Will Jefferies Succeed In Bringing ESG Credibility To Wall Street?

In their April 2022 leadership letter, Jefferies CEO Rich Handler and Chairman Brian Friedman, focused on honesty and the importance of doing good, not emphases you might expect from a niche Wall Street financial services player with a market capitalization of $7.6 bn.

Aniket Shah, an Oxford PhD, joined the firm a year ago as Global Head of Environmental, Social and Governance (ESG) and Sustainable Finance Strategy. Aniket worked previously at UBS and OppenheimerFunds, is a Senior Fellow at the Columbia Center on Sustainable Investment and was, among others, instrumental in the articulation of the UN Sustainable Development Goals. Aniket is at the forefront in pursuing the symbiosis between sustainable practice and Wall Street banking acumen. I spoke with Aniket recently to find out what he is hoping to accomplish at Jefferies and what he sees as the opportunities and impediments to furthering the goals of ESG.

F. Can you briefly describe your new role at Jefferies and what made you decide to join Jefferies?

A. I joined the firm in April 2021 as Global Head of Environmental, Social and Governance (ESG) and Sustainable Finance Strategy. My remit is to advise both corporations and institutional investors as they are trying to navigate the maze of ESG and all its related acronyms. I chose Jefferies because it is an incredible entrepreneurial firm, yielding remarkable growth in recent decades fueled under the visionary leadership of Rich Handler and Brian Friedman. Both have created a corporate culture that allows employees to focus in on their clients’ interests coupled with rapid and efficient execution methods. Why is that important? ESG has become so complicated, so bureaucratic, so sclerotic, that my team and I needed to be in an environment that allowed us to say what is right, to move quickly and provide useful guidance on this space. It has been a remarkable and truly fun first year.

F. Which are the largest ambitions that you would like to see achieved in your current role?

A. The single largest ambition is to simplify for our clients and to focus their attention on the most commercial and most relevant parts of ESG for them. I am hyper-focused on prioritization and on driving materiality-based thinking for our clients. In the absence of such drive, ESG can become anything and would not serve our clients’ purposes.

My second ambition is to open a structured discussion around human capital and corporate culture as an ESG topic, next to net-zero emissions by 2050.

Net-zero is the energy transition ambition to steer a global $100 trillion economy, growing annually at 3% and emitting 55 Gigatons of CO2 equivalent, to net zero emissions by 2050. This is a very complicated and well-worn topic; the investor community and corporations are starting to understand.

As a firm, we are convinced we can add value on the topic of human capital and corporate culture. We are living through a period, due to the pandemic, social changes, and the resignation, where people are reevaluating how they want to work, where they want what to work, and what an office and colleagues mean to them. How companies decide these vital human capital concerns and how they shape their corporate culture, how investors integrate human capital dynamics into their capital allocation analysis will ultimately drive alpha (an extra return over the market yield) and will engender an improved outcome for hundreds of millions of people.

F. From an ESG perspective, what are the largest impediments in the current financial system represented by, respectively, each of the Environmental, Social and Governance considerations?

A. The biggest impediment to implementing effective zero-emission strategies is public policy. The financial world will finance risk-reward driven energy renewable or carbon capture ventures, but there is a need for greater political consensus on how larger economies will decarbonize. Capital markets will finance the energy transition but there needs to be political support and an ensuing framework. From the social side, the crucial challenge is awareness of the right way to analyze assets. There is a need for institutional knowledge on how to build inclusive, analytical frameworks to understand human capital and corporate culture.

F. The SEC recently released their proposed mandatory Climate Risk disclosures by public companies. What would you have recommended differently or additionally?

A. The SEC achieved a truly remarkable moment in both its history as well as that of the capital markets. The SEC delivered a monumental climate risk disclosure milestone, even more comprehensive in scope than anticipated. One could have hoped for making Scope 3 emissions (the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain) mandatory for all companies, not just if deemed material. Scope 3 emissions are only meaningful if every company is compelled to disclose, but the overall cost burden is a mitigating counterargument. From a global scope, I hope that interoperability will prevail between SEC disclosure requirements and the European taxonomy for sustainable activities, over and above their Sustainable Finance Directive (SFDR), released in March 2021. Avoiding duplicative efforts is of the essence.

F. Thirty states in the US have now allowed sports betting. Yet there is no widespread product innovation and opportunity for institutional and retail investors to trade in futures and options around prime climate change variables like the daily observations of CO2 PPM in the atmosphere or the evolving Emissions Trading Scheme (ETS) prices in Europe, China and California. What’s your explanation of that?

A. My view is that we are getting there. Until recently, there was no belief in the longevity and the durability of the carbon markets to impact climate change. The compliance Emissions Trading Scheme (ETS) market in the EU, started in 2005 only 20 years ago. The first ten years were very challenging, with a full price collapse during the 2008 financial crisis. With the ETS market in China taking off now, the largest in the world, we still have only 28% of total carbon emissions covered. The World Bank estimated that the current weighted average carbon price stands at $3 per ton of CO2, some way off from the current Euro 90 per ton of CO2 in the EU ETS market.

F. ESG ratings have been problematic in terms of coherence and consistency. What is missing in the approach and why is there such a divergence?

A. ESG ratings are an answer to a non-clearly delineated problem. Anything that contains subjectivity will engender different methodologies and eventually divergence, just as we experience divergence in credit risk ratings.

We have always been critical of ESG ratings. ESG is subjective content matter and ratings are not what this project is about. The ESG related data quality is still fragile, and companies are complex entities that can’t be boiled down to a single letter or score.

