Experts Only Podcast #108: with Kara Mangone, Global Head of Climate Strategy at Goldman Sachs

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Transcript

Jon Powers:              Welcome back to Experts Only. I’m your host Jon Powers. I’m the co-founder of CleanCapital and served as president Obama’s chief sustainability officer. On this podcast, we explore solutions to climate change by talking to industry leaders about the intersection of energy, innovation and finance. You can get more episodes at cleancapital.com.

Jon Powers:              Welcome back to Experts Only. Today, we talk with the global head of climate strategy, Goldman Sachs, Kara Mangone. Kara and I really dive into the roadmap for ESG through 2030. At this point, when this gets published, the SEC rules will be out. We’ll talk a little bit about the effect that’s going to have on the industry. She brings some really interesting facts to bear, including the fact that 80% of the world’s GDP is now committed to net zero going forward. This is a fascinating dialogue about where ESG is common and where it’s headed. And I hope you enjoy. You can always get more episodes at cleancapital.com. Kara, thanks so much for joining me on Experts Only.

Kara Mangone:             Thanks, Jon. It’s great to be here.

Jon Powers:                  So I want to explore your career path a little bit. As we were talking offline, you grew up in Delaware, you ended up going to school, getting into finance first, really, before you got into the sustainability space. How did you go from Delaware to Columbia and finance? Was that a track you wanted to follow?

Kara Mangone:             All good questions. The short answer is no. So if you had told me 15 years ago or 20 years ago that I would be sitting in a climate strategy seat at Goldman Sachs, I would’ve told you no way. I went to Boston College for undergrad and studied a mix of things, English, finance, Italian. Really just always enjoyed optimizing for things that were interesting to me and areas where I felt like I could grow and I could learn. And I had debated a couple different things post undergrad, but ultimately decided to try investment banking. And that’s where I started my career. And that was, again, optimizing for an area where I thought

Jon Powers:                  Can I stop for one second? Studying Italian to investment banking, that’s a good leap.

Kara Mangone:             I know. It’s quite a leap. Although, I can tell you, working with ESG is very big in Italy right now, so I could tell you it does come at times. Look, I think for me what has always been consistent career wise is just being really hungry to learn and putting myself in situations where I have the opportunity to stretch and grow and learn from others, and do work that’s high impact, and investment banking seemed like that opportunity for me. And so I started here in New York. I actually started an interesting group, which at the time was called our mergers leadership group, is now really core to our M&A franchise. But think of this as a product group that cut across industries and regions and was focusing on supporting our corporate clients who were facing hostile M&A and shareholder activism, so capital A activism, hedge fund activism.

And this for me was super interesting both in terms of when I was doing it, which was pre and then in the middle and post the financial crisis. And was also interesting because although I was very junior in my career, it was my first couple years out of school, what it did was it gave you a lens very early on for how important two core things were for corporates. One was stakeholder relationships, because, of course, if you’re in any type of hostile situation, especially if it comes down to a shareholder vote, your relationships with your shareholders matters significantly. So that was one.

The second was just the importance of strategy. And not only having a strong internal strategy, but then how do you communicate that to market? What are your KPIs? How do you measure progress? How do you engage with the world on that strategy? And so that was really crystallizing for me. It was very early, like I said, in my career and I got to work on some really interesting situations, but it was also an opportunity quite early on to have a pretty significant aha moment, if you will, in my career. These were really critical areas that I wanted to focus on over the next foreword element of my career.

Jon Powers:                  And then when you transitioned, you transitioned from the investment bank space into sustainable finance, could you see that coming? Was it more the door opened?

Kara Mangone:             I didn’t see it coming. So I didn’t see it early on. I still didn’t see it after a couple of years. And so a after investment banking, I had the opportunity to work in investor relation in the next chapter of my career. And I actually spent almost 10 years at Goldman Sachs spending time with our shareholders on ESG. And when I first started it, it was a 2009, 2010 timeframe.

