State Street Corporation (STT) Earnings Call Transcript & Summary

Well, great to be here with everyone. I'm a last-minute fill in, Virginia sends her apology, she could not make it. So I get the honor of moderating my first panel for the Milken Institute. So thank you, Laura, and thank you to the team. When we talk about ESG, we really talk about how a business operates. So ESG is a part of every single business. Every business has ESG elements. Some have more of the E, the environmental, could be how much greenhouse gases they emit, could be how much water they use. Could be the waste they produce and what they do with that waste. From that S, that social bucket. It ranges from ensuring there's proper worker health and safety. So that there's no forced labor or slave labor in your supply chain. It could be, do you protect your customers' data, or are you there selling it without their knowledge. When it comes to governance, it's about ensuring that there's no corruption in your system. It's about having policies in place and processes in place so that me too doesn't happen at your company. It's about Board composition. So every business has elements to ESG and what an ESG mindset enables you to do is to reduce the amount of harm your business can cause to society. It's to derisk the business, and it's also about value creation. And when you can put all of that together, you become a more sustainable business, not only from a societal perspective, but also from a financial and return perspective. And all stakeholders care about ESG. Your employees care, your customers care, your regulators care, civil society cares. So that's kind of the framework that leads us into our discussion when we start talking about ESG capitalism. And what exactly is ESG capitalism? How can ESG help address some of the imbalances capitalism creates? And support better outcomes for a large number of stakeholders.

So maybe Ahmed, start with you on this question. Where do you see the link between ESG and purposeful capitalism? And what is ADB's role in it?

Well, thank you for having me, and it's a pleasure to be here. I guess what I would say, ESG, as you just described it, is a set of tools and methodologies. And purposeful capitalism is a set of theories and philosophies. And I think what's very interesting about the evolution of this conversation that we've been having various stakeholders in recent years is it began as a conversation about tools, and it's quickly become one about philosophy. And I think that's actually quite important. Many of us noted that this was the year that was the 50th anniversary of Milton Friedman's famous essay on the purpose of a corporation. And that essay really defined an intellectual conversation about what is the role of the company, what is the role of other actors in societies. It's a debate we've been having very, very actively. And I think ESG has to be understood within the context of that and other debates because I think those are the conversations that actually broadened up the aperture beyond a narrow definition of ESG. I'm actually an alumnus of Milton Friedman's institution, but I went both to the law school and the business school. And it was very interesting to me when I was a student many years ago, how differently ethics was taught in these 2 programs. In the business school, we learned about the Milton Friedman ethic. You have a responsibility to obey the law. You have a responsibility to follow the rules of the game. You have responsibility to your shareholders. But a very older set of ideas prevailed in the law school. In the law school, you had an analog to that, which was you're a zealous advocate for your clients. But in law school, you also had a responsibility in legal ethics as a lawyer as an officer of the court. You got a responsibility to the system. And I think what's happened with this conversation about ESG is that companies have started to re-recognize their responsibilities to the system. They've started to recognize that they cannot impose externalities on society and be successful actors for very long. And I think that institutions like the ADB, and it's a pleasure to be joined by a colleague from the World Bank group, which obviously is a similar institution, our unique role in this ecosystem in this debate and in this conversation is that in a world within which we have declining institutional and political legitimacy. Institutions like ours have extraordinary legitimacy. We have extraordinary convening authority, the ability to bring together actors who don't trust together each other to solve problems. We also have knowledge and insight, and we have capital. And these 4 things, if combined, in dialogue with other stakeholders, I do think can produce consensus, both at the level of philosophy, and then ultimately, consensus at the level of tools. So both at the level of what does it mean to be a purposeful company? What does it mean to have purposeful capitalism? Where does it fit within society, but also at the level of what is ESG specifically for this company, for this sector, for this project, for this investment.

And so Hiro as an asset owner, what do you do in terms of outcomes and supporting the type of alignment that we just heard. I mean, do asset owners go beyond the notion of investment return? And do you measure success not just from a financial return, but on externalities? And then how do you keep -- do you trade-off for the 2? Or do you have to maximize both?

