Latest / Bloomberg Intelligence / Covid Has Significantly Accelerated ESG Investing: PGIM Head of ESG

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Covid Has Significantly Accelerated ESG Investing: PGIM Head of ESG · Bloomberg Intelligence

• 0:01
  Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney. Along
• 0:04
  Speaker 1: with my co host of Bonnie Quinn. Every business day
• 0:06
  Speaker 1: we bring you interviews from CEO, market pros and Bloomberg experts,
• 0:10
  Speaker 1: along with essential market moving news. Kind a Bloomberg Markets
• 0:13
  Speaker 1: podcast on Apple podcast or wherever you listen to podcasts,
• 0:17
  Speaker 1: and on Bloomberg dot com. And today's special edition of
• 0:20
  Speaker 1: Bloomberg Markets is focused on E s G and green finance.
• 0:25
  Speaker 1: Let's bring in somebody who knows all about that now,
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  Speaker 1: Eugenia Jackson, as head of E s G Research and
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  Speaker 1: co chair of the E s G Committee for PGM
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  Speaker 1: Fixed Income about eight nine billion dollars in assets under management. Eugenia,
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  Speaker 1: thanks for joining your co chair of the E s
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  Speaker 1: G Committee, head of E s G Research, I can
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  Speaker 1: only imagine how much work that is E s G.
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  Speaker 1: You now seems to permeate every single investment and every
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  Speaker 1: investment product. How do you manage all of that research
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  Speaker 1: and decision making on investments? Hello, and thank you for
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  Speaker 1: having me Um. Yes, I mean E s G. S
• 1:00
  Speaker 1: you rightly said. E s G today is at the
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  Speaker 1: front and center of very many investment decisions, but it's
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  Speaker 1: also such a constantly evolving space, and things are shifting
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  Speaker 1: at a very at increasing speed. So and also unlike
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  Speaker 1: in many other investment areas, in E s G, we're
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  Speaker 1: seeing a lot of subjectivity and a lot of preconsumptions
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  Speaker 1: associated with D s G, So most people would find
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  Speaker 1: it very difficult to keep space pace with the U
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  Speaker 1: s G development. So I will give you an example.
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  Speaker 1: For example, the imperative of addressing climate change and transitioning
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  Speaker 1: to low carbon economy is changing business models, operations, product
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  Speaker 1: services of many industries and companies all over the world.
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  Speaker 1: And energy companies are often verified for their contribution to
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  Speaker 1: climate change, but these are also the industries that are
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  Speaker 1: adapting fast, that transforming their business models through their investments
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  Speaker 1: and renewable power generation, investing in developing new technologies, exploring
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  Speaker 1: opportunities for credible offsetting programs, and these are this This
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  Speaker 1: creates investment risks and offers investment opportunities. But given the
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  Speaker 1: sheer scale of ESG topic and the pace of change,
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  Speaker 1: investors need both expertise and agility to create value. So
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  Speaker 1: this is exactly what we're doing at Digion's ext income
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  Speaker 1: and I'm very fortunate to be given this opportunity to
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  Speaker 1: contribute to this exciting and involving area. Digim So, Eugenia,
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  Speaker 1: you know, I'm gonna talking about data, the data that's
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  Speaker 1: out there to support investors really want to factor E
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  Speaker 1: s G into their calculus. Here for typical investing, you know,
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  Speaker 1: you go to the financial statements, income statement, to balance sheet,
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  Speaker 1: the cash flow statements. They're all audited data and that
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  Speaker 1: can really help analysts and investors make decisions when you
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  Speaker 1: want to factor an E s G investing, Talk to
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  Speaker 1: us about the quality of data that is out there
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  Speaker 1: for investors to help them, uh, you know, using their analysis. Well,
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  Speaker 1: if I compare to what we had even ten years
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  Speaker 1: ago in E s G, I would say that it
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  Speaker 1: being a tremendous improvement in the both the amount and
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  Speaker 1: the quality of data that we have. However, you're absolutely right,
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  Speaker 1: compared to what we get is the financial data that
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  Speaker 1: we get E s G data is not sufficient, it's inconsistent,
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  Speaker 1: and it's still largely produced a voluntary basis by companies.
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  Speaker 1: So there is very little um laws and regulations that
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  Speaker 1: would require the disclosure of the data. And this is
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  Speaker 1: one of the major struggles when it comes to doing
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  Speaker 1: U S G analysis and trying to you know, make
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  Speaker 1: investment decisions on the basis of s G considerations. So
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  Speaker 1: this is why you know, at Pigeon six th Income
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  Speaker 1: we do not rely so much on third party data
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  Speaker 1: and third party ratings. We are collecting the data ourselves.
