On Wednesday, August 26th, 2020, the New England Young Professional Chapter hosted a live panel and discussion on the ESG (Environment – Social – Governance) strategy of asset management investing. ESG refers to the three central criteria – Environment, Social, Corporate Governance – in evaluating the sustainability and societal impact of an investment in a company. Ethical investing has been around for decades and is fast growing. A Bank of America Merrill Lynch report from 2019 found that the top three groups that care about ESG are women, millennials, and HNIs (high net-worth individuals); they estimate over $20 trillion of asset growth in ESG funds over the next two decades. About thirty people attended the event, which raised $200 for AIF.
The panel featured two highly accomplished and knowledgeable professionals, Stephanie Dobson and Asha Mehta. Stephanie is currently a Portfolio Manager of the Putnam Sustainable Leaders Fund and Putnam Sustainable Future Fund. She has over 9 years of public equity investing experience in consumer, energy & financial sectors. Asha, CFA, is a Senior Advisor at Acadian Asset Management. Her thematic focus includes Frontier & Emerging Markets and Sustainability Investing. Both panelists offered insightful information about the strategy, starting with an overview of ESG. They covered different approaches to ESG investing, types of data used for analysis, and the main obstacles to adoption.
Employing an ESG investing strategy means using information about a company’s operations that isn’t shown on financial statements. Environmental criteria consider how a company controls its environmental impact in areas like carbon emissions, water management, etc. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, and shareholder rights. As explained by Asha, the consideration of these non-financial factors has great financial relevance to the companies. Any good investor is likely already thinking about these aspects of a company, but Stephanie described how the difficulty lies in determining which factors and data are relevant. Each industry sector has different ESG metrics that matter more to the financials of a company within it; greenhouse gas emissions are probably more important to measure and analyze in an automobile or airline company than in a marketing or entertainment company.
Establishing what is material to a company out of the heterogeneous “E”, “S”, and “G” elements is only just beginning to become standardized. One of the most commonly used frameworks mentioned from the panel is the SASB Materiality Map, which identifies which sustainability issues are likely to affect the financial condition or operating performance of companies within a particular industry. However, each investing firm will have its own guidelines for internal use that may be much more extensive than the SASB map.
There has been a lot of demand from both active and passive managers for companies to begin to disclose more and more ESG data. The more data that is disclosed, the better CEOs and executives can understand what is going on within their companies. Asha and Stephanie agreed that as stewards of capital, investors must work together to call on companies to be transparent in this aspect.
However, not all ESG data is created equally. When asked about measuring ESG and which metrics are important for ESG analysis, the panelists emphasized that single overall ESG ratings found on platforms like Morningstar or Bloomberg are not helpful and not indicative of greater returns. Investors need to look at granular data in the areas that are material to specific companies – it is here that they will find that companies with better material ESG practices outperform their peers. Furthermore, much of the ESG data available is not quantifiable, which can lead investors to assume that it isn’t important – but ignoring intangibles is one of the biggest mistakes an investor can make, claimed Asha and Stephanie. There are many interesting ways to collect valuable information about a company they mentioned, such as analyzing Glassdoor reviews to assess company culture and retention, which provide insight into labor practices, employee engagement and diversity, hiring methods, etc., and can affect a company’s financial performance.
Overall, the panel provided an extensive overview of the ESG investing strategy and drew a highly engaged audience. One attendee, Emil Kuruvilla, commented, “It was exciting to take part in the AIF New England Young Professionals Chapter’s event. I have not seen many finance events that focus on ESG and found it very informative and engaging. I’m looking forward to future events!” To view the recording of the webinar, you can access it here or view it below.
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