We recommend that investors apply judgment. What are the core key material issues, from an ESG perspective, that drive a company’s value and how is this company evolving as compared to its peers? In some circumstances a qualitative assessment might be appropriate and in other circumstances a quantitative metric may be used. The ESG ratings are a misplaced hope for an elixir that never was going to come from the rating community.

F. The four largest central banks have now more than $30 trillion on their balance sheet. Has this been a wasted opportunity to allocate public money to the largest societal challenges?

A. The role of central banks in terms of climate is a complicated one. The Network for Greening the Financial System is eliciting different perspectives and they have become a body of knowledge around the topic. In my view, central banks should not print money to finance a climate transition. That is not their role. Central banks are in the business of price stability, employment, and financial supervision. That should be their focus. If money is to be provided for energy transition it should happen through the fiscal system. There is going to be a price for such an approach through taxation or borrowing. We must decide this calibration through the ballot box.

Why am I in favor of such a pathway? The reason is sustainability. A 30-year transition should not be the decision purview of central bank governors, who change over time. It is elected lawmakers who should be focusing on this and who should get their mandate from voters.

F. AT COP26 in Glasgow last year, Mark Carney launched Glasgow Financial Alliance for Net Zero (GFANZ) aiming to generate $130 Trillion in Climate Finance commitments from the global financial sector. Is Jefferies part of the effort and for how much? And what would be true and verifiable Key Performance Indicators to consider the overall effort a success? What is currently missing in the approach?

A. Jefferies is not a member of GFANZ. I am not a representative of what Jefferies undertakes at the corporate level regarding climate, I do however advise their corporations and institutional investors on climate and ESG.

GFANZ should be commended for raising awareness and involving more than 100 institutions, and some of their key staff, around the topic of reaching net-zero by 2050.

GFANZ should now focus on what it would take in terms of public policy, corporations, technology, customer demand to reach carbon neutrality as a 10 billion people economy by 2050. GFANZ should further endeavor to define what role investors could have in shaping that future.

Engaging with companies is all well and good, but ultimately you must engage with policy makers and elected officials. Divestment from fossil fuel assets may make your portfolio aligned with some recommended pathways, but it doesn’t do much in terms of putting new capital into the solution potential. Often divestment will drive capital away from companies seeking transition.

The recent IPCC Working Group 3 report conveyed a clear sector-by-sector approach of what is needed, including on the demand side of the question. GFANZ should spend more time on these sections. We support the GFANZ spirit, but a lot of detail needs to be filled in. We are spending a lot of time with our clients on that.

F. Nestle CEO Mark Schneider has halted Russian sales of its brands as a result of public tweets about the brutal Russian assault on Ukraine. How would you advise CEOs to handle geo-political tension and human rights issues?

A. The Russian invasion in Ukraine has been a tragedy in so many ways on the human level. But is has been fascinating to observe how investors and corporations responded to it. We have seen several 100 corporations and investment companies halt activities or divest from Russia. Some driven for commercial reasons, some for ethical considerations and some for reputational risks. This is a difficult topic for CEOs to handle because geo-politics are tough and operate often in a grey zone. A nuanced approach is absolutely needed. Companies need to be aware of the unintended consequences of their actions. What is the impact of their action or divestment in one year, three years and ten years from now?

So how would I advise CEOs to handle geo-political tension and human rights issues?

Firstly, get educated, bring in outside expertise, learn from human rights organizations on how to integrate human rights analysis, understand the frameworks that exist. Make this an educational project to start with. Secondly, develop a formal decision process and introduce structure. They can’t just spontaneously withdraw or divest – they need to engage with the larger cohort of investors, their board, regulators, and customers. Thirdly, educate the public on the complexity of these issues. There isn’t a simple answer in a very complicated world. I wish we would use the Russia-Ukraine war as a teaching moment.

F. You have talked in your daily briefings about “degrowth.” What is your best definition of the concept, and how do you contrast this evolving notion with ubiquitous growth in nature?

A. We hosted several calls about the topic of “degrowth” earlier in the year. Many of our clients were surprised. To reach the 2015 Paris Treaty goals, there is a need to decrease material consumption to ensure a sizeable drop in fossil fuel usage. Investors need to understand that it is becoming abundantly clear that temperature rises below 1.5 degrees Celsius, even two degrees Celsius are totally off the table. We will consider ourselves lucky to experience less than three degrees Celsius temperature increase by the end of this century. The change in consumption habits, influenced by a combination of activists’ campaigns, elected official decisions and shareholder resolutions will modify the analytical risk valuation perspective. The perpetual growth paradigm is one the world might no longer allow. In this context, I like to point out that the latest IPCC Working group 3 Report conveyed that significant lifestyle changes can lower 40 to 70% of greenhouse gas emissions by mid-century. It is remarkable that the scientifically endorsed IPCC report is aligned with the notions of degrowth.

F. How can Wall Street and ESG compliant asset managers incorporate the voice of the Southern Hemisphere?

A. Climate change is a stock issue and not only a flow issue. Carbon dioxide released in the atmosphere stays present for thousands of years. Since the industrial revolution, the EU and the US have been responsible for most greenhouse gas emissions. From that perspective, it is only logical that more runway and resources are offered to the emerging and developing world to pursue their policy ambitions and decarbonization strategies. Furthermore, high income countries should compensate the developing world for their efforts in achieving energy transition. Investors should advocate for that going forward.