Katherine Collins: Sustainable Investing – What Are You For?

July 30, 2019 | Episode #14

Interested in what constitutes healthy growth, the benefits of high failure rates, and what nature can teach us about becoming better investors? Katherine Collins shares her thoughts on these topics and so much more. Her career has been a series of groundbreaking firsts, from serving as the first female of director of research at Fidelity Investments to being the first professional investor to weave powerful mental frameworks such as biomimicry into her work. Katherine’s insights are not only applicable to your investment portfolio—utilized creatively, they can also enhance your overall life!

“Over the long arc of history, when capitalism has overshot and underdelivered, it’s often as a result of pining oneself to a growth imperative that is overly narrowly defined.”

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Katherine Collins: I highly recommend going back into a formal educational structure in the middle of your career or in the middle of your life. It’s definitely better than any luxury good I can imagine. It’s better than a boat or a car or other things people do at mid-career to try to redirect things.

Manisha Thakor: Welcome to the true WELLth podcast, where we seek to bring you wisdom from experts in the four core areas of holistic wellbeing. Emotional, social, physical, and financial. Our goal is to help you identify tiny tweaks or radical reboots that you can make in one or more of these vital areas of wellbeing, to more tightly align the way you spend your money in your time with what matters most to you in life.

Manisha Thakor: My guest today is Katherine Collins, who currently serves as the first head of sustainable investing at Putnam Investments. Katharine has had quite a career journey, punctuated by a number of firsts. As you’ll soon hear, her stories and insights are fascinating on two levels.

Manisha Thakor: From a purely human standpoint, Katherine is a perfect example of someone who has intuitively used what we call true wealth pivots. As you’ll soon see, she’s never been afraid to make life adjustments when they lead her closer to what feeds her soul intellectually, and brings her everyday joy and sparkle.

Manisha Thakor: As a result, Katherine has crafted a career that in arrears can be seen as a classic example of the kind of tiny tweaks or radical reboots we hope to inspire you to make, so that you, like Katherine can find yourself spending your days, personally and professionally in activities that at a soul level are in deep alignment with what really matters to you.

Manisha Thakor: From a professional standpoint, Katherine raises some very big, very central questions about the role of sustainability, but not in the way you might think in terms of metrics and standards. But rather, peeling the onion back deeper and deeper, tapping the wisdom of the centuries. Talking about issues such as collective benefit versus individual benefit, how to navigate uncertainty, whether or not growth is actually something we should always be aspiring to. And she uniquely weaves together these big philosophical questions, with the standard building blocks of investing such as PE ratios, ROIs, and dividend yields. Without further ado, let’s dive into today’s episode.

Katherine Collins: It’s funny, when I say I went to Divinity School, most folks raise their eyebrows a little bit. And if I’m meeting someone for the first time, it’s almost always the very first question. Nobody cares about the funds I’ve managed, nobody cares about my professional credentials. They all want to hear about divinity school. And for good reason. I mean, it’s definitely not something that appears on too many investors resumes.

Katherine Collins: What was really important to me was to peel back the onion. If you’re a good researcher, you’re always trying to go further back, further back, further back until you get to something that is primary data, primary question, primary source that you really feel is from foundation. And from there, you can build up all the layers of interpretation and influence.

Katherine Collins: And so as I was working more and more on issues around sustainability and impact, I found that there was a lot of activity at a surface level. Talking about development of different metrics and standards and investment approaches. And those were all really vital developments.

Katherine Collins: But I really wanted to spend some time further back in the in the food chain, if you will. And the more essential questions around how do we think about issues of collective benefit versus individual benefit? How do we navigate uncertainty in the world? We have centuries and centuries of wisdom to build upon here. And sometimes in the investment world, we pretend like all of this just came to light a couple of years ago and now we’re trying to figure it out Di Nuovo. I really wanted to tap into that ancient wisdom to bring to bear to my work.

Manisha Thakor: Wow. That was like an intellectual symphony. If you had to pick just one highlight, what comes to mind?

Katherine Collins: One real highlight for me was just the reminder that investing and finance does not actually make the whole world go round. In fact, it’s a pretty small proportion of what’s happening in the world. It was such a healthy thing to wake up in the morning and spend the day with people who weren’t watching CNBC as they brushed their teeth or checking their stock quotes every time that we had a break between classes.

Katherine Collins: And in fact I was there just after the worst of the financial crisis. So it was a very anxiety ridden time for all of America. And the questions that were being asked at the divinity school campus about capitalism were not technical questions about the CDO market. They were essential questions about allocation of resources, development of wealth. Are we sure that this is actually a good system to begin with?