Well, thank you for having me. And ESG has been sort of an agenda I probably push as hard as I could when I was the Chief Investment Officer of the Government Pension Investment Fund. So your question about the how asset owner like a big pension fund should approach ESG is the center of my challenge internally as well as externally because the -- I had to persuade my own team and our own governance and also the stakeholder around us. So let me just answer your question from that perspective, because when I started my advocacy for the ESG integration into the GPIF investment process. The most common reaction, usually negative was on that -- in a notion of financial return and social and environmental, the consideration, whether they are mutually exclusive or not. And I still find it actually fortunate if I got to that point because a lot of people, particularly in my own industry, asset management or finance, they grew up believing in those are mutually exclusive, the factors. So if I found that somebody asked me that question whether it's mutually exclusive or not, I felt myself quite unfortunate to have that conversation because most of the cases, they have a very, very fixated mindset, that's mutually exclusive. So I had to start from there. And one particular -- the unique or characteristic of the pension fund is that we have a very long-term investment time horizon. And also usually very big and a very well-diversified portfolio. And my started questioning myself and my own team and also other stakeholders, is it possible for the fund like $1.6 trillion and required to have a very, very wide -- required to make a very diversified the portfolio. Is it reasonable for us to make an assumption, our goal is to outperform the market because -- but at the end of the day, such a portfolio, if we manage for long term, I mean their performance is pretty much in line with what happened to the global capital market. So I just started just to bring in the concept of, it's probably not enough to pay attention to what's happening in our portfolio. Also, actually, we have to pay attention to what's happening to whole system. So that's why I just may try to persuade the people like looking at our portfolio performance is not good enough. Because if they make a profit, creating negative externality, that is affecting outside of the portfolio but does actually affect the system. And then we have -- see that as our long-term performance of our portfolio. So that's one thing. You need to actually change the way to look at the performance. So obviously, if we don't deliver short-term performance, nobody trust us. So the job of the CIO, of the big asset owner, in my opinion is now not only paying attention to how to make the quarterly annual report but also to pay attention to the long-term consequence of that the asset allocation choices. So I just want to repeat that, I think the other notion of that -- those 2 being mutually exclusive now changing, but the -- I had a conversation with the CEO of CFA Institute this morning, Margaret. And I still perceive that the young -- even a young professional in the finance or asset management, they actually just getting -- to have that fixated mindset. And we just need to open their eyes to pay attention to outside of what they own.

And maybe T.J., just coming to you on this -- the mutual exclusivity part of this. So as a fund, you have a responsibility to your LPs, right, to the investors in your fund to maximize the return. So can you, in doing that, be thinking about the externalities, if it is going to detract from the return on the investment?

I think when we -- well, first of all, happy to be here, and thank you for that question. When we think about investments, we do identify certain issues prior to the investment on ESG front. I think us as a private equity were really the bottom-up practitioner of ESGs and we pride ourselves in being that. And by doing so, this idea of identification and implementation on ESG centric thesis is rather important. I think that's what separates us a little bit from a public approach, which is kind of more screening and engagement, we actually have the governance rights to make some of these changes and that responsibility falls on us as shareholders. Now I think this idea of ESG originally, it used to be a lot more kind of risk management centric conversation even within our firm. But that has really transformed itself into more of a return generating initiatives as being an ESG initiative. And again, this idea of identification and implementation is a big part of what we do as a private equity. Initially, pre-investment, this identification phase is still very thesis centric. I think it's our own ideas of what companies can do. But after the investment, I think a lot of GPs talk about, say, 100-day period, where we try to engage the management on some of the business model changes and so forth, and ESG is a big part of that conversation. And with that, within governance, we think of and we agree on ESG initiatives along with the management, and that will be simple enough and achievable enough, will the management can communicate to employees who, at the end of the day make the day-to-day changes. Now as far as the conflict between some of the actions, I think, particularly under this kind of COVID environment, there are some sensitive conversations to be had. Certain sectors that are greatly impacted or reducing headcount and so forth in order to survive and to balance that conversation along with some social issues and ESGs, sometimes can be very difficult in a board room setting. But I think the important thing is to set that ESG initiatives as one of the core management plan and objectives early on from the date of investment, even pre-investment to engage the right people and then engage all employees for a common goal and having the same language, I think is very important. So the practice and keeping that in a consistency really enables us to kind of face some of those challenges or difficult questions, along with the idea of ESG initiatives versus maybe some of the more economic conversation.

And Alfonso, I think IFC has been doing ESG even before it was called ESG. I think, all right, I mean, IFC's had the IFC performance standards. That's basically the framework that most private equity funds use today as their standard. So from an IFC perspective, how do you think of meeting those IFC performance standards from that ESG perspective, is it to impact the system worldwide? Or is it just to look at how each investment performs as that particular investment and the return that you're going to get financially and socially?

