The Exchanges

Q Why don't we start with your path that led to your interest and current role in this space?

A So it's kind of a counterintuitive that my original Motivation for really getting into the environmental sustainability area is actually related to coal. I grew up in China, mainland China, in the early to mid-eighties, and at the time, coal was a rationed commodity by the central government. And obviously living in a, what is now a small city in China of only 1.4 million people, which in the US would be probably the seventh or eighth largest city in the US. We were dependent on coal for survival, both for heating, electricity, but also for cooking our food. And I actually remember Going to our rationed warehouse, allocated warehouse from the government with my grandfather, retrieving our coal, taking it back to our apartment, and my grandmother would actually use the coal to cook our dinner. So I actually depended on coal for survival. But as I've gone back to visit family every few years, Just seeing the environmental degradation from the massive increase in the use of coal and other fossil fuels, and just seeing the degradation and seeing the health effects on society has made me realize that, wow, like there is a cost to all of this development, which obviously has taken a lot of people out of poverty and really expanded the middle class. But it all does come at a cost. And so that was one of the major reasons why I was really focused on the environmental issues of our time…

AI assessment note: “my original Motivation for really getting into the environmental sustainability area is actually related to coal.”

Q those two pieces. So the first, the kind of notion that this is more or less the same type of manager selection process. One of the differences I would think is that the space is, let's call it newer compared to a traditional long only equity investor who's been around forever. Where do you find a manager that has a track record in a space that hasn't really been around?

A We've been actually fortunate to find managers who have been tested through cycles and who have been able to layer in thoughtful sustainability lens. But of course, there are many more emerging managers as well, both in the public side, as well as in the private side. And of course, we're seeing some newcomers in the hedge fund arena as well. And for those, I would say that it's really probing them on Their sector expertise, if they're investing in certain areas of the market, are they really well networked in those particular industries to both source and add value to deals, right? Both pre-investment and post-investment. Just like when we Due diligence and assess any manager, right, with a little more limited track record. It's their ability to attract the best deals, given their expertise in their networks, and given their specialization, their ability to really pull levers after they invest in a company to enhance the operational outcomes of that business. So in many ways, it is the same framework and the same tools, but you're right in that certainly there are many managers who are Newer, and we have to really dig in on their underlying capabilities and their sector theses.

AI assessment note: “for those, I would say that it's really probing them on Their sector expertise”

Q What are the types of backgrounds that these managers are coming from? That are entering the space.

A Yeah, it's really interesting, and it kind of goes into our sourcing for our platform at Cambridge Associates. I think one common theme we're seeing is well-established investment managers who spin out of larger platforms, and they are tackling a, let's say, a smaller cap part of the market They're focused on a more inefficient part of the market, and they are taking their institutional investment approach and their knowledge base into that more targeted area. We're actually also seeing some, especially on the private side, some operationally focused managers who have spun out of industry, of strategics, and even some family offices who have been very active in certain areas like environmental sustainability and clean energy To start new funds focused on, let's say, resource efficiency or climate change technologies. Because they've been in, let's say, a large industrial organization trying to find innovative solutions, and with some of the bureaucracies that are inherent in the larger organizations, they found it challenging to implement, but in a smaller, more nimble format, they can actually execute and fulfill their theses in a much more effective way.

AI assessment note: “well-established investment managers who spin out of larger platforms”

Q Does it start with a, almost like a bucket? I don't know if you'd call it an asset class, but a portion of a public equity portfolio, a portion of a private equity portfolio that is either thematic based or impact based, dedicated to these strategies. Is that the starting point that typically happens?

