In this episode, we speak to Alex Hetherington, the founder of Third Line Group, about ESG strategies and sustainable finance. Alex discusses his career journey and how he became interested in environmental and social development issues. He explains the role of investors in driving ESG performance and the importance of integrating ESG into enterprise risk management systems. Alex also touches on the topics of greenwashing, the complexity of ESG strategies, and the opportunities for Guernsey to establish itself as a leader in sustainable finance.
Transcript
Rosie (00:00.036)
Welcome to the latest Sustainable Finance Guernsey podcast, rated
one of the top 10 most useful sustainable finance podcasts by Green
Finance Guide. Guernsey is one of the jurisdictions leading the way
in green and sustainable finance. And as part of this podcast
series, we will be speaking to and learning from some of the
leading global figures in this field. My name is Rosie Allsopp.
I'm Communications Director here at Guernsey Finance. We are
the promotional agency for Guernsey's finance industry.
And today I'm very pleased to be speaking with Alex Hetherington, who is the founder of Third Line Group. Through his work with Third Line Group, Alex consults and trains organisations on issues such as ESG strategy, climate change, investor ESG risk and opportunity analysis. Since 2005, he's advised companies such as Nedbank, Sanlam, Santam and Kansai Pluscon in developing and implementing strategically focused ESG strategies.
He also designed the first corporate climate change mitigation project for the South African government and WWF. So welcome Alex. It's great to have you on the podcast with us today.
Alex (01:08.195)
Thank very much, Rosie. Very, very nice to be
Rosie (01:11.593)
Shall we kick off, maybe just build on that intro, tell us a little
bit about your career to date and what you're doing now.
Alex (01:19.089)
Okay. Well, originally I was trained as a journalist, rather
unorthodox. Okay, right, very good. Communication is important,
especially in this ESG field, but a slightly unorthodox approach, I
imagine. But I very quickly, within my journalistic career, became
interested in environmental issues and social development
issues.
Rosie (01:24.823)
me too!
Rosie (01:30.126)
Certainly is.
Alex (01:46.139)
tended to go myself towards those kinds of stories. Ultimately,
that led to me heading up and directing a media and communications
agency that focused specifically on these two sectors. And after a
while, as a journalist, you get a little bit jaded by reporting
from the outside, looking in, you really want to be inside, right?
And doing what it is that actually you're reporting on.
That took me into doing some post -grad studies in environmental management. And that was very specifically focused around the triangular nexus of corporate sustainability, carbon emissions, and climate change, if you can picture that as a triangle. What that allowed me to do coming out of those studies was to go into the corporate sector and start
advise and consult to them around ESG in its broad entirety as such. That was we're talking nearly 20 years ago now so that's a long time but the focus has largely remained in terms of that ESG but coincidentally and corresponding to that I also co -founded a
carbon management and climate change consultancy. And that has focused a lot of my attention around this issue of climate, both from a risk and an opportunity perspective. So these days, while I still look at ESG in its broadest facets, I also have that particular niche and focus around climate.
Rosie (03:37.506)
Okay, so we mentioned third line group in the intro. Can you tell
us a little bit about it specifically from what I can understand
you work with corporations and investors to provide information and
analysis on a variety of sustainability issues?
Alex (03:54.011)
Yeah, that's absolutely right. you know, over the years,
I've continuously been looking for the drivers of good
corporate practice from an ESG perspective. Let's call it a non
-financial perspective. you know, there many out there, of course.
There's policy, there's effectively reputational issues to
look at. There is good business sense. All of those are drivers
of
corporate sustainability, but what I came to realise probably around 2014, 2015 was that the investor community can actually play a major role in this. And what I mean by that is that if investors increasingly can understand the impact that ESG will have and could have and will have on the value of their portfolios or the value of their investments,
then they will start to ask the right kind of questions in terms of ESG performance of companies. So the link here is if you get the investors to ask the right questions, the companies are obliged to respond to that. Now, let's be honest. There's no CEO or CFO that in an investor roadshow or an AGM ever wants to be asked a question that they can't answer.
