Lazard Q&A: Russia, inflation and climate change

Head of US equity on ESG's role in the US

Ron Temple is managing director, co-head of multi-asset and head of US equity at Lazard Asset Management. Temple spoke with ESG Clarity in New York to explain how the firm has been incorporating ESG over the past two decades and how its efforts have been ramping up recently. This is the second excerpt from the interview.

Should some sectors be off-limits for ESG?

It’s interesting. I was in Europe [recently], and the big discussion was, “Are defence stocks really on the ‘no’ list?”.

This is why I don’t think it’s an optimal approach to say you can’t own “X.” I think it’s better to understand the context.

I could see the argument that any company involved in defence is building things to kill people and hence that shouldn’t belong. But I also recognize if you don’t have a defence industry, [and] you have Russian tanks rolling through your border, you can’t do anything about it. So, I think this is prompting a really important debate of “what is the role of ESG.” And I don’t think exclusion lists are necessarily going get us where we need to be.

I would also argue by the way – this is not necessarily going be a universally accepted view – I don’t think you get to net zero without nuclear power. I think we’re going to have to have some areas where we have to decide if we’re going to let the perfect be the enemy of the good. And as with life, you’re always making choices.

The case on climate change was so compelling. It was an irrefutable slam dunk, unanimous decision. We need to deal with climate change. And yet somehow, the US is still failing to [address] it. Europe already understood the case for energy transition. It just got accelerated. So in that regard, it’s a positive ESG tailwind.

I think for the rest of the world, it should be another positive tailwind, because the one thing I can say with certainty, if you want to hurt Putin, stop using fossil fuels. And the only way you’re going stop using fossil fuels is we figure out how to invest in the [energy] transition.

This should be the most bipartisan thing the US could ever do, is invest in energy transition. And by the way, last time I checked, a sizable majority of Republicans believe climate change is real and made by man – is caused by humans. We know that the sizable majority of Democrats agree, it’s just, unfortunately they’re not being represented well in DC.

There’s a continuum of where people want to be in the sense of urgency. I have an incredible sense of urgency on climate change, but I also recognize that if people use more coal because they can’t use natural gas, we’re moving in the wrong direction. Natural gas is a transitional fuel, in my view.

Let’s wean ourselves from the dirtiest stuff as fast as we can.

Ultimately over time, you’re going need a carbon price, right? You’re going to need regulation. And this is one of the other things about ESG [that] I worry about. There’s this sense that all of us, as investors acting on behalf of our capitals, trying to maximize long-term returns can solve the problem. This is a hands-on-deck issue, and climate change, in particular.

We’re not going to solve climate change by having every asset manager in the world engage companies. It’s going to take regulation, and there’s going to have to be a price. And by the way, anyone who talks about free markets and small government, if they’ve ever taken an economics class, they understand the concept of externalities. Then you need a price on externalities. I can think of a more obvious example than climate change. That will require some kind of pricing, but I’m confident we’ll get there.

What else is important to keep in mind about ESG right now?

Russia’s invasion just highlights even more how important climate change and energy transition are.

If anyone’s still sceptical about ESG and whether it’s a political agenda, this has really nothing to do with politics. It is about profit.

I think climate change is one of the least discussed topics in macroeconomics. We’re all talking about inflation right now. Climate change is inflationary. I mean, the trillions of dollars we’re going to spend on climate change – we’re not going to get new office buildings out of that. We’re going to hopefully just protect the quality of life we’ve already got, but who’s going to pay for that?

That’s going to flow through the cost of goods and services through the economy. Labour productivity goes down when temperatures go up. Climate volatility goes up when we have climate change. This is going to challenge supply chains’ resiliency. You’re going to have periodic surges in food prices.

Imagine if the Northwest heat dome had occurred over Iowa for two weeks at 120 degrees, what that could have done to your agricultural crops. I don’t think people are thinking enough about these issues.

What are your thoughts on the DOL’s proposed rule for ESG within retirement plans?

What was interesting to me about the new proposed rule is that it not only allows you to take ESG to account – it requires it, if it’s material. And I think that’s exactly what it should do.

What the DOL has set up is that you have to consider climate change, and you have to consider other things that could be material to future profitability, in valuation. And that’s exactly what government should do. It should require that you consider all material aspects of financial analysis.

I think it’ll be the standard in retirement plan over time.

Outside of the US, if you’re not integrating ESG, you’re really just not even considered [as a manager]. And maybe the US needs five-to-10 years to get there. But I think the longer US investors wait to truly integrate ESG – and do it right – the more they’re risking their returns.

This all comes back to what’s best for the client. What’s best for the client is to understand a risk and reward. And by the way, in a lot of cases, our ESG analysis is about identifying opportunities, too.

That’s another odd view in the US. The view that ESG is about avoiding risk. No – we’re paid to take risk. We’re just paid to make an informed decision about risk. And I think ESG is creating real opportunities for some companies to take market share and to grow certain parts of the business that right now might not be material, or might even be pretty material, and basically grow their addressable market and their profits.