Katherine Collins: So it was a really terrific time to be able to step back and examine those roots. Another thing that happened that was again, just a good reminder of how separate we’ve made some of our professional endeavors is the response I received from my friends. So everyone in some ways was very supportive, but my friends in finance, while cheering me on, they kept saying things to me like, Katherine, I’m so glad you found your calling. Which is a weird thing to say to someone that you’ve worked side by side with for 20 years. Like what do you think? What do you think my calling is if not this thing we’ve been doing together.

Katherine Collins: What they really mean when they say that is goodbye, farewell. You’re clearly over there now. You’re not really one of us anymore. And then my friends at divinity school also very, very supportive but in a really particular way. They kept saying things to me like, Katherine, it’s so great. You’re here. I’m glad you’ve seen the light. Which is kind of encouraging and kind of mean at the same time.

Katherine Collins: It was obvious both of these groups were happy that the other group existed, so long as it was over there. Like a very separate endeavor. And for for both communities, when I tried to explain to them, no, I actually want to combine these things, I think they’re actually already combined at a very essential level and I want to explore that. It was not met with universal cheering on.

Manisha Thakor: On the subject of divinity, I’m reminded of St Thomas Aquinas, the philosopher who said hominem unius libri timeo meaning… And I apologize for my very poor Latin, I fear the man of a single book. Saint Thomas was attributed with allowing ancient wisdom to coexist with the Catholic doctrine. Similarly, Katherine was allowing ideas penned by Thomas Aquinas to coexist with PE ratios and dividend yields.

Manisha Thakor: In a very organic and serendipitous way, which is a long story for another day, Katherine’s intellectual curiosity inspired her to create Honeybee Capital, an innovative investment research firm that combined her two worlds. Her harder knowledge from premier league two decades at Fidelity Investments, and the insights gained while earning her master’s degree at Harvard Divinity School. Katherine, looking back at your time running Honeybee, what brought you the most joy and sparkle?

Katherine Collins: Oh boy. Again, I was so happy during that period with Honeybee Capital to be able to spend some time on some really long arc, truly fundamental foundational issues. A couple that were really important. First I was able to really dive into systems thinking, both complex adaptive systems, but also just systems thinking more broadly.

Katherine Collins: The idea that any research that is good understands how its subject fits into a broader whole. You can’t always research an entire system in one fell swoop. But anytime that you’re examining something in a little bit of a silo or a separated box, you need to recognize that up front and then account for it when you’re making conclusions about that research.

Katherine Collins: And that sounds kind of abstract, but if I look at some of the areas where collectively as humanity we’ve kind of taken a wrong turn, it’s because every individual decision seem to make sense if it was kept in the little tiny box of that one decision. And it’s only when you added them up in aggregate that we veered off course and ended in a place that we didn’t intend to.

Katherine Collins: And so really having a chance to dive deep into systems thinking and how it might apply to investing, as well as lots of other systems was one big arc of research.

Katherine Collins: And the second big arc is still one that I’ve noticed causes very, very strong emotional reactions on Wall Street. And it was this question of growth and this sort of growth imperative, growth at all costs, never ending growth, grow or die, is the motto still in a lot of organizations. And it’s not necessarily a bad motto, but we don’t often stop to think, OK, but growth in what dimension? Right?

Katherine Collins: So if you’re a for profit company, really, is it never ending revenue growth? Or never ending earnings per share growth, that’s your goal? Or are there other things that need to be growing at the same time in order to assure that those financial results are healthy? I get a lot of pushback still on this question of growth. But if I think, again, about the areas where over a long arc of history, whole centuries capitalism has overshot and under delivered, it’s usually pinned back to this idea that you’re not only going to latch yourself to a growth imperative, but it’s going to be very, very narrowly defined.

Katherine Collins: If we just broaden the definition, I think we could go a long way and we could think a little more thoughtfully about major transitions. For one thing to grow, sometimes there’s something else that has to shrink. Not always, but sometimes. And even saying those words, like I feel a little bit anxious. This idea that somehow shrinking is losing is a very powerful thing that’s embedded in a lot of conventional capitalism and conventional financial analysis. But actually, shrinking can be a huge victory, both financially and otherwise. We’ve all seen companies that ended up ruining the whole company because they were stretching, stretching, stretching instead of admitting limits and maybe growing in a different direction, sooner versus later.

Katherine Collins: So that’s a lot about growth and the the missteps of growth. But a big arc of research that I did within that big umbrella of understanding systems was trying to think about growth in a more complete, more holistic, more multidimensional way. What is it that constitutes healthy growth is a pretty fundamental question that we sometimes skip over in business and finance.

