Style Research hosted a three-city, West Coast roadshow along with Mercer and RBC Global Asset Management addressing the evolution, evaluation and implementation of environmental, social and governance (ESG) strategies. The attendees came from the institutional asset management, consulting and plan sponsor communities as well from the RIA and Endowment space.
The three presenters were Alex Bernhardt, Head of Responsible Investment from Mercer; Bernie Nelson, President, North America of Style Research; and Brian Fairhurst, Director, Advisory Solutions Group from RBC Global Asset Management. The speakers were introduced by Kirsten English, Style Research CEO.
Brian Fairhurst kicked off the event discussing what ESG is – and is not. He stated that ESG is NOT socially responsible investing, ethical investing, negative screening, or established from values-based judgments. Today, ESG provides enhanced analysis of companies, a better understanding of overall risk and opportunity, and active ownership. Brian went on to discuss the spectrum of ESG investing as well the typical factors that make up E, S, and G scores. Finally, he addressed the crucial question, “Can ESG improve performance”? He answered this with an unequivocal “yes,” and cited three studies to support this conclusion: Sustainable Investing, Establishing Long-Term Value and Performance, Deutsche Bank, June 2012; From Stockholder to Stakeholder, How Sustainability can drive financial performance, Clark, Feiner, and Viehs, March 2015; and The Journal of Sustainable Finance and Investment, 2015. Brian also gave a practical example of Nike cleaning up its child labor practices, focusing on sustainability, and including ESG factors in its business model. A 20-year stock chart of Nike demonstrated that the company had not only improved its brand, but also delivered results for shareholders.
Bernie Nelson addressed the issue of communicating ESG through portfolios between institutional asset managers, consultants, and plan sponsors. Communication between these parties must be based on analysis which is objective, transparent, and conclusive. This ultimately builds the trust that underpins asset flows. Bernie showed how institutional-strength considerations of style, such as sector-relative perspectives, are critical when trying to understand true ESG impacts. An example using carbon footprint data showed how the performance insights could be strongly misleading otherwise. Bernie then demonstrated some effective ways to visualize ESG portfolio insights alongside more traditional style-based insights using Style Tilts™. Asset owners, asset managers, and consultants could then use the same, familiar framework for assessing style factors to assess the less familiar ESG factors – across a range of ESG data providers. Finally, Bernie showed that the same metrics could then be extended across a range of investment products using Peer Insights™. This has the twofold advantage of calibrating what is high or low across a peer group as well as seeing how competing funds are exposed to specific style and ESG factors. This is especially important for ESG factors where the benchmark can be significantly different from the median manager. Communicating with counterparties and stakeholders using Style Research’s visualization tools strengthens ESG proof statements and builds the trust required to drive business development.
Alex Bernhardt wrapped up the seminar with Mercer’s perspectives on ESG definitions, thesis, and practice. ESG sits between socially responsible investing , a more conventional approach, and impact investing, which is more aligned with philanthropy. Each approach utilizes different techniques to achieve financial, ethical or sustainability goals, and all rely on ESG information to support implementation. , However, investors must determine which information is relevant and consider the time frame over which it will have an impact. With 586 ESG data and ratings products currently available from 143 organizations, this is no easy task. Looking at trends in the UN PRI signatories, 1,500 firms representing $60 trillion assets under management have signed the UN PRI principles to agree that ESG issues can affect the performance of investment portfolios. The signatory base represents more than half of the world’s institutional assets – and nearly one third of global assets under management use responsible investing approaches. The US, however, still only represents a small proportion of this group. Other drivers of ESG interest include consumer attitudes and academic studies of financial performance. Consumer research shows that women and millennials are more likely to factor sustainability into their investment decisions.Academic research favors a positive correlation between ESG and corporate financial performance. Regulatory and market dynamics are also evolving, with growing emphasis on ESG transparency and disclosure, while increased environmental and social changes are now being documented more completely. A framework is required to understand where ESG governance should start, and Mercer believes that investors should consider a three-step process focusing, on 1) beliefs, 2) policy and process, and 3) portfolio. Mercer developed their own proprietary ESG Ratings Analysis to help investors determine which ESG strategies to pursue: Sustainability Overlay, Pure Play, High ESG Rated, or Broad Sustainability. Finally, asset allocation must be considered across the ESG spectrum and Mercer uses a proprietary model hierarchy to help determine appropriate asset allocation.
It’s undeniable that there is growing investor interest in ESG globally. Regulatory and transparency requirements are on the rise. Women and millennials, two demographics projected to receive a significant transfer of wealth in the coming years, are increasing the demand for ESG in investments. The number of ESG data and research providers has mushroomed. While Europe has seen the greatest adoption to date, the US is now showing an increased appetite for ESG considerations in investing. Leading consultants, asset owners, and asset managers aren’t just talking about ESG – they are actively integrating ESG research into building better portfolios and providing better solutions for their clients. ESG is no longer simply about screening investments. Most of the discussion now in the institutional arena is about integrating ESG into the investment process and the realization that, as a result, performance can potentially be enhanced. Ultimately, investment managers and pension funds will need to provide evidence of their various ESG exposures based on their underlying holdings and investment products. The ability to communicate that effectively between investment manager, consultant, and asset owner will create the trust required to propel asset flows related to integrated ESG investing.