Jon Powers:                  People could barely spell ESG at that point.

Kara Mangone:             Exactly. And interestingly, I was spending time with a lot of constituents who were very thoughtful on issues like climate change, but typically were smaller shareholders for us. Sometimes it was shareholder proponent, sometimes it was the faith-based investors, socially responsible investors, that was the early days. By the time that I left seat, over the course of the consecutive 10 years, I really had started to develop relationships with all of our shareholders. It was passives, it was State Street, it was BlackRock, it was our large active investors and then it was other stakeholder groups. It was the credit rating agencies. It was the ESG raters, if you will. So these are companies who, think of MSCI or Sustainalytics, you may be aware of those names, but think of companies who are actually coming up with ESG scores or frameworks to evaluate your company.

And so with time, not only did it become clear that ESG was an increasing area of focus for our shareholder base and our stakeholder base, but it was also really clear that it was important for us to be really proactive in our storytelling and our disclosure. And so over that time, and this is how I really got into the ESG component, in addition to spending time with shareholders and realizing that this was more and more of a priority, was actually getting more involved in our strategy, vis-à-vis, our reporting. So I led our sustainability reporting and that got me really connected with all of the parts of the firm where we were developing and driving strategy. And then fast forward to where I sit today, leading climate strategy globally for the firm is really a core… If there were a function that sat at the cross section of strategy and stakeholder engagement, that is really the seat specifically focused on climate.

Jon Powers:                  Along that trajectory, where’d you see the title wave begin to change where you were first going around internal shareholder or stakeholders and talking to them about sustainability reporting, to the point now where there’s obviously massive investor demand. It is not just coming from the millennials, it’s coming from all parts of the industry. When did you see the internal wave happen that the support for the work you were doing really took off?

Kara Mangone:             It’s a great question. Let me give you the internal and external, if you will, because there’s always been a really strong conviction around sustainability at Goldman Sachs, even from my early days doing it. In fact, we were one of the first investor relations teams on the street to actually put ESG, if you will, as an engaging discipline within IR. It’s now much more mainstream to do that, but when we did it, it was pretty early on and it was in part because we had a very clear commitment to spending time with shareholders and stakeholders and realized quite quickly this was important to them, and it was important therefore for us to manage our firm. So there’s always been a lot of momentum within the firm and conviction on the importance of sustainability.

I think where we’ve seen the acceleration is really in the public markets in terms of what is taking place across both equity and fixed income. And just to give you a little bit of a frame, we now have 80% of the world’s GDP committed to net zero.

Jon Powers:                  It’s amazing.

Kara Mangone:             Absolute proliferation over the course of the past year or two. In 2021, we had total sustainable debt issuance, so social sustainability green bonds, surpass over 1.5 trillion, which is almost double 2020 levels. A lot of acceleration debt markets. And on the equity markets we saw, in 2021, ESG represent more than 40% of global equity flow. So we just have seen a tremendous amount of momentum. And this really matches what we had said as an organization, it was the 2019 timeframe, it was the end of 2019 and David Solomon, our CEO, came out with an op-ed. And so this is the other tipping point or acceleration I would give you from more of the internal perspective, but it’s matched what we’ve seen play out in the broader environment.

And in that op-ed, David did two things. One was he made a commercial commitment for the firm, and that’s a $750 billion commitment to finance investment, advice in sustainable finance by 2030. So, that was one. The second and arguably more important or equally important was he described why we were making this commitment. And the why really had to do with our view both as a corporate financial institution managing our carbon neutrality, thinking about risk management from a climate perspective, engaging with shareholders. So, that’s one. And then two, as a financial institution serving clients, and by the way, those clients are sitting, it’s corporates, it’s institutional investors, it’s asset owners, it’s pension funds, it’s governments, acknowledging that through wearing those two hats, climate and inclusive growth have clearly become drivers of risk and opportunity. And so it was really taking a view that this would become more mainstream considerations, if you will. And an area that historically had been dominated by more of a values conversation was quickly becoming a value conversation.