Manisha Thakor: Katherine, during this time period you wrote a book called the Nature of Investing: Resilient Investment Strategies Through Biomimicry. What the heck is biomimicry and how can it be used to make better business and investment decisions?

Katherine Collins: So biomimicry is a pretty simple premise that is deceptively simple. Because once you dig into it, it leads to a really rich and kind of never ending path of inquiry. The main point of biomimicry is to step back and think about the wisdom that is embedded in our natural systems. We’ve got 3.8 billion years of evolution, and yet we tend to look at nature more as a storehouse, like a place to harvest stuff. And we rarely look at nature and natural systems as a sort of a library, like a source of true wisdom about how things can work in an elegant, ongoing, adaptive way.

Katherine Collins: So the idea behind biomimicry is, before you make a decision or design a system or create a product, to pause and ask yourself, what is the essential function of the thing I’m trying to do here? And how does that function manifest in natural systems? What can I learn from observing the natural world about the question that’s in front of me right now? So the shorthand I sometimes use is WWND, what would nature do in this situation? It really, again, sends you down a path of inquiry that is still surprisingly not that common and yet is always a very fruitful path.

Manisha Thakor: Katherine, you’ve given us a lot to think about regarding the wisdom embedded in nature’s complex adaptive systems. You and I have both spent a number of years in what some might call the corporate jungle. So tell us, what can nature teach us about how to make better decisions in the business world? Be it in running a company or looking at a business through an investment lens.

Katherine Collins: There are a couple things. One is this idea that investing really is a lot more like a garden or an ocean or a forest, and so are most businesses, so are most organizations, so are most human relationships. And yet through the 20th century, a lot of the tools that we’ve all trained in in our different professional disciplines have been the tools of the industrial era. They’re not bad tools at all, but they’re inherently incomplete. They look at things on dollars in dollars out, linear analytical basis. That’s definitely one important dimension, but it’s one of multiple dimensions. And so if you want to be thinking about your decision making in a way that lends itself to those systems and conditions changing in the future, adding natural systems tools is a really, really helpful way to frame the initial questions and then frame the research and decision making that goes upon them.

Manisha Thakor: For many of us, this is our first exposure to these kinds of ideas. For those of us educated primarily at the alter of cut and dried capitalism, what are some takeaways that we can implement right away to make our corporations or any organization for that matter, more adaptive and flexible in the way that nature is?

Katherine Collins: Yeah. Yeah. So two things. One, I mean the core of the principles of biomimicry are just evolution, right? And so understanding what is it that makes evolution so effective and so powerful over time. And so one key premise of evolution is lots and lots of different mutations and variations are tried over time. And there’s a very, very high failure rate at different points along the life cycle.

Katherine Collins: And so one thing that is tricky for businesses is that we usually don’t tolerate a very high failure rate, at least not once something gets all the way to the point where it’s visible to lots of people and you’re putting a lot of resources behind it. That’s not necessarily a bad thing. But it does mean that in the very earliest stages of ideation, we should be testing a lot more and rejecting a lot more along the way.

Katherine Collins: So for any company that had five key growth initiatives they were going forward with, and they were telling the whole world about it, they were pretty far along in making those commitments. One of my key questions would be, tell me about the original list. And if the original list wasn’t a hundred or a thousand ideas that ultimately got honed down to that five, I might be a little bit wary.

Katherine Collins: Another key element that is really useful in the natural world that translates completely to a business setting is the idea of feedback loops. I had used this term for 20 years as a business professional and thought I knew what it meant. But in biology it has a very precise set of requirements. So for a feedback loop to be effective, you have to have a relevant signal being sent out, not just any signal, but a relevant signal. And then you have to have a receptor for that signal. So the signal is picked up. And then the third piece is, you have to have an appropriate response. Not just any response, but an appropriate response.

Katherine Collins: And when I look at a lot of what’s gone awry in business over time, it’s either a feedback loop that’s a little bit misaligned, like you’re getting a signal, but it’s not being interpreted correctly. Or sometimes a signal is being sent, but it’s not being picked up at all. Or sometimes both of those first two things are in place. But the reaction and the response is actually off. It’s not actually responding in a way that is appropriate to the initial response.

Katherine Collins: So for anyone who’s developing a new product or a new customer base or a new internal capability that’s gonna lead to some kind of terrific new abilities over time, those are the loops that you want to have in place. And you want to ask about all three of those. Tell me, what is your indicator that customers actually want this new thing? Tell me, what have you tested that has not worked out, and how did you know it wasn’t working out and what did you do to adjust and how long did that take and who did the adjusting? You want to ask about all three of those different pieces, separately.

