Sustainable Investing, AI & the Future of ESG 

Hi and welcome to the Impact on FinTech TV.

I'm your host, Jeff Gitterman.

We're down on the floor of the New York Stock Exchange.

I'm joined this morning by Marian Macindoe.

Marianne is the managing director of sustainable Investing strategies at Parnassus Investments.

Marian, welcome to the show today.

Oh, thank you so much.

Thank you for having me here.

So on our show, we kind of do this thing where we like to find out why people are using their powers for good, which is why are you not in traditional investment banking and you're in sustainable investing at one of the kind of founding firms, as I like to think of Parnassus.

So give us a little bit of insight into why you're Doing good in the world.

Yeah, well, I think like many people, I ended up in my career through a bit of serendipity and a and a bit of hard work, and I started my career out at a proxy advisory firm helping institutional investors make decisions about how to vote on proxies and came to realize very quickly that there is a path in financial services to help shareholders protect and promote value, to protect and promote value for shareholders, and also to be doing things that are good for the enduring businesses. like taking care of people and taking care of the environment, and then I've just stayed on this path ever since from Glass Lewis through to now being managing director at Parnassus.

So talk to us a little bit about the sustainable investing world.

We've gone through a lot of changes over the years.

We've both kind of been on the side of being very involved at ESG and sustainable investing.

Just give us a little insight into where we're kind of at in the world of sustainable investing.

What's changed?

Uh, yeah, well, let me take a step back and talk a little bit about what Parnassus does, uh, and then I'll share a little bit about my background, and, and I think through that story you can see where sustainable investing is and how we do it at Parnassus and also where the, where the. is gone.

So Parnassus is about a $36 billion investment manager out of San Francisco.

Uh, we have eight strategies, uh, two of which are, uh, ETFs.

Uh, we're long only, uh, all equity, all active, and we apply sustainability criteria to every investment decision that we make.

Um, by way of background, um, I've had 4 jobs before this one.

I mentioned Glass Lewis, um, but 2 of those jobs were at companies, and I worked at Uber.

Uh, my most recent job, I was the head of ESG strategy and engagement at Uber.

Um, I worked at Chevron as an advisor on sustainability and governance issues, uh, and I worked at Charles Schwab as a director of investment stewardship there as well.

And when you look across my resume and you see these jobs, and they're so disparate, and you think, you know, what is pulling oil out of the ground and turning it into gasoline or other products or, you know, ride hailing or food delivery or proxy advice have to do with being Um, um, head of sustainable investing at Parnassus.

But the fact is, across all of these jobs, I've sat at the intersection of sustainability and investors, and across all these roles, I've had the same job, which is to make money for investors.

So for the last 20 years, um, I've made the same joke, which is that when I come to work, I stop caring about people in the environment.

I take my, I care about people hat and My environment hat, I hang it up and I put on my monopoly man mustache because my job is to make money for investors.

And that was my job at Uber.

It was my job at, uh, Chevron.

It's my job now at Parnassus.

And then I always hope that the, you know, the lights don't go out and everyone says, wow, you know, Jeff's guest today sure is a sociopath, uh, because the fact is that it's the same story, right?

It's It's the same story that if you are a company, if you're a business, and you don't take care of the natural and human capital on which your business relies, you will not be successful in the long term.

These companies, all of us, every company on the tickers here, like we all operate in ecosystems of stakeholders, uh, your employees or your customers, your suppliers, your regulators, or, you know, for.

Companies with strong operational footprint, your fence line communities, and you have to fit into that ecosystem to be successful.

And, and every day you can see companies that are missing out on value or losing value because of their treatment of stakeholders.

And you know, my streaming algorithm pushes corporate malfeasance, documentaries and movies, and you can watch companies making decisions to prioritize.

Advertise short term returns at the expense of quality, at the expense of enduring returns and long term shareholder value.

And I think that sums up how, you know, I think about sustainability and how I've thought about it for the last 20 years is companies that do take care of people, companies that do take care of the environment and deliver safe products and services and have strong governance, um, are the ones where we want to invest.

So we talked about a little bit of what's constant in the whole sustainable movement and trajectory, but a lot has changed over the past few years, and there's been ESG as the front headlines, and a lot of people took ESG out of their marketing materials.

Where do you think the industry is? right now and and is it going through a revolution or evolution currently?

Well, I'd say it's been a wild ride the last 20 years that I've been doing this.

I started doing this work in 2005, so right in the wake of Enron.

And there was a raft of regulations and legislation that came towards improving corporate governance at listed companies and right before the great financial crisis when there was new accountability introduced for auditors and other firms and you know, Parnassus started in 1984 when the term ESG didn't even exist and it was mostly socially responsible investing.