So if you get the investors to be asking those kinds of questions, which historically was unusual, it's increasing now, particularly with investor activism, etc. But back in those days, it was unusual. But if you could get them to ask those questions, because they truly believe and, understood and believe that it did impact the value of their investments, then you're going to start to get that push back into the corporate leadership that is so very, very important. And I think
Rosie, you know, reality is that Many CEOs, etc are really appointed on short-term basis. They have a five-year tenure. They have to turn around various performances, mostly financial, and ESG becomes not top priority. We need to change that. We need to get them to understand that actually it does impact the long-term sustainability of their organisations
Alex (06:16.953)
and not just the long-term sustainability of the fund as such. So
investors can play this critical role.
Rosie (06:23.812)
I think that's absolutely right. So on the investor side,
almost 20 years ago, you coined the phrase "benefits beyond
compliance." So it's probably fair to say that the
information available to the average investor has changed
dramatically in that time. Alex, tell me a little bit about that
concept and how does this access to information change investor
expectations of a company?
Alex (06:48.551)
Yeah, great question. Thanks, Rosie. I mean, I think, you know,
going back 20 years, sustainability was generally seen as a
compliance driven exercise within corporations. It was not business
strategic. It was in very, in very many cases, a piece of
regulation that might've been put in place by the stock
exchange at a particular company might've been listed on.
Companies are not getting asked questions. We're not getting asked the investor led questions around this. So it was very much kind of in the realm of corporate social responsibility as such. against that. I'm not saying that that's not important, but it was translating itself into corporate leadership, not taking it as seriously as one would have liked.
What we saw often was that a ESG or sustainability department would be formulated or formed in a company. It would be middle management. It would have the task of producing sustainability reports. The reports would be issued and often they gathered dust. And I'm talking against myself here because I've contributed towards such reports.
And it leads to a certain amount of frustration, to be quite honest, because it was not resulting in the kind of change that arguably we need at all levels of society. the push since then, I think, has been very encouraging, albeit somewhat slow. I think what we are increasingly seeing now is
As existential issues such as climate change come to be witnessed and experienced. I think the sustainability reporting sector is becoming a much more important role within corporations. I think investors and other stakeholders, governments, communities, etc are truly starting to drill into this kind of reporting.
Alex (09:10.843)
to try and properly understand how companies are responding to
these various risks and also opportunities. And let's never
forget about the opportunities and investors love opportunities. So
fair enough. But so the nature of the reporting is changing
tremendously. And I think you can see that particularly in, take an
example in the climate space, the TCFD report, which obviously now
is IFRS S2.
What is being asked in those reports? There's tremendous focus on governance, board expertise especially. So there's a desire to know what kind of top level oversight is in place and what that oversight actually knows about the issue. I think that's encouraging. There is
increasing understanding that this is actually not a one -off risk. It actually needs to be integrated into enterprise risk management systems, fundamentally important. Obviously, strategies need to be developed as we move into a lower carbon future. Transition plans need to be developed. These need to be interrogated. Are they in alignment with what the science is telling us? Maybe the science is telling us it is forcing us to be too ambitious, but at least it's putting out there
marker and indicator of what we need to be doing. I think very importantly, reports like the TCFD are demanding that companies start to quantify the financial impact that these risks and opportunities might have. So take that away from the climate space and just look at it from an ESG perspective. What is the financial impact that these risks and opportunities could have on a company?
going forward. And I think this is really critical. I'm not one to say money is everything, but I am one to say that money can give a certain focus. And if you can start to quantify it and take those figures and push them back into the balance sheets, income statements, et cetera, companies, investors understand that language. So let's use that language. Let's speak the investors language so that they can properly understand what this might mean.
Alex (11:33.061)
And again, I go back to my point, hopefully they will then be
asking and challenging the companies that they're
investing.
Rosie (11:39.234)
Yeah, absolutely. And from the corporate side, what are the other
major opportunities and risks when one is developing ESG
strategies?
