A New Perspective on ESG

Stewart:   Everybody wants to talk about ESG these days, and my guest is no different. Michael Rodriguez, head of ESG and Sustainability at Academy Securities. Mike, welcome. Thanks for being on.

Michael:   Stewart, thank you so much sir for the invitation. An honor to be here.

Stewart: Thank you. And my name is Stewart Foley. This is the Insurance AUM Journal podcast, and we are here with a very different kind of guest. You and I came to know each other through a good friend of mine named Randy Lauer, who recently joined your firm from a large Wall Street sell-side shop, and he made me aware of Academy Securities. What is Academy Securities, and what do you do?

Michael:  Well Stewart, again, thank you. And to answer your question, Academy Securities is a Hispanic, minority, and service disabled veteran owned and operated investment bank. I myself am a former veteran and work on our firm as our head of ESG and sustainability, and also on our tech capital markets and syndicate team. But what's really unique about our firm was it was founded over 10 years ago by two Naval Academy veterans with a mission to mentor and train military service members for careers in financial services. And over the past 10 years, it's continued to develop, our mission's continued to grow. And we now have a very robust suite of investment banking services and capabilities, including our debt and equity capital markets, underwriting, and distribution. We're a top performer among our DNI peer groups. We also have a best in class rates and liquidity team, responsible for our US Treasury agency and commercial paper trading.

Michael: In addition, we have public finance, leverage finance, structured products, capabilities, and cash management. So we are a strong shop. We are very aspirational and really aim to punch above our weight class. But one of our real chief differentiators is our geopolitical intelligence group, and our advisory board, which is comprised of over 14 former US military admirals and generals. These are folks and individuals with expertise in issues of national security ranging from regional specific expertise on a particular nation or a region, as well as cybersecurity, supply chain, government procurement space, and really everything in between. And this is a capability and service that we provide for free, and something our clients find extremely helpful, as it's a really unique perspective than what might be delivered in the news media or other information flows. So it's a phenomenal team to work for. We are in fact a team of former military and Wall Street financial services professionals.

Michael: And again, like I said, 45% of our team are former military. That is, with our mission to mentor, train, and hire military veterans, that we take very seriously, and integrate throughout all of those verticals I had just mentioned. For instance, our commercial paper team. When we had first started out, it was over half military, half career financial services professionals. Our debt, capital, and markets team is predominantly military veterans. So we really tried to integrate this throughout every portion of our business. And it's also a wonderful value add for our clients, that you have not only your bankers, but they also are foreign militaries, and have a different perspective and insight. And that's something that we can provide to our clients and our stakeholders, and something that they also find real value in as well.

Michael So it's a real honor to be a part of the team, and within my specific role is helping out our issuers, stakeholders out there, better understand what we're seeing in the sustainable investment and financial space. And that's specifically, a lot of what we're talking about is capital raising, ways of developing ESG frameworks so you can go out there and issue a green bond, and capture that investor interest, and ideally, benefit from pricing, if there's an ability to. But I'd say that is the 10,000 foot overview, and happy to answer some more questions on that if you'd like, Stewart.

Stewart: So you were a Marine, right? We talked about this because when Randy first introduced this idea of you and I having a podcast together, you and I talked briefly, right? And you have a very unique background, and you come at ESG and sustainability from a very different place than most people. So can you just give a quick run through your military background, and then I want to go into how your education and the path it led you down, and how you got where you are today.

Michael: Absolutely. Like you had mentioned, I was in the Marine Corps. I actually come from a family, career military service members. So actually most of them were Coast Guard. So I ended up wanting to do something a little different and went the Marine Corps as a infantry rifleman, where I served... This would be over almost 17 years ago, in the operation Phantom Fury as an infantry rifleman. So in Fallujah of 2004, and in November of 2004, responsible for going through house to house, making sure weapons weren't stored, and that if there were any threat actors, or terrorists, or anything like that, that were in the area, that the situation was contained. I was actually injured in that fight on Thanksgiving day of 2004, and was medically retired from the Marine Corps. And since then over 17 years ago, a lot of what I focus on, almost entirely my areas of research and work, have been on issues related to, I guess you could say, sustainability.

Michael: lAnd initially that was water stress and management, and how that affects the military's operations. And specifically munitions development and storage, and how water stress impacts bullets for all intents and purposes. I carried that work on in DC, national security and climate change, and continued to do the same throughout my graduate degree work before I began here at Academy. But my initial career when I started was as a Marine, and as they say, once you're a Marine, you're always a Marine, and very much draw back from that, those experiences and those frameworks of learning and analysis, in what I do today.

