN is not prescriptive. We have common objectives and goals, but different approaches to reach them. By coming together, we can share best practices among ourselves and with the industry and agree on a consistent framework and tools for action.
That’s essential for dealing with an issue as vast and complex as climate change, which cannot be tackled effectively using a black-and-white approach.
A lasting solution to climate change requires a transition and a process.
Coal contributes to climate change but we can’t stop coal consumption right away. We need to be thoughtful and work together for the long term. If investors engage in a constructive manner with companies, that will drive a dialogue across the industry to ensure that capital is allocated to the companies and technologies that will have the greatest impact.
McKinsey: Your companies have invested in ESG [environmental, social, and governance] for years. What’s changed?
Charles Emond: A CEO recently told me that, a year or two ago, ESG was the last question that would come up in (an investor) meeting, if there was time. Now those meetings start with that question. We have 42 depositors that care about these issues and trust us to manage their money. We have this commitment to be carbon neutral by 2050. To drive sustainable and inclusive growth, it’s helpful to have a grid and act accordingly.
To meet our commitment to be carbon neutral by 2050, we need to act now. In 2017, we really focused our climate strategy on three things. The first was increasing investments in low-carbon or greener assets by 80 percent. We doubled our target so that today we have about $26 billion in those assets. We’re one of the top investors in the world in renewables.
The second target was reducing our carbon intensity by 25 percent by 2025. Today, we’re at 21 percent. The third was ensuring that leadership aligns with the low-carbon transition. The team has annual carbon targets that impact their compensation. We give an ESG report to our depositors and the public. Instead of being a constraint, having these targets tied to compensation has become a source of pride.
Jean Raby: The debate of financial performance versus ESG integration is behind us, or at least it’s fast becoming that way. It will be completely mainstream within five years. It’s common sense that supporting energy transition, climate-change transition, and other ESG policies are long-term drivers of performance. We look at these measures the same way we look at financial statements or the quality of the management team. At Natixis, we have 23 different investment companies, all of which are autonomous in managing their investments and day-to-day operations. Although everybody is traveling the same road, they implement ESG considerations according to their own unique strategies and investment philosophies. As ESG integration becomes ubiquitous across the industry, everyone will benefit as investors find new ways to incorporate ESG into their pursuit of alpha.
Charles Emond: It’s moved from being a “nice to have” to a “need to have.” For shareholders, it’s no longer peripheral. There’s a vast and growing number of people who demand it. Increasing low-carbon assets is easy. When we invest in a wind farm or light-rail transit, everybody applauds. Reducing carbon intensity can be trickier. The reality is that some sectors pollute more. We think it’s important that investors not run away from those problems but confront them and help companies transition to cleaner output. The question is how to do it. That’s why we’re measuring our impact not only from greener assets but also from helping the transition of the real economy underneath. You’ve got to have both.
McKinsey: What’s the outlook for the fossil-fuel industry in terms of attracting capital?
When we invest in a wind farm or light-rail transit, everybody applauds. Reducing carbon intensity can be trickier. The reality is that some sectors pollute more.
Jean Raby: I think it’s inevitable that fossil fuel will attract less and less capital, because it’s seen less and less as a source of future growth, and there are real risks from regulation and stranded assets. Oil companies invest in renewable industry, but they also know their historical businesses have to change. Our message to the industry is, if you don’t position your business for the inevitable transition to a low-carbon economy, you’ll attract fewer investors.
You could argue that if governments want to play a role from a regulatory standpoint, they could differentiate the cost of capital in financing certain industries versus others depending on their climate impact or progress in the energy transition. At Natixis’ banking division, we already do that through a mechanism called the Green Weighting Factor. When we allocate capital or assess risk, we take all that into account. We don’t think divestment policies as a blanket approach are the right answer. It’s less about black or white than, say, brown, green, or olive.
Charles Emond: Transition is the key word. We closely monitor sectors with high carbon emissions. As long-term investors, we are working to accompany companies on this important transition. We expect to see improvements and are helping them to identify more sustainable business opportunities and drive effective change.
McKinsey: How do you work with companies to help them make this transition?
Charles Emond: A few years ago, talking about emissions was like raising a sensitive topic to an old friend. Now that friend likely understands the importance. It’s no longer a conversation about the need to change but rather the pace of change. You can influence that through a dialogue with the management team. You can also use your votes, which speak loudly. We help them set targets and identify sustainable opportunities. We ask them to stop harmful practices, if there are any. And we tell them to improve disclosure.
In November of last year, we announced a new policy governing the exercise of voting rights for public companies. It targets 300 companies in our portfolio in about 28 countries. It sets our expectations in areas such as disclosing climate risk. We give people time to change, but it’s meant to have some teeth because the clock is ticking. So it’s a balancing act. We’re supportive, but we also provide what I’d call “healthy tension.”
McKinsey: Do you see this as a fiduciary duty or a moral duty?
Jean Raby: I consider that a false debate, whether it’s a fiduciary duty or moral obligation. It’s in our interest—collectively and individually, socially, and for our clients, from a shareholder standpoint and from our employees’ standpoint. It’s in everybody’s interest.