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  Speaker 1: We are doing our own research. We are reading the
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  Speaker 1: disclosures provided by the issues. We are engaging actively with
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  Speaker 1: the companies and with you know, software issues and others
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  Speaker 1: to get the information and to get our questions answered.
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  Speaker 1: And that's how we are collecting, analyzing and incorporating this
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  Speaker 1: information into our analysis. If we only relied on right, well,
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  Speaker 1: I was just going to say, what do you prioritize?
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  Speaker 1: Is that outcomes? Is how much change that that investment
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  Speaker 1: might effect to as is it's something else. How do
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  Speaker 1: you decide what's important when it comes to the metrics. Um,
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  Speaker 1: that's very good question. So at Picture Fixed Income, we'll
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  Speaker 1: look at s G factors from two different perspectives. So
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  Speaker 1: on one hand, we are looking at those us G
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  Speaker 1: factors that we believe as an active fundamental investor, we
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  Speaker 1: believe our credit material are financially material that they can
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  Speaker 1: move this. This are the us factors that can move
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  Speaker 1: bond prices that can move spreads, and therefore we integrate
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  Speaker 1: them directly into our credit analysis and in relative value discussions.
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  Speaker 1: Now this on the second set of On the other hand,
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  Speaker 1: we're also assessing how issues companies and and their economic
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  Speaker 1: activities are impacting the environment and society it and for
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  Speaker 1: this way you're using our proprietary eas impact ratings. So
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  Speaker 1: there are two types of assessments u s G assessments
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  Speaker 1: that we're doing. And we feel that this is really
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  Speaker 1: important because you know, there are certain elements of certain
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  Speaker 1: us G factors which today they might not be credit material,
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  Speaker 1: or may not even be credit material in the foreseeable future.
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  Speaker 1: But over time, as more and a sustainability becomes bigger
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  Speaker 1: and bigger consideration for a growing number of investors and policymakers,
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  Speaker 1: these factors are going to become a lot more material.
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  Speaker 1: So this is also the forward looking perspective. So and
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  Speaker 1: this is how we saw how we look at the
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  Speaker 1: data that we have, how the factors that we analyze,
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  Speaker 1: and then so that we're looking at them from the
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  Speaker 1: materiality perspective, the financial materiality as well as from the
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  Speaker 1: environmental and social impact perspective. You need to spout thirty seconds.
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  Speaker 1: How has COVID nineteen impact the e s G invested
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  Speaker 1: as an accelerated trends or maybe even slowed it down.
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  Speaker 1: I think it has accelerated very significantly because what it's
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  Speaker 1: done is really cost the spotlight on the social inequalities
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  Speaker 1: and the differences and working conditions and treatment of employees, suppliers,
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  Speaker 1: you know, across companies, industries, countries, and these are all
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  Speaker 1: social issues. The COVID really has brought the social issues
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  Speaker 1: to the forefront. And I think it's also highlighted the
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  Speaker 1: risks that investors face when it comes to supply chains.
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  Speaker 1: So um, this will have consequences for companies and their investors,
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  Speaker 1: and I think it's just really another tale wind for emergy. Eugenie,
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  Speaker 1: thank you so much for joining us. Really appreciate your time.
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  Speaker 1: Just a fascinating discussion. Eugenia Jackson, head of E s
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  Speaker 1: G Research and co chair of the E s G
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  Speaker 1: Committee for Pigeon Fixed Income. They had eight nine billion
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  Speaker 1: dollars under management, and you can tell that they are
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  Speaker 1: clearly focused and committed to E s G investing, and
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  Speaker 1: we're hearing more and more of that for more and
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  Speaker 1: more large global institutional investors will have more on that
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  Speaker 1: coming up. This is Bloomberg. Today's show is special edition
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  Speaker 1: of Bloomberg Markets. We're focusing on E S, g N
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  Speaker 1: green finance. Joining us right now is Catherine Nice, chief
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  Speaker 1: European economist for PGIM Fixed Income based in London. Catherine,
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  Speaker 1: thanks so much for joining us here. Boy, what a
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  Speaker 1: year has been. Just extraordinary. In the second quarter just
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  Speaker 1: seeing bearing the full brunt of the pandemic and then
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  Speaker 1: of course that's snap back in the third quarter. Here,
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  Speaker 1: fourth quarter a little bit uncertain here as it relates
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  Speaker 1: to Europe. Give us a sense of kind of how
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  Speaker 1: do you think Europe is going to finish out the
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  Speaker 1: year and then more importantly, how do you think the
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  Speaker 1: economies across the European Union and Union are going to
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  Speaker 1: perform in next year. Thanks so much for having me. Yes,
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  Speaker 1: it has been an extraordinary year. I think for for
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  Speaker 1: all of us, we each have our own unique story
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  Speaker 1: to tell. In Europe. The economy has has has moved
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  Speaker 1: in ways that we never seen before. The hits that
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  Speaker 1: we had in Q two was really completely off the scale.
