Simon Hallett, Cambridge Associates Head of Climate Strategy

What if climate change isn’t an alpha problem but a beta problem? Listen to Jason Mitchell discuss with Simon Hallett, Cambridge Associates Head of Climate Strategy, what investors, consultants, and asset owners can do to move beyond performative alignment toward capital allocation that actually accelerates the transition, and how investors should course correct without losing momentum or giving sceptics an opening to disengage entirely.

Recording date: 24 March 2026

Simon Hallet

Simon Hallett is a Partner and Head of Climate Strategy at Cambridge Associates where he advises institutional investors on climate, sustainability, and net-zero investment strategies. He joined Cambridge in 2005 and has more than 30 years of investment experience working with endowments, foundations, and sovereign wealth funds managing assets from $75 million to over $100 billion. In 2021, he shifted his focus fully to climate strategy, helping clients integrate sustainability and real-world climate impact into their portfolios.

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

I'm Jason Mitchell, CIO for Responsible Investment at Man Group. You're listening to A Sustainable Future, a podcast about what we're doing today to build a more sustainable world tomorrow.

Hi everyone. Welcome back to the podcast and I hope everyone is staying well. Over the past year, I've been chasing answers to a set of fundamental questions. If you care about sustainable investing, how exactly does that work in practise? What's the investible universe look like? How do you balance impact and returns? Is sustainability a return driver, simply a constraint that comes at a cost? And perhaps most importantly, is the industry genuinely becoming more honest with itself or simply rebranding the retreat from net-zero as pragmatism?

In the process, I've had some fascinating conversations. And this episode with Simon Hallett at Cambridge Associates is very much a continuation of one of those long-running discussions, particularly through the lens of what all this means for endowments and foundations.

Now, late last year, Simon wrote a piece arguing that it's time to re-energise investor climate action, starting with a candid acknowledgement of past missteps and moving towards a more pragmatic, economically grounded approach to delivering impact. That framing feels especially relevant right now, because at this point, climate investing has clearly entered a much more complicated phase, marked by political pushback, higher interest rates, shifting net-zero goalposts, and I guess a growing sense of fatigue around both frameworks and data, which leads to a more fundamental challenge.

What if climate change isn't really an alpha problem at all, but a beta problem? In other words, an undiversifiable system level risk that threatens the performance of entire markets. If that's true, are investors too focused on portfolio construction and not focused enough on system level stewardship, policy engagement, and collective action?

So we talk about why the gap between climate commitments and real world impact keeps widening. What investors, consultants, and asset owners can do to move beyond performative alignment towards capital allocation that actually accelerates the transition and how investors should course correct without losing momentum or giving sceptics and opening to disengage entirely.

Simon is a partner and Head of Climate Strategy at Cambridge Associates, where he advises institutional investors on climate sustainability and net-zero investment objectives. He joined Cambridge in 2005 and has more than 30 years of investment experience, working with endowments, foundations in sovereign wealth funds, managing assets from $75 million to over $100 billion. In 2021, he shifted his focus fully to climate strategy, helping clients integrate sustainability and real world impact into their portfolio.

Welcome to the podcast, Simon Hallett. It's great to have you here, and thank you for taking the time today.

Simon Hallett:

Thank you so much, Jason. It's great to be here. I'm a huge fan of the podcast. You've had some fantastic guests that I'm honoured to join, and you've just have a fantastic sort of deep questioning style, so I'm really looking forward to it.

Jason Mitchell:

That means a lot. Thanks. And we've talked about this for a long time, so it's great to finally make it happen. So Simon, let's start out with some scene setting. I want to kick off with an article you wrote last December in sustainable views titled Time to Reenergize Investor Climate Action. In it, you asked the question about how investors can recover their climate ambition, writing that "We can start by being honest about past missteps. Then we can advance in an action oriented, flexible, and prioritised approach that maximises positive climate impact without being performative or challenging the laws of economics input." Now, I think you'd agree a lot has changed and maybe not so much since your article was first published, but namely most of the big US asset managers exited the Net Zero Asset Managers Initiative, which effectively drove NZAMI to effectively reconstitute itself with softer commitments and a subtle shift from 1.5C to 2C alignment. So to your point in that article, is the industry actually being more honest with itself, or is it just rebranding retreat as pragmatism? And to that end, what more needs to be done here?

Simon Hallett:

I think the industry is actually doing all of those things from rebranding retreat for sure through reflective recalibration all the way to dogged persistence in what they were doing before. But it really depends on the kind of player you're talking about. You ask what more needs to be done, and here's the first good thing we can do, I think. We can agree that net-zero is the right global societal goal, but it also, it's a team sport. You can't be net-zero by yourself if you're connected in any way to the rest of the economy. So it'll take policy regulation, science, business, consumers together, all along with some political leadership and political will to get there.

We shouldn't forget that the goal isn't just to have less of X and more of Y. It's to put this complex dynamic system that's the economy and society onto a different path. And in the finance world, we need to be really clear about what our roles are in that, which brings me to your point about NZAM. So managers are agents, not principles, right? And many of the academic critiques of investor climate action that I've read are really describing investment managers. And you could say that the troubles of NZAM stem from a kind of original sin in trying to commit managers to so called alignment targets that they mostly didn't have agency to achieve.

You can't unilaterally change investment agreements or impose goals on clients who haven't asked for them, but what they can do is manage climate risks and opportunities well, explain those risks and highlight them, and then design products for clients who want to have climate impact. That's all within the legitimate agency of the managers, but the asset owners, they've got much different and much more agency, I'd argue, in being able to interpret and articulate their own long-term interests or those of their beneficiaries.