Thank you, Steven, and thank you, Milken Institute for inviting us one more year to this great conference. So I think that, as you mentioned, ESG is an IFC, we could actually think that it's the same as part of -- it's synonymous almost, no? So you cannot understand IFC activities. Actually, you cannot understand the World Bank Group without thinking on ESG. It has been at the core of our mandate since the early stages. And let me take one step back, taking what Ahmed was mentioning. I didn't go to business school. I didn't got to a law school, but I went to an economic school. And actually, this is the third piece of the ESG that is critical, which is to create the right incentives to actually make ESG used across the board and across the system, which is part of your question, Steven. And I think that there is where the World Bank Group can really play a significant role. How can we create the incentives? How can we incentivize both the public sector, but also the private sector to use and to adopt the ESG principles in their activities. And this is sometimes can be painful. Because some of the ESG principles in some countries are not easy to be implemented. And some stakeholders might not be ready to implement these principles. And some clients might not be ready to implement these principles. But I think that it is really worth it to do it. And we know that actually the benefits of this are significant. So today, I can say out of the 6, we have more or less 600 projects in Asia Pacific. Thinking that these 600 projects comply with the ESG principles, not just at inception, but actually, we do a regular checking every single year that actually these projects continue complying with the ESG principles. This is a public good that in our opinion, has a huge value in -- for the society. But let me think -- and why is it like that? This is what we call the World Bank Group nonfinancial additionality. When we think on what is the role that we should play as an institution, we always think, okay, what is the seasonality that we bring to the markets where is the additionality that you bring to what the private sector or the public sector could do, why do we need the World Bank Group. And we think on this additionality, what we really add to whatever is being invested. And the nonfinancial additionality is precisely the ESG principles. So how can we use these principles to really create the incentives to really help stakeholders and clients to adopt these principles in their day-to-day. And this comes, of course, with the incentive of providing financial support, but also with the help of providing the advisory services and technical assistance that is needed to adjust it. And let me conclude with 3, I would say, innovations on this area of ESG principles, now that we are trying to move in that direction and that I think that is worth mentioning. One is the impact investment, and we hear from the market -- from market participants, this impact investment goes beyond the ESG management risk. So really is how can we make -- how can we bring together the 2 pieces of the economy? So basically, the portfolio managers and the assets. How can we really make sure that these speak the same language and that we can create an ecosystem, an asset class that can really be recognized by asset managers as something that can provide a financial return and an economic sustainability return that is worth investing. So this is one thing that I believe is critical. The second one is how to bring or how to make ESG more dominant in capital markets? Which is not an easy task, and we know that. In fiscal year '20, IFC was issued the first bond where actually we requested the ESG conditions to be complied by the underwriters, which is quite a new thing that we did. I think it was not easy. But I think this is a way of bringing as well the ESG considerations, not just to the real economy or to the real films but also to capital markets to underwriters, and therefore, at the end of the day, to the securities market. And the third one is, I think that we need to continue changing views, continue bringing together the private and the public sector to really try to avoid what we call the either green washing, social washing, blue washing, whatever you want to use. So basically, to define standards that we all feel comfortable with and that can help us to define an asset class. That at the end of the day, is what I think will be a game changer in order to make ESG something really spread out the capital markets and different investors.

And Mostapha, I want to ask you because T.J. talked about, Alfonso talked about ESG at the portfolio level. I mean -- and it's relatively -- it's not easy, but it's pretty clear when you can look at a portfolio company or a potential investee company and due diligence, what are the material ESG issues? How do you mitigate that risk? How do you have value creation? And then as an asset owner with influence, how can you work with that portfolio company in the investment phase. But from State Street, you have a whole system to look at. So how do you take this ESG approach that fits very well within a private capital framework, and apply it to the entire financial sector?

First of all, thank you for having me. I think we cannot improve something if we cannot measure it. And I think the challenge, a lot of asset owners, asset managers, clients we talk to is the lack of standardization, lack of consistency across the data set available. And as well, I think, in a way, transparency in the way this information has been gathered and been provided. So the challenge is you have more than 100 market data providers, providing information around ESG factors. So you have a plethora of choice. The issue is when you look at it in detail, and we've done some study on it. You have a few issues in this data set. One is materiality. So the way different data providers are looking at it from what is material and you know that have a big impact in ESG, depending on the industry is not the same. Second is around data acquisition and way estimation. So the raw data available is not consistent across all corporates, and we need to make sure, have you sourced the right information? And what do you do for the information which is missing? And in that respect, there is a lot of algorithm statistical models that are mainly based on average, not as accurate. And the third is the aggregation and weighting. Again, when you look at these factors, which one you put at the first, how you weigh that. And if you compare -- and we've done that in, I think, a few years ago, we compared across different provider for 18 months. The correlation factor was less than 1 out of 2. So 1 out of 2 is different across providers, which show you the way we need to go forward to standardize. So to your question, what we can do as asset servicer and investors to help move in the dime anyway. So if you look at -- technology is key now, so ability to aggregate information, and provide an open architecture model for institutional investor is very important. So how can we put together ESG analytics, which are multi source, multi provider, providing the optionalities for clients to make their own decisions about the source of the information they need because some providers are stronger in climate analysis. Some are more in, I would say, social impacts. So how can we allow our clients to pick and choose, depending on their own understanding and objectives on the solution. Third, how can you put together the traditional risk metrics and the ESG ones? I think to T.J. point, you have a portfolio view, an asset allocation view. And then you need ESG risk is one important. And the Hiro mentioned it as well, it's not all areas. We need to have a holistic view now on the risk analytics, you look at it as a portfolio across portfolios, across strategies, across geographies, across sectors. And finally, how can we have this client providing in a way the reporting they need to provide? And you know emerging now some standard of reporting is ESG and others, GRI. So how can we get this ready go solution for this client to report back to their board, to their investors. So that's the way -- that's kind of zone we are acting on to make sure we help in the way transition and help transition clients into this ESG friendly investment policy in a way.