Uh, where revenue thresholds would determine, you know, whether stock was or wasn't suitable for values-based investing, and a lot has changed since then.

And I think the two main things that have changed are the information that's available now to investors and produced by companies, uh, and also the market itself, uh, in here, you know, speaking about it on the floor of the New York Stock Exchange is a, is an apt place to be doing it.

And one number that I often think of is, is 90.

Which is 90%, actually a 92, 90% of the S&P 500 is intangible now, right?

So you think about, you know, all these intangibles as your trademarks, your licenses, your technology, but it's also social media following, your social media following, exactly, your reputation, your ability to attract and retain customers, your ability to attract and retain and engage employees.

And this in 1976, that number was 17%.

So you think about from 1976 to today, what a reversal that's been of where that value is embedded.

And, you know, in 1975 was when the Supreme Court definition of materiality came out, right?

So a lot has changed since then, and all of these changes have also changed the information.

That investors need to make quality decisions about companies.

So the market's changed.

And so because of that, the information that investors need has, has also changed, and there's a lot more information out there in part because of sustainable investment, in part because of shareholder advocacy.

There's a lot more sustainability reports, and you know, while there may be ebbs and flows in, you know, regulation around this.

The trend has been for more, uh, and it's not just investors as well.

It's, it's companies who are putting this information out because they're doing materiality assessments and determining that doing the right thing actually is good for their businesses.

One of my favorite evolutions that I've seen over time talking to companies is, you know, I would say the preponderance earlier in my career when I would talk to companies about their sustainability management, talking to an executive or a manager there, and you want to find out who do you report to, right?

And so you ask, who do you report to?

And I would say in a long time ago, or, you know, when I started.

Um, it was often in charitable functions or philanthropy functions, social investment functions, you know, the cover of the report would be an op, correct, and that was the next evolution was, you know, it moves on to communications, you know, they, when companies realized they should be engaging stakeholders on this information because people like it, right?

Many people like it.

Um, and then a lot of times in government affairs, but now I would say many, many companies have moved their sustainability functions to strategy, and that says a lot, not just about those companies, but about the evolution of the market and the evolution of this information over time.

So I'm curious, because as you've seen the kind of ESG moniker fall to the waveside a little bit, and a lot of companies kind of changed their marketing focus.

I'm just curious if you've seen what I've seen that the function and the role really hasn't changed, and what the companies are actually doing about these themes hasn't really changed.

They might just be talking about it less than they were talking about it before.

I, I think that's true.

Uh, I also think that materiality is materiality no matter who's in office, right?

So companies that are doing These things, continuing to set science-based emissions targets in 2025 and 20206, continuing to prioritize stakeholder relationships, and I have not seen much change in how companies are approaching these issues.

I have seen change in how they're choosing to disclose it, how they're choosing to discuss it, and certainly changes in terminology.

So in your role at Parnassus, how do you work with the investment team?

How do you engage with companies across the Parnassus investment landscape?

Give us a little bit of insight into that part of your role.

Yeah, well, I think notably and importantly to me when I took this role, my team is part of the investment team.

You know, my team's a sustainability team, and we are part of the investment team, and we work very closely with our PMs and analysts, and every PM and every analyst at Parnassus is a sustainability analyst too.

Uh, and before we invest in companies, we evaluate the sustainability characteristics of the company and try to say, how does this company make money?

Uh, and what are the, uh, environmental and social characteristics of this company that we think, uh, could make the company, uh, could introduce risks or opportunities to the company, uh, and then evaluate those on, on various dimensions.

Uh, once we've evaluated the company for sustainability, we decided, yes, we like you, you're one of the companies that we're gonna own in our funds.

That's where the stewardship activities come in, and my team manages the stewardship activities as well.

Uh, we define stewardship as, uh, engagement, proxy voting, and.

Industry advocacy and I'll talk a little bit about engagement, although I'm a huge proxy voting enthusiast, we're in the middle of proxy season right now, um, but I think engagement is very important and it's important to identify issues that are material to the companies that we invest in because I don't believe that you will make a difference at a company if you can't tell the story of why action on that issue matters to the business because they're fiduciaries, we're fiduciaries, and it's their responsibility to be delivering value for.

Their shareholders.

So when we pick an issue or we pick a company, we always want to make sure that the story that we're telling and the questions that we're asking or the actions or improvements in performance and disclosure are consistent with the way that company makes money, because that's how you'll end up making improvements, right?

Improvements for shareholders and around value.

I love what you're saying because I feel like for a little while, up to a couple of years ago, ESG kind of became a hammer looking for a nail, and there were departments at investment companies that were asking.