So they've got a different and I think more powerful role in the sort of team net-zero by setting the goals that'll then cascade through the manager and advisor community and might actually result in real world change. It's no good people saying investors should do this or not do that as if they're some kind of homogenous blob. But going back to your question of what more can we do, there are some other things that we can do to reenergize climate action.

Next, we can stop conflating risk management with climate impact. I'd argue that the thoughtful management of material risks and opportunities from climate change, that's arguably the duty of any investment manager or asset owner. That's your job, but that and market forces we know won't get us to net-zero. Since climate change is arguably the largest unpriced externality in history of externalities, it's the definition of market forces not working.

So I think we need to acknowledge that what people describe as a net-zero portfolio is really a species of impact portfolio. And we've been a little bit shy about using that language, but that'll focus our attention on what real world impact we actually want to have and how effective we are in it rather than obsessing on portfolio emissions, which only matter in aggregate and there's a second or third order derivative of what we actually do.

Moving on, I do think the industry could do a much better job of making the materiality case. That means we articulate the sheer scale of likely financial and economic impact from say a current policy scenario. Even if the range is hugely uncertain, the magnitude kind of isn't. And adopting a risk management mindset where we consider the tail risks as well as the central cases, which we do in any other financial risk management, right? You don't just consider the central case, you consider the 95th and 98th percentile. And I suppose there's a more human way of putting this, which is to say long horizon investors should try and bring future generations into the room whenever they make their investment decisions.

Finally, a quick one, please can we retire the word align? It seems to me that it means whatever you want it to mean, often quite a passive forming. And people often say it, I think, because they can't really articulate the actual intention. So it's just an easy word that trips to the tongue when you haven't really got a clear idea of what you're doing.

Jason Mitchell:

Look, I really like the introspection. I totally agree on the conflation. I want to push you a little bit here. In my mind, it's clear that investor climate initiatives, both collectively and even within firms have lost, I think you'd agree, a lot of momentum as a result of burnout, maybe excessive complexity and bureaucracy, and obviously political pushback.

Given that, does additional picking at them, I'm basically throwing stones, does it do more harm than good? It seems way too easy sometimes to sit on the sidelines and dwell on what about us, and I'm talking generally, not you specifically, but I do kind of reconsider. I mean, the reality is that climate action is very hard. At the same time, I fully appreciate that investors are also very well compensated to address the complex job of capital allocation. I guess what I'm asking is, how do you get an industry to admit it went down a blind alley and redirect its efforts without losing momentum or giving sceptics another excuse to abandon climate ambition entirely?

Simon Hallett:

That's a really subtle point actually, Jason. And I know I have been frustrated about, as you put it, the what about-ism where quite intellectually coherently and for good reasons, there's, well, this doesn't precisely work or that doesn't precisely work or why are you doing this? And in a way adds to the complexity and the bureaucracy and it makes people more timid. So the notion that for your organisation, you're going to set out a plan, we're going to do this. The notion that there's somebody out there who's come along and saying, "Well, actually that's not precisely aligned with the framework for this. So you're in some way delinquent," it saps energy. But at the same time, I've got to acknowledge where I'm guilty of, it's like, how did I start off saying, "This is wrong, that's wrong, et cetera. We should be ..." At some stage, we have to move beyond the debate and talk about the change.

I would say, let's restrict our debate to identifying the fundamental objectives that we might want to switch and less about the methodologies and the precision because what we're talking about here is an immensely complicated issue embedded in a complex dynamic system, which is the economy, et cetera. There should be no precision here if we're genuinely thinking about how do we contribute to real world decarbonization over the next 10, 20, 30 years.

There's so many layers of uncertainty there, and I think we should try and embrace that and try and think about understanding processes rather than trying to quantify relationships and get too trapped in debating with each other on the nitty-gritty. So if I wanted the industry to admit things, it would be that it tried to assume or tried to map a collective goal onto an individual goal. The collective goal is we society, the economy needs to decarbonize and reduce and achieve net-zero emissions by some point in the future to avoid accelerating climate change.

That's the meta collective goal, but it might not be our ... Our individual goal might be how do we contribute to that? And I suspect every organisation, individual kind of investor can contribute to that in different ways. And I'd love us to all kind of embrace that and, if you like, celebrate the things that people can do individually rather than imagining that if we all do exactly the same thing, somehow that will make everything better. We've tried that and it's failed. I was very influenced right at the beginning of thinking about this by Sam Sharpe book, Five Times Faster, where he describes the problems of the cop process as essentially getting everybody in the room together at the same time to try and solve all the issues simultaneously, which means you just get bogged down all the time and all the energy gets soaked up in process. I think that's a little bit of a metaphor for how we've approached investor climate action.

We've tried to have everybody solve every problem simultaneously together, and it's result in a lot of process, a lot of framework. We could start looking at the bottom up and thinking, "Is there a technology transition that's going on here that is irrelevant to how I invest? And how do I, through the decisions that I make, make that technology transition either faster or more likely?" There's a whole series of those kind of decisions.

And to accept the degree of humility that investors are just enabling, encouraging, making things more likely, they're not actually determining what's going to happen in large part. There are a lot of other people who are involved in that process. So we need to understand the landscape and try and push on the levers that we have to encourage things in the right direction.

Jason Mitchell:

Interesting. Let's come back to the decarbonization kind of question a little bit later, but I guess I want to push you a little bit more on quantifying the nitty-gritty. I really relish the fact that you've been so prominent in terms of writing opinions publicly. It's sort of helped, not just in this podcast, but sort of in my own learning process, but you've warmed that the explosion of climate data and reporting is breeding fatigue rather than decision useful action.