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  Speaker 1: We're going to end up with GDP hits to the
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  Speaker 1: your area that are around twice the size of what
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  Speaker 1: we saw during the global financial crisis. The good news
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  Speaker 1: is that it wasn't as bad as as we thought
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  Speaker 1: in real time, and the bounce back in Q three
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  Speaker 1: was really remarkable. On sort of seasonally adjusted annualized rates,
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  Speaker 1: we're looking at a number that's over sixt A comparable
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  Speaker 1: number for the US was a little over thirty. These
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  Speaker 1: are huge numbers and very promising in that UH. It
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  Speaker 1: suggests that as we do move to a phase where
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  Speaker 1: the vaccine becomes more widely available, we could see some
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  Speaker 1: really strong bounce backs. I think said that we are
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  Speaker 1: experiencing now a second as in Europe we've had a
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  Speaker 1: second round of restrictions put in place. These restrictions have
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  Speaker 1: been much less UH severe and restrictive generally speaking than
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  Speaker 1: they were in the spring UH, and you know, encouragingly,
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  Speaker 1: the numbers are looking good. We're seeing a turnaround, we're
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  Speaker 1: seeing a flattening in that curve, but that has come
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  Speaker 1: at an economic cost. So I think you are looking
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  Speaker 1: at a sort of W shaped, sort of lopside of
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  Speaker 1: W if you like, UH for Europe, where we see
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  Speaker 1: GDP contracting in Q four UH and potentially also into
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  Speaker 1: Q one. If we think that these lighter touch restrictions
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  Speaker 1: will need to stay in place post the holiday season,
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  Speaker 1: that would put Europe in a sort of double dip
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  Speaker 1: recession UH position, which of course raises risks of long
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  Speaker 1: term scarring. Well, just as we're seeing an extraordinary amount
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  Speaker 1: of heterogeneity across the United States in different regions, we're
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  Speaker 1: obviously seeing that in Europe too. Now, if you look
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  Speaker 1: at the bond market, it tells you a vastly different
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  Speaker 1: story in Italy than it does in Spain, for example.
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  Speaker 1: How can we read what investors are anticipating for these
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  Speaker 1: various countries from the data? Absolutely great point. Qualitatively, of course,
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  Speaker 1: across Europe you've seen a very similar pattern. This big
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  Speaker 1: hit is very strong, bounced back and now, um, you
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  Speaker 1: know a bit of a bit of a step step
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  Speaker 1: step back in Q four as I just described. But
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  Speaker 1: looking underneath that, there is this heterogeneity, and that's a
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  Speaker 1: real concern for the your area because this is a
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  Speaker 1: monetary union that doesn't have a complete risk sharing ability,
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  Speaker 1: so there's always this risk the union UH could be
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  Speaker 1: stressed and tested. Um, where you're really seeing the divergence
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  Speaker 1: to pick out you know, some of the countries you
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  Speaker 1: just mentioned Italy Spain clearly hit very hard by the
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  Speaker 1: public health crisis very early on uh in this pandemic,
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  Speaker 1: but also their economies were more vulnerable to the social
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  Speaker 1: distancing measures that that were needed to help manage the virus.
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  Speaker 1: That was especially true in Spain they have a very
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  Speaker 1: large tourism sector and clearly uh, you know, international travel Brits,
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  Speaker 1: you know, my fellow friends and nelighbors, they couldn't go
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  Speaker 1: to Spain in the summer, and and that you know,
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  Speaker 1: translated into these GDP hits. Whereas countries like Germany, which
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  Speaker 1: are much more manufacturing based and which have really benefited
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  Speaker 1: from the rebound that you're seeing in China, their hits
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  Speaker 1: aren't two. GDP has been much more muted, and they're
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  Speaker 1: recovering better now even with these social restrictions in place,
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  Speaker 1: because the manufacturing sector is helping to kind of offset
• 12:08
  Speaker 1: what's happening uh in the services sector, you know, by
• 12:12
  Speaker 1: by a construction, you know, through these social distancing measures.
