The woman who pioneered sustainability risk management on Wall Street

6th January, 2014 by Anna Simpson

Anna Simpson meets Marlys Appleton, CEO of the metals recycling company Avtaar America and an early champion of sustainability risk management.

“We had a $700 billion investment portfolio.” The year is 2005, the company AIG Asset Management. Marlys Appleton had been working there for four years when she was asked to take part in a ‘management development’ exercise which, she recalls, defined both her attitude to risk and her career. She went on to become the Chair of the Sustainability Steering Committee, and Vice President, Sustainability Initiatives for AIG Global Investment Group. Today she is the President, founder and 100% owner of the wholesale metals trading and recycling firm Avtaar America, and Co-Founder-Director of the Indian company Avtaar Management Solutions. She is also on the board of the non-profit Women’s Network for a Sustainable Future, which aims to support women as agents of change for sustainable practices in the business world.

Back in 2005, Appleton was one of a small group charged with investigating how climate change issues might affect the company’s portfolio, and researching progressive behaviour in corporations to see what AIG could learn. “My first thought was ‘What does this have to do with me?”, she admits. “My background was analytics and this sounded more like softball!”

Based on the group’s findings and acceptance by the CEO, Appleton was asked to chair an internal committee to convince the asset class business units, to take the risk seriously, and help them change their governance and approach to risk. What had they found? Put simply, that high-impact, low-probability events – such as those related to a changing climate and environmental degradation – could affect the performance of the investment portfolio. But not everyone was listening.

“There was considerable resistance”, she recalls. “Just because you convince the CEO of a company, it doesn’t mean all the lieutenants fall in line. We had to tell reluctant people who thought they knew everything already that this was a risk worth putting in the main category, and then give them the tools to assess it themselves. My role was to lead that effort.”

Before Appleton could convince anyone else, she first had to see the value of what she terms ‘sustainability risk management’ herself. “When you’re in a corporate environment and you have to go against the mainstream, one of the basic requirements is your own belief that what you are doing is legitimate and correct.” She describes the intense research process she threw herself into at the time, delving into papers on the potential impacts for business and industry of climate change and resource shortages and applying rigorous economic frameworks to them – in her words, “connecting the dots”.

“For lack of a better word, I was not educated about these things, but once I began researching the issues, it became eminently clear how important these newly emerging risks were”, she admits. “We were a mainstream asset manager across various classes: bonds, equities, private equities, real estate. In those days sustainability risk was not considered risk at all. Risk was seen as financial risk, business risk, event risk and so on. Sustainability risk is all about acknowledging the externalities, the effect your behaviours are having on others. I could see this within an economic framework – and that’s the way I was used to thinking: analytically. This gave me the confidence and enthusiasm to push the concepts.”

Conviction is one thing; communication another. Appleton describes her approach in the language of a marketer: rebranding, translating, creating messages. There’s a lesson here for anyone trying to promote sustainability in the mainstream. First listen to your audience; then adapt your message.

“We had to take issues around environmental and social aspects and translate them into the language of risk. We called it ‘enhanced due diligence’ – because that was part of the rhetoric the portfolio managers and research teams were used to hearing. You really had to demonstrate how these things could impact the bottom line.”

I ask her for an example – the sort she would have used to make her point. She picks the potential impact of water shortages on the many semiconductor manufacturers in Hong Kong. “In their production processes they need a lot of clean water. If there’s a shortage of water, what’s their back-up plan? If they all have the same one – to truck it in from a few other reasonably local sources, for instance – then that’s a recipe for disaster.”

Appleton describes one ‘aha’ moment with the Project Finance team – an asset class that gathers funds for large projects, such as infrastructure. They looked through the externality checklist, and began to discuss the impact of developments on indigenous peoples and their ability to disrupt the infrastructure. It’s not that this ‘social’ risk was unknown, Appleton hastens to clarify – but that the right value hadn’t been placed upon it. This exercise turned the fixed income team, into one of the biggest supporters internally of this new risk review. It was for this team that her group developed a carbon calculator which focused on sensitive sectors such as metals, mining and energy companies, and quantified their potential to adapt to future carbon-related regulations.