Personally, if you ask me, I mean, I totally agree on the reporting side. I'm a little bit more sceptical about the climate data side. I'd also say that the reality is that investors and regulators demand metrics, more and more of them. And that explosion is separating serious investors from the unserious, which I think is helpful for allocators. So where's the line where measurement stops helping and starts becoming a substitute for real change?

In my own mind, I kind of tend to think of climate is sort of intrinsically becoming more quantitative. Not to say that the investment strategy is always going to be quantitative, but we're talking about more quantitative data by nature and sort of a departure from that kind of traditional narrative driven storytelling on the discretionary side. What are your thoughts?

Simon Hallett:

You're right that if you're a serious investor, you need to hold yourself accountable for something and you need to allow yourself to be measured in some way. I think, correct me if I'm wrong, I think that's what you're saying, the difference between the serious and the unserious, but I think measurement stops helping when it just becomes the end in itself. And the production of a long and glossy TCFD report say results in breed, sigh of relief, job done, we've done our bit because that's all the time and the budget we have in order to spend all climate stuff. That's a shame.

I guess the part of the original benefit of TCFD reporting requirements where they exist is to highlight and validate the materiality of climate risk, which moves climate up the attention agenda for asset owners and starts to open the door to decisions of changing how you're actually going to do things because it's material. So that's been kind of really helpful. But I wonder whether there's a distinction in data usefulness between risk management and impact.

So let's kind of stop off on that distinction for a second, because I've been talking about impact. What I'm talking about is I think what people tend to describe or have tend to describe as a net-zero portfolio, which again, I think there's been some confusion about what that could or should mean to my mind, it's a portfolio which has a strategy to make a positive contribution to the collective goal of net-zero by 20X. It's not about the emissions of the portfolio itself, but I just want to clarify that's what I'm talking about when I think about climate impact is, is what we do helping. And there I think there's some really, really important data, but it's kind of a very different kind of data. It's data that understands lease cost transition parts. So it's the sort of data that'll help you make a decision that says electrification is a priority.

Clean hydrogen is maybe not a priority because there actually isn't a cost acceptable path to doing things with hydrogen that we couldn't otherwise do directly with electrification. So that's where investors need to get used to different kinds of data. They need to get used to engineering commercial economic data to understand technology transition paths and think, "Okay, right, this is how I allocate capital." So, yeah, it's really important, but I don't think we can actually get away from the messiness and the narratives.

Now, they can't be kind of just woolly storytelling without substance, but I think a logical reasoned argument supported by data is what drives positive climate action. I don't think chasing a metric gets us to the positive climate action that we want. So I have an aversion to sort of single number metrics that are supposed to encapsulate your target, like for example, implied temperature rise, where you're given a number for your portfolio, which says all the businesses in your portfolio added up in some kind of aggregate are doing things that would imply that if they were the only companies in the world, the world would get to a temperature of 1.8 by 2050.

And I really question how useful that is. When you then show that to investment committee and you say, "So what do we do with that? Is that good? Is that bad? Should we make it go lower? What do we do to make it go lower?" So that's, I think, I draw a distinction between abstract high level metrics that don't feed into useful decisions and those which can feed into useful decisions.

Jason Mitchell:

Let me change lanes a little bit because one thing that I've sort of been mulling over is with the current US around conflict and energy crisis, some would say that we could be heading into a similar situation as 2021, 2022, where we saw a big rotation to fossil fuels and where clean energy and sustainable strategies, I'd say generally underperformed. And I guess I kind of want to use that as sort of a lens for this.

Next question. Philosophically speaking, do you think of sustainability as a constraint or a return driver? There's some very strong views about the compatibility, I'd even say incompatibility of the idea of alpha and real world impact and whether they can kind of coexist. How do you reconcile the two and what kind of trade-offs do you think are necessary?

Simon Hallett:

I think there's a time horizon question embedded in that kind of composite question though, Jason, correct me if I'm wrong. You're right. We're now in a situation where we've got prices in the market for energy pushing us in a certain direction or rewarding activities that weren't so much rewarded for the last few years. But we've been here multiple times, haven't we? In the sense that back in the day, I actually started my career as an oil analyst, funnily enough, and I was doing that job on the first day of the Iraqi invasion of Kuwait when all prices spiked. And a CEO portfolio manager came up to my desk and he said, "I just bought this. Do you think that was a good idea?" And it was a trade ticket for an independent exploration production company whose stock price had spiked on the day, on the news. He'd seen a line of stock, bought it. It never saw that price again in its whole existence until it was ultimately bought out and consolidated another company.

So it's grabbing our attention, because you've got short-term prices in the market saying, "This is so much more valuable than it was a week before." And that's just the nature of investing. There's always the ebb and flow of factors, which mean something's in favour, something's out of favour. I'm not sure what that says about an investment philosophy or investment strategy. We think about sustainability that way, but you're right that maybe the sustainability investment community has sometimes overclaimed about what it was going to do to returns, or by which I mean has implied that what you're buying is superior return, superior alpha over any time horizon down to three years, which I think is massively overclaiming for any strategy typically.

So I think we've got to be very careful saying sustainability works, sustainability doesn't work on a trailing three-year basis when the returns are just dominated by other drivers. Sustainability is what enables your business, your strategy to keep going, keep generating returns, because it's not being tripped up by some external, social, environmental, economic factor that you've been ignoring that then suddenly comes back to bite you.

So it's absolutely seen as a return driver, because it's a way of incorporating fundamental information that otherwise you're leaving out. And I've never known an investment decision that was made better by less information. We think there's important information here. If you see it through a materiality lens, it's the sort of information that plays out over multiple years or even decades, and you can never quite know when the payoff or whatever is going to happen. I wouldn't want to overclaim for shorter periods, and I acknowledge there's a tracking error implication.