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  Speaker 1: So I think that is a concern that there is
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  Speaker 1: this uh, you know, potential divergence uh in the economic
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  Speaker 1: outlook across the European region. And I think that you
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  Speaker 1: know that really underpins a lot of the policy action
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  Speaker 1: that we've seen, uh since this pandemic, where European policy
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  Speaker 1: makers have been much more unified and coordinated than I
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  Speaker 1: think perhaps we're used to seeing them respond in the
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  Speaker 1: face of these sorts of stresses that we've seen in
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  Speaker 1: the past, in the sovereign debt crisis, in the global
• 12:53
  Speaker 1: financial crisis. Now they're acting decisively on monetary policy, decisively
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  Speaker 1: on Cisco to enable uh, you know, the support from
• 13:04
  Speaker 1: the stronger member states in the European Union to help
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  Speaker 1: support and prop up some of those countries that have
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  Speaker 1: really been hit hard. Well, Catherine, just as you say
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  Speaker 1: that the euro has extended its advanced and strongest levels
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  Speaker 1: since two thousand eighteen versus the dollars, so you certainly
• 13:20
  Speaker 1: bring out the headlines on the Bloomberg. Thank you for
• 13:22
  Speaker 1: joining us today. Would love to talk to you more
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  Speaker 1: about the European economy as time goes on. That's Catherine Nice,
• 13:27
  Speaker 1: chief European economist for PGM Fixed Income joining us there.
• 13:32
  Speaker 1: And again Katherine Nice of PIGIM. This is Bloomberg. Let's
• 13:38
  Speaker 1: bring in somebody very fascinating now, q m A. It's
• 13:42
  Speaker 1: the quantum division of PGIM and the person who's the
• 13:44
  Speaker 1: chairman and CEO of q m A is Andrew Dyson,
• 13:47
  Speaker 1: who joins us now. By the way, q m A
• 13:49
  Speaker 1: with almost ninety one billion dollars in assets under management. Andrew,
• 13:54
  Speaker 1: thanks for joining. I can imagine with the election you
• 13:56
  Speaker 1: had all sorts of models ready to go and althors
• 13:58
  Speaker 1: of inputs ready to to press enter on. Let's say,
• 14:01
  Speaker 1: when we knew an outcome, how does the outcome of
• 14:04
  Speaker 1: this election change the equation or the algebra or whatever
• 14:08
  Speaker 1: goes into quant investing for you. Look, I think I
• 14:15
  Speaker 1: think that you know this. This is in a sense
• 14:19
  Speaker 1: that potential for a regime change um an element. It
• 14:23
  Speaker 1: was already discounted in the market. But I think you've
• 14:27
  Speaker 1: seen many positives come through, and in terms of have
• 14:33
  Speaker 1: a market to have responded, and certainly in terms of
• 14:35
  Speaker 1: value for example, which has been out of favor for
• 14:38
  Speaker 1: a long time, that the last few weeks have generally
• 14:41
  Speaker 1: been a strong sort of rally. And that's a common
• 14:44
  Speaker 1: theme for quant so I think you know you're likely
• 14:47
  Speaker 1: to see I think those themes continue generally. And then
• 14:51
  Speaker 1: one area I know we're particularly interesting is what does
• 14:54
  Speaker 1: this mean to the future of E s G in
• 14:56
  Speaker 1: the US, and that's certainly something where we could be
• 15:00
  Speaker 1: a ce change I think in the next few years. Right,
• 15:02
  Speaker 1: we even have a star now, John Harry So Andrew.