Stewart: That's fantastic, because I wanted to get that out there because your background is substantially different than most of the people who we have on as guests. And so given that your background's different, I guess the first place to start is, what does ESG and sustainability mean to Mike Rodriguez?

Michael: That's a great question. I think I should be able to give you, I think, a very clear and succinct answer. When I think of sustainability, often what I go back to is a report. It was written over 20 years ago, called the Brundtland Report, or Our Common Future. And it simply states sustainability, or sustainable development, in fact, because it's actually a lot about development, is about how we develop now without compromising the opportunity of future generations, or children and grandchildren, to also develop. So what ways can we continue to do business without developing so many negative externalities out there, that those in the future are going to be extremely hard for them to, or be much more costly. And that same report, the Brundtland Report, is actually what the United Nations Sustainability Development Goals really draw upon, and other issuers will align their capital plans with.

Michael: But I look at ESG, because it's a little bit easier to say than sustainability, is really the sub metrics for how we look to assess and value what sustainability is, or what a sustainable investment might be. And so I guess we have this broad goal, this end goal of sustainability, that might even be a little esoteric and nebulous, but ESG... The metrics for how we can measure that are a little bit more concrete. So when we look at sustainability, we might be talking about climate change, water, stress management, as well as inclusion and equity. Especially when we talk about certain underserved populations. How are we measuring tangible measurements there that we can ensure we're getting towards sustainability, versus just saying we're doing something, and maybe not making the headway? And that's something that a lot of people are very cognizant of.

Michael: We call this greenwashing. Nobody really wants to be a part of that. But I really look at ESG as the metrics for how we measure that out. And of course, it's important to also look at what are the macro drivers behind this. We have global population, technology, demographics. These are the three big things that folks at the UN as well are considering when they're thinking about sustainable development. And when you consider climate change in that, deforestation. So what numbers, maybe data points, can we use to ensure that we're on this right path that ensures that those who are coming after us have the same opportunities that those of us have today? And I think that's what a lot of sustainability in ESG is about. And a lot of companies now, when they're thinking about the long term, this is something that they now have to consider. And it's in the past three years, you've seen some phenomenal growth, but when I really look at what ESG means, it's the path towards sustainability.

Michael: And that path is something that you need to be able to measure, monitor and report on. So that way you're getting to that head goal and maybe not getting sidetracked, or not making the headway that you want. It's also important to understand, for a lot of what we're talking about related to climate change, they have these 2030 and 2050 climate scenarios. And if you're not properly measuring, then when you hit these milestones, how are you sure that you're on the right path and pacing correctly? So I look at ESG as how we, for all intents and purpose, how we measure sustainability.

Stewart: I think that's a very interesting way to look at it, to link the two in that way. And so, I mean, given the fact that most of our audience are insurance investment professionals, or actively involved in that space, can you talk a little bit about ESG and insurance from your perspective? There are a number of risks and data metrics and whatnot, but how do you consider the two, ESG and insurance?

Michael: So, I mean, insurance is just, it's a very integral push of how we look to finance, and I think the liquidity within our broader markets. When we're thinking about risk, what insurance do you have? What sort of hedge do you have in place? And so a lot of insurance is about how you're managing this risk. And I think there's a couple of ways we can think about risk, and using the example of climate change, I think you have these two areas. So when you're looking at maybe your general accounts and your investments that are in it, specifically maybe around climate risk, and ESG, you're going to be primarily, you're going to want to look at not just the physical risk of your asset, which is maybe a house, or a building, or a property. Something like weather is going to impact that. Increased damage costs related to extreme weather related events. But you also have this whole other area of transition risk, which is, how is the investment's valuation going to react to this changing environment?

Michael: And those things are policy, technology, and behavior are really some of those drivers behind transition risk. And I think that's important for an insurance company especially to be cognizant of. As I said, the insurance industry is critical to liquidity. So having a sound understanding of where ESG risks lay within a portfolio, and how to manage those, I think, will be really important. From a climate perspective, this is something I think that the SEC as well as the Federal Reserve has their eye on, and it's climate related financial stress testing. And I think in the future, what for insurance, especially, you might see some more of this. I think with insurance right now, they represent about 12% of the two trillion in assets here in the US that have ESG commitments, or screening, or embedded mechanisms.