Alex (11:48.343)
Yeah sure, well I mean of course it depends on the sector, the
nature of their production output. It depends very much on the
geographies in which they operate. So there's a raft but you
know these days just you know very generally speaking high level
issues. One is obviously responding to a changing climate
that's absolutely critical and that kind of goes across cross
-cuts across so many environmental issues from
water, quality, quantity, accessibility, energy, waste, et cetera. All of those actually do feed back into the changing climate that we're experiencing at the moment. And then of course, also on the social side, have, know, it's about a license to operate. Companies are part and parcel of society. They employ people, they have customers, they have supply chains. All of this is, we're talking about
human capital. Of course, the integrated reporting council spoke about the six capitals in the past and used that as a way to report, but I'm not sure that really landed. And I think now we're starting to actually more fully understand what we mean by these kinds of different capitals. And one that's also, course, Rosie, very important is governance. I mean, we've seen some really fundamental
poor governance that have resulted in investor and financial catastrophes. That ultimately probably affects people with pensions and their pension funds. So, you know, there's a huge interlink between all of these. And I never like to think of ESG as the isolated E, S and the G. The three are in interconnected, you know, circle of, you know,
interconnected ecosystem as such.
Rosie (13:49.536)
Mm hmm. For sure. So I'd like to take a moment to talk about
greenwashing and the complexity of this area. As both corporate and
investor understanding increases and the impacts of such
developments are better understood. Do think we will see more
complex strategies developing in this area?
Alex (14:07.131)
Yeah, it's an interesting one. I think there's a natural
tension taking place here. So on the one hand, we have increased
proposed regulation, increased proposed reporting. If you look at
Europe, you know, CSRD, EU taxonomy, the EU Green Deal, a lot of
that is about ensuring that greenwashing
is eliminated at the very best, it's avoided. But there's a pushback, isn't there? And in different parts of the world, there's a pushback in Europe against the increasing reporting requirements. They're expensive, they're timely, know, they take up a lot of time. Onerous and arguably actually might be somewhat self -defeating.
Rosie (14:56.673)
onerous
Alex (15:03.047)
And that's, you know, sure, that's being a little bit
controversial, but the points of the matter is, that a lot of
organisations are battling to respond and respond adequately. And
that is taking the focus away from the actual strategy that ESG
should be providing companies. But of course that came into play
because there was greenwashing. In the 20 years that I've been
involved in this space has been fantastic,
you know, the stories of greenwashing. Sometimes greenwashing where companies have been able to capture a space and perhaps it's not authentic and there's a tremendous lack of integrity in it. And then other cases where they have tried to capture a space and been shot down for whatever reason. And then they've incurred tremendous reputational damage as a result.
So we have this tension taking place at the moment. What we're seeing in the States is a pushback against it, but unfortunately that's being politicised as well. And if you talk to lot of folks, perhaps also the whole ESG, and I'm talking here about ESG investments and the whole trend towards that and massive inflows of capital into such funds. I think maybe that was
And we shouldn't be taking ESG as a separate kind of asset class or other vehicle. ESG simply is a very, what I would call, common -sensical way to look at risk and opportunity with lenses that are not purely financial. And so it doesn't really matter whether it's an ESG fund or any fund. You should be looking at
at the risks and opportunities that ESG provides. And so I think there's greenwashing and then there's mislabeling as well. And of course, then there's semantics. So at the end of the day, us folks in the ESG space need to help companies and investors navigate that. I think we've been at fault, to be perfectly honest with you. I think we've come up with way too many acronyms, number one. I think
Alex (17:19.597)
made it sound way more complicated than it actually needs to
Rosie (17:22.68)
the alphabet soup that people talk about.
Alex (17:25.273)
What a disaster. If we're absolutely honest, and you and I come
from a communications background, communications is about
simplifying a message. And I think the ESG folks have actually gone
into over -complicating the message, and that's pushing back.
So what we are seeing is a protection against greenwashing, but at
the same time, we've arguably over -complicated the issue.
And as a result, it's making it more difficult for us
Rosie (17:58.84)
We'll start to see some change there and simplification and but
yeah, let's watch this space, I guess. So you were recently in
Guernsey and I believe that you had a chance to meet with some
local administrators and advisors and lawyers while you were
here.
