Name: Impact Initiative 2023: The Triple Bottom Line Of Esg Investing
Uploaded: 2023-09-13
Duration: 18 min 23 s
Description: John Oxtoby, Senior Vice President and Director of Environmental, Social, and Governance (ESG) Investing, Ariel Investments, Jackie VanderBrug, Head of Sustainability Strategy, Putnam Investments Moderator: Ellie Austin, FORTUNE

John Oxtoby, Senior Vice President and Director of Environmental, Social, and Governance (ESG) Investing, Ariel Investments, Jackie VanderBrug, Head of Sustainability Strategy, Putnam Investments Moderator: Ellie Austin, FORTUNE

Impact Initiative 2023: The Triple Bottom Line Of Esg Investing

Conferences

John Oxtoby, Senior Vice President and Director of Environmental, Social, and Governance (ESG) Investing, Ariel Investments Jackie VanderBrug, Head of Sustainability Strategy, Putnam Investments Moderator: Ellie Austin, FORTUNE

John Oxtoby, Ariel Investments, Jackie VanderBrug,  Putnam Investments, Ellie Austin, FORTUNE

Now it's time for the last time that we're going to talk about ESG. Is that possible? Is there ever the last time that we talk about ESG? No, I don't think so. We're going to keep talking about ESG um the triple bottom line of EG investing. And that's something I remembered from John Elkington, right, the triple bottom line. We're going to hear from investors though about how they're capturing eg performance. Um and without formal reporting standards, as you know, they're under way but not fully there and to discuss the future of the EC reporting integration, I'd like you to welcome John Ox, senior vice president, Director of ESG investing at aerial investments, one of the largest black owned investment firms in the United States and Jackie Van Der Burck, head of sustainability strate strategy at Putnam Investments, an investing firm who helped establish one of the first balanced mutual funds. Very interesting to hear what and there's two. Thank you so much. Bye bye. Hello again, everyone and thank you so much John and Jackie for being here. Um Let's start with the basics and John, I'll go to you first. What do you currently consider the most useful metrics for figuring out the ESG performance of companies that you are interested in investing in. Sure. Well, thank you so much for having me here today. It's great to be with you all. Um I think like a lot of our peers, we, we focus on a um A SAS B align originally SAB align financial materiality focused approach. So depending on the company and the industry, we're going to identify a different set of, of underlying material issues that we're going to assess. So whether that's carbon intensity, whether that's uh board and leadership diversity. Um And I think for some companies we specialize in the small midcap side of the market, which I think is often a, a bit of a different conversation than the one that seems to play out on the, the front pages of the, of the newspaper. And so for some companies that are lower disclosure on certain metrics, I think that's where there's an important qualitative component that active managers like like an A or a Putnam can also pick up on where when you're speaking directly with management teams and you may not have the metric or the three years of year over year data to assess progress and benchmark that against the, the peer set. But you can look the CFO or the CEO in the eye and see the level of energy, the depth and conviction that they bring to this or conversely, are they are they, do they feel a little bit disconnected to the management of this area? Does it feel like this was a eg report that was fully outsourced to a third party? So I think that that's an important part of the conversation when you're thinking about metrics or assessing companies that don't yet have those metrics and earlier in their journeys. So there's a human element to it as well as the hard fact, Jackie, I'll pose the same question to you to kick off. Yeah, as John mentioned, um Putnam is also an active manager and so we are also looking at a set of materiality maps and, and they are different, right? So um what we look at in, in equity is, is slightly different than what we're looking at in corporate credit. Um What we're looking at, you know, in structured products and they're updated regularly because materiality is dynamic coming out of uh what was going on in the pandemic. You saw a lot more focus on worker engagement um and flexibility and, and how companies were looking at those particular issues. And like John said, we're not necessarily just looking at a, a set of data or dare I say a score, that's the beginning of the conversation that allows us a jumping off point, but it is that active conversation with the management team that really allows you to assess what's going on. And so can you give us some examples of what those active conversations might look like and maybe the specific pieces of counsel you might give to the teams in the hopes of them improving their scores. Well, just I mean, one as of late and again, improving their scores, not what we focus on, right? But um even the financial services companies, we have been looking very carefully at governance processes, especially given all of the challenges of late. And this question of as things move very quickly, are your governance processes? Um And specifically the role that boards have um set at pace given how quickly things can unfold in, in financial services. So that was an ongoing question of, have you updated processes? What is the board role? What was the board role in this last set of challenges? How did that look? And those are conversations back and forth um with board members specifically with the independent directors to understand how they're playing. Let's say we have a lot of in terms of examples, you know, a lot come to mind. 11 in a segment of the travel and leisure space, for example, um the smallest company in its peer set that is by third party metrics considered to be the riskiest from an esu standpoint, high risk from