McKinsey: Would you agree, Charles?
Charles Emond: Yes. Whether you’re an investment manager, pension fund, or a portfolio company, if you don’t act according to these new standards, it’s going to impact your revenues. Increasing inequalities impacting minorities, younger people, and women will affect your long-term growth and our collective benefit. We’re not creating an ecosystem that sets winning conditions. It’s arithmetic. And this is the right thing to do.
McKinsey: Are you worried about climate change on a personal level?
Charles Emond: Yes. Absolutely. We believe the clock is ticking, and science is clear about that. I don’t need numbers to get worried, but they can get you even more worried. In Canada, the weather-related costs of the last decade alone are double the total cost of the past 30 years. And Europe’s got the hottest year on record. So it’s like compounded interest here. At some point, there’s going to be a limited ability to reverse this trend.
We’re managing the pensions of six million Québecers. We owe it to them and to future generations to invest in making this transition. Also, I have two kids. And even though they’re young, they’re sensitive to these issues.
McKinsey: What do you think is the role of regulation in addressing these issues and in driving the behaviors you want to see in your portfolio companies?
Charles Emond: You always need regulation. As Jean said, governments can help set up a framework so that behaviors adapt accordingly, or there’s an incentive to move in a certain direction. Then I think the private sector is sometimes better equipped to set that into action.
The voting policy I talked to you about spells it out. Our preference is to engage with companies, to lead by example and benchmark our own progress, to give investors relevant tools, and to endorse the behavior we’re looking for.
And that’s why we think that the climate-change initiative is so important, because it will speed up the use [of carbon-reducing tools.] Do I see a need for regulation? Yes. It’s part of the solution, but it doesn’t bring you to the final destination, in my mind. You need widescale endorsement of these objectives.
Jean Raby: The way I think about regulation is that it’s about creating a level playing field, in terms of disclosure, data, how you present information, and such. But it should not be prescriptive for the asset-management industry or the rest of society. The asset-management industry should not be a back door to regulate society. You don’t want to impose on asset managers’ choices that the regulators are not willing to make for society as a whole. That I think is important.
The asset-management industry should not be a back door to regulate society. You don’t want to impose on asset managers choices that the regulators are not willing to make for society as a whole.
McKinsey: How should investors measure the success of their portfolios going forward?
Jean Raby: That’s a good question. At the end of the day, it’s about understanding your clients’ objectives and agreeing upon the definition of success. An asset manager has to have measurable criteria for success, financial and otherwise. It could be about the percentage of women on boards or carbon emissions, but since we are managing money on behalf of a wide range of clients around the world, the objectives can vary. A union pension fund may be focused more on the S, while a university endowment concentrates on the E, for example, but their primary mission is to provide a secure retirement for workers and scholarships for students in need. We work to understand what our clients are trying to achieve and the best KPIs [key performance indicators] to track progress.
Charles Emond: You’ve got to anchor it on principles, moving from capital to constructive capital. That means taking a broader view of investment. Depositors need solid returns over the long term, and factoring in climate change is part of that. Now there is another layer whereby you take a step back and say, “What is the impact that’s coming with our investing? Is that directionally positive? Is that in line with our core values?” These are all difficult things to measure, but there’s a sanity check on top of all of it at that end that is an important element. To match these two things that Jean talked about, where is that overlap?
McKinsey: If I’m a CEO of a company, what do I need to do to get more of your money?
Charles Emond: Well, I’d say get ahead of the curve. Show leadership in your industry and ambition that will bring in capital, and hence, good returns. When there’s an important trend, differentiate yourself. Best-in-class companies in every sector attract capital and differentiate themselves.
That’s about competitive positioning, which is a language that CEOs can relate to. The mindset is also shifting. The sales pitch needs to be less focused on the bad things that might happen if you don’t do something, and instead focus on the good things that could come if you do something.
There are a lot of possibilities out there. To me, it’s about showing leadership and conviction, not just checking the box because you have to. If we take climate change as an example, it is a factor that is here to stay and will become more and more material in the future. Whether we are talking about transition or physical impacts, companies that today are fully integrating the climate factor within their strategies to help identify opportunities and mitigate risks have a better chance to outperform in the future.
McKinsey: Jean, what is your message to CEOs?
Jean Raby: Demonstrate to us that you take a long-term approach—that you don’t manage for the quarter but take a long-term view—sometimes even sacrificing short-term profitability for long-term benefits.
Demonstrate that you nurture your culture: you grow people internally, and you take care of your staff as much as you take care of your clients. It’s all part of thinking long term.
Charles Emond: This train is not reversing. It’s here to stay, and it’s going to accelerate. We talk about that with leaps forward in technology. It’s also happening with climate and ESG. These issues are here to stay and may actually represent the biggest investment opportunity.
There’s a Venn diagram in which doing the right thing actually creates a good outcome. I think we’re at this juncture; this crisis probably made us realize a lot of important things at an important moment. We can’t miss this opportunity or let that momentum drop, because it will have an impact for generations to come. It’s a privilege to invest people’s money, but it comes with responsibilities.