Kara Mangone:             … Value discipline, if you will, and an opportunity. And so I think I give you those external data points because I think it just really shows that hard acceleration that we had started to feel in CEO level conversations and CIO level conversations, board level conversations is really clearly playing out now in the broader marketplace.

Jon Powers:                  It’s fascinating. You’ve been at the cutting edge a lot of this stuff for over a decade now, really, when you’ve been thinking about ESG with shareholder engagement before 2010. We are now getting at a point where you’re right. The, tidal wave is here, but the rules are still very emerging in how we’re measuring this stuff how have you guys begun tackle that, I know Goldman’s really been a leader at helping establish those rules, and figuring out whether it be talking about the European taxonomy or what’s going on here in the US, the SCC, rules that are about to come out, or by the time this publish should be out, how have you guys worked in that environment to help shape the rules so that it just makes sense for investors?

Kara Mangone:             So this is such an important topic. And Jon, you and I have talked about this before. For all of the acceleration that we’ve seen, so I gave the glass half full, if you will, on the prior answer a tremendous amount of momentum and acceleration. I think the glass half empty, or the counterpoint to that is to say that for all of the momentum we’ve seen in ESG, and this is really the crux of your question, where are we in the journey and what more has to come, if you will, in terms of how we manage performance? And so what are the frameworks that exist today and where do we need to go? And I’ll give you a couple of things that I think we’ve seen today and where we need to go. One is we’re really moving from a place of aspiration and voluntary commitment to a place of execution on those commitments. And also moving from a largely voluntary framework, to your point, to a place where we’re actually going to have more concrete and some jurisdictions, mandatory data.

We’re having this conversation the week that the SCC is releasing its mandatory climate disclosure rule, so the first time we’ll have proposed mandatory disclosure related to climate here in the US, for example. And to date, we’ve really had a very heavy reliance on third party ESG scores. And these have played a really important role in certain areas like fund construction, for example, but there’s a lot of information and noise that can go into these third party ESG scores. And I did this when I was in the investor relations seat, believe it or not I used to spend time with close to 10 different organization that were rating us on ESG. And there often was not a tremendous amount of consistency between the approaches, which is natural, it’s a lot of different organizations developing frameworks. Again, very early days. Our research team has actually looked at the correlation between ESG ratings across these different providers, and it’s about 0.3. It’s very low.

Jon Powers:                  Oh, my God. Really? That’s amazing.

Kara Mangone:             Yeah. And you compare that to typical correlation between Moody’s and S&P for the same corporate and it’s 0.99, so a lot of divergence. A lot of the third party ratings have a heavy reliance on policy, so less about performance. And that’s where we are today, but I think where we’re shifting to is a place where we are going to have a pretty significant ramp up of performance related ESG data that looks at risks and opportunities. And I think the positive of that is that’s going to make a real difference in terms of the ability for investors to measure and manage progress. It helps organizations think through, when they set significant goals, whether that’s net zero goals or other targets or commitments, what’s the right information that they need out in the market, how do they want to tell their story, and then shareholders be able to actually ascribe value to that strategy.

And so I think the lens I would really put on it is moving from a place of a lot of different information, pretty early innings, two of these where we’re really optimizing for how ESG factors intersect with financial returns. And that’s going to change depending on the sector, depending on the business, it could even change based on institutional investors view, but I think that is part of the progression that we’re seeing. And I think that’s one. The second… I know this is a little bit of a long answer.

Jon Powers:                  Oh, this is super interesting so you can go on.