Jason Mitchell:

Simon, I want to pick up on a fundamental tension and kind of unpack it, specifically around systems thinking. Now, most of the investment industry, even sustainable investors, treat climate change as kind of a portfolio optimization problem. I mean, basically screen out the losers, tilt toward the winners, generate alpha in the process, and at the very least, avoid any drawdowns. But in your work at CA, it kind of points to something, I think you tell me a little more radical, that climate is actually an undiversible system level risk that kind of ends up degrading beta itself. In other words, no amount of portfolio construction can protect you if the system itself fails.

In fact, I remember a piece you'd written suggesting that a net-zero portfolio, in fact, actually you alluded to this at the very beginning, is essentially meaningless if others aren't also net-zero. Basically, you're selling carbon exposure to the next investor. So it's back to that idea of sort of a team sport. So if climate change is fundamentally a beta problem rather than an alpha problem, does that essentially mean that we're, for the most part, rearranging deck chairs by focusing on idiosyncratic risk rather than solving these bigger systemic problems?

And if that's true, does that mean that real fiduciary duty isn't portfolio optimization, but rather system level stewardship? I mean, think policy engagement, collective action, shaping the whole of the regulatory environment. Even if that sits, I imagine, sometimes uncomfortably with how most asset managers define their role.

Simon Hallett:

I think you've really hit the nail on the head here, and in fact, it's a more interesting way of describing the risk versus impact point that I was making earlier. I think climate change is both an alpha and a beta problem, but it is the beta problem that really matters. We can tend to spend our professional lives worrying about relatively small differences in alpha, but the money that institutions will actually spend in 10, 20, 50 years' time, that'll depend predominantly as we know on the asset class returns, the beta.

And every new piece of research I see is proposing a larger impact on GDP and hence asset values as a result of climate change. The last thing I saw was a 50% GDP loss by 2100 coming from the Institute of Actuaries. And that's a problem that will manifest over time. 2100 seems a long way away, but if I'm cumulatively and perhaps irreversibly, and that's really the scale of this beta problem, and you can't outsmart it with alpha and you can't diversify it away. It is, in fact, the fiduciary case for a net-zero or climate impact strategy. And if there's one thing I'd love your listeners to remember from this podcast, if nothing else, it's that. For me, at its core, fiduciary responsibility is about loyalty to the client, and surely that includes taking some responsibility and accountability for the world the client or their descendants will inhabit and their future welfare. But you're right, Jason, that it's a collective action problem and therein biggest challenge.

And I think it's the reason investor climate initiatives are still valuable if only to mutually reinforce the idea of acting alongside others for some common benefit. But I think there's a whole podcast series on the collective action problem for climate change. So if we have a moment, there's another more fundamental way I think systems thinking can be applied in this situation. I'll suggest that the task of long-term investing is really about navigating an environment driven by processes that are in constant motion. That's what the dynamic system is.

There's no equilibrium. We're always going to some new place. So long-term investing is the opposite of an optimization problem. It's about building resilience to uncertainty as we continually try and figure out what's going on here, where are we going? And this all comes back to sustainability because a sustainability mindset, to my mind, really helps us in that because it helps us focus on the process of change and what may threaten our value.

Conventional finance, on the other hand, tends to be concerned with equilibrium and what will be the perfect portfolio if nothing ever changed. It makes me laugh and cry as well when someone says, "Oh, my client would love to invest sustainability, but they wouldn't sacrifice even 10 basis points of return to achieve it." Looking at 10 years or more, that client has no idea what their return will be within a thousand basis points. The whole point of sustainable investing is to try and, literally, it's in the word, sustain your investments through that uncertain future. Why would you not want to do that?

Jason Mitchell:

I guess I wanted to push you on a related topic and specifically this article on Impact Investor a while back, and I'm paraphrasing here to be clear, but you sort of implied in that article that a manager who can't address climate risks is simply a weak fundamental analyst. I mean, that's, I think you'd agree, a pretty provocative claim. Say more about this. So you actually seen a performance advantage among managers who get this right and maybe think about that vis-à-vis the temporal dimension that you're talking about, or is there still no clear link between climate sophistication and top quartile or top quintile returns?

Simon Hallett:

Yeah, I think in principle, that comment flows straight from the discussion we just had on the previous question in the sense that if you take as your premise that climate transition, climate risk, whether it's policy-wise or physical risk or whatever, is going to be a significant and increasingly significant factor in the global economy in years to come.

If you say, "As an investor, I'm going to choose to ignore that and just not try and understand it." Imagine if your manager came to you like a traditional value equity manager and they said, "AI, we're just ignoring that, because actually we don't think it's going to affect our businesses, so we haven't really thought about it." How would you think about that strategy? I think this is kind of similar.

Here, we've got an investment factor or set of factors that 10 years ago might not have been material 20 years ago, very hard to argue. It was material in the short term. Now, it's increasing in materiality. I actually would expect a manager or an analyst with more than a very short horizon to say, "I need to understand this. I need to incorporate that in what I do." Which is not to say that all managers are not created equal. If I was faced with a manager who's running a very high turnover, short horizon strategy, trying to harvest lots of little pieces of alpha, I might think, "Actually, I could forgive you for just ignoring this for a while because I just don't think it's going to be a drive of your three-month return forecast for a while." That probably will change over time too.

Is there evidence of this? I don't think we've got a back history really, not with a big sample size. So I can't say I can see a performance advantage among managers who get this right, because they get it right in different ways. And it's too hard a measurement problem to define just yet. We actually have a live project that's wrestling with this. We have a team who are going to spend the rest of the year trying to see what messages we can sift from, this is about sustainability broadly.