Manisha Thakor: As Katherine has so eloquently described, nature is rich with feedback loops. Sometimes evolution leads to positive symbiotic outcomes. Yet other times those leaps create parasitic relationships. A classic example in nature is the cuckoo in the mockingbird. Cuckoos actually don’t build their own nest. Instead, when a female mockingbird has laid eggs and flies off to get a bite to eat, the conniving cuckoo sneaks in to kick out one of the mockingbirds eggs and replaces it with one of its own. When Mama mockingbird returns home, she is none the wiser that there’s an alien amongst her brood. Why? Evolution has designed the Cuckoo’s egg to visually mimic the mockingbird’s. Specifically, what is happening here is that the Cuckoo’s egg is sending a false signal. The mockingbird receptor is broken and not recognizing this faulty information, and thus the mockingbird’s response, raising a cuckoo bird as if it were its own is not appropriate.

Manisha Thakor: What does this have to do with business and investing? Well, we all know the CEO who surrounds herself with a team of so-called yes men. The CEO thinks she’s powerfully and effectively ruling her own unique nest, when in fact, she’s actually sitting on a cuckoo egg. What we can learn from nature is, just as Katherine taught us, feedback loops don’t work unless you have a relevant signal, functioning receptor and an appropriate response.

Manisha Thakor: Now, take a look at business history. When a once mighty company crumbles, almost always you can attribute it back to a failing in one or more of these three essential feedback signals, or put in nature speak, a leader can end up the duped mockingbird raising a cuckoo bird rather than their bottom line.

Manisha Thakor: So Katherine, you’re the first head of sustainable investing at Putnam. I feel like sustainable investing right now is… It is so hot. It’s this buzz word, but it’s also a concept that a lot of people don’t really know how to explain and it’s also a concept that’s changed a lot, as you and I both know, over the last couple of decades. Can you give us the lay of the land of what sustainable investing is and what we should know about it?

Katherine Collins: Yeah. Sometimes I described this shift that we’re in the midst of as a shift from a compliance oriented mindset to one that’s more of a commitment oriented mindset. So for a long time in the sustainable investment field, whether you called it responsible investing or whether you are looking at ESG analysis, environmental, social and governance analysis, there was a little bit of report card mentality and a question of what are you doing that’s bad was kind of the ethos. We want to stop the bad stuff, which is certainly a logical place to start.

Katherine Collins: But in my studies at divinity school, one interesting thing that I took away is, there’s no successful movement in the history of the world, whether it’s political or religious or social, that hasn’t shifted from being against something to being for something. And I think that’s what we’re in the middle of right now, is this idea of, yes, I definitely want to know the report card version. If you have environmental violations or if you’re cheating your own workforce or cutting corners in terms of your governance structure, I certainly want to know that.

Katherine Collins: But that’s the beginning of the discussion and the analysis. It’s not the end. Where I want to take that, looking forward then is, again, what are you for? It’s a much more open ended question. There’s actually much more common ground there. If you ask a hundred investors, what are you for? You get very, very similar answers. If you ask what are you against? You get this huge, heterogeneous laundry list of things people think they’re sincerely concerned about.

Katherine Collins: So this shift of what are you for really opens up all the potential that already exists within the companies we’re investing in. So if you’re talking to a company that is one of the world’s leaders in bringing together disparate information in an empirically robust way and making it available to a wide variety of scientific audiences around the world, that’s what they can be doing that’s usually impactful. And I’m thrilled that they’re also running their data centers in a carbon neutral way. Awesome. But it’s the data that might actually change the whole world beyond the footprint of that one little company.

Katherine Collins: So this bridge from what are you doing to be responsible for your own operations? Moving that forward to, what are you doing to actually add to the whole? And how is that… Nine times out of ten, that is actually what’s enhancing their own business when you look at the longer term prospects. And so that is where the potential is. I sometimes think we know how to manage the things that are terrible. We’re not yet doing it. There’s still a really urgent need to stop the things that are harmful in the world. Whether it’s on the environmental or the social side.

Katherine Collins: But also at the same time, there’s this infinite potential to be building something that is better and more beneficial. And that gets everyone fired up. And the report card version, the best thing you can do is not to lose. But in this more open ended, what are you for question? There’s a chance to really build something that is, I mean, true benefit to all concerned. What could be more inspiring?

Manisha Thakor: I totally get what you’re saying about the power of framing it as “What are you for?” And that brings me full circle back to the story of Katherine. And let me turn that question to you. What are you for and how is that manifesting itself in your career?