Michael: So for insurance companies, I think it's a lot of how they look to maybe not transform investment analysis and risk, but look for it to evolve and adapt to this new, changing, literally changing climate, from both a weather perspective, but also other perspectives. We now have cybersecurity, we have a lot more people on the Earth to consider. So I think that's going to be important for them. And I think going into this for insurance companies, what's this going to mean when you start to consider all of this data that's going to have to come into play? Also, maybe legal sense around fund marketing and the sales of products as it relates to sustainability. But I'd say for the general accounts out there, insurance especially, maybe who might use any sort of third party managers, if something like a climate related financial stress testing comes into play, it's going to be important that those third party managers have expertise on climate related investments or ESG.

Michael: Just because given these net zero alignments, this is slowly becoming less of an option, and asset managers will have to put in place, whether it's governance standards, certainly science based targets will be one of them, the relevant metrics, as well as monitoring or reporting. This will all come into play, that I think that will be important for insurance companies to have in mind, and look to consider in the next coming years. Especially as we approach 2030 and then 2050, with these net zero commitments. But I think for insurance companies, it's going to be using these new, maybe traditionally non-financial data points as ways of adapting and transforming their analysis and risk management within their portfolio.

Stewart: Can you talk a little bit... And I think there's challenges, right? I mean, you mentioned it when you were talking about ESG and sustainability. It's not like I can get a scale out and measure it to an eighth of a pound, right? I mean, it's challenging to put metrics around this, and I think everybody wants that score. So there's definitely challenges out there in ESG investing, as clear standards are being developed. How do you see the differences in those challenges, US versus the EU, for example?

Michael: I think one of the big challenges, one is the EU is a couple steps ahead on this, at least in terms of codifying some of the language for finance and investment around sustainability and ESG. But I think it's going to be that interoperability. And I think right now it's primarily the US and EU, but eventually it will become APAC as well. And I think that what nobody wants is a system where you have three or four different, big standards in place, and you each have to cater to each one of those. And then at the same time, there might be overlapping components. So I think that is what people want, interoperability, and they don't want to add on another survey into the work that they're doing. Especially asset managers, who are often being asked for a lot of this information. I don't think... We shouldn't be going out of their way to make anybody's job more difficult.

Michael: And I think this is something that might be a bit of a learning curve going forward. But I think right now in the EU, they have Article Eight and Nine, which lay out some pretty sound language on what is considered maybe a transition fund. What is a sustainable fund, and the marketing around that. The US, we're just, I think, starting to come to that. The SEC recently has put some letters out to issuers asking some more information on climate related financial disclosure and materiality, because this is something that's often talked about is a company might say they do a 30 page sustainability report. And they talk about how SASB or the Values Reporting Foundation has indicated that this is a material issue, and they report it on their sustainability report, but don't mention this material point within their 10Ks or any of their quarterly releases, with whether that's in the management discussion analysis.

Michael: So I think it can be a lot. There's going to be some disclosure work there, but ultimately I think when we're thinking about ESG and data, there's just so much of it. And there's really no one source you can go to. A lot of what's being pulled might come from a company. If you're a ESG rating entity, you might be looking at what a company says, and then what maybe a government source, and then another third party source. There's no one place to go to, and that leads, perhaps, to, I think, some issues within the quality and transparency of the data that remains. For example, just a lot of climate change data, this is not released quarterly like financial data is. So to have a better idea, per se, of it might be your environmental capital, and your budget around your environmental capital, that flow of information is going to need to be more up date.

Michael: But I think between the US, the EU, and APAC, it's going to be important that to some degree that everyone's on the same page. Or else it's going to be a lot of... There will be some inconsistency and just friction within reporting. And it just goes back to wanting to avoid what's often dubbed just greenwashing, which is going out and saying, "Hey, I'm doing this. It's good." But in reality, it isn't quite having the impact that you're saying it is, or it's just not having impact at all. Or maybe even worse, it's having a negative impact. So I think what the challenge ahead is, how do we have interoperability, avoiding erroneous or extraneous ESG data reporting, that might not be critical to a certain business or business line.

Stewart: That's very helpful. So you mentioned this a little earlier on the podcast. How do or do ESG and cyber risk, how are they related based on your viewpoint?

Michael: I think cyber actually can be lumped into almost two buckets. And it's what I often see, is some folks will put in maybe that social component, and others might put it in that governance component. It lives in between, but really cybersecurity, when we look at it, it almost might be better to look at it as a whole, maybe... and this is a bit different... but almost as its own environment. I mean, you look at it as its own ecosystem. It's very similar to how we look at our physical environment and the ways we want to invest into climate change. We need to be looking at this digital environment that we operate in, which has now become, you and I, we're doing this phone call digitally. People do a lot of their finances digitally, banks and healthcare institutions and organizations are some of the most targeted of these. People are just, want access to this information.