The impact it has on portfolio returns and how you as an investor, as a selector of managers, you can manage those characteristics so you don't trip yourself up. Because I think there's probably ways of tripping yourself up if only by assuming an enormous unintended style bias that came along with your sustainability strategy. I think it's being swamped by lots of other factors, I think.

Jason Mitchell:

Interesting. I want to revisit this point about all managers not being created equal and kind of press on it a little bit. When you think about manager selection for a foundation or an endowment, say, do you look for managers doing everything well, or do you look for managers that bring a specific specialism or subject matter expertise in a way that you as a consultant or more broadly an allocator put together, call it a mosaic of capabilities?

I guess what I'm asking is, to what degree is the manager selection in the sustainability investment world a pragmatic exercise in identifying maybe it's some managers that add alpha, others that add climate or nature expertise and others that add stewardship or maybe even some combination? To what degree do you distinguish managers with that specialism vis-à-vis managers, they can do everything right? And I think even as an extension of that, to what degree do you distinguish managers from the firm level versus the fund/strategy level, particularly given the sensitivity around whether it's commitment, net-zero, those kinds of activities?

Simon Hallett:

There's a lot there. Make sure I come back to that firm versus strategy.

Jason Mitchell:

I apologise for hacking a lot in there.

Simon Hallett:

No, that's all right. Yes, mosaic for specialism versus good at everything. I mean, we're essentially pragmatic about this, but I think we lean towards the specialism and subject matter expertise, the mosaic, if only because investment managers are kind of unique, interesting organisations that they themselves are not stable over time.

There's a great virtue in diversification of your exposure to those investment manager issues. And we found it more plausible to diligence expertise where there's a specific deep focus. You can think about that as being a really specific focus or literally just within global equities, we adopt this particular approach across our firm.

I think it's actually very hard to, as you put it, do everything well. And the sort of firms that go down that route by nature tend to be pretty large. And then you've got an awkward trade-off, whereas do they care more about their business results than about your performance, which brings us back to probably a leaning towards the specialist.

So let's take this to sustainability and climate specifically, and what are the roles of managers in your portfolio? And you laid out that different managers could have different roles, that you could have alpha generation, you could have nature expertise, stewardship. I totally endorsed the idea that managers have different roles. I just put the roles slightly differently. I'm not sure I want to overtly separate alpha from climate or nature expertise or impact.

After all, we'd be a little bit inconsistent if we said that climate expertise has fundamental value and we didn't think that could feed into alpha generation, but let's accept a bit more complexity in this and accept that managers might have a different role in your portfolio. So you might have a manager whose role is liquidity and diversification of equity risk, and they might achieve that with a high turnover, multi-asset, long, short strategy. Do I expect them to contribute to my climate impact? Maybe not. Maybe there's nothing reasonable they could do within the parameters of their process that would contribute to that. And likewise, climate might not be relevant to their process, but they might have a valuable role to play in my total portfolio architecture.

Stewardship, you can, I think, separate that out from a lot of other things, but it's especially important where you've got passive beta capturing. We've got a large chunk of your portfolio that's in passive or low tracking error equity, then stewardship is really the only theory of change you've got for contribution to climate. And we haven't talked about the concept of theory of change, but I think it's foundational when we're making decisions about what strategy or manager to add from a climate or sustainability perspective. There has to be a reason why it's actually going to ... You have to understand and document the reason why that's actually going to work.

I would say the relationship with alpha and sustainability is not simple. We see long-term alpha in sustainability, but we still like, if you like, the mosaic approach. And if I was building a portfolio whose goal was climate impact, I'd be thinking, what different kinds of managers with different asset classes and strategies across my portfolio can have their own right impact, which will be different in each case? Sometimes it might be purely stewardship. Sometimes it might be how they allocate capital. Sometimes it might be a narrow focus on energy transition expertise. Sometimes it might be dealing with high emission sectors.

So I think using the right tool for the right job is how I would describe it. I'm not sure I would draw the dividing lines between alpha impact and stewardship. There's much more blending between those three, but I do totally endorse the idea that you've got margins performing different roles in your portfolio.

Jason Mitchell:

Interesting. No, that's really helpful. I'm really interested in this sort of notion of institutional ambition in the sustainable investing space. And I was struck by your exchange with Lisa Sachs at Columbia on a recent LinkedIn post. And please do give some context around this, but it seems like you've spent a lot of time working with the institutions that want to have climate impact, but in practise, aren't really achieving much. Where does that blockage actually sit? Are investors overthinking this and need to just act with tools they already have? Or is there a deeper structural problem where even the most willing allocator can't move capital because the projects, coordination and policy signals simply aren't there yet? Or is this simply and ultimately a problem that only governments and development finance institutions can solve?

Simon Hallett:

Well, that speaks directly to Lisa's post. I don't know, Lisa. I've read a lot of her work, which makes a lot of sense to me. And we did correspond on this particular topic on LinkedIn. And the approach she made was trying to ... It links to some of the things we've already talked about in the sense that it's saying achieving societal net-zero, it's a economic engineering transformation problem. We kind of know the size and the shape of it. We know which things we need to electrify. We know there's a connection problem. We know we need clean power generating systems, and the nature part is more complex, but we've got some of the building blocks for that. So what we're misperceiving investors' role in this, investors are kind of almost bit players in this. And by inflicting on them, this whole net-zero objective framework we're getting in the way. And it made a lot of sense to me. I'm going to talk about a specific example. You suggested, I've spent a lot of time working with institutions that want to have impact, but aren't achieving much. Thankfully, that's not the case. I think we're helping them to have impact. But early in the process of developing our own policy, I have experience of working with a medium-sized institution. So the billions, not the tens or hundreds of billions, but not tiny either. And they were in a situation where their board had said, "Climate's really important to us as an organisation, reflect that in how we manage the endowment."