MS C I, et cetera. But we actually think it's the top performer on eg and it's getting unfairly hit not only because it's a smaller market size and lower disclosure. Um But, you know, when we speak to the management team and understand um you know, the extent to which ESG is, is um integrated across their culture and all the initiatives that they're um that they're involved in from circularity to local sourcing of their products um to kind of leveraging the smaller size of their facilities and how that gives them an advantage and access to certain sustainability technologies relative to the folks who have a much larger scale. So I think that's where there's an opportunity and inefficiency you can exploit when you actually get in there and do the work yourself, read the uh read the reports and the 10 Ks and engage with management where you can have a distinct point of view relative to what the third party metrics are showing. Do you ever get pushback from the teams that you're in conversation with? And if so how do you navigate that? We have? I think it, it, it's a, we have gotten pushback and, and a lot more so 57 years ago than where the conversation is today. I think the confluence of factors from the conversation at the board level to the regulatory and policy discussion and the um media scrutiny. And I think some of the um some of the data that you're seeing around kind of customer trends related to um that's driving demand decisions. So I think it's a much easier conversation but I think it does take um it does take creativity and thoughtfulness to, to think about who you're talking to and how you approach them. Are you talking about um the importance of the, the un Global Compact and Human Rights? Are you talking about supply chain transparency and, and really kind of breaking it down into terms that um A CFO who doesn't see himself as a environmentalist will, will still um resonate. So I think for the most part, we haven't had a lot of pushback from some of our companies, but some, some you do and, and, and it does, um it can lead to some difficult conversations where you have to push yourself and think about, well, what, what do we really think about our, our approach to escalation as a using our proxy voting power? Um Is that enough, do we need to go? Um Do we need to go further than that? And consider, is there actually financial risk that we think would um would necessitate a uh um a, a cell decision? For example, Jackie, you and I were talking before and you were saying that sometimes the disclosures that are required by the SEC, for example, don't represent the information that you would maybe find the most useful when you're thinking about investments. Can you elaborate on that a little bit? Yeah, I think the, the key piece in terms of um disclosures and maybe step back from the SEC because there's a lot, we're, we're waiting to see what the SCC will require in, in some sense here. But um is that folks are looking for reporting information for different purposes, right? So um investors, institutional and individuals are, are looking for reports um from funds to say, does this particular uh investment products match my preference? Right. I'm looking for a certain type of sustainability approach and I want to understand from reporting if, if this matches um whether I'm looking for sustainability leaders or, or more uh future products or, or whatever it is. Um versus regulators have a whole set of things that they're looking for and, and more specifically what I was speaking to there is European requirements. So we have some, some article eight products in Europe that require a set of disclosure around principal adverse indicators. Increasingly that those data points while we will absolutely disclose them are not what the portfolio managers, investment teams are looking at because they are looking for that fundamental question about your purpose and how sustainability is going to drive forward your business fundamentals. And so increasingly, there's a bit of a, a divergence in what's being uh the different types of information that are required. Does anyone have any questions before I press ahead with all of mine? Um ok, so John Ariel has been known as a socially responsible company since it was founded in the 19 eighties, 1986 I think. Um Can you give us some tangible examples of how as ESG has morphed into a key priority across the business community. Ariel has further integrated sustainability ESG in general into its day to day practices and considerations. Yeah, thanks for the question. I think um you know, as you know, this is something that's been, you know, integral to our approach and our culture since our founding, we also take seriously the idea that um you know, we're not just adopting, we think that the, the, you know, the most the best in class approaches and policies with respect to ESG but the the importance of living your values and walking the lock when it comes to, to ESG. So I think currently what we know in our most recent report, we're going to be putting out a our own TCFD disclosure, not, not a new or novel thing for an asset management firm, maybe for smaller firms, you're less likely to do it. But I think it, it enables us to have deeper conversations with our management teams when we can discuss our approach to PC FD disclosure to disaggregated workforce diversity, reporting certain things that we're going to expect that or ask that of our portfolio companies that they hear from us, that this is something that we believe in and that we're doing. Um But when I look back on when you sort of think about the evolution from the sr days to, to eg you know, at a, we've, we've, we've evolved as the marketplace has evolved we've put in place more dedicated resources. We have a three person dedicated team that we've got a unique model. We're a hybrid in that we sort of provide that sort of traditional centralized support and analysis across our strategies and PM. But then we're also embedded deeply in our small