Kara Mangone:             Give you the lay of the land. I think the other piece, which is a really important piece as well, is also just thinking through how do we get to a place where we have clean, reliable, but also affordable energy, and so I’m specifically double clicking on climate right now, but there’s a lot that needs to be in place for that dynamic to happen. And so I think a lot of the discussion that’s also happening in the market now is how do we look at the approach within the private sector in a really holistic way so that we are actually supporting, funding, facilitating a long term effective energy transition. And so if you ask institutional investors today, financial institutions, big corporates, I think this is one of the big things on their mind, is how do we really get to a place where ESG is not just about winners or losers, this sector’s good, this sector’s bad, but actually thinking through it in a little bit more of a nuanced, holistic way that’s going to set us up for success, vis-à-vis, long term climate goals.

Jon Powers:                  Fascinating. So let’s flash forward for a second, and SCC comes out with the rules. I love to talk about the importance of this decade to the stuff that we care about. And if we flash forward at 2030, what’s the environment going to look like at that point? Would there be clear understanding of the metrics, reporting dialogue that happens on a regular basis from Goldman, from your portfolio companies and others? Just paint a picture of if we’re going to succeed, what does it have to look like in 2030 to be succeeding?

Kara Mangone:             So 2030 is not a long way away.

Jon Powers:                  Not at all. Yeah.

Kara Mangone:             So it’s a really important question and it’s something we think about a lot. I think a few things from our perspective are going to be core to making the progress that’s needed by 2030. One is if you take a step back and you look at the magnitude of capital that’s needed to fund an effective energy transition in line with the goals of Paris, you’re looking at anywhere from 100 to 150 trillion by 2050. And then you haircut that for what you need to do by 2030, substantial amount of capital. And so that I think is

Jon Powers:                  … Substantially more than we’re doing today.

Kara Mangone:             Substantially more than we’re doing today. I think also worth noting that about half of that is going to need to go into low carbon solutions, renewable, solar, wind areas that we’ve been able to get to commercial scale, if you will. But there’s a substantial amount of that spend that needs to go into technologies like carbon capture, sequestration, hydrogen, et cetera, that fuel stuff that are not yet there and there’s not been as widespread adoption. And so I think for us what that tells us is energy transition can’t just be about… If we want to be effective, to answer your question specifically, by 2030, we really need to be ramping up work with clients across all sectors focused on decarbonization. And so it can’t just be about investing in renewables, although that’s really important, but it also needs to be working with our clients in the auto manufacturing sector and helping them deliver on their EV objectives, working with clients in the power sector, oil and gas, et cetera.

And so our roadmap that we have by 2030, and we put out a roadmap to the market end of December, that was very clear to say that, one, the most meaningful role we’re going to play in transition is going to be strategic advice, it’s going to be capital facilitation, it’s going to be capital raising in the public markets, but that’s going to be a really important thing that needs to happen. And there’s a role financial institutions will play, there’s a role capital markets will play, vis-à-vis institutional investors, but that’s a huge, important factor in the private markets, is that we actually engage versus disengaged. So I think that’s that’s point one. I think point two is there’s a lot of gap apps that need to be addressed quite quickly. We talked about climate data. Climate data is one. If you don’t have the right data to measure progress, you can’t manage it.

So I think data is, for sure, one. I think another area is this point that I touched on in terms of what’s at commercial scale and what is not, and one of the things that we’ve been spending time on is looking at where are the areas where public private partnership and collaboration can play a really effective role when either the risk factors are too high or the IRR isn’t there, and one area per particular that we’ve looked at is South and Southeast Asia, which is obviously critical to meeting global climate goals. We launched, last year, an innovation facility with Bloomberg Philanthropies and the Asian Development Bank. And for us this is the epitome of how you could bring private and public sector together, if you will.

So it’s a great example of the Asian Development Bank has boots on the ground, has a tremendous amount of expertise in this region, they understand the interplay between economic development and climate, there’s a lot of projects that they look at and there’s a lot of interest from private sector in the region, but not all of these projects get funded. And sometimes you need an actual proof point and risk capital. And so we alongside Bloomberg Philanthropies committed to fund 25 million in risk grant capital. You pair that with the Asian Development Bank’s ability to crowd an additional private sector capital and credit guarantees that they can provide and we expect we can scale that up to 500 million in investment capital. And so I think it’s a great example of where we’re not at a place where we can actually fund that 100 to 150 trillion, where are ways that we can use public private collaboration or partnership to actually be able to drive momentum.