• 15:07
  Speaker 1: I guess you know, I first started really getting questioned
• 15:10
  Speaker 1: about E s G investing probably a dozen years ago,
• 15:14
  Speaker 1: and it was by my institutional investor clients in Europe
• 15:16
  Speaker 1: and London and frankfort Uh way before the US. So
• 15:21
  Speaker 1: it seems to be E s G investing kind of
• 15:23
  Speaker 1: was was much more firmly entrenched in Europe and maybe
• 15:26
  Speaker 1: some other regions of the world. Where do you think
• 15:28
  Speaker 1: it is here in the US and how do you
• 15:32
  Speaker 1: how do you think it might play out over the
• 15:33
  Speaker 1: next several years and will abide administration maybe accelerate that. Oh,
• 15:38
  Speaker 1: I completely agree. I mean historically, I think the US
• 15:43
  Speaker 1: in terms of E s G adoption, whether it's for
• 15:45
  Speaker 1: institutional or or for individuals, has really lagged you know,
• 15:50
  Speaker 1: most of Europe, probably all of Europe now and market
• 15:53
  Speaker 1: like Australia, and some of that I think was just
• 15:57
  Speaker 1: history and cultural and but but I think what's been
• 16:01
  Speaker 1: very interesting is actually think now clients interest is actually
• 16:06
  Speaker 1: really probably at all time highs if if you chart
• 16:09
  Speaker 1: interest in the US, and what has held back that
• 16:12
  Speaker 1: that turning into assets has been some of the sort
• 16:17
  Speaker 1: of much more hostile regulatory environment that the d o
• 16:20
  Speaker 1: L has has sort of propagated over the last two
• 16:23
  Speaker 1: a few years. And so if that's right, you can
• 16:26
  Speaker 1: absolutely envisage that um that that regulator vironment, that regulatory
• 16:32
  Speaker 1: tone will change to be much more favorable. And then
• 16:36
  Speaker 1: I think that sort of pent up demand that that
• 16:40
  Speaker 1: we're seeing from a lot of plants as they both
• 16:42
  Speaker 1: institutional and individual plants will come to the floor. So
• 16:45
  Speaker 1: so this really could be a turning point in terms
• 16:49
  Speaker 1: of interest from all sides really in the US and
• 16:53
  Speaker 1: be a four year period where you do see a
• 16:55
  Speaker 1: big catch up in that gap between the US and
• 16:58
  Speaker 1: the rest of the work. Yes, I mean the very
• 17:00
  Speaker 1: fact that there's somebody dedicated to it now on the administration,
• 17:03
  Speaker 1: Assuming that you know, all goes well and Don Kerry
• 17:06
  Speaker 1: does you know, get into the position of climate I
• 17:09
  Speaker 1: guess sorrow or whatever they will call them, will re
• 17:13
  Speaker 1: enter paris most likely, and there are the authors that
• 17:16
  Speaker 1: will that impact any of your strategies. Well, we run
• 17:20
  Speaker 1: all our strategies now very cognizant of B s G consideration.
• 17:26
  Speaker 1: So as you as you mentioned before him, and we're
• 17:30
  Speaker 1: QUANTZ and so the way we would think about it
• 17:32
  Speaker 1: is we would talk about a regime change, in other words,
• 17:36
  Speaker 1: a situation where the future diverges from the path, and
• 17:41
  Speaker 1: that would be very clearly a regime change. So I
• 17:45
  Speaker 1: think the in any events, in our strategies were already
• 17:49
  Speaker 1: modeling the risk, if you like, or the potential of
• 17:52
  Speaker 1: that sort of regime change. And I think the likelihood
• 17:55
  Speaker 1: of that increased significantly, and so yes, you would expect
• 17:59
  Speaker 1: to see that cat gay through it. If that happens,
• 18:01
  Speaker 1: there'll be winners and losers in the market, and they'll
• 18:04
  Speaker 1: be you know, changing demand patterns from plants as the
• 18:07
  Speaker 1: results of that. Andrew, you know, I assume you folks
• 18:12
  Speaker 1: at q m A have your version of the black
• 18:14
  Speaker 1: box sitting on your desk here, How what are the
• 18:17
  Speaker 1: key inputs for the E s G part of your
• 18:21
  Speaker 1: uh you know, your format, your formula. What are some
• 18:24
  Speaker 1: of the key components? So we we have a number
• 18:28
  Speaker 1: of them. So we would look at, for example, elements
• 18:32
  Speaker 1: of government, so typically board independence, there's been one we've
• 18:36
  Speaker 1: used actually for quite a long time. But in terms
• 18:40
  Speaker 1: of the newer risks. We would particularly give a high
• 18:44
  Speaker 1: premium to c O two emissions, and I'm giving that weight.
• 18:49
  Speaker 1: If you look historically, you know companies have not had
• 18:53
  Speaker 1: to pay for the externalities if you like permitting zero two,
• 18:58
  Speaker 1: that's likely to change, It's like through quire sort of
• 19:00
  Speaker 1: business models. So so we elevate that is a key
• 19:05
  Speaker 1: sort of regime change risk, if you like. And so
• 19:08
  Speaker 1: our models will therefore favor companies that otherwise have the
• 19:11
  Speaker 1: same characteristics that lower missions um and so you see that.
• 19:16
  Speaker 1: But we also try and look in context at different
• 19:18
  Speaker 1: industries because I do think one of the other themes
• 19:22
  Speaker 1: of the s G is a theme around customization. So
• 19:26
  Speaker 1: underneath the letters, actually it means very different things for
• 19:30
  Speaker 1: different people, and it means very different things to companies.
• 19:32
  Speaker 1: So in our models we try and have a much
• 19:36
  Speaker 1: more industry driven view rather than one size fits all.