Michael: And at the same time, this environment that all of this information and this data is flowing through, a lot of the people who are using it, I'll use myself as an example, I am not an IT expert. So if there's an issue I'm going to have to troubleshoot it, or maybe if there's something that is going on behind the scenes, many people don't quite have, maybe, the expertise to go in, figure that out, or build their own secure network or the like. And so right now we have everyone who's plugged in and to some degree has a target on their back. So no matter who you are, there's this... You are now plugged into this ecosystem that opens you up to both state and non-state threat actors. And I think that's something that's just really important to think about, because there's so much that now relies on our digital infrastructure and networks.

Michael: And it's not just communication. It's not just video games. Earlier this year was, we had the colonial pipeline, we've had the solar winds, and then just this week, I believe it's called the Log4JT, where they went in and they realized part of the Java script that's used to help program all this software had a major flare, or had a major issue with it. So this is something that they now have to go back in and rework, and reinvest into making new apps. So I think it's something that we just really need to be hyper focused on, and looking almost at the cybersecurity and network security on the same level that we think about climate change, or water stress and management, or diversity and inclusion. Just because so much is centered on that.

Michael: I remember reading this a while ago. It was a statistic about the amount of money that flowed across a silicon microchip. And I guess back in the '70s, it was less than 10% of the economy went across silicon chips. And by the end of the '80s, it was around 50 or something greater. And then by the '90s, we're talking... or late '90s, 2000s, over 80% of the global economy is reliant upon these silicon microchips to operate. So every year you have a silicon microchip, that's a digital network place that a threat actor, if it's plugged in, maybe from somewhere around the world, if they're savvy and smart enough, could go in and look to reach and maybe glean. They're going to go in there, breach something, just look and see how it operates. Maybe they'll extract some information or they'll lock it down and then charge you ransomware for it.

 Michael: But I think ultimately, we need to be thinking about the cybersecurity as this ecosystem to invest in, the same way that we're looking at climate change, or waste disposal, or diversity and inclusion, just because of so much that is relying on that. And then going back to social component, because I think there is a social component here, and that is there's data and information belonging to all of us on there. I think one of the most... I could only imagine folks who might have the ability or resources to rebound from maybe a data breach, but what about the folks out there who don't have the resources, and maybe are the targets of ransomware, and the underserved populations who maybe this data is now out there, and makes them targets?

Michael: So that data protection component I think is... actually eats its way into the social bit of ESG, and also maintains that governance segment too. But I think really cybersecurity is... It's on top of mind of everybody. You're regularly speaking to people, and it's been something I have been very bullish on for about three years since I've been working with Academy, was cybersecurity as a ESG risk and focus area for investment.

Stewart: It's really interesting. You've mentioned the term a couple of times while we've been on this podcast. Can you help those of us who are less familiar with this space, what do you mean when you say water stress?

Michael: Oh, water stress. Depending on... because certain governments might define drought within different parameters, amount of water that falls within this time, or doesn't land on the ground, or is absorbed within this time. When we're thinking of water stress, we're looking at industries, regions, investments that might be, while 20 years ago it was fine for them to be located, or an investment to be located in this particular region, because maybe drought wasn't as much of a big issue, or water stress wasn't. And what I mean by water stress, coming back, that can be drought. It can be maybe too much water usage for the amount of water that's available. So you can have an area that might not be in a drought per se, but you have so many people or technology using the water that there's not enough available for everybody.

Michael: So there's really a couple of ways you can cut it, but it's something that we are going to be running up against here soon. It's something that, it's popped its head up a couple of times this year. I think specifically, I do work a lot with some tech companies. So I look at what's been happening within the supply chain of the chip crunch shortage, which has been obviously driven by immense demand for these semiconductors. But also TSMC out in Taiwan, they were coming up against a drought, which impacted their ability to put out these microchips. So they had to go in, do some water management work. So put in efficiency measures, water waste disposal, to make sure that whatever water that they're re-putting out there has been filtered. It's not contaminated. So that way other people can use it within the area or have access to it.

