Katherine Collins – Impact and ESG Investing

**Patrick O'Shaughnessy** (0:04)
Hello, and welcome everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_3** (0:24)
Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (0:48)
My guest this week is Katherine Collins, who is the head of the sustainable investing at Putnam Investments, a portfolio manager on two of Putnam's sustainable investing funds and the author of the book, The Nature of Investing, Resilient Investment Strategies Through Biomimicry. Our conversation is on the ins and outs of ESG and impact investing, a young but increasingly common topic in the investing world. This is challenging ground for me as a quant because the data available is so new and limited, so Katherine's perspective was very helpful as we continue to learn.
Given the importance of this topic, I'm also searching for guests with both positive and negative views on the role of ESG in an investing framework and welcome suggestions for future guests. Please enjoy my conversation with Katherine Collins.
So, we'll spend a lot of time on your current investment process thinking ESG, which is a topic that's become, I think, really important and interesting. Before we do that, I want to have this debate about mechanical versus human judgment processes. You already mentioned it earlier when you said, you know, everyone's asking about tracking error in sectors and not about what are you actually doing here. Maybe sum up your view on this. I think what you would characterize as an over mechanization of investing.

**Katherine Collins** (1:51)
I think it's easy to present this as an either or, and it's equally important to emphasize there's a really powerful and that is at the center of this that we haven't yet reached where you're taking the best of newer analytics and systems and structures that we've developed and matching them to a framework that is a little more adaptive or maybe a little bit broader in its objectives.
Kind of uniting the art and the science is really the exciting part and pretty often when I talk about looking at natural systems, it's perceived as like an either or or that this is kind of a softer way to think about investing. It's kind of the opposite in my mind. So you want the best of both worlds to bring all those tools to bear.
What I see that troubles me in finance and I also see it shifting, which is pretty exciting, is for a really long time, we've sold people a pure utility function in many cases in finance. So you know, money in, money out, that's it.
And when you make that your proposition and your only proposition, it's pretty easy for the towards what end kind of questions or how to actually get pushed to the side. And pretty frequently, I see long, long, complicated discussions about yet another version of a synthesized security going out into the world. And they're not bad things, but they're not even the tail of the dog. They're like a couple hairs on the tail of the dog. And what's much more interesting to me is to connect that back like, okay, here's how these relate to the underlying securities that these synthetic buckets are composed of. Here's how that then relates back to the stock market or the securities market you're investing in. Here's how that then relates to the economy. Here's how that then relates to society. Here's how that relates to the world. When you link all those things together, that's an exciting discussion and you can make the most of those mechanics. What I worry about is pretty often those conversations and those decisions and those activities are happening in pretty great isolation from that broader setting. And yet they have tremendous impact and they're impacted by that broader setting in a really important way. So one thing I love about the framework of biomimicry and the framework of sustainable investing in ESG as well is it gives us a little bit more tangible way baked into our processes to make sure that that linking happens. And when you do that, you can get the best of both worlds.

**Patrick O'Shaughnessy** (4:21)
So let's spend a bunch of time in ESG. I will admit that my experience with it thus far, and I'd love to talk about the datasets and the math and all that kind of stuff, that's definitely more my world, but it definitely is through this utility lens that you described, which is like, okay, we've got a machine we put money into and hopefully more money comes out at some later date at a high rate of return.