Katherine Collins: Hmm. Well, one thing that I appreciate about the role that I have now at Putnam is that it really is the embodiment of everything I’ve been building toward. I didn’t know that frankly until I got here and this role came about. But my whole career has been spent on this idea that what we’re investing in is deeply connected to the world that we live in, and is also influencing that world at the same time, back to that core Peter Lynch premise. Know what you own. If you spiral that out further and further and further, you need to know what you own in more dimensions than ever before.

Katherine Collins: And so if I hadn’t been trained as a professional investor, there might be a different version of this that was calling to me professionally at this point. But this idea of linking my professional life with the world I want to live in, like that’s what I’m waking up thinking about all day, every day. And it’s not just the world I want to live in. It’s a world that is thriving for all concerned.

Katherine Collins: And what a great alignment. I think for a long time, like many people, I felt a little bit of a push and a pull between what I was doing in my spare time and what I was doing on any given Tuesday, and to feel that coming more and more into sync over the years has been a really wonderful development.

Manisha Thakor: This conversation was rich with takeaways, so much so that I really struggled to narrow it down to my standard top three. As such, I strongly encourage you to visit the show notes for this episode. Where I include additional nuggets that I have a strong hunch will be of interest to you as well. For now, I will highlight these three macro themes from this episode with Katherine.

Manisha Thakor: Number one, what constitutes healthy growth? Katherine talks about the ultimate business mantras, such as “growth at any cost”, “grow or die”, et cetera. And points out that while valid in many situations, rarely do we ask, but growth in what dimension? Is it really never ending growth in revenues and profits? Or are there other things we need to be growing at the same time to ensure that those financial results are healthy? What really struck me was when she said, quote over a long arc of history, when capitalism has overshot and under delivered, it’s often as a result of pinning oneself to a growth imperative that is overly narrowly defined. She challenges us to think about how we could broaden that definition of growth to come up with even better objectives. And she also cautions us to remember that for something to grow, often something else might shrink. We typically view shrinking as a bad word. She says, we consider shrinking to be losing. But often, it’s exactly what is needed to succeed in reaching a desired outcome.

Manisha Thakor: Takeaway number two, biomimicry. “What would nature do?” Katherine has written a seminal investment book called Nature of Investing: Resilient Investment Strategies Through Biomimicry. She points out that we have 3.8 billion years of evolution to use as a reference guide, and that’s been a very underutilized resource. By contrast, she makes a very powerful argument for looking at nature as a library, as a source of true wisdom about evolving systems in elegant, ongoing, adaptive ways. Specifically, whether in business or your personal life, she suggests when making changes that we first pause. Then we ask, what is his central function I’m trying to achieve and how does that manifest in natural systems? What can I learn about from observing the natural world, about what is in front of me now? In other words, WWND, what would nature do?

Manisha Thakor: Takeaway number three, feedback loops. In biology, feedback loops has a precise set of requirements you need. Number one, relevant signal being sent out. Not any signal, but relevant. Number two, a receptor for that signal. And number three, an appropriate response. Keyword here is appropriate. In business, what often goes awry is a breakdown in feedback loops. Either because the signal is misaligned, and thus not interpreted correctly. Or the appropriate signal is being sent but not picked up. Or both of those are in place, yet the reaction and appropriate response is off.

Manisha Thakor: When companies grow, evolving this feedback loop can be the difference between creating a dynamic ecosystem in every way, or imploding. And I couldn’t help but note, as I’m about to turn 49 years old and start, as so many do at this age to ask some pretty big questions about how I want my time, money, meaning, alignment to look like going forward, how important it is that I focus on feedback loops in my personal life as well.

Manisha Thakor: As always, to learn more about today’s guest, be it Katherine’s bio, social media handles or links to recommended resources, simply visit our show notes at truewellthpodcast.com. And remember wealth is spelled W-E-L-L-T-H. If you enjoyed this show, please text a link to someone in your orbit who you think might enjoy it as well. Or share an episode with a broader group of friends and social media, telling them in a sentence or two what you loved about it. Personal recommendations are the most effective way of spreading the word, if you enjoy this show.

Manisha Thakor: I’m Manisha Thakor, and that’s it for this episode of true WELLth.

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Announcer: Today’s episode was edited and produced by Stan Hall alongside our true WELLth team, as always, Chris Sylvester, Michael Stubel, Marc Asmus, Lindsey Hurt, and John Dougherty. To get in touch with the team, visit truewellthpodcast.com.

Resources Cited in the Episode