And then Ahmed, building on that. So what role do regulators and central banks have in this? Because obviously, you have a huge investor demand, you have people trying to provide some type of framework upon which to make judgments. But what else that can be done without the regulators or central banks coming in either in offering new products or standardizing some of what is happening by naturally in the market right now?

Well, I mean, I think regulators have an absolutely critical role. And as does the broader official sector, and I think Alfonso alluded to that a bit in talking about the role played by the World Bank Group and others in establishing standards. But I think we often, when we talk about regulators, we focus very much on disclosure and on standards, but I actually think the role is much, much broader. We recently did a study at the ADB with the University of London and the WWF on the relationship between climate change and sovereign risk. And we looked at what is the role of regulators in this ecosystem, which is I think one subset of many other problems. And it sort of begins with analysis and actually identifying the issues, identifying the linkages, the transmission mechanisms. Regulators should also be doing in this specific example, national adaptation strategies. They then, I think, just to sort of build on this as a specific example, you then have to mainstream that analysis in the context of a sovereign, if you've done sort of this scenario planning, well what implications does that have for budgets? You're doing budgets on an annual basis, how do you incorporate long-term costs, what implication does that have for your funding profile, regulators have a role in driving that analysis forward as well. Then I think you get, at that point, you've done analysis, you've done scenario planning. You sort of incorporated it into your planning documents. I think at that point, you get to regulatory framework, disclosure standards, stress testing. All of these things, I think, are also important areas where regulators become very, very important. And as we've discussed, I think, and Mostapha was saying, there's an extraordinary plethora of data sets there's just an extraordinary number of standards. And I think that the official sector is one of the few places where you can actually force some consolidation, some standardization and build some consensus around nothing is perfect, but you've got to move forward sort of with something. And then I think moving beyond that and looking forward, regulators have a role to play in developing tools to deal with the problems that we identify. So in this specific example of climate, new forms of insurance tools or other mitigation tools, I think regulators have a role there. And then finally, what I would say, another role for regulators on these issues goes beyond the national level into the international level because there's always a dialogue amongst regulators. So they have an obligation to bring each other along. So technical assistance, surveillance. So I think what I would say is that the role of regulators is extraordinarily broad, extraordinarily important and very, very multifaceted.

Here, Ahmed just mentioned some new tools. And so we've been talking a bit about private capital, private equity, but you also have other ways to invest behind ESG principles in green bond, social bonds. So what tools do you see coming? What new financial instruments might there be that can help achieve that balance?

Well, the -- when I was running GPIF, I need to find the -- some -- the new way to really allocate the capital to push this agenda because on one hand, a big asset owner like GPIF has the policy asset allocation. And also, there is some limitation in how flexible we could have been in terms of the product selection. So I kept asking asset managers and the banks we work with, just to give us some new ideas how GPIF within the fiduciary duty to redirect the capital to push this agenda. And the green bond and a social bond, which is in compliance with the ICMA social and green bond principle, is one area that we found we can push. And while we are achieving the same interest rates from issuers, we can push that agenda. So social bonds, green bonds and SDGs bond. Those are the other sort of like useful product for GPIF to use. And I have been pushing this -- the new product becomes more and more mainstream. And on the other hand, I think the -- I was actually surprised to find out GPIF is not only one, but many, many asset owners, they make very unconscious choice of indices.

What about in terms of public private partnerships? Are there opportunities to expand in terms of ESG into getting the type of financial returns where you don't have to balance off those externalities because you're partners with the government?

Yes, absolutely. And I think -- I mean we need to unpack the ESG when we think about the role of the public sector, regulators private sector. I mean, yes, to be there are too many things within ESG. So when thinking of how we can bring together, actually, when thinking on the public, I would include the regulator, as Ahmed was mentioning, because the role of the regulator is absolutely critical. Not just on setting standards, but also on creating the right incentives by using the regulatory frameworks to create those incentives. And we know that this is one of the channels or of the tools that we use in financial markets to create the right incentives. But second, because the data is absolutely fundamental in this market or in this topic. And it is not easy to find consistent data across the board. There is -- and this is a role that the public sector needs to play. You need to bring the public sector, but we need to construct a good database that can be used by the private sector, and therefore, that can be the basis for a potential scalability in a way of this issue. An example of how to bring together the private and the public sector. I mean, there are many. And I think that, for instance, the recent initiative that MAS has announced an on climate transition task force is a good one. It's a way of bringing together and to facilitate that dialogue to allow the transition risk to be managed. But let me bring another one, which is probably very new, but in my opinion, very relevant, which is all related to the blue economy. All the problems that we have with marine plastics that has actually been increased significantly due to the COVID-19 and the single-use of money -- of bottles, these need action. And when you think of what is the action that actually we can -- what can we do? You need both sides, you need the public sector because you need to regulate. You need to decide you need to establish the policy, you need to create the incentives. And you need the private sector to start adjusting their modus operandi in a way to this new policies -- this new ecosystem. So if the public sector, the main role in this context should be to provide the certainty to reduce the uncertainty that exists in the market, to provide transparency, to provide the information. And the private sector to then start adopting this new way of operating based on the analysis, as Ahmed was mentioning, that has been done, that is great. I mean, I feel we have enough analysis to understand that ESG is absolutely critical in our modus operandi. A different thing is if we have the right tools or if the tools that we need from the private sector to really use it or to really adjust our activities to this are available for all -- and are transparent enough and useful enough.

