Ep 2 - Simon Mundy - Accountability in ESG

Introduction: 

Hello everyone. And welcome back to ESG in VC, a podcast exploring all aspects of ESG-related topics and diving into complex issues associated with environmental, social, and governance measures. I'm your host Oksana Stowe. In this podcast, you will hear from Simon Munday. Simon is a Moral Money editor at the Financial Times covering ESG issues for the world-winning Moral Money platform and across the wider FT. He began his reporting career in Johannesburg, where he covered Southern Africa for the FT, before period writing on the London financial sector. 

He then spent seven years in Asia, heading the FT bureau in Seoul and Mumbai, and then two years travelling across six continents while writing a book called Race for Tomorrow. It was recently released. It's a great book on the global scramble to respond to climate change told through personal stories that make it even more real. Do check it out. 

Oksana: 

Hi, Simon. It's great to have you with us.  In this podcast, we cover all three aspects of E, S, and G, and you have dedicated more than two years to collect incredible, personal stories that in different ways, touch on all three of these in your book. 

But before we dive into your book, I would like to start with your FT role if that's okay. You as a Moral Money editor, and this is a relatively new coverage for FT, would you be able to elaborate a little bit on how it emerged, how you go about finding stories and interesting topics, and why you decided to lead this effort?

Simon: 

So Moral Money was set up a couple of years ago by my colleague, Jillian Tett, who's based in the US. She became quite well known because she, ahead of the global financial crisis of 2008, she was writing a lot about the potential dangers of mortgage-backed securities, as she turned out to be very prescient.  With ESG, again, I think she was ahead of the curve, because several years ago, she spotted that this was going to become really important and central theme in global business. So she with colleagues set up this platform called Moral Money. What we produce is published on FT.com and also goes out as a newsletter currently twice a week.

It's looking at the flows of money, how these affect the social and environmental impact of business and finance. It's a very big subject and it's something which is really increasingly top of mind for a lot of people in global business. I think when I started out as a generalist around 2009, social environments impact, these were things that I think a lot of companies felt they had to seem to take seriously and that they had to seem to care about them.  They didn't necessarily put in a lot of time and resources into addressing them. 

I do think that's now changing. I think a lot of companies are realising that it's no longer good enough just to come up with an attractive seeming marketing campaign or something around this. You have to actually take it seriously. And that's why I think there's a lot of interest in the work that we produce at Moral Money because a lot of people in business and finance really do want to stay on top of what's happening in the space. I joined that team a couple of months ago now having finished my book that I was working on and said, it's really, for me, it's a perfect thing to be focusing on right now because there is no bigger story in the world right now, as far as I’m concerned. 

Oksana: 

And now coming back to your book, I guess storytelling is something that resonates with most of us and you have done an incredible job collecting all these various stories across six continents. I think you might get this question a lot, but which one had the most lasting impact when you were collecting those stories?

Simon: 

Well, there are so many, as you say, so the range of characters featured in the book, and these were people that I spent time with on the ground, in most cases in their home countries or in their place of work. So they range from Prince Abdulaziz the Energy Minister of Saudi Arabia to herdsmen on the plains of Afar in Ethiopia to the winemakers in Chile and cobalt miners in the Congo. So all of these really made a deep impression on me. I think one of the deepest impressions on me was made by what I just mentioned, actually, the cobalt mining industry in Congo.

So I went to a town called Kolwezi, which is in the southeast of the Democratic Republic of Congo. This is an enormous country. It's 19 million people, it is an area, the size of Western Europe. It has fewer miles of paved road than Wales. So that's an extremely large, but extremely poor country. And the reason it's so poor, I think is fundamentally it's to do with many years of bad governance, both under Belgium rule and then in the years that followed the colonial era. The thing is that Congo is actually very closely interwoven into the global economy. It's the greatest source of mineral wealth. You have a lot of big foreign companies involved there. 

