November 2, 2015
Interviewed by: Tom Franco
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Should Investors Give Up on ESG?

While many private equity firms have soured on investing in cleantech in the last two to three years, Daniel Feder of Washington University Investment Mangement Company and Jonathan Roth of Abbott Capital discuss whether investors should give up on the sector and other ESG strategies.

While many private equity firms have soured on investing in cleantech in the last two to three years, Daniel Feder of Washington University Investment Mangement Company and Jonathan Roth of Abbott Capital discuss whether investors should give up on the sector and other ESG strategies.

Should Investors Give Up on ESG?
With Jonathan Roth of Abbott Capital

Daniel Feder, Washington University Investment Management Co.: Hello, we’re here with Jonathan Roth of Abbott Capital Management. Welcome.

Jonathan Roth, Abbott Capital: Thank you.

Tom Franco, Clayton, Dubilier & Rice: Another issue I wanted to mention, one that you confront at the university every day, is students who are interested in social issues, ESG-type initiatives. How important has that become in your mix of evaluation tools?

Roth: It’s definitely become more important for us. We became a signatory to the UN Principals a year ago, and it’s been standard on a go-forward basis to ask every potential manager how they incorporate ESG in their investment process and philosophy.

Franco: Is that just to check the box?

Roth: You can say it might be just to check the box, but in reality, when you think of private equity, it’s all about G—governance, right? The point of building businesses is often having an active, productive and involved shareholder, and that’s about governance. For us, we’ve always been big on the G part and now it’s a matter of factoring E and S in the entire process.

Franco: How do you guys think about it at Washington U.?

Feder: We have a bit of a different position and I can speak for myself, not for the institution. For myself, I’m part of YM Adam Endowment—it’s because I really want to be part of a university community and part of that means being part of the educational mission. I view what we do at the endowment office ought to be part of that, with respect to ESG or socially-responsible investing. Again, speaking for myself, I think that’s the area that we should welcome dialogue on, but it doesn’t mean that since you welcome the dialogue or discussion, you get your way. It means that there’s an obligation on our part to explain what we do and why we do it, and to be part of that process of intellectual or experimentation and helping educate young people.

Again, I’m not speaking for the institution, I’m speaking for myself. More broadly, we take this very seriously at Wash U., and I won’t go into the details of it, butsocially responsible investing is something that is taken very seriously all the way up to the trustees and the chancellor. For myself, I think it’s an important part of why I’m at a university.

Franco: Jonathan, is clean tech, in general, a fertile area for investment in private capital?

Roth: Based on what we’ve seen to date, coming out of the period of, I’d say, more robust cleantech investment, probably beginning to tail off in 2012, probably between 2008 and 2011, there was a fair amount of interest in cleantechnology investing. We chose not to invest in any pure cleantech funds, just based on the absence of proven data to show that you could—there was history associated through making strong returns with such a focused strategy. I would say rolling the tape forward, we’ve seen very little positive results from that overall initiative and we’re seeing less and less capital being deployed as a result of some of the disappointing returns some of the VCs invested in, in the prior period.

Feder: Some good news is that hope springs eternal in venture capital. So, there’s a very popular theme around clean tech several years ago. A lot of those projectsrequired a lot of capital and were not capital-efficient. And there was affair amount of capital destroyed through that. That doesn’t mean that we or venture capitalists should give up. Thankfully, the mindset of venture capitalists, at least the good ones, is, “Well, try something else. Let’s try another angle.” I wouldn’t say thematically, but there are investment areas that are pretty interesting right now that I don’t think would have been in place now had it not been for the destruction of capital that preceded it. For instance, what a lot of VCs are doing around food and food supply, and agriculture—

Roth: —Agriculture and water.

Feder: —as well as energy. How much water does it take to make a pound of beef? Too much, so there must be a better way. And capital efficiency may be better with some of these projects, and so forth. So, it doesn’t seem to be we’re at the point where we can declare defeat on any of this, except the good news is that with venture capitalists, and with the capital that’s coming in that’s focused on longhorizon outcomes, it ought to be the case that innovation gets funded and, because of that, profits can be made along the way.

Roth: There will be new initiatives that also don’t turn out to be the end results that are sought. That’s the nature of venture capital business. There will be a handful of interesting outcomes, I would say.

Feder: Also, take life sciences. Because money gets lost every now and then—or not every now and then, more than every now and then—it doesn’t mean we should discourage or think that it’s the end of trying to find treatments for rare diseases or cancers, or so forth. We should be enthusiastic about trying to find the ways forward to fund those activities.

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