“Externality is a key analysis of sustainability risk. We open our eyes to costs to which we were able to close our eyes in the past.”

If the language of risk and externalities was one tool in Appleton’s change-making kit, proxy voting was another. Proxy, she explains, is an annual voting process for issues relating to all the public companies in which you hold shares.

“We had a proxy voting committee and they took their role very seriously. There are all kinds of questions that fall under proxy voting issues: transparency, reporting on a company’s vulnerability to climate change, etc. What we did was educate the proxy voting committee on how they might vote on sustainability issues.” Appleton became the first nonportfolio manager member of the committee, voting exclusively on sustainability-related issues. This could only happen after she and her team convinced internal and external counsel and legal teams that by taking into account such risk, they were indeed upholding their fiduciary responsibility to manage funds prudently. She considers this a fundamental achievement.

Another essential factor in minimising risk is governance, Appleton maintains. “It’s not just about how boards behave”, she explains: “it’s how the whole chain of command behaves. Good governance won’t necessarily gain you a lot that you can quantify, but poor governance will almost always comes back to hurt you.”

Take the BP oil spill, she says, referring to the 2010 Gulf of Mexico disaster in which 4.9 million barrels flowed into the sea over 87 days. “If the questions that might have been asked of that company had been informed by sustainability, that would have been a good thing”, Appleton observes. “What happened with BP was a case of governance risk: down to poor safety policies or lack of enforcement. It’s clear that they saw citations [reports of health and safety incidents] as a cost of doing business, and didn’t take them seriously. This I see as a result of poor governance and it doesn’t just occur at board level, but also at project and division level.”

In contrast, it was the strong governance of some metal and mining giants that prompted Appleton to consider starting her own company in metals. “I became fascinated by it while doing research into the sustainability reports of the [the mining and natural resource group] BHP Billeton and Anglo American and [the aluminium manufacturer] Alcoa. I saw that these guys had been looking at environmental issues, such as water and waste, for a long time. They’re also big supporters of education and healthcare in developing nations, because they know that if they don’t, they won’t have a workforce. What really surprised me was that they had put together a rigorous intellectual framework to consider these issues – particulary BHP Billeton, the Australian mining giant.”

Come 2010, Appleton was looking for a change. Her progress mainstreaming sustainability at AIG had stalled during the financial crisis. Her ambition had been to expand the global investment platform for long-term risk assessment to the liability underwriting side of the business. However, after the crash there was no funding for new programmes. (Her established programmes remain in place, she is happy to say.) After 25 years on Wall Street, she was ready for a new challenge.

“I decided that I wanted to do something more independently. One of the biggest exports in the US is high quality scrap metal, and this is also one of the biggest inputs into the steel production process. By using recycled steel you reduce the carbon emissions and water footprint significantly – and it’s less costly. I looked at the big emerging markets for scrap steel – Turkey, China, Korea, India, and so on. India is a big steel producer: by 2020 they could well be the second largest steel manufacturing country in the world [after China]. I found a partner in India who knew the business, and that was the genesis of Avtaar.”

Fundamentally, Appleton believes, she wouldn’t have started the business without her experience in helping others to understand sustainability. Appleton also credits her time chairing the Sustainability Steering Committee as a process that brought her entrepreneurial skills to the fore, and informed her decision to seek out more autonomy.

There’s a long way to go before sustainability risk management is common in financial markets, Appleton admits. If she could make one change to the world of finance, I ask, what would it be? “To encourage CFOs and others working in investor relations to consider long-term risk and to bring it up in their quarterly calls”, she replies, “even if the Wall Street analysts don’t ask! The main impediment is short-termism.”

However, she adds, there’s a need for regulation as well as advocacy. “I am encouraged by the work of some progressive organisations in assessing all manner of sustainability risk – GE, Allianz and Deutsche Bank, and non-profits such as WWF, to name a few. That said, had you told me in 2007 that by 2014 we would still not have any climate change legislation, I would have thought it implausible.”

Anna Simpson is Editor, Green Futures.

Photo credit: Marlys Appleton / iStockphoto/Thinkstock

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