• 19:40
  Speaker 1: And certainly I think in terms of how we build
• 19:42
  Speaker 1: portfolios for clients were likewise we think customization is the
• 19:47
  Speaker 1: future in this area as well well. And so in
• 19:50
  Speaker 1: those cases, do you look across the globe, is there
• 19:54
  Speaker 1: an area where you find more candidates that fit your models?
• 19:58
  Speaker 1: You know? What I mean is the United States in
• 20:00
  Speaker 1: there at all. Oh yes, I mean if it's a
• 20:04
  Speaker 1: global efforts, I mean, of course of the United States
• 20:07
  Speaker 1: is in there in both directions. And then there are
• 20:11
  Speaker 1: fantastic companies doing great things in their laggers as well.
• 20:14
  Speaker 1: But that's that's true across all markets. I mean, the
• 20:17
  Speaker 1: issue is now a global seed, and I think it
• 20:20
  Speaker 1: will be great to welcome the US fully to that
• 20:23
  Speaker 1: party in terms of investing and in terms of plants. Hey, Andrew,
• 20:29
  Speaker 1: thank you so much for joining us. We really appreciated.
• 20:32
  Speaker 1: Andrew Dyson, chairman and CEO of q m A. Q
• 20:36
  Speaker 1: M A is the quant division of PIG and about
• 20:39
  Speaker 1: ninety one billion dollars under management. And and you know, Vannie,
• 20:43
  Speaker 1: I think one of the key things we learned from
• 20:44
  Speaker 1: today is just how much growth there isn't E S
• 20:47
  Speaker 1: G investing, both on the buy side and the sell
• 20:49
  Speaker 1: side and companies themselves, right, and such a mandate for
• 20:53
  Speaker 1: it now across you know, from family officers to you know,
• 20:57
  Speaker 1: endowments and so on. You just need to need to
• 21:00
  Speaker 1: be able to do this. Every every shop needs to
• 21:02
  Speaker 1: have an E s g R M and H S
• 21:04
  Speaker 1: g RM even better health. Yeah, it's interesting and one
• 21:07
  Speaker 1: of the aspects that here Bloomberg is trying to make
• 21:09
  Speaker 1: sure that we have the data available for clients who
• 21:13
  Speaker 1: want to really incorporate E s G uh into their
• 21:16
  Speaker 1: investment analysis. And on the f A function there's actually
• 21:19
  Speaker 1: an E s G tab, so when you're doing your
• 21:21
  Speaker 1: financial analysis you can look at the E s G
• 21:22
  Speaker 1: data though, So that's pretty interesting as well. Well the
• 21:26
  Speaker 1: next three it just fascinates me. You know, you think
• 21:29
  Speaker 1: about the electric vehicle business and you think Tesla, and
• 21:32
  Speaker 1: you think where are the big U S automakers, where
• 21:35
  Speaker 1: are they in the electric vehicle business? With General Motors recently,
• 21:38
  Speaker 1: you know, made a plan to take a steak and
• 21:41
  Speaker 1: equity stake in clean energy trucking startup Nickela Corporation. But
• 21:44
  Speaker 1: that plan has fallen apart, and quite frankly, I'm confused,
• 21:47
  Speaker 1: but I know somebody's on top of it, and that's
• 21:49
  Speaker 1: Tim O'Brien, senior calumnist for Bloomberg Opinion. Tim, it was
• 21:54
  Speaker 1: a promising deal, but a strange one. But what's even
• 21:57
  Speaker 1: stranger here is that General Motors has kind of pulled
• 22:00
  Speaker 1: out of the deal with Nicola. What's going on, Well,
• 22:02
  Speaker 1: they're pulling out Paul because it's become an embarrassment. And
• 22:06
  Speaker 1: and the curious thing in in this whole transaction is
• 22:10
  Speaker 1: GM had every opportunity not to do the deal. It
• 22:13
  Speaker 1: it UH famously began unraveling in September after Hindenburgh researcher,
• 22:19
  Speaker 1: a short seller, published a research report pointing out a
• 22:23
  Speaker 1: whole raft of problems with Nicola's leadership and and statements
• 22:30
  Speaker 1: by by its founder Trevor Milton and UH that ultimately
• 22:37
  Speaker 1: forced Mary barn and GM to step back. But it
• 22:41
  Speaker 1: wasn't September when a lot of controversial things about Niccola
• 22:44
  Speaker 1: was known. We're known that goes back as far as July,
• 22:48
  Speaker 1: when issues were raised about claims that had made for
• 22:52
  Speaker 1: trucks it was producing that that um it it said
• 22:58
  Speaker 1: there were heightened design and um uh energy efficiencies around
• 23:04
  Speaker 1: that vehicle that weren't the case. UH. Other things came
• 23:08
  Speaker 1: out about Milton's past over the summer, so the father
• 23:11
  Speaker 1: was out there. And the real question that comes up
• 23:14
  Speaker 1: and all this is what sort of due diligence did
• 23:16
  Speaker 1: GM actually do when they decided to give its corporate
• 23:20
  Speaker 1: blessing to a three year old startup that was still
• 23:24
  Speaker 1: an essentially an unproven truck producer, right, and why don't
• 23:28
  Speaker 1: we know that? I surely that should be transparent. Well,
• 23:32
  Speaker 1: it should be. I mean I think you know there's
• 23:33
  Speaker 1: now the Security and Exchange Commission and the Justice Department
• 23:37
  Speaker 1: are both now reportedly looking into, um, some of nicholas
• 23:41
  Speaker 1: public statements and Trevor Milton's public statements. Uh. There are
• 23:45
  Speaker 1: probably legitimate legal reasons uh for GM and for bear
• 23:51
  Speaker 1: Up not wanting to be more more forthcoming in the moment.