The same set of questions to every single company.

Here's a form, fill it out.

That's your ESG disclosures.

But what you're talking about is real engagement and understanding what issues actually matter for that company in the marketplace, not the same set of questions for every company across the board.

So I like the uniqueness of that approach.

Yeah, it's more nuanced, right?

And I think that the, the changes in the market and changes in available information have made that possible in ways that it wasn't possible for.

So you've spent a lot of time on chemicals.

Safety in consumer products.

Talk about why that's a big investment criteria and kind of view that you're taking across companies.

Yeah, so I think a lot in Time magazine spreads where there's big numbers just splashed and it tells a story.

And one of the numbers that I think of with chemical safety is 350,000.

There are 350,000 chemicals in global inventories and counting, probably a new chemical while we're talking, and less than 20% of those have been tested for toxicity.

And even fewer for effects on children.

And even this is even as research comes out demonstrating that many of these hemores are hazardous to health, hazardous to the environment.

There's been a 35% increase in childhood cancers, a doubling of male reproductive birth defects.

There's a 79% increase in cancers for adults under 50, right?

These are real.

Health issues for real people and there are also issues for businesses as well.

Uh, you know, many of these chemicals are known carcinogens, so this, this really matters to businesses and hazardous chemicals represent risks to business.

Uh, I think this can manifest through, uh, fines, through litigation.

Uh, through, uh, changes in regulation where you have to, you know, retool your projects to, uh, products to meet new standards.

But most importantly, in my view, is through consumer trust and consumer behavior, because when consumers understand what hazardous chemicals are in their products, uh, they're more likely to change their behaviors as well.

So imagine you're going to the store, you're going to buy shampoo.

Shampoo or conditioner or dental floss, and guess what?

These hazardous chemicals are in those products some of the time, right?

And so you go to a store, you go to your local grocery store or a big box store, and you're trying to buy these products, and you're putting it on your skin, and you're putting it in your hair and, and you're putting it on your kids.

So you want to know that those chemicals are safe, uh, and we want to safeguard.

You and your family, but most importantly for our, for our investors, you know, we want to make sure we're safeguarding enduring business value from these, from these, from these companies.

I mean, look at Monsanto and all the trouble they've gone through what they are buying them and all the lawsuits and settlements, Johnson and Johnson.

I mean, yeah, absolutely.

There's a long list of companies who have lost consumer trust because of product safety issues, and we, and we.

Want to avoid that.

So, for, we own the companies, uh, and engage them on chemical safety.

This year we've focused primarily on consumer facing.

So that you think, you know, your shampoo, your deodorant, um, to get them to, number one, we want them to know what chemicals are across their brands and products.

And it might surprise you, you know, they don't.

They often don't know, or at least they may not know cumulatively, like what is.

The impact of the chemical chemicals in these products, then we want them to manage those chemicals effectively and where it's feasible to transition to safer alternatives.

And I understand in some use cases that's not possible.

And, you know, we buy these companies because we like them.

We buy these companies because we think they're good investments.

And, you know, they, we trust their judgment on many of these things, but we bring to the table, uh, Knowledge, uh, and information about resources to learn more about how to do your chemical footprinting, uh, and then what kind of safer alternatives are available.

So it's amazing we're talking about safer alternatives.

Let's jump to AI and talk about how do you look at AI and what consumers are interested in about AI safety and controls around AI and what is Farnasa's engagement with companies around this issue.

Well, let me start by first acknowledging the enormous potential that AI has for creating value for shareholders.

I mean, we've seen that play out in the market, right?

But as a sustainable investor, I also want to acknowledge the enormous potential that AI has to make society better, uh, to improve climate change, um, just staggering implications for health.

So, I was listening to a podcast the other day about matching existing pharmaceuticals with health conditions.

You know, trying to find on and off label uses for these in ways that humans have not been able to or have not strived to do.

And I'm a, I'm a type one diabetic.

I'm very excited about an artificial pancreas someday.

Um, I'm excited about precision agriculture.

Uh, I'm excited about implications for climate change and water.

AI can do all of these things.

AI also carries risks, and I think, you know, ripped from the headlines, that's what we're seeing is people, regulators and communities starting to be more and more concerned about the upstream impacts of this surge surge of AI and also the downstream impacts on human rights, right?

So I think that what we're focusing on as investors is we want the companies we're invested in, particularly those that are developing artificial intelligence capabilities, most companies are deploying, and that's very important as well, but also developing these technologies to be thinking about.

A human-centered approach to AI, right?

And so for us responsible AI means it's good for the business and it's good for people, and you have appropriate governance in place.

