MARISA HALL: Well, hello. Good day. It is my absolute pleasure to be able to introduce Stewart Brentnall, CIO of New South Wales Treasury Corporation, otherwise known as T Corp, actually number 100 on our Top 100 Asset Owner List at standing at about $110 billion Australian dollars. Stewart, it's an absolute pleasure to have you here.
STEWART BRENTNALL: Marisa, thank you for having me. It's a pleasure to be here.
MARISA HALL: Brilliant. So, Stewart, I just want to talk to you some questions because you have spent quite a lot of time thinking about issues around sustainability and ESG. And you're an incredibly valued member of the Investment Organization of Tomorrow Working Group as part of the Thinking Ahead Institute. And so I just really wanted to pick your mind on a few questions. And I might just dive right in if that's OK with you.
STEWART BRENTNALL: Sure.
MARISA HALL: So we see that there are multiple stakeholders in the investment industry. And we see that investment goals have multiplied. They have shifted. We see that societal context has changed. I mean, do you believe that the needs of all of these multiple stakeholders have framed the asset owner's agenda when you think about setting a purpose and vision.
STEWART BRENTNALL: Look, I think it's a good question. And, traditionally, we've come from an environment of risk and return as the primary lenses for investing. There is the third dimension now of ESG.
And both companies and asset owners and investment managers need to think about that third dimension because while they have a legal responsibility to deliver the best financial outcome for their members or shareholders, they, nonetheless, have to think about their footprint in the communities that they operate in and the impact they have on other stakeholders. And if they don't operate their businesses sensibly, those stakeholders can impact the health and outcome of those businesses and, ultimately, the financial outcome. So I think there is a requirement to think more broadly simply about members and shareholders and financial returns. Yes.
MARISA HALL: Brilliant. So I just want to cast your mind back to last year at COP26. And there, we heard all of these commitments from government to move towards this net-zero economy. And there was much talk about GFANZ back in the day, about private finance. What challenges do investors face, do you think, in meeting net-zero portfolio goals, but also meeting a net-zero economy, so that vision of a broader net zero?
STEWART BRENTNALL: Look, there's a few of them. Number one is a good link to the previous question and answer. It's quite easy to change your portfolio so it gets to net zero very quickly. But in today's context, where most of the highest-returning assets are some of the environmentally least friendly ones, it's going to have an impact on returns. So there's the first challenge. One has explicitly to think about the trade-off between a more sustainable-friendly portfolio and returns.
Number two, decarbonizing a portfolio is just that, decarbonizing a portfolio. It doesn't necessarily have any impact on the world because we trade secondary instruments from one investor to another and don't necessarily in that process impact companies and governments. So the importance of engaging is very high. And that's a challenge for many investors, to know how to do that, how to get access to the right companies and governments, how to get access to the right individuals within those organizations and, ultimately, to have the right dialogue to have impact.
We have our own engagement program. We also recognize the power of collaboration. And even at $100 billion, we are actually a relatively small player in the global system and can have more power by recognizing that the whole is worth more than the sum of the parts. And collaboration is a good thing. So I think that's something to take into account, which is a challenge and an opportunity as well.
MARISA HALL: And when we think about what's happening around us, ESG seems to be going through this identity crisis. We see increased politicization of the topic, commentators calling out its limitation. I mean, how do you see it? Do you think ESG is more harmful than good?
STEWART BRENTNALL: Well, let's-- I think in answering this, let's take a step back first. The concept of sustainability is actually pretty consistent with the concept of the efficiency of capital allocation in asset markets. Ultimately, there is a risk for every return. And capital markets, if efficient, will essentially operate a market that allocates capital to the highest long-term returning organizations promoting sustainability. Now, that doesn't necessarily mean that will work in that way in the short term. And that provides some of the challenges for us.
What are we seeing at the moment? We've come from an environment where voters have given politicians a hard time because they haven't been green enough, only to find ourselves where we are now, where because of the war in Ukraine, energy prices have gone through the roof. And now voters are giving politicians a hard time because their heating bills are so high. And that has, rather, taken the focus off ESG.
But it doesn't make it bad. It just means there are conflicting interests from voters and relevant stakeholders. And we need to look through this and understand that the basic premise of efficient capital allocation in markets is unlikely to change. And in the long run, we'll still allocate capital to the most sustainable companies. So I still think it's more good than evil.
MARISA HALL: And would you say sustainability is one of your top three of your agenda as an asset owner? And if so, what are the other two?
STEWART BRENTNALL: Yes, it is. And so it should be. I think for most investors, we come-- we have a political context which is perhaps slightly different from some in that our current treasurer was formerly the Minister of the Environment. So sustainability is near the top of his agenda and is something that's a constant discussion in our dialogue with Treasury and the treasurer and, therefore, also within T Corp with our own board and board investment committee. So yes, ESG is.
Other than that, I think probably the other two are the challenges of going into a new market environment where the great moderation has finished and we no longer have falling rates, benign inflation, and lots of liquidity, which help asset prices. And we're facing a more volatile, low-returning environment for markets and portfolios.
Probably the third one, which is linked to that, is that as we now see liquidity being sucked out of the market rather than excess liquidity sloshing around markets, we need to think about that really carefully. Liquidity is getting much more valuable in portfolios as it gets more scarce. And we need to think about that very carefully in terms of the proportion of assets that we have that are illiquid and things like hedging contracts, where we seek to protect exchange rate risk, but where hedge losses need to be paid for out of cash or liquidity every quarter. So those would be our top three.
MARISA HALL: Hmm. And all incredibly challenging. And we can see that we're living in this increasingly uncertain and complex world. And, dare I say, that requires, obviously, leadership, which I'm sure you can connect with. I mean, what do you see as the key challenges for leadership in trying to deliver these parts of the agenda?
STEWART BRENTNALL: Well, I think it's an interesting question when one considers the letters that are in my role description and many of my peers in the industry, chief investment officer, CIO. In fact, I'm finding more and more these days that the requirements of leadership are moving away from strict investment model and investment decision making and the parameters behind that towards two other things that I think about a great deal. One is organizational context and stakeholder management. And the other is people, talent, and culture. And really, many problems that we think about in providing a sensible investment outcome to our clients actually need all three of those things to be thought about in a very interlinked way rather than just concentrating on an investment problem and the mathematics behind it.
MARISA HALL: Probably just one more question for you if you can oblige me. I just think there are so many challenges of living up and meeting this net-zero world. Are you optimistic about the future, would you say?
STEWART BRENTNALL: Yeah, I am optimistic about the future. I think it will happen. I think with the passage of time, a bigger and bigger proportion of the population in third-world countries who are-- I beg your pardon, in first-world countries, who are ultimately the polluters, will come to realize that if we don't change things and tighten our belts, we are going to have a much more serious problem that we'll be giving our children and the planet.
Now, as our ecosystem consists of many different stakeholders-- companies, asset owners, investment managers, and shareholders and individuals-- all of them need to play a part, as do our regulators and politicians. I think all of them will play their part. But ultimately, it probably rests on the shoulders of the consumer to really decide that now is the time to change habits rather than wait for the regulators to change them for us. But that would be my view.
Nonetheless, I think over the passage of time, we will realize that. We will go on that journey. And we will see a better future and, ultimately, hand a better planet to our children. So yes, I am an optimist.
MARISA HALL: Well, brilliant. Well, great to hear. Well, thank you, Stewart, for your time. Very much appreciated. And lovely to be able to hear your insights. So thank you.
STEWART BRENTNALL: Not at all. Thank you very much, indeed, Marisa. It's good to contribute.
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