• 23:56
  Speaker 1: That's an argument that that could be made. The problem is,
• 24:01
  Speaker 1: I think GM has some problems of its own in
• 24:03
  Speaker 1: this transaction. It came to GM and Mary Bearas attention
• 24:08
  Speaker 1: through Steve Girsky. He's a former GM and executive who
• 24:13
  Speaker 1: became an investor and invested in Nicola and was very
• 24:17
  Speaker 1: um uh public in his statements that Niccola was the
• 24:21
  Speaker 1: real thing. It was Steve Gursky who brought this deal
• 24:25
  Speaker 1: through GM's doors. So was there an arm's length transaction here?
• 24:29
  Speaker 1: When when Mary Bera says that her team and the
• 24:34
  Speaker 1: company's accountants and lawyers and financial wizards scrutinized this before
• 24:40
  Speaker 1: GM tied up with Nicola, Well, did they really we
• 24:43
  Speaker 1: don't know, and I think that it would be useful
• 24:46
  Speaker 1: for the company to be more transparent and offer a
• 24:48
  Speaker 1: more public timeline of what occurred here and tim you know.
• 24:52
  Speaker 1: For for background, I used to work with Steve Gersky
• 24:56
  Speaker 1: way way back in the day when he was a
• 24:57
  Speaker 1: young OTTO analyst of Payne Warbert. I know he's enjoyed
• 24:59
  Speaker 1: it very good career in the auto industry. Government folks
• 25:03
  Speaker 1: known from the bailout, plus Mary Barra, who again has
• 25:07
  Speaker 1: a very good reputation. You just wonder how, you know,
• 25:10
  Speaker 1: people like these could put such an odd transaction together.
• 25:14
  Speaker 1: Do you think this is going to weigh on Mary
• 25:16
  Speaker 1: Barra's reputation and maybe even that of General Motors. Well,
• 25:20
  Speaker 1: I think they've taken a repute. Both of them have
• 25:23
  Speaker 1: taken a reputational hit. You know, I agree with you, Paul.
• 25:25
  Speaker 1: I think Mary Bara is an incredibly inspiring executive. She's
• 25:30
  Speaker 1: one of the few women to run a fortune. She's
• 25:33
  Speaker 1: the daughter of a GM tool and die craftsman. She's
• 25:37
  Speaker 1: entirely self made. She went to work for GIM when
• 25:40
  Speaker 1: she was eighteen, went on to get a degree in
• 25:42
  Speaker 1: electrical engineering and an NBA from Stanford. She's been g
• 25:46
  Speaker 1: m CEO for almost seven years, and she's handled a
• 25:49
  Speaker 1: bunch of thorny problems very deftly. But this, this, this
• 25:54
  Speaker 1: is a real problem for her because she's been opaque
• 25:57
  Speaker 1: about it. Her decision making here was clearly flawed and
• 26:02
  Speaker 1: and she's not really coming clean about what led to
• 26:05
  Speaker 1: a debacle. This this, there's no allegations of fraud here.
• 26:09
  Speaker 1: This is not going to cause legal headaches for her.