And the investment team, which is a high quality expert investment team, we don't know anything about this. So they tried to embrace the frameworks that were out there, the investor initiatives, and none of it made any sense to them because it actually didn't speak to the way their portfolio was built, the accountability of the CIO. For one reason, everything was framed at the sort of security level as if you had just had a giant portfolio of securities and you could go and lecture every management team on what their transition plan should be. And they were in a position that they got this beautiful portfolio that they spent the last 10, 20 years building with these long-term manager relationships, lots of manager diversification on alternatives and so forth. And they were pulls apart from what the investor climate initiatives were talking about.

So I learned what it felt like to sit in their seat and think, "What's the best, easiest thing you can do first, and then what's the next thing?" And start getting a flywheel going of action by saying, "Okay, this is your strategy. Given your starting point and given your constraints, this is the base of the best things you can do through firstly understanding what's in your portfolio." What are your managers currently contributing or not to this goal? And what could they reasonably contribute? What are the things that you really can't touch because they have an essential portfolio role and there's no way of changing them? What are the things where you think, "You know what, actually, we could do better?"

So I think that was an encapsulation for me of the problems of achieving action, but also the ways of greasing the skids to get things moving. You suggested that there's a key role for governments, development finance, et cetera, which there absolutely is because what Lisa is pointing out is a transition in any part of the system works because you have incentives, you have requirements, regulation, you have available capital, you have an engineering solution that is the lowest cost solution. That's a multi-party coordination exercise that a society we need to get better at doing, but investors have a little part to play. At the very least, they need to understand that and they to be, if you like, ready to provide the capital whilst the plan's in place.

Jason Mitchell:

Got it, got it. So I want to move on and circle back to the beginning of the decarbonization sort of discussion that we have a little bit earlier. And in my mind, there definitely seems to be, at least in listed markets, this sort of struggle in distinguishing real world impact from portfolio exposure to climate. And look, it's well known academics have observed this. I always point to the Hartzmark, and Kelly, Shue paper, Counterproductive Sustainable Investing, although there are others, specifically Climate Capitalists, the most recent paper that talks about this cost to capital kind of issue. But how do you balance real world impact? In other words, a reduction in financed emissions against a more traditional view that's focused on risk adjusted returns and a portfolio's net carbon exposure?

Simon Hallett:

Right. So the Hartzmark and Shue Paper, so correct me if I'm wrong, Jason, my understanding is they talked about in public markets, your theory of change is around cost of capital. If you don't invest here, you invest there, you're shifting to cost of capital. And their point was that effect's really, really small, but more to the point, it actually has the opposite effect than you thought. It turns out, according to their paper, I think, that if you deprive a sector of capital, if you move their cost of capital up a little bit, let's go. Nobody's deprived of capital in this world, but if you nudge their cost of capital up a little bit, rather than responding by undertaking some kind of green actions to decarbonize what they're doing, they actually go the other way.

So I suppose it's a way of saying, if you say, "We really don't like the cement sector, so we're not going to invest there. We think somehow the rationale is because it's high carbon and we think somehow that's going to cause the cement sector to decarbonize." The answer is the cement sectors go higher cost of capital. It just focuses down on keeping its costs down in the near term and chunks all of the future green strategy. I think that's Hartzmark.

Jason Mitchell:

Yeah, I would agree. And to sort of add to that, because I do think there's been this sort of a lazy assumption that if you penalise heavy emitters, then you will kind of catalyse them into more green investment. And I guess what they show, which I find really compelling because it's not ESG ratings, it's 20 years of carbon emissions, they find the opposite, right? You find these often asset-heavy carbon intensive firms that are much more vulnerable to financial shocks, much more fragile to this. They basically pull in, they focus on cash flow, they become much more short-term oriented and actually end up delaying that. And as a result, exactly what you said, actually become dirtier, right?

Simon Hallett:

Yeah, it makes intuitive sense, doesn't it? And I guess my perspective on public markets per se is we've got collectively, we've misunderstood the theory of change. The cost of capital theory of change is a really weak one, and wherever it operates, it goes the wrong way, as we've described, and intuitively so. And I would say if we think about those high emission sectors, if they are going to transition to decarbonize, they need supportive shareholders to do that. They need the incentive of shareholders saying, "This is what we expect of you. And by the way, we will support the board in a CapEx strategy that will deliver that." And we're doing that because we think in a rising carbon price world, this will get you a competitive advantage.

So if you are abdicating responsibility for high emission sectors as investor, feels like exactly what you shouldn't be doing if you care about climate, but equally, you've got to have a strategy for what you do think about high emission sectors. So if you're prepared to distinguish between businesses in the same sector on the basis of the creditability of their plans, be honest, be open about that and say, "This is a part of our decision making process, and we are supportive shareholders." That feels like a better outcome.

And you could achieve that as a passive manager without making any capital allocation decisions at all, or you could incorporate it into an active strategy, but you won't ever incorporate that into an active strategy that indexes on emissions as a metric that you're trying to minimise. This is where we've had the performance tracking error issue is it's focusing on emissions as a optimising metric, has just pushed people into a sort of quality growth bias of businesses that are much less relevant to the transition, but have a whole load of other investment baggage, because you've undiversified your portfolio.

So I think enlisted markets, people have picked the wrong tool, it doesn't work, and it's had negative consequences elsewhere because it's messed up your portfolio. And actually, we'd need to think about it's much more about stewardship and public markets.