Mostapha, do those tools exist today to do that type of measuring? To be able to find out that carbon emissions have been reduced? Or what is the carbon that's been produced and that would have -- and the opportunity cost of having done it a different way? To be able to measure what needs to get done, so you can enable these public-private partnerships.

So again, the framework exists. So the tool to be able to play back the impact of the portfolio, the carbon exposure are available and could be again consolidated across a large asset owner, across external fund manager, internal managed assets, private equity and public market business. The issue is the raw data you need to source into these tools and the standard you apply to that. So who is the authority today defining what is the rating, what is the weight of these factors. And there is effort, as you know, there's a lot of people asking for more coordination, standardization around the way we look at it. There are a few initiatives happening in the marketplace to define a kind of set of standard we can use. So for now, it's pretty much a discussion with large investors. And again, Hiro mentioned what he was doing at GPIF, it's this kind of large, very committed asset owner are driving, in a way, this mindset change around this is my expectation. This is the factors or this is my policy, I would like to apply for their external fund manager managing their asset to apply and to integrate that. So they are playing a big role in influencing convergence around the set of rule, which will be used in the future as a standard like any standard we have today gives or others in the way we report back performance or analytics or risk, et cetera.

And T.J., talking about raw data. When MPIA does its survey of private equity and venture capital funds. One of the biggest challenges is getting the data from the portfolio companies. Because if you -- and especially in emerging markets, most of the investments are minority deals. They're not controlled deals. So you can't go in and demand that you get all of the data you need. So how are you handling that as a fund? Is this some -- and what are your LPs demanding of you or requesting of you? And are those demands increasing when it comes to data?

Yes. So as my fellow panelists said, I think the standardization is very, very important. But at the same time, as a practitioner, we can't wait for a certain standard to be set for each one of our investments. So in a sense that it's very important that we, as a GP kind of makes a certain initiatives that are achievable. And fits our sort of insight and our country specialty and things of that nature. So things that really fit our organizational resources, the initiatives that make sense and then to pursue them. I think it's very important. For example, for us, we focus on things like community, diversity and empowerment over things like carbon or energy and things like that because of the type of investments that we do, and we believe this social impact or employee empowerment and things of that nature make a bigger sort of day-to-day changes. Now this idea of data is very important because that's part of the common language or common goal that we can show to not only our management, but their employees as well. I think the entire company has to share the same information and the same goal in order to achieve it. Now as far as the quality of data and then going back to this idea of standardization, I think this is a trial there. We first agree on a certain set of KPIs and certain set of data or a quantitative goal and then to share that on a very periodic basis to our LPs, and our LPs and our investors definitely help us define or improve on the quality of data as they see other GPs or other standardized format. And we actually have the responsibility to take that and take it back down to the management and then to almost each employee level so that those who actually make the difference on a day-to-day basis share the same language and same kind of information that the ultimate LPs and investors and stakeholders are looking for. So we have to play the role of translator in that sense. But the translation only work as long as it fits within a certain criteria or sectors or certain ESG factors that we, as a GP, understand quite well and have a very specific insight to.

Could I -- Steve, can I jump in?

Of course, yes.

It's been quite interesting to me to listen to -- we've got 3 different kinds of asset owners here, right? So Hiro is so large, $1.6 trillion and is going to own the assets for so long that there's no such thing as an externality, right? He is the market. State Street, is a custodian and an asset manager for third parties. And as a consequence, is highly regulated. And so has to obey the rules of the game. But then when we got a private equity firm, it's very micro. It's the deal. It's the transaction, and there's a desire to do the right thing because you want to do the right thing, but less regulated and actually a much harder set of choices in specific instances. And I think one thing that was really interesting to me in hearing the 3 different types of asset owners or managers talk about how they think about these problems is that, for one, it's fully internalized, for one it's regulation. And for the third, it's a really hard set of choices, knowing that there's things they want to do that there's expectations, but there may be specific situations where the near-term interest is a 10-year fund. If you could create value for the first 5 years, you exit, you're out, somebody else's problem. And I think that, that, for me, just listening to those 3 different perspectives on struggling with this problem, really also encapsulates the challenge in driving this agenda forward because there are really hard choices at the micro level that managers and asset owners made. So I thought I'd just sort of jump in with that because I thought it was sort of interesting to see those 3 different voices on this issue.