So when I went to Kolwezi, I saw a bit about how this plays out at the local level. There is an area of Kolwezi called Casulo, where one day a man was digging a pit toilet behind his home, and he struck a seam of cobalt. He recognized that immediately because this is mining country and he stopped digging a pit inside his house. And then the secret, he did it inside his house because he didn’t want the secret to get out, he wanted it to be his own private mining operation but then his neighbours realized what was going on and soon everyone started mining all over Casulo. Just people sinking pets around the houses, incredibly dangerous, going very, very deep into the grounds. These shafts would often collapse because they were not dug in modern, safe ways.

So when I got there, one area of Casulo had been requisitioned and taken up by the government and handed over to a Chinese mining company, but that was still a lot of mining happening in Casulo. I went down inside one of these mines. It was very scary to be honest. I mean, it's a 40-foot drop to get down. Now you can sort of go down with your hands and feet sort of pressing against the sides of the mine shaft and you get down there and you're crawling around and your belly inside there. And these mines collapse all the time.  The cobalt that comes from there, it's going increasingly for the most part, into electric car batteries.

So the miners in Casulo, they sell the cobalt to Chinese traders on the edge of town. The cobalt from there gets sold to big Chinese companies. They refine it, and it will end up in batteries, that in many, many cases now got into electric cars. It's shed a light for me on the complexity of the modern supply chain.

I think it's important as we look at investment into low-carbon industries, it's very important to achieve the highest standards we possibly can with things like supply chains. It’s also important to think that we need to address the broader problems that are driving these particular issues on the ground.

For example, in Congo, there's a lot of concern about the proliferation of illegal mining, especially child labour. There've been a lot of children working in these mines. But it's not good enough just to eliminate child labour because you have to think about why these children are going to work in mines in the first place, because this is an incredibly poor country and that's in part because they have incredible problems of corruption, which is partly done by or goes on with the involvements of foreign companies. 

I think we really need to think very, very carefully when we think about, for example, the green energy transition. It's not good enough just to say, okay, well this particular product is low-carbon and we can leave it at that. We need to think about supply chains. We need to think about issues of governance in countries around the world. 

This is a very, very complicated problem to fix, and that's why when we think about ESG, we do have to think about these issues in the broadest possible sense because it ultimately comes down to the lives of individual people all over the world. That's something that I tried to shed light on to some extent in the book. 

Oksana: 

Agree, and I think this is why the frameworks are expanding and more transparency is being sought after, but it's still very difficult because you're sort of done your tick-the-box exercise and yes, as you say, at some points, a trader checks out, but what happens afterward might be a bit more complicated and you just don't have the means to seek that transparency. So, agree. 

You also have met a number of entrepreneurs. Do you think that the start-up venture community has a shot at being able to deal with the complex issues around all of the ESG components in a sort of more progressive way? Or they have their own problems? 

Simon: 

I mean, if you're a relatively small company as most start-ups are, then to get, for example, let's say you're dealing with lithium-ion batteries and to get visibility into the full extent of your supply chain, all the way back into Congo, where your cobalt and your lithium-ion batteries probably come from, it's very, very hard. I think we need systematic changes.

We need to have better systems of assessments and accountability. I think it's also worth thinking about how much we can expect of those systems. I think something I've noticed with a lot of ESG assessment systems, which, for example, if you're a start-up, you're not going to have your own big team of people going out and doing exhaustive assessments all over the world. You're going to rely on third-party assessments almost certainly. 

When you look at the level, the sorts of products that are provided by the ESG ratings agencies, I've been interested to see that a lot of them will have scores. Say, for example, that would be an environmental impact score, which could be for example, 58.24. Those sort of, you know, getting get right down to two decimal places. 

I wonder, is something that I'm thinking about at the moment, so I haven't sort of come down with a judgment. It's something that I want to think about more and research more. Is it useful to have a single score that goes down to two decimal places for something as complex as companies, environmental empires? Because inevitably there's going to be a huge amount of subjectivity involved there in terms of how you weigh the various components.

I think we need more assessment. We need more accountability. We need more data, but we also need to be quite clever and careful about how we use that data. Because if we take a rather simplistic approach and don't take into account the real, huge complexity of the things we're working with, I think we might start getting a bit offtrack. 