Jason Mitchell:

Yeah. So there's definitely a through line between what we're talking about now and Paris-Aligned Benchmarks, but let's put that aside for one second. Let me just ask you, I mean, some of the highest emitting sectors are also the ones that need capital the most to transition. In your perspective, how should asset owners think about allocating capital to messy transition opportunities without undermining their own net-zero commitments?

Simon Hallett:

Without undermining their own net-zero commitments, that's the kind of key part of your question, isn't it? You don't want to be tripped up by a commitment. Commitments that were made back in the day about portfolio emissions, we are going to reduce our portfolio emissions by X, by Y. Those can trip you up, but I'd argue that please go and reconsider what that commitment was and why you were trying to achieve it.

I do think that both from a traditional portfolio management risk adjusted return perspective and a client impact perspective, investors have to engage with that kind of messy piece of the high emission businesses because that's exactly the piece of the economy that needs to change. And investors want to be a part of the change, which surely we do if we care about if you have climate impact, then we need to be players in that in some way.

As I say, I think it can be in a lot of dimensions. It can be purely about stewardship, supporting best practise. It can be around funding technology with other parts of your portfolio because innovation is going to be key to the transformation of some of those sectors and financing that as well as in asset light aspects of tech is important. And there's what we talk about the messy middle, which is I think the thing our industry is still wrestling with, which is how do you finance the scale up of technologies that are essentially proven at an engineering level, but have not been done at industrial scale and that are absolutely needed to decarbonize high emission sectors, because that's where it becomes very capital intensive. You get whole lot of delivery risks and it takes time. So I think that's where there's a capital deficit right now. We need to do a better job at that.

Jason Mitchell:

Got it. Got it. Paris-Aligned Benchmarks were designed to align portfolios. I keep saying align, your favourite word, but align portfolios on a 1.5C pathway, but they mostly work through exclusions and sector tilts rather than driving real economy decarbonization. From your perspective, advising asset owners, are Paris-Aligned Benchmarks actually accelerating the transition or mostly reshaping portfolio optics? In other words, do PAB simply give asset owners, you tell me, a false sense of alignment with the goals of the Paris Agreement? And if they do, what does alignment really mean here? And I think you've already answered that before, but does that definition need to be more pragmatic and flexible than it currently is? Particularly with over the last probably 6 to 12 months, the increasing tracking error relative to the policy benchmarks and notable underperformance. And I would add notable unhappiness by many adopters.

Simon Hallett:

Paris-Aligned Benchmarks are not going to drive real economy decarbonization. Let's think about why you'd want to create a Paris-Aligned Benchmarks in the first place. It would be to frame what a portfolio would look like if everybody was doing the right thing. If the global economy was on a one and a half degree pathway and all the components of it were on that pathway and there were no problems in the world, and that's what your portfolio would look like, it would be on this Paris-Aligned Benchmarks.

So it's a kind of a way of saying, "This is our societal goal manifested for how portfolios would look like." But in practise, you can't invest like that unless the world does its bit and you actually get the changing companies. Otherwise, what you're limited to do is go and find those companies that are already doing something, only invest in them and see if you can construct something that's vaguely diversified and kind of looks like an index out of that. But obvious point, what have you achieved by doing that? You've just decided to favour people who don't need to change. And we already just agreed with Hartzmark and Shue that there's no theory of change around that. What you've done is you've made a really great line chart in your annual report, which shows, "Look, we aligned with the Paris Agreement. Our emissions are going down." You said they give a full sense of alignment. Yeah.

I mean, this is the nexus of my problem with the word alignment. You've created some optics where the characteristics of your portfolio in terms of emissions appear to be consistent with falling emissions in the real world and the goals of the Paris Agreement without having any influence whatsoever on whether emissions in the real world are actually falling. So full sense of alignment is kind of kind, I think for this.

We dug into this in quite some detail with a manager who manages a product against the Paris-Aligned Benchmark, and we put to them that, well, surely if the world is not decarbonizing on that pathway, your tracking error is just going to get greater and greater and greater until you can't build a diversified portfolio any longer. And they said, "Well, actually, it's not really as bad as that because we've got all these sectoral constraints that will bite at some point to ensure diversification."

So they'll stop being so Paris-Aligned. And because emissions are so concentrated in a few sectors, it's not as bad as you think, which I guess is correct, but you're still not achieving anything. There's no theory of change about what you're doing, but you have a different portfolio to the one you would otherwise have had for no reason. It's like an unmanaged portfolio. You've got stock weightings that are driven by a model that has no bearing on returns, but it also has no bearing on climate. Why is that a good idea?

But the notion of portfolio emissions driving them down is still really deeply embedded in a lot of people's minds such that we get enormous pushback occasionally from clients who say, "You're not serious about climate change because you are not prepared to adopt a reduced emissions targets and Paris-Aligned Benchmarks." And they're doing that from the complete place of sincerity and ambition and wanting to do the right thing. But for us, our whole motivation is to build portfolios that can have the maximum climate impact that we can while meeting our financial goals and Paris-Aligned Benchmarks do not do that. They actually undermine both of those goals. So this brings us right back to the beginning of our conversation, Jason, I think of how could the industry help reset and reframe itself? This is the issue it could be honest about.

Jason Mitchell:

Really, really interesting. I keep going back to some of the early thoughts where we talked about this explosion of data and sort of the onus or burden of reporting. And I kind of reflect back on your guys' own research acknowledges that you can cut a portfolio's reported carbon exposure by, I think 75% simply by reshuffling its constituents, its holdings, without removing a single tonne from the atmosphere.