And I think the third piece, or maybe part two of number two on that partnership point is if we want to be where we need to by 2030, of course, we need to do more on the policy front. And Jon, you and I talked about this when we were together at the energy forum in Aspen, but there’s a lot that needs to happen, vis-à-vis, consumer incentives and behavior to be able to achieve climate goals. And I was reading the other day that in New York State I think there’s 20,000 EVs today… In New York city, I’m sorry, that needs to ramp up to 400,000 by 2030 for New York State to meet its climate goals. And so there’s a lot that needs to happen, vis-à-vis shaping consumer behavior. I think not just focusing on the supply side, if you will, but this dynamic on energy is so important. And so I think the more that those provisions and build back better, there’s a lot of good things on the table. I think the more those can be accelerated the better off we will be, the better position we’ll be.

Jon Powers:                  It’ll be very interesting to see if the current environment, obviously the war in Ukraine is driving a lot of energy conversation, if that can help shift both the policy landscape that seem to have stalled in DC, but also the consumer demand piece, when folks are paying Fed dollars, the tank right now, how’s that going to shift their demand? When Ford’s going to come out with an F-150 and Rivian’s got their pickup truck coming. A lot of interesting things are on the horizon to shift that… Will Ferrell having fantastic Super Bowl ads about electric vehicles, if we can continue that momentum it’s going to be really powerful.

So I’m going to shift from Goldman for a second and global view and talk about one of the things we talked about is as a lot of companies that may not have the scale of resources you guys do to tackle this are also going to have to play a role in reporting going forward, portfolio companies, et cetera. I think a lot about how Walmart tackled their supply chain and they had some fantastic goals, but then they had to find ways to help their suppliers get themselves in line. What are some of the ways you guys are thinking about educating your portfolio companies to understand how to report, because they may not have a chief sustainability officer, they may have to put together a working group, for instance, to figure out how to even respond to these type of reporting mechanisms.

Kara Mangone:             It’s an opportunity, but it also can be a big burden and on ramp, if you will, just in terms of the amount of resourcing early on that you need to actually prepare and get ready for… And we saw this already in what the SCC put out that they’ll likely be different on ramping for just different size of clients acknowledging this reality, that’s just one area in terms of disclosure. So the strategy that we’ve had as a firm has been… And this is broadly the way that we’ve thought about our decarbonization offering and our commercial objectives is really around listening and spending time with our clients and figuring out what they need and figuring out what those pushes and pulls are.

And one great example I will give you is we’ve spent a lot of time with the institutional investor community, and it became very clear that they just needed good carbon data to look at their portfolios and they needed historical data, they needed forward data. It was very hard for them to think about alignment with Paris for their portfolios, weren’t sure where to start if they didn’t have that data. And so we spent a lot of time over the course of many months last year actually developing… In our marque platform, which is our trading platform for clients where they can look at their portfolios, there’s research, and we actually developed a carbon analytics tool for them where inputted raw emissions related data as well as forward information like targets and things like that, that have been committed to the market and they can actually use that to measure and manage their carbon footprint now.

Jon Powers:                  Oh, that’s incredible.

Kara Mangone:             But I think that’s where a lot of the innovation comes in this space, is building the tools that our clients need that we know is going to be useful and practical and pragmatic in the market. So, that’s one example that I’ll give you. The second is I think we need to acknowledge that we’re on a journey.

Jon Powers:                  For sure. Yeah.

Kara Mangone:             And I think it’s important to have the right disclosure out there, but I think it’s also really important to hone the exam question of what you’re trying to answer. And in my view, and people have different… You of course can have different investing philosophies and you can have a investing philosophy heavily based on values. I think where we’re actually going to need a lot of mainstreaming is being able to deliver on investing solutions that get at how to assess inclusive growth and climate through the value lens.

