Republished with permission from The Australian
Before she was 35, Karen Karniol-Tambour was already head of investment research at Bridgewater Associates, the world’s largest hedge fund founded by the legendary Ray Dalio. In 2019, she cracked Fortune’s “40 Under 40” most influential leaders in business.
In investor world, there is a clamouring for answers as to how to tackle climate change and energy transition. Karniol-Tambour is now co-chief investment officer for sustainability at the $US160bn ($220bn) fund.
On Wednesday, she spent two hours talking to a select group of clients from UBS across the world on the future of sustainable investment.
Investors and policymakers are the two forces upending traditional risk return thinking for business. The changes coming are big: to transparency, investor engagement, new markets and tough choices.
And as an investor, whether you personally are concerned with social issues or not, she warns that the basic tools that affect economies are now less macro and more driven by the political process and therefore social feelings.
Karniol-Tambour no longer sees investment as a two dimensional risk/return. Climate change may have risk, but “impact” is a class of its own. “I think of this whole area as in its infancy,” she said. “It took us decades to measure risk in so many multi-dimensional ways and now we have huge risk practices and many ways of capturing it. Impact is very, very new.”
Bridgewater has been working on how to measure net zero transition thinking systematically over an entire portfolio: carbon emissions, ways of offsets, putting money towards solutions or exposure to clean technology.
“What we have built is an ability to start asking those questions and be a guide for how to do engagement well with corporates, look at a systematic process and say here is where the problems are, here is where you are not meeting your goals of being aligned to net zero. Without this building block, you can’t really think about a three dimensional portfolio,” Karniol-Tambour said.
She agrees measuring is a challenge, but she likens it to measuring growth in China.
“There are so many data sources, questions on accuracy and yet we all know as investors China is too important to the world economy not to have some assessment, so we do the work.”
Growing up in Israel, Karniol-Tambour joined Bridgewater in 2006. Dalio has famously called her a vacuum cleaner of learning. “What drew me to Bridgewater as a young university student was the curiosity that people had about the world and trying to understand it and how it was a space where you understood something, it was very actionable,” she said.
“Precisely because Bridgewater is systemised, everything we have learned over 45 years has already been written down and captured. So running research was an incredible playground. What are the things we want to study, why are they important, how do they affect economies and markets?”
She says her mentors, Dalio and co-CIOs Bob Prince and Greg Jensen, invested hugely in her. “That was the thing that kept me there. If Ray taught me anything it’s really how much you don’t know is often more important than what you do know. How you have to be able not just to look at the data there, but ask what data do I need?”
Australia, despite its reputation on climate change, is expected to come through energy transition pretty well. “We don’t have Australia as a major loser in this. We map all the economies, matching what they make to what the world needs. Australia is also making commodities that the world needs more of, not just fossil fuels. Plus Australia has such a wealth of talented firms and individuals and knowledge built up” she said.
Central banks have emptied their tool kits and Karniol-Tambour says money printing directed through the fiscal process makes for a very different world for investors.
“The basic tools that investors have got used to as being the ones that affect economies are being driven by the political process and therefore what people care about.”
Today, she says policymakers are the biggest force in deciding whether profit and purpose is aligned. They set the rules of the game on how easy it is to get to net zero, and those rules vary by country and commodity.
Take the transition risk in iron ore versus gas, both under pressure from regulators on emissions. “Yet the price of one, natural gas, is up, causing all these issues particularly in Europe where it’s very expensive, and iron ore is basically in freefall in terms of its price. It is because the way policymakers attacked it is quite different.”
Most economists would like to tax emissions, but this is not happening. Instead, there are supply squeezes on gas in Europe, which is yet to be proved as a successful transition model. “It brings up this issue of whether you want to be that investor that is profiting off that price squeeze,” Karniol-Tambour said.
Governments can regulate business directly on net zero, or set up incentives. “In the US, you’ve seen the clearest pushback from the oil majors. They said if you are not giving me incentive to transition away from oil, why should I? And you are seeing the shareholder activism in response. Those are probably the bluntest conversations we are watching the most closely because you are getting the most clear push-pull.”
Interestingly, Karniol-Tambour says hedge funds, with a reputation of moving prices through shorting stocks, are not big players in energy transition. “I don’t know if we are going to see that, we haven’t seen much of that yet. Hedge funds are probably the most behind in the investment industry. Europe is most advanced and hedge funds are less popular there.”
She does acknowledge the power that hedge funds wield when they choose to do so. “We just don’t know how they will choose to use it, for good or for evil, because they are not players right now. The best possible role for them is that by the time they get in the game more has been shaped in standards and regulation such that they are playing a positive role in accelerating the changes we want to see.”
Karniol-Tambour says public market investors are having the most direct impact on businesses because they can change the cost of capital. “You see how hard it is to get financing for certain types of projects” she said. Pressure from investors is also forcing disclosure on emissions, in turn changing business behaviour and also pushing business to lobby governments to speed transition.
Bridgewater’s own strategy on engagement is to leverage the power of its systemisation tool. As a macro investor, it has formed a consortium of partners that can table results for companies. The firm is also active at many other levels. Karniol-Tambour said: “Engaging at a policy maker level, engaging sovereigns, engaging people like market makers, people who run exchanges offering for example green aluminium contracts for us to invest.”
She says she has no idea of the risk return on hydrogen. “You need science evidence-based investing for saying, hey this is a high-quality bet for these reasons but I’m really excited to see an ecosystem try to invest in it.”
However, she does see a carbon offset market developing globally, providing the integrity can be guaranteed. “The biggest risk is that people pay a lot of money that doesn’t actually remove any carbon from the atmosphere. It should not be on every investor to be an expert in the exact project.”
Used under license from News Corp Australia.