Michael: What we've been seeing within the semiconductor space is also being mirrored elsewhere. And I think it's just important to keep that in mind, because we don't actually have too much fresh water here on our planet. If we're going to go about ways of developing more, you then have to do salination, which is again going to increase the cost of water, because that's a very energy intensive process. It also produces some pollutants, like a very hypoxic brine. So they have to then store that somewhere. So the best way, when we're talking about water stress, especially here in the United States, which over the past few years has become increasingly more stressed as we see more development along rivers. So places like in the southern United States, Los Angeles and the such, your access to water is becoming less as more and more folks are developing higher along, further upstream.

Michael: That's one area. So you got a bunch of compounding issues going on. You have more folks maybe developing in areas, more types of technology that are using some more water, as well as simultaneously the climate change, which is for all intents and purposes, just reallocates where water is going. So climate change takes water out of some areas, and then dumps it more in others. And I said, when we're looking at climate change specifically in water stress, I think I've mentioned this to people before. Emissions is our contribution to the problem. It's your contribution in a long term sense, but the immediate impact that climate change has is on how water is managed and allocated. So for folks out there, when we're really thinking about, all right, well, how is climate going to impact me? Well, you can keep pumping emissions and emissions, and that's going to keep contributing to the problem in the long term.

Michael: But if you're not planning for how water is going to be allocated around you, and your operations, and your investments, then you're missing half of the problem. I think a great example of this is, when we talk about physical and transition risk, is the national flood insurance program. So that is one area where there actually might be a bunch more folks who should be a part of that, but because how we're tracking water and the like, they're not being included. So floods are one way, droughts another, but it's something that we really need to focus on. Because no matter what, regardless of your business and that you operate in, water's going to come into play. Whether it's for the people in your labor, or to develop your product, water's going to be there. So it's very important that you consider that. And I think Aflac, who actually did a sustainability bond earlier this year, included that in one of their use of proceeds, was investments in facilities and equipment that reduce water consumption. And they specifically have some metrics that they provide for how they plan to track that.

Stewart: Yeah, it's interesting. Eric Kirsch is the CIO there, and a good friend, and was on a webcast with us earlier this year. Part of the CFA New York Asset Owner series. So a small world. I appreciate you being on, man. I've had really a... There's a really unique view of ESG and sustainability. So I've just got one more question for you, but I wanted to say thank you for the ESG portion.

Michael: You're absolutely welcome, Stewart. What was your last question, sir?

Stewart: Okay, so here's your last question, Mike. I want to take you back to a day that I'm confident that you'll recall. It is the day that you graduated from your undergraduate institution. Now, regardless of what sort of festivities may have taken place the evening before, you are bright eyed and bushy tailed, and ready for graduation. Your name starts with R, so you're in the second half of the group going up. You've had to wait a while. You get up on the steps you walk across, they call your name. The crowd goes crazy, right? You get your diploma, quick handshake, quick picture. And as you walk down the stairs, you run into Michael Rodriguez today. What do you tell your 21 year old self?

Michael: That's a great question, Stewart.

Stewart: It's a good question.

Michael: I would tell him to keep doing the path that he was on. I think I actually look back on my time in undergrad, and we were just talking about water stress and management. That's where I was introduced and got fascinated with it.

Stewart: Is that right? That early? All the way back in undergraduate school, you were interested in this.

Michael: Yeah, that's right. I did my undergraduate work with how munitions impact... or how water stress and management impacts munitions development. How are bullets made here in the United States impacted by water, and how they impact water. That's actually, it would be a point we could always go further, double materiality. It's actually something that is one of the big shifts that we've seen in ESG. So earlier, I think ESU was based a lot on values based investing. I don't want to invest in things that maybe hurt people, like guns, or don't hurt the environment, or like that. Now it's shifted to something a bit different, which is double materiality. So looking at an investment decision, how it weighs the impact of sustainability factors on the investment, as well as the investment's impact on sustainability factors. So that's how I got started. It's been an interesting road from there, but I would just say, keep doing what you're doing, and eventually I ended up here in front of you on this podcast. So I wouldn't change a bit of it.

Stewart: Yeah. There you go. And this is your podcast debut, and certainly I hope not your last time on. So Mike, thanks for being on, man. I really appreciate it.

Michael: Oh, absolutely, Stewart. And I just want to wish you and the team there the best, and you stay warm and toasty there in Chicago for me, sir.

Stewart: Thank you very much. Michael Rodriguez, head of ESG and sustainability at Academy Securities. If you haven't heard of Academy, check them out. Very worth your time. If you have ideas for a podcast, please email us at podcast@insuranceAUM.com. My name is Stewart Foley, and this is the Insurance AUM Journal podcast.

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