Oksana: 

 interesting and I think that’s also part of the solution. And once again, it's quite complex. It's way more complex than checking numbers in a way even though that itself has become a very sophisticated system. But audit is one of the solutions where you have a credible party auditing some of those scores and sources of data. But once again, we still can manipulate numbers even on financial reporting. It is quite important. And also everything is so intertwined, in my opinion, adding an extra layer of complexity to it all. 

But sort of maybe my last question is around kind of taking into maybe a more high-level view that we, as a society evolve, climate evolves, and we tend to sort of sometimes maybe forget that certain issues in certain changes are part of evolution. For some, it's quite difficult to deal with it. Do you think at this stage of maturity of human evolution, we have enough tools to deal with all of those challenges in a sort of good way or a human way? Or do you think that there will be a crisis and those crises will lead to solutions?

Simon: 

Yeah. I mean, it's a really important question. I think the fact is that right now we are obviously not tackling this in the way that is needed. The question is, could we? I think physically we could, I see no reason why we couldn't. If you think about the amazing resources and ingenuity that we have as the human race. Absolutely, I think this is within a power to address this. 

To keep global temperature rise below two degrees. I'm not sure it's any longer possible to keep it below 1.5, but I think two degrees from what I can make out, if we really got our act together, we could.  The trouble is that we have a system at the moment that is still reliant on fossil fuels and has many other features that are perhaps not optimal.

For example, you have a large number of people who are paid many, many millions of dollars a year and more. And you have people who have billions of dollars in wealth. Now, I think if you were designing a system to maximize the title amounts of human well-being, you probably wouldn't design it like that, but there are people who are benefiting enormously from the current system that we have.

I think if you were to really tackle the climate crisis, you would have to disrupt a lot of things about the current system and a lot of people who are doing extremely well out of the current system might find themselves doing somewhat less well. A lot of those people would probably be somewhat resistant to that prospect. And a lot of those people are very powerful politically. 

I think that that's one of the issues that we face. I don’t think it's an issue with technical capability. I think it's an issue of political will and ambition. Something that struck me when I was at COP26 in Glasgow was the hugely varying levels of ambition between people. Different people that I spoke to, and especially people in their twenties and younger just seem to have much higher levels of ambition.

We're not so focused on the reasons why something was politically impossible. We're more focused on what could in principle be done and then how that could actually be done. So I think if we have more of the latter approach, then there is a possibility that we could keep the impacts of climate change below truly catastrophic levels.

But I think if we stick to this rather feeble level of ambition, which I think is constrained by how much skin in the existing game that some powerful people have, then I think we will remain on our current trajectory to a large extent, which is a very, very dangerous trajectory, which will leads to enormous numbers of lives and livelihoods lost. 

The stakes are incredibly high. I think we can do an awful lot better than we’re doing. The one thing I think about a lot for example, is the scope to introduce really serious carbon pricing. I mean, various jurisdictions around the world have been experimenting with carbon pricing.

Obviously the EU has a cap and trade system, which is the world's most advanced, but even in the EU, the extent of carbon pricing is way short of what would be needed to drive a real transformation of the economy. And no other jurisdiction in the world is even close. But if we were to push forward with that and various other regulatory and systemic changes that to tackle the problems that we have, then I think that's how we would tackle the climate crisis.

We would also create a different plane for a whole new wave of innovation, a whole new generation of innovative companies. I think that the potential there is enormous, but as far as whether we can do it… well we have to do a lot better than we're doing now, if we’re to get there. 

Oksana: 

Great. Which is a call to action. Thank you so much Simon for your time and for answering all the questions and we speak soon. 

Simon: 

Thank you so much Oksana. Great to speak to you.

Oksana: 

Thanks so much for being part of this podcast and stay tuned for the next episode. Please do not forget to subscribe, rate or follow ESG in VC on LinkedIn, Instagram, or Twitter, or perhaps invite a friend. Until next time, I'm Oksana Stowe and this is ESG in VC.