So through optimizing for financial returns. And so, to get back to your question on how we portfolio companies on this, what that may mean is that you start small, what’s actually relevant for that given company and their sector and their footprint, and how can we leverage shared solutions, if you will, to help support that? And one platform that we’re spending a lot of time on is called Open Source Climate, which is actually a platform that leverages a lot of the existing data that’s out in the market, I think of this as a pre-competitive layer of climate data. It could be public data from energy websites, it could be our government websites, it could be public emissions data that’s out there and trying to house it and put it in one place. I think this is a great opportunity if you’re a smaller company, you do have a big on ramp, how can you actually leverage some of the existing sources that are out there?

I think there’s a wide variety of solutions, but we do have to be really realistic that this is a really big on ramp for a lot of companies, and we have to be careful, I think, that we don’t create really burdensome compliance costs or expectations too early on because it’s going to scare, I think, a lot of market participants.

Jon Powers:                  First of all, I love your term journey, because I feel like that’s exactly what the next few years is going to be here and it’s getting more and more defined. And it’s really clear that your experience in conversation and dialogue with shareholders and stakeholders over the course of the last decade is paying huge dividends, because you clearly hear and think a lot about what others and I guess maybe the best way to put it is have empathy and how those are going to approach this and I think that’s super valuable for figuring out the path ahead. So I want to ask one final question. If you can go back in time to Wilmington, Delaware, when you’re graduating. Did you graduate high school in Wilmington?

Kara Mangone:             I did. Yeah. academy.

Jon Powers:                  Outstanding. If you could sit down and have a conversation with yourself, what piece of a career about you give yourself?

Kara Mangone:             Gosh, I give myself so much advice. Where do I start, Jon? Gosh, look, I think what comes to mind most acutely I would say is two things. One is stay hungry. Especially, I think it’s easy to optimize for a certain position and you go and you look at what’s out there and you figure out, okay, I need to do this for three years and this for seven years and this for two years and I need to get my MBA, and there were times where I really thought that way and I think it got the best of me. I would say the more that you can just be hungry and be open to learning, I think the more that you’re going to optimize for growth and the more that you will end up in an area really fulfilling and energizing for you.

And one great anecdotal I’ll give you on this front was when I was in investor relations, it was a couple years into my tenure on the team, and like I said, I started investment banking, I had studied finance and English. I was like, “I’m a finance girl and I can do corporate strategy.” And you could probably envision some of the things I was thinking about doing in my future, and one day my boss at the time, Dane Holmes, asked me to come into his office and he said, “Hey, we have this really important project report for the firm, it’s called our sustainability report and I think you should take it on.” And I’ll never forget my first inclination, I think response, although I had to stop myself pretty quickly was I’m not a marketing person. I don’t write sustainability reports. I don’t know what this is who does he think I am. He thinks I’m going to shift my career.

And let me tell you, that was the biggest opportunity that I had been given at that point, one of the biggest opportunities I think I was ever given. And it’s just hard to know what doors that will open. And for me it was a tremendous amount of learning, not just in terms of the knowledge that I had to gain to be able to feel comfortable sitting with our executive team and going through our carbon neutrality pledge and emissions related information, but it also was an incredible opportunity in terms of my internal and external network. I asked for help from a lot of people. Those were people that became really important relationships for me. Some of those were institutional investors who just sat with me and helped me brainstorm how we could improve our disclosure. And so I think the more that you can stay hungry and be open, I think the more you’ll have doors open for you as well.

Jon Powers:                  That’s fantastic advice. Well, thank you so much for joining us today and thanks for the amazing work you’re doing at Goldman.

Kara Mangone:             Thank you, Jon. This was awesome. Really appreciate you having me on.

Jon Powers:                  And thanks to Matthew and Cordelia for helping us set this up, and to our producers at CleanCapital, Colleen Young. As always, you can get more episodes at cleancapital.com, and we look forward to continue the conversation.