• 26:11
  Speaker 1: She actually engineered a very smart financial deal for GM,
• 26:15
  Speaker 1: so there's no money being lost, but there is reputational
• 26:18
  Speaker 1: damage that I think they should think about. And as
• 26:21
  Speaker 1: it also assigned him of the desperation a sort of
• 26:24
  Speaker 1: older legacy companies to try and get in on what
• 26:27
  Speaker 1: they see as something that might be disrupting them and
• 26:30
  Speaker 1: not missing out on that. Well, you know, it's this
• 26:33
  Speaker 1: is classic in corporate America when up starts find new
• 26:36
  Speaker 1: markets and they get um lush valuations from the market.
• 26:40
  Speaker 1: We saw it, uh you know a decade ago when
• 26:43
  Speaker 1: banks UH began, you know, rushing to create internet only
• 26:47
  Speaker 1: banks under new brands, but over the banks to sort
• 26:50
  Speaker 1: of capitalize on the markets enthusiasm for standalone digital only
• 26:57
  Speaker 1: financial UH services companies. And it's happening now clearly in
• 27:03
  Speaker 1: this sector. Tesla's obviously enjoyed a big run up, but
• 27:06
  Speaker 1: at one point in June, Nicola had a market capitalization
• 27:10
  Speaker 1: that was larger than Ford's and um. I think the
• 27:13
  Speaker 1: auto companies are seeing this. They want to capture that value.
• 27:16
  Speaker 1: But the end of the at the end of the day,
• 27:18
  Speaker 1: a well run company and a well run corporation captures
• 27:21
  Speaker 1: value by making great products and being very profitable. And
• 27:25
  Speaker 1: if if legacy automakers want to be competitive in this
• 27:28
  Speaker 1: new space, they've got to be shrewd about who they
• 27:31
  Speaker 1: partner with, and they've got to be willing to embrace
• 27:33
  Speaker 1: authentic innovation. It's interesting, Tim, I was talking about this
• 27:36
  Speaker 1: with Kevin Tynan Bloomberg Intelligence auto analysts, and you know,
• 27:40
  Speaker 1: just we had this ongoing conversation. It just feels like
• 27:43
  Speaker 1: the big automakers, say, let's just take the big three
• 27:45
  Speaker 1: in Detroit are just so far behind in this ev
• 27:49
  Speaker 1: that they're seating the market to Tesla. But Kevin and
• 27:51
  Speaker 1: other auto and also come back and say, hey, when
• 27:53
  Speaker 1: there's a big enough market to make these things profitably,
• 27:56
  Speaker 1: really profitably, the big three will be there. Is that
• 27:59
  Speaker 1: kind of the few you think is permitting through Detroit.
• 28:02
  Speaker 1: I think so, and I think there's some truth to that.
• 28:05
  Speaker 1: You know, the reality is that Tesla's not necessarily at
• 28:08
  Speaker 1: a point right now where it can scale its production
• 28:12
  Speaker 1: at all on the order of a Ford or a
• 28:14
  Speaker 1: GM UM. I think at some point Testa will will
• 28:18
  Speaker 1: probably need a production partner if it really wants to
• 28:22
  Speaker 1: become a mammoth producer of vehicles at a lower price
• 28:26
  Speaker 1: point than it than it sells right now. UM. On
• 28:29
  Speaker 1: the other hand, I don't think legacy companies can just
• 28:32
  Speaker 1: sit back and say we have production advantages, we have
• 28:36
  Speaker 1: marketing advantages, we have scale, we're authentically global, Therefore we
• 28:40
  Speaker 1: can let someone else innovate and then we'll pick them
• 28:43
  Speaker 1: off when they're mature enough. That's a dangerous strategy for
• 28:48
  Speaker 1: any corporation in any industry, and we've seen this in media.
• 28:51
  Speaker 1: We've seen it in traditional manufacturing and other sectors where
• 28:55
  Speaker 1: people wait too long to innovate. Well, Tim, thank you.
• 28:59
  Speaker 1: You're always innovation with your columns, so we appreciate it.
• 29:01
  Speaker 1: Tim O'Brien is senior columnist for Bloomberg Opinion, and his
• 29:04
  Speaker 1: column to say Mary barn needs to explain GMS Nicola
• 29:07
  Speaker 1: miss step pretty much speaks for itself. To have a
• 29:10
  Speaker 1: read of it. Thanks for listening to Bloomberg Markets podcast.
• 29:14
  Speaker 1: You can subscribe and listen to interviews at Apple Podcasts
• 29:18
  Speaker 1: or whatever podcast platform you prefer. I'm Bonnie Quinn. I'm
• 29:21
  Speaker 1: on Twitter at Bonny Quinn, and I'm Paul Sweeney. I'm
• 29:24
  Speaker 1: on Twitter at pt Sweeney. Before the podcast, you can
• 29:26
  Speaker 1: always catch us worldwide at Bloomberg Radio.