Alex (18:16.997)
Yeah, yeah.
Rosie (18:18.626)
So how, yeah, no, I was going to say how was your experience? You
know, I know that you may not have had much previous experience
with Guernsey, but what was your impression of your visit and of
those providers that you were able to meet?
Alex (18:35.567)
Yeah, sure. Well, I mean, It was an incredible experience to be
quite honest. And I'm lucky enough to still be in discussion
with a number of them. I think obviously, know, Guernsey being a
historical financial centre with a very good regulatory environment
is that, you know, places it in a fabulous position. What I
particularly enjoyed. And at first I thought, gosh, this must
be
negative but actually I've come to realise that it's a positive because it's a relatively small, very small community and very small financial sectors as such. Everybody tends to know everybody else in one way or another and that is in its own right somewhat self-regulatory because you don't want to make mistakes and you don't have to carry the burden of a mistake made over a period of time when you're operating in such a small environment.
So that was intriguing to me and very useful. And then just, you know, of course the interconnectivity of Guernsey into global financial centres is phenomenal. And yeah, it was an incredibly illuminating and also refreshing experience for me, Rosie.
Rosie (19:57.262)
We hope you come back again. So we're very proud in Guernsey to
have achieved some sustainable finance world firsts in our
regulated fund regimes, Guernsey Green Fund and Natural Capital
Fund, as well as producing the first ESG frameworks for insurance
and pensions industries. How much of an opportunity do you think
there is for a place such as Guernsey to establish itself as a
leader in this area?
Alex (20:23.441)
Yeah, so it's interesting. mean, of course there's
tremendous influence of money into ESG and impact vehicles as such.
I think it might have tapered off a bit, but just going back to the
discussion we've had now, I think people are increasingly
understanding of ESG as actually a lens for investment decision
-making.
Again, I think There is a tremendous opportunity for Guernsey to arguably position itself as a kind of pragmatic, common-sensical destination for ESG funds, not overcomplicated with the kind of reporting burdens that we're witnessing in other jurisdictions, and at the same time, not diminishing it or trying to reduce the impact
of ESG. Guernsey seems well positioned to do that just geographically, potentially, but also just in terms of the nature of your regulatory environment. And I think you could probably attract what I would like to call the common sense co -investor who's going to say, I understand ESG. I'm obviously looking for a return. I don't want to trade off the
the return for an ESG type of product or an impact product. But I do want to take these things seriously. And I also completely understand how ESG can impose or will impose risks onto my portfolio performance in the future. Guernsey can provide all of that with a limited amount
reporting regulation and other structures that are not as punitive as what we've seen particularly in Europe. that for me, that was a key takeaway. And of course, you've been exploring it there. And the two funds that you're talking about are nascent in terms of their developments, it felt like, but there's great opportunity to get those rights, to position them, to market them correctly, as I say to that,
Alex (22:50.469)
that type of investor who understands this stuff but doesn't
want to label their products ESG because then they've got to go
through all those different hoops. You can actually perhaps provide
an alternative platform in which for them to position their
products under those kinds of labels. So I think there's
opportunity there and I do also know having spoken to your
colleagues that there's a lot of thinking around that.
Rosie (23:13.208)
Yeah, absolutely. That's a great endorsement. Thank you so
much. Alex, I'm afraid that's all we have time for today,
but thank you so much for your time and your insights. It's
been lovely having you with us on the podcast. Really interesting
to hear your thoughts and we look forward to hearing more of what
you'll be doing in the coming years. I'd also like to thank
our listeners for tuning into today's pod. We've got quite
a catalog of interviews and panel discussions on the Sustainable
Finance Guernsey podcast.
You can check them out by searching for sustainable finance, Guernsey, wherever you get your podcasts. And if you enjoyed today's episode, we'd love you to leave us a comment or a review. We absolutely love to get your feedback. We'll be back soon with another episode of the sustainable finance Guernsey podcast.
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