I'm not trying to sound provocative, but is the sustainable investing industry essentially guilty in your mind of an enormous accounting sleight of hand? I know that I've sort of weighed in on this myself a couple years ago on the long short side and kind of the question of netting. So I am very sensitive and really interested in this kind of line of thought. But if so, how do you talk to a client or tell a client that their decarbonized portfolio hasn't actually changed anything in the world? And what are those alternatives?

Simon Hallett:

I mean, and it's a challenge we're facing literally right now. It's a live challenge. I think we should be humble here and accept that most of us have been guilty of this at some point in ... Investors are action orientated people. They've got a goal that they seize on climate's important, they want to do something about it. Here's a metric that's really tangible and we can change. And I know in my sort of first early iterations of incorporating climate into my role here, I fell for that goal. So I'm not trying to call out anybody for sophistry or anything like that. I think we went down this path for, in most cases, in almost all cases, the right reasons, but we just need to recognise that we've been doing things that make us feel good without actually doing any good.

Sometimes we need to make ourselves feel good. We need that as human beings. So I think what's not productive is going to a client and saying, "You've been misled or you don't understand how this works and you're somehow, as you put it here, there's a sleight of hand going on." The question is, you are trying to achieve an objective. There's a better way of achieving it. I think that's how we ... This whole field is still new and it's really complex. How much thinking has evolved and changed and how much effort has been put in since the Paris Agreement was originally signed as to thinking, what is investor's role in this and how can we best play that role? We've been all on a learning journey. And I think if we acknowledge that and try and learn and move on, there should be no shame in that. Rather, there should be ambition and sort of mutually reinforcing ambition.

Jason Mitchell:

Yeah. And Simon, let me add to that. I mean, because I get this question a lot and I've asked some of the top regulators at the SEC, European Commission, et cetera, about is the system filled with bad actors? I mean, certainly from a regulatory perspective, there have been cases. We all know of them. I don't think there have been a lot, but I do think that there's been a lot of best efforts, kind of commitments around this. And look, things change. Governments have certainly retrenched and not supported that similar journey, mandates change. Like you said, maybe over-committed and the reality of what those mandates look like or maybe turnover and strategies change and they've sort of been caught in a corner. But, yeah, I do agree. We need to be, I think, more honest about this and realistic and pragmatic about what the solutions are, unless you disagree.

Simon Hallett:

No, I think we are in danger of having talked ourselves into positions that we're afraid are backing out of. Absolutely. And that's kind of a little bit cowardly, and we should try and avoid that. But then us as different players in the field, whether it's asset owners or managers or whoever else, if you'll help and support each other to make that shift rather than throw rocks to each other and so forth, as you hinted earlier.

Jason Mitchell:

Yeah, totally agree. So final question, and I'm not trying to back you into a corner, but as co-chair of the Net Zero Investment Consultants Initiative, you've talked in the past about the catalytic power of consultants and how they can unblock decision-making and accelerate progress. But critics would say consultants are, I guess, structurally constrained. In other words, you're paid to advise, not take risks. So in your view, how much real leverage do consultants like Cambridge actually have when a sovereign fund or an endowment or foundation is reluctant to make uncomfortable climate-related decisions?

Simon Hallett:

Well, first thing I'd say, Jason, is that I think we are actually these days paid to take risks to some degree in the sense that the industry and certainly our firm has evolved to the extent that in most of our relationships, we're held accountable, at least in some part for investment performance. So I don't think we're, in most cases, any longer sitting on the sidelines and sending memos, but that's a small part.

Your point is about what's the agency of our part of the industry? Is there much here? Am I right to talk about catalytic power of consultants? So I've been invited onto a UK government work task force about emerging markets investment, which is trying to catalyse transition finance to emerging economies. And there's definitely a lot of discussion there, which goes both ways on this topic where you've got players saying, "Actually, consultants are part of the problem because they're not bringing forward ideas or data that will help us do this." Or they're sort of cautioning what it would do and worrying about risk.

And then there's others who have the opposite opinion. So I think just as consultants can unblock decision-making process and accelerate progress, they can do the opposite. They can be a force for sort of small C conservatism. Consultants can, in some instances, they're there to validate strategy and decisions by the client institution. And it can be difficult for that organisation to go down a new path, a new strategy, unless it feels it has support from external advice.

So if we're not prepared to find ways to support those new strategies, then they won't proceed at pace. So the Net Zero Investment Consultants Initiative goal, or one of its goals at least, is to do honest and data-driven education of clients on basically the why and the how. What are the implications for you, for your stakeholders of climate risk, of different climate pathways? Why might you care about this? Can we quantify that? And if you decide this is important for achieving your mission, what are the tools that you can use to actually address it?

So we should be enabling as well as educating. And I think if we fail in those roles, then change will be slow in areas that our industry touches. And I think that'd be a great shame, because we should be able to ... It's a very concentrated industry. We should be able to create some sense of common understanding here that will serve asset owners well as they wrestle with how and in what way they approach climate change.

Jason Mitchell:

Got it. Well, it's a great way to end. So it's been fascinating to talk about why the gap between climate commitments and real world impact keeps widening how investors, consultants, and asset owners can move beyond performative alignment towards capital allocation that actually accelerates the transition and what it's going to take to recover climate ambition. So I'd really like to thank you for your time and insights.

I'm Jason Mitchell, CIO for Responsible Investment at Man Group, here today with Simon Hallett, Head of Climate Strategy at Cambridge Associates. Many thanks for joining us on A Sustainable Future, and I hope you'll join us on our next podcast episode. Simon, thanks so much for your time today. This has been super, super interesting.

Simon Hallett:

Thank you, Jason.