And that's -- I mean, kind of leading to our final section, which is on what are the investment opportunities, given you have ESG being looked at all from those 3 different investment perspectives, but they're all thinking about ESG. Now when I was at KKR, I would often get the question, how many deals did you not do because of ESG, and I said that was not our mindset. Our mindset wasn't what do we vito because there's an ESG prompt. The mindset was, what deals can we do that we wouldn't have done otherwise because we have an ESG mindset. So maybe you wouldn't invest in palm oil and say, well, they're not RSPO certified, we won't invest in them. We say if we can get you to become RSPO certified, then you become investable or maybe there's a company in Vietnam that's not great in terms -- or doesn't have a worker health and safety program. But if we can work with you and put one in, then you become investable. So it is all about what can you invest in? What are the opportunities? And that was kind of the mindset of the approach to ESG. And so the question now that more people are looking at ESG as an investment opportunity, where should investors be looking at over the next 5 to 10 years. And it's got to be more than slapping tech on the end of everything, right? Oh, it's EdTech, it's HealthTech, it's FinTech. Every it's AgTech. Everything is tech now. So it has to be more than that, right? So maybe we'll start with the IFC. Where do you see the trends emerging right now in terms of investments you might not have been making even 3 years ago?

Well, I mean, I would start with the SDGs. At the end of the day, the ESGs and the SDGs are intimately correlated. And we know that at least we can identify 5 sectors within the SDGs that will absorb part of the attention because opportunities are there. We can think on education, we can think of health, we can think on roads, electricity, water and sanitation. So these 5 sectors, we believe that will be at the core of the ESG investments because it will be very much related with SDGs. And because I see that these are sectors that are facing a huge transformation. I mean transformation because the economies are transforming. The countries are transforming. If we look at South Asia, for instance, if we look at India, there are a number of people that are moving from rural to urban, the lack of capacity that we have today to absorb all these new demographics that are coming to the organization. I think that it opens a huge opportunity for investors and a huge opportunity for stakeholders globally to really, as we do -- as we say in the World Bank Group, building back better to really start doing things in a way that can be -- that can really shape a resilient recovery. I think that all these smart green and smart investing infrastructure in the future is going to lead part of the agenda. And the numbers are there. I mean, I'm not going to repeat all the numbers and estimations that are because of trillions and trillions, and one gets lost among so many trillions. But I think that the opportunities are clearly related to this way of thinking how we can create a more resilient recovery. I just to give one number, one -- the group of the 30, Mark Carney published, I think it was yesterday or before yesterday, a report on the serial net growth, serial net green. And they estimated and they made this estimation that we can lose 25% of the world GDP, if the temperature increases by 3 Celsius degrees by 21 00. 25% world GDP. I mean, it's unbelievable, the impact that it can have in terms of poverty in terms of losing all the gains that we have actually achieved during the last century. So I think that what can we do? The only thing that we can do in order to avoid that happening is really thinking of how we can invest, how can we direct and create incentives to avoid this happening, which is very much related with ESG, and which is very much related to really complying with the commitments that we did with SDGs as a global institution.

So Ahmed, Alfonso just talked about building back better, which applies everywhere. It's the President Elect Biden's theory on his next administration is going to be building that better. So this is globally, people are talking about this, but what's the difference between ESG and emerging markets and developed markets? What's the difference between ESG, even within Asia, between Japan and Singapore, you're going to be very different from Vietnam and Malaysia, Let Alone a Cambodia, Laos, Myanmar.