Like this is a lane shareholders operate it is governance, right?

So we want a good governance.

We want the right people in the room with the right information.

We want.

Accountability for decisions.

We want guardrails.

So think policies that these companies have in place or principles that they're relying on as they're building out these technologies.

And then the policies we don't want sitting on a website or on a desk.

We want the policies to be implemented in operations.

And you know, I've had many conversations with IR people or company representatives where they proudly discuss, you know, this is our policy, this is our, our human rights policy, this is our environmental policy.

And then when you ask them about implementation, it just, it just goes blank, and you say, well, give me an example of a time when the guard rail triggered and you were not able to pursue a project or you changed a project and, you know, understanding confidentiality, like you can also see that there's just not an answer, like, so what we want to see is companies that are have the policies and then have ongoing monitoring.

And transparency not only to their customers but also to their investors.

And that's what our engagements have focused on now.

We actually put out a set of investor expectations on responsible AI that's on our website, which is probably for me at least my number one piece of collateral that people ask for because companies ask for it because they want to do this too, and investors. want to because they say how by what yardstick should we be measuring these companies when it's moving so quickly and we don't want to stymie innovation.

We want to, you know, I think of AI sometimes as a like brakes on a race car or responsible AI is brakes on a race car where it's like they're not there to slow you down.

They're there to make sure you can go fast, safely.

And that's the approach that we've taken to engaging on AI.

So that's the social concerns.

Are you looking at also the energy usage, the water usage?

I had a big pivot to adding nuclear back into your screening at Parnassus.

Is some of that because we're looking for cleaner, safer ways to drive a lot of this energy demand that AI is bringing to the marketplace?

You're absolutely right that AI is increasingly an infrastructure storage, at least here in the United States, you know, already having strained infrastructure as well, aging infrastructure and demands on grids already.

You know, this is an introduction and unwelcome for climate change, of course, and what we're seeing is AI colliding with real world constraints on energy.

Real world constraints on water and real world constraints on trust.

You know, that's just sort of an umbrella for this dissatisfaction that communities are, are experiencing around AI.

So let me talk a little bit about the energy usage of, of AI is, um, right now, data centers, uh, use about 1.5% of energy in the world, and that's projected to be 9% by 2030.

So there was recently a, an AI buildout in Texas that was anticipated to have use as much energy as the city of Chicago, right?

And these strains are in these communities.

They're, they're very real, um, or, you know, talking about water, for example, is The Large data centers can use 5 million gallons of water a day, and that's about the same size as a city of 10, to 50,000 people.

So just think like Harrisburg, Pennsylvania or Palm Springs, California.

Like that's the size of use that we're talking about.

And then you multiply that by thousands of data centers across the US and across the world, and the very Local impacts of water get very real, very fast, and companies are also running into constraints, uh, political and regulatory constraints.

There were over 1000 bills introduced in legislation across all 50 states.

Talk about bipartisan issues, right, across all 50 states about AI, um, moratoriums on building in local areas and.

I just saw last week that Erin Brockovich, speaking of corporate malfeasance warriors, launched a website to crowdsource data center complaints from communities, right?

So this is, this is becoming a constraint too is companies' ability to operate in these environments and and the energy issue is a very difficult one to solve, and it is a representation of the evolution of how sustainable investors and specifically Parnassus has thought about these issues as the Demand for carbon has changed and demand for energy has changed, and a need to consider this low carbon, no carbon, reliable source of energy alongside renewables, alongside improvements in storage capacity and geothermal, and even gas with discipline, right?

Like this is something that we have evolved to.

To believe and to think and to act on, um, but it's absolutely something that we're all going to have to be grappling with as, as, and, and maybe AI can help us solve some of these problems as well.

Well, Thomas Friedman said the two things that will kill us are climate change and AI.

We just have to hope that AI will solve climate change in time.

So that, that sounds right.

Yeah, um, so, ending thoughts, anything you want to share with our audience about Parnassus or what you're looking at into the future?

Uh, yeah, what I always want people to take away, whether you're an investor or uh you're a company or you're just a person, is that it's very important that companies operate and recognize that they operate within these systems of stakeholders and that caring about people, minimizing your environmental footprint, taking care of your employees, delivering safe products like that, that's part of being an enduring business.

And I think you see that with some of the businesses that have been around the longest, right, is they recognize that these are important issues that are Integral to delivering value and not an obstacle to me.

For sure.

Marianne, thank you so much for being on the show today.

Well, thank you for having me.

Thank you.

That's it for the impact on FinTech TV.

I'm your host, Jeff Guterman.

Until next time.