A It is one starting point, certainly, for Several of our clients who have started with a carve out allocation to impact investing, where it's focused on certain themes, or it's just a general allocation to broad sustainability impact sectors. And of course, the risk to that is you never expand it because the committee or the organization feels like they've done something and that's sufficient, but you always have to push The envelope and ask the question, okay, what have we done here in this portfolio that has worked? And let's do more of that and expand that to the broader portfolio, because I do think there are many relevant lessons that can be drawn for the broader portfolio. And again, over time, graduate some of those managers into the Broader portfolio and or take those networks and learnings and apply them to everything you do when you're assessing portfolio construction and manager selection. And I think that latter piece is Less concrete, perhaps, but it's also really important because it's about mindset. It's about framing the issues in a way that hopefully drive long-term returns.

AI assessment note: “It is one starting point, certainly, for Several of our clients who have started”

Q Of all of these potential opportunities, what are your favorite themes in the space today for the next bunch of years?

A Yeah, so I think what this current and tragic health crisis is teaching me and informing me is that we really need to think about long-term resilient portfolios, right, in all its dimensions. And to think about building climate resilient portfolios against physical and transition risks from climate change. Need to build socially resilient portfolios, meaning if we have widespread and acute social inequality, that's just going to lead to reduced social cohesion. You have more social unrest, and that's really value eroding for everyone in the system. And so what this current crisis is informing me is that, okay, let's take supply chain. Disruptions that we're seeing across the global economy right now. How do you find opportunities that layer in more resilience on our supply chains, right? There are so many interdependencies, the way we operate in the global economy, that I think there are innovative models of distributed Infrastructure, manufacturing, real-time, more flexible manufacturing, whether it's three printing, for example, or flexible capacity manufacturing to de-risk. Obviously you can't de-risk the whole system, but in certain parts of the supply chain, de-risk so that you are more resilient as a society and as an economy. And similarly, when you think about all the labor disruption that is happening right now, but also over the longer time period with globalization, …

AI assessment note: “So those are a couple of areas that I'm really excited about”

Q When the 151st client comes to you and says, wow, this is really interesting. I'm excited. I want to incorporate this into what I'm doing. How do you take that and turn it into an actionable strategy for that client?

A I think this is where having worked with So many clients who have done this in some way, there are some really early movers in the field that we've been very fortunate to have worked with and helped along the way, and obviously some newcomers, right? And seeing the best practices instituted throughout that time, seeing kind of the pitfalls as well, we can really have an engaged conversation with that, let's say, a 151st client that's asking the questions, that's expressing interest to really say, okay, What are you truly in terms of your mission? What are you about as an organization or as a family? What is the true north of your organization? Whether you are a climate change or environmental focused foundation, which would make it pretty easy to then craft a portfolio around that core mission, or if you're a foundation that's trying to prioritize the well-being of a certain community, right? Let's say it's a region. How do we have a holistic strategy around sustainability and impact that Would make sense for that particular mission. So just like any early conversation with a client, you're talking about not just your risk of return objectives, but also your impact objectives. And so we have a framework at Cambridge Associates where we call it the three P's. So it's purpose, priorities, and principles. First, you have to understand, again, the purpose of the organization or the…

AI assessment note: “we have a framework at Cambridge Associates where we call it the three P's.”

Q Do you find that these people grow up with this interest throughout their careers, or is it something that they come to later on in their career?

A Some of it is they grow up, they find that there are these dire challenges facing the planet, facing society, and they have that mentality baked into their being, to their DNA. And they want to do everything in their power to create market driven solution to address those challenges. Others perhaps come out of it through, let's say traditional industry, through traditional investing, and they have come around to the fact that, wow, these are real systemic issues. And what I've been doing before as an entrepreneur, as an investor, As I look at the world going forward, right, some of those frameworks are less relevant or are not as current to the times that we are living in. And they're focusing further on these, again, real world solutions to these challenges. And so you see a combination. Some are channeling their existing mentalities and best practices, and others are coming at this fairly with a kind of new and enlightened sense of, wow, we have to act now, and we have to act urgently, and they're applying all their talent to go into it.

AI assessment note: “Some of it is they grow up... And so you see a combination.”