So I think what I'd say in answer to that question is to go back to the beginning of our conversation, which is it really begins with what does it mean to have purposeful capitalism. And I would define ESG as a set of so the real question is in Asia and emerging markets, what's the role of private enterprise. And I think that this is a really important question. I mean, we're obviously a development agency of the World Bank. And there's an important theory of development that argues that development is really about the quality of institutions. And in many countries in emerging markets, development there is tend to talk about political institute but in fact, some of the most capable institutions are economic institutions. And so it's very important that these institutions have a sense of their responsibility in society. And I think actually, in Asia and in emerging markets, they often have. Very soon after -- I'm based in Manila, where the ADB is headquartered. Very soon after we went into lockdown in the middle of March, I had the conversation with the owner of a very large business group who's construction firm employees over 50,000 people. And I said, what are you going to do? He said, look, I've got 0 revenue, but I have a responsibility to these people, and I will pay them until we don't have any more money left. And I think that was an ESG. That was purposeful capitalism. That was a sense of responsibility. And I think that in many of these countries, whether it's because these institutions have capabilities or whether it's because the legal and financial markets and systems were not so atomized and so regulated that they were able to -- in developed markets, what we ended up doing over time is we defined our sense of more obligations as equivalent to our legal obligations. And that was never true, but it's something that emerged over time. In emerging markets in Asia, that didn't happen. And so these organizations always had a broader sense of their responsibilities towards society. And that really comes through in times of crisis, like this example that I told you. Working with this business owner and others, the ADB in the Philippines created a development bank, government, private sector partnership in the immediate aftermath of COVID-19. We ended up feeding 60 million meals. We drove PCR testing capacity in a matter of weeks for the country from 3,000 to 35,000. So when I think companies engage in their full sense of civic and public and social responsibility with owners and employees and stakeholders to recognize that then they look beyond the narrow trade-offs. And I think that's the direction we have to move in. I actually think that is the lesson that emerging markets in Asia have for the rest of the world. Which is that you've become so obsessed with a theoretical construct that you actually forgot what you already knew.

And T.J., maybe turning now specifically to Japan and Korea. I mean as your deal teams are coming up with their investment thesis. Are they looking at different sectors now than they were looking at beforehand because of an ESG perspective? Or is that they're looking at the same sectors, but you can use ESG to differentiate yourself from other funds, which don't have the track record and the frameworks that you have had in place and have had in place for years now.

Yes. This idea of a different set of ESG priorities and issues per community, I think, is a very interesting discussion. I think what Japan and Korea share, to a degree, is one, these are 2 countries with decreasing population and aging demographics. So that's a big sort of community social issue challenge. And as a firm in Japan as well as Korea, we've identified things like employee empowerment to be a big part of how we want to approach ESG because the human resources, particularly on the younger professionals or female participation. These are big issues where Japan and Korea maybe lags some other developed markets. So in that sense, in particular, we look at consumers or B2B services, retail, services, outsourcing, some of the industries that have performed, but the the lack of people heme resources or the right incentivization, all these kind of social issues is actually a real bottleneck to some corporations. So we try to untangle that. Another thing that we think about is this idea of community approach. So we do quite a bit of hospital investments in Japan. And we definitely look at each investment in each hospital, some operational improvement. And again, with ideas of employee empowerment, which is very timely issues with -- under the COVID situation. But there's actually beyond that, beyond the hospital that we own by improving the efficiency of our hospital, the overall community, meaning that the city, the the county, where there are multiple hospitals, if our hospital manages a certain aspect of health services better than the other hospitals can actually concentrate on other medical care sectors. So for us, we do a lot of rehabilitations and that type of things, where other hospitals don't have to do that and they can concentrate on other areas of medical practices. So as a whole, we have not only improved our own hospital, but the entire community efficiency of health care services. So this idea of ESG extending beyond our portfolio company and then try to make an impact on community is very important to us. And as we try to extend the challenge, it goes back to the conversations we have had, the right set of data, and that becomes very important and more difficult. But again, for us, as we look at our expertise, this idea of community approach is just as important as trying to improve our own assets so that our impact goes beyond just our ownership and affiliates.

A quick follow-up on the data point. Because employee engagement is something that can work across sectors. But how do you measure it? I mean, you could say, okay, well, you can count diversity in terms of how many women do you have on the Board. We had 1. Now we have 3 or how many women are in management as opposed and management in terms of finance as opposed to HR. And -- but how do you measure it? And then if you do have an improvement in your financial return, how can you tell them, well, that came from having a more diverse workforce? And if it's impossible to do it, then how do you end up when you come to judging one investment over another one, private equity firm over another one?

That's a very good question. And I think it starts actually even before the idea of measuring. And when we actually -- as I said, when we make an investment, start engaging our management on tax of ESGs and try to get some ideas, not only from the management but from employees. There are a wide range of issues that can be considered as ESG policies. And so we have to actually choose simple and again, achievable sets of initiatives that we can follow a very specific number and quantify them. Again, this is very important so that each employee can understand what we're trying to achieve. Now this kind of goes back to again standardization idea, but whether it's a participation or having a certain number of e-mail above a certain rank. I think these are some common figures, and we try to take some examples from other organizations. But I just -- we never think that there is no right answer immediately because it has to resonate with the management and the company. So this idea of dialogue that we tried to do our best in identifying each company's right set of goals and tools and communicate that to our investors and getting feedback on their having much wider perspective and network to other GPs that we try to take other GPs best examples on using certain data and so forth. So it's really a trial and error. And then this idea of transparency and communication is very important in order for us to continue improving the quality of data collection and reporting.

And here, moving in terms of investment opportunities from the geographic kind of the sector and the disruption thematic with your experience with Tesla, where -- do you see Tesla as like an ESG investment? And what other disruptive technologies or disruptive business practices should investors be looking at so that they can invest in the next Tesla?