Q What are the different lenses that some of your clients think about holistically looking at their portfolio in this space?

A Yeah, let's just take climate change for an example. I think if you take a holistic view, climate change is a systemic risk, right, to portfolios, to our society, to the planet. And you have to look at the downside risks of climate change, whether it's the physical risk, extreme weather directly impacting our infrastructure, our real estate. It could certainly disrupt our supply chains over time, and it could certainly introduce more health risks, right, as vector-borne diseases spread because of climate change. And one way to think about this holistically is Think about defense and offense against climate change. On the defensive side, understanding where the risks might appear in a portfolio, whether it's in your real estate portfolio, whether it's in your private equity portfolio or public equity portfolio, and really engaging with the managers to understand, number one, but also then to address and mitigate, number two. And how you mitigate is a combination of leading into the managers who are more thoughtful about these risk factors and embedding these risk factors into their decision making. You can certainly, like what we talked about, screen away areas that you think are really fundamentally disrupted and at risk. Some clients are adopting that strategy. And I think more importantly, on the offensive side, you can really lean into proactive solutions, whether it's envir…

AI assessment note: “one way to think about this holistically is Think about defense and offense”

Q So as you lay out the risk factors today on some of these investments you make, what are the key components to risk?

A So, as with any investment, you have to focus on the team, their ability to execute on their strategy, and we have to do a lot of reference calls to understand how they operate in a boardroom, how they work with management teams outside the boardroom. Do they really add value? Do they really know the ins and outs of the industries that they're investing in? And then secondly, I would say the risk around market adoption and the broader economic piece is, You have to factor in cyclicality when you're looking into sectors such as food and agribusiness, right? There are certain parts of the supply chain there that are less cyclical, perhaps the staples, whereas others like in perhaps branded sustainable consumer products, it may be more subject to the wins of the consumer and have pricing competition from your players. And you have to focus on The supply and demand of capital, right? There may be a lot of money coming in to alternative proteins at the moment because of the recent successes of certain companies in that space. And while we still see the long-term structural opportunities there, you have to be very selective in what are the enduring technologies and models that still align with this theme, but are not going to get eroded away by the heavy competition.

AI assessment note: “you have to focus on the team, their ability to execute on their strategy”

Q And how about your biggest investment pet peeve?

A I would say it's the same, not cleaning up after your own mess and not owning up to your mistakes. Look, I think really trying to relate this to our earlier discussion, right? So much of the sustainability and impact arena is around recognizing externalities, both positive and negative. And for the market operators and players who have Generated any negative externalities. It's really important to recognize it and help clean it up. And I think investors have to hold the companies accountable because it affects everyone at the systems level and owning to mistakes, right? I think everyone from the allocator perspective knows that you want managers to be transparent about their mistakes and own up to the failures as well as take credit for the successes. And I think it's not doing anyone A service when they're hiding their mistakes and just outing their successes.

AI assessment note: “not cleaning up after your own mess and not owning up to your mistakes.”

Q When we cross over into the social and, you know, you mentioned this sort of socioeconomic gap, this widening inequality, retraining education, workforce, we are coming through this dramatic sudden stop in the economy. Where do you think there will be investment returns that come out of this need to balance out the inequality in the country?

A It's hard to imagine what the world looks like after we get through this really challenging period. We need to get tens of millions of Americans back to work, and not just back to work earning a paycheck, but also doing work that is Again, fitting of their skill sets and fitting the demands of the modern economy, and that transition will likely take some time, right? You need to be able to retrain and reskill millions of American workers, and obviously those outside the US as well, to jobs that are, let's say, in the technology sector, in the healthcare sector, in broader services sectors, That still have demand and long term relevance. So I think there will be some short term pain as we go through this transition. But I think if you're intentional as an investor and looking for, again, innovative models to deliver the training The skill sets, but also to place the retrained workers into the global economy. I think those are some compelling and promising areas to be looking into.