Well, that's the other most popular question I receive. Before jumping on to the -- my view on Tesla from an ESG investors perspective, let me just touch upon the type of this panel. And I feel a sense about this quite of achievement just looking at this title of our panel. Universal ownership, which we advocated because the biggest -- you have to have a concept of not just the order of the portfolio, but the owner of the capital market universe. So that's one thing. And the ESG capitalism, I served on the Board of PRI and ESG started about 10 years ago as the investment concept by PRI and under the leadership of Kofi Annan at that time. And so it started as the other investment terminology or investment jargon and now that expanded into the everything. It's being integrated in reporting, it being integrated in not only equity but the bond and bank loans as well as the regulation. Now the La Galda talks about a green key using ESG, the standard. So I think ESG started as a just kind of like a technical terminology in the investment community now expanded throughout the -- our economic system. So the ESG capital is something like kind of the one milestone we started like seeing, like we are moving on to the next stage. So this is a paradigm shift. So when the paradigm shift, that created a lot of opportunity for investors, right? That's what the paradigm shift is all about from the investor's perspective. So that's one layer of the opportunity for investors. And the second layer of the opportunity for the investor is, I discussed this a lot with active managers when I was a Chief Investment Officer of GPIF. They -- And I keep asking, can you integrate and use the ESG more actively in your portfolio management for your active mandate? And usually, they said, "Well, we want to do that more, but the information, not the standardized or like there is no data to prove that point." But on the other hand, I argued saying like, "If there's no comprehensive data set or not proven yet, academically, this creates a great opportunity for active investors to make a difference. So stop complaining about the lack of not such information, standardization, this will give you the best opportunity in probably a century to create a real extra return offer, the difference." And the third one, the layer of opportunities, as you just touched upon, some companies see businesses seems to get the more tailwind than the others, right? So if you look -- when we look at the stock market performance, we tend to discuss index. So even under the other -- this pandemic, we seem to have a very strong performance of index. But if you -- when you look into what's going on, we saw a lot of significant changes in market cap ranking, not only within the industry but also the -- across the industries. And when I analyze those, 2 major factors to make the enable that change is the digital transformation and the sustainability transformation. And I'm afraid to make my comment on the Tesla's today's stock price, but we made a big headline when they surpassed Toyota, like only just 4 months ago, now it's valued about 3x as much as Toyota. So that's that's the phenomena. I don't want to comment. But the one thing I can tell is, Tesla is a digital transformation company as well, because they are transforming car into the digital kind of gadget or IoT. And also they are promoting like a zero-emission transportation. So that's sustainability transformation company as well and getting a big tailwind from the ESG investors. I think that's the way I see what's driving Tesla's market value at the moment, obviously, under the leadership of Elon Musk. Those are factors I observe. And if you look for that kind of the businesses to get 3 of them, obviously, you have a great chance.

And Mostapha as kind of a platform and as a custodian, where is it that State Street needs to invest to stay ahead or keep up with the ESG curve?

Yes. I think, again, reminding you for State Street, we have 2 businesses. So we are in large institutional investors, and we have a large asset servicer. And if you look at it and some resonate with what my fellow panelists have said, first, we do research. So in that respect, we have a role to play around raising awareness around ESG. And in that respect, we have what we call State Street associates. We work with pioneer, George Serafeim, we do studies around how ESG factors have an impact on performance. And to the point you raised earlier, the latest study show a direct connection between employees management, supply chain management, basically how corporates manage their supply chain, and including in the COVID situation with their performance and marketplace. Check it out. It's very interesting to see data, solid proof that this is working. Second, as investor, I think 2 things. There is something we haven't touched on a lot, which is asset silver chips. So as a large invest, we all play a role, been in Board having vote to make sure that ESG components are understood and driven by the management of this corporation of investing. We have as well to provide investment solutions, which are ESG compliant for client. Last but not least, the analytics, the data story, as you said, has a large $34 trillion of assets we have in our book as a large data holder and data custodians, we have as well a lot of lean way to continue developing technology and to your point about rules and data sets, there is a French saying, better is the enemy of good. So to the point earlier, so better is the enemy of good. So we have enough information to make the right decision. We can have better information, but there is enough information there for people who are engaged and committed to make a difference to make it happen. And in a way, we believe our role is to walk the talk as a corporate. And in the other side, it's facilitate that through research, investment, data and as a larger corporation like all my fellow colleagues here in the room.

And on that point of shooting, don't let better be the enemy of the good. I just want to say to the panelists, thank you for all being better. This was a great discussion. And I just want to congratulate on behalf of all of us, Laura, and the team at Milken for really putting on an amazing conference given the circumstances. Even without the circumstances, it's been a great event. So thank you all very much. Thank you.

Thank you very much.

Thank you.