AI assessment note: “innovative models to deliver the training The skill sets, but also to place the retrained workers”

Q You mentioned the word sustainable, and I know that there's different lingo that people throw around when they're talking about this space. There's sustainable investing, there's ESG, there's impact investing. What language do you use, and how do you differentiate between these labels?

A I bet, Ted, if you asked every person on the show in the series, you would probably get a slightly different answer or a very nuanced answer. My view of this is, let's start with sustainable investing, which I think is the broadest way to define it. Take the traditional investing framework. You're looking at the world. You're trying to analyze certain factors, metrics, usually financial factors, right? What sustainable investing really allows you to do is take a little bit of a wider aperture, let's say a wide angle lens, and you're trying to capture more information, more material information that's not historically embedded in traditional investment analysis, whether that's analysis on environmental externalities, carbon emissions, the effects that you have on local communities, employees, on vendors and suppliers. You're taking all of that information, and some of it is relevant, some of it is not relevant, and what you're really trying to do is just take those additional signals And find the ones that are material to financial returns and risk metrics, and embedding that into your view. And how you navigate is all in the details and very skill dependent, right? Some people can take that wider aperture and, in practice, add a ton of value to portfolios. And some, and we'll talk about this maybe later on, say that they're Looking at the world in a sustainable way, but may not…

AI assessment note: “let's start with sustainable investing, which I think is the broadest way to define it.”

Q So you focus on the sustainable part of Cambridge and those clients that are interested in that. How does your work permeate across the rest of Cambridge's investment activities?

A Yeah, absolutely. We are seeing the mainstreaming effect of this whole area from sustainability to ESG integration to impact investing. Um, I'll just give you an example, right? Cause we are allocators. We have a unique and differentiated position to engage with all managers, not just though those who self identify as ESG or sustainability managers, but any type of manager who are working on their ESG integration efforts to apply This, what I called earlier, this kind of wide angle lens to their investment approach. And if they're not doing so intentionally already, we are in the position to advocate and engage with them on these practices, just like with certain managers, right, that are engaging with their portfolio companies on more sustainable operating and governance practices. We think that there is a strong opportunity for allocators to be engaging with all of their managers on sustainability, on ESG integration, on team diversity, And especially for public equity firms, right, how their practices and policies are reflected in their actual day-to-day implementation. For example, with proxy voting records, are they consistent with what they said they would do? And to be mindful of not just the transparency, but the continuous improvement of all these areas. And I think there is a two-way conversation many times and managers will often ask us for Our advice and best practi…

AI assessment note: “We have a unique and differentiated position to engage with all managers”

Q in those instances where the first step creates this divide between returns and mission, in that maybe the performance of whatever they invest in isn't quite as good. Maybe they didn't pick the right manager, they didn't go about it the right way, but it's not quite as good as what they might have achieved elsewhere in the capital markets. How does that tension get resolved in the early going?

A I would say this is the same with any area of investing where you're going into a, either a newer asset class, or you're picking a new manager, right? There are bound to be successes and bound to be mistakes and failures. And I think what's really important is to not Discard the entire approach because of any early mistakes, but rather really incorporate those lessons learned and not have a A-B test, if you will, from the very beginning. And as we know, especially in private markets, it takes time for your thesis to be proven out and be validated often many years for a full cycle to reflect this thesis or this investment opportunity. So I do think that Embedding the early lessons learned into your approach as you go is a really important best practice for any institution, any family moving in this direction. But I also highlight that through the successes, and there are many, right, if you're, and we're seeing in this environment, the sustainable managers who are focused on high quality, durable cash flows have stayed really resilient in the market volatility that we've seen. So of course it's very time periods dependent. It is subject to style, favorability, whether it's growth or value, quality, private versus public. And you have to maintain conviction in your thesis because you do have to take a long-term view and abide by that thesis over time.

AI assessment note: “not Discard the entire approach because of any early mistakes, but rather really incorporate those lessons”