midcap value portfolio. So on the same hallway as our portfolio managers were in the engagement meetings and investment committee meetings with them. And I think that's a unique depth of integration that I think um in that unique part of the market, small mid cap that I think there's a real opportunity for active managers um to to really um uncover value and make a difference using your voice as shareholders. And that and that is concentrated, investor is often the largest one of the largest in a particular holding. And you've mentioned a few times, John, the difference between small and mid cap and and bigger companies when it comes to best practices. I'd love to maybe hear you both give a couple of concrete examples of what you consider the biggest differences to be Jackie if I get a few first. So um I will say we look um in terms of integration um for that, you know, basic materiality, you know, what are you doing from an opportunity and a risk perspective, but then there are markers. Um so we have a couple of products uh that like John said, you know, the the evolution at Putnam has been from an integration perspective to a set of products where sustainability goes further and, and there you're looking for markers of leadership, right, where they're going beyond esg compliance um to really something that is expansive, something that's durable, something that you can show is um innovative and, and beyond or that there's a whole set of products. And I think those that opportunity is um where people say is this just going to be investing? That's the question I get usually on a panel. Is this just good investing? Is this just sharing? The answer is in some sense? Yes. And you're seeing a lot of managers who go beyond really looking for, as you said, where does sustainability drive that performance? And that's the central thesis. So I think it's a, it's a bit of both anything to add. Yeah, I mean, I think I would add the um the dynamic between small and, and, and um larger companies. We've, we've also tried to, you know, we're only a three person team but how can we kind of leverage and amplify our efforts? Well, we've built these great relationships across the portfolio. A number of our larger companies in our portfolio have a degree of sophistication and thoughtfulness on certain issues. And we've actually at times been able to, to activate them to connect them with a uh a, a separate portfolio holding, not a, not a pure competitor, but there's a company that's thinking about and they've set short term um greenhouse gas reduction targets and they are thinking about how to approach long term targets and what this, what the process of um applying for uh this science based targets initiative entailed. And um so having them be able to connect directly with a team who's really done that work um help to accelerate their, their own efforts. So I think there are some ways in which the the larger companies can help pull up those smaller companies, whether it's through the, the supply chain and some of the work that's getting driven down by the, you know, the targets, Amazons and Walmarts, et cetera and federal government procurement process. But, but also from that kind of human approach to um helping connect companies that want to improve and want to know what to do but aren't maybe resourced or optimized necessarily to able to do everything Jackie, I read you um say that you said in a previous interview that you don't think we're ever going to get to the point where different regions have the same reporting requirements for ESG um why do you think that is and what does it mean for the future of investing? Um So I guess, think and hope are, are two different things. Um I, I, we are huge advocates of um Sbissbifrs and as was mentioned earlier, um S one and S two and have been very firm, in fact, have chaired the IISSB Investor Advisory Board to say um this is the standard um that, that we think is important for companies to report to. Um And it also is very useful that there has been um specific materiality based uh differences by sector. So we stand with, with Issbifrs and then there is the reality of um what's going on in Europe, what has uh just happened in California and a bit of the the differences. Um Some people will say competition, I don't see this as competition. I just think it's the reality of um the US approach to sustain in ability is going to be different than the eu um it's a, it's a bottom up much more incentive based versus the top down, much more centralized and so reporting is gonna be different. Um Not saying that's what I'd want, but it, it is where we are right now. And John, what do you think the ripple effects on us, companies might be of the regulation that we're going to see come into force in Europe? Yeah. Well, I think um and just 11 point to add there um is that I think the, the building blocks approach that the ISSB has brought is, is, is um I, I think that's, you're bridging the difference a little bit and helping to find a common baseline, but then allow for that jurisdictional um requirements on, on top of that and then we're seeing it firsthand from um from the issuers that we're talking to on a regular basis, you know, by the most recent example, um you know, last week we actually had a engagement meeting with management from Aflac, a Georgia based company. Um 70% of the business is in, in Japan. And so you can sort of hear first hand sort of how they're managing on the one hand, the evolving dynamics here in the US. But then what's happening in Japan, which is a little bit more aligned to the um to the eu approach, there's a Japanese stewardship code and just totally different context. So in terms of what we sort of hope for, uh and the idea is you have limited resources to dedicate to um ESG strategy and management. We, we hope we can get to a place where we can have a little bit less focus on, on managing very different types of approaches and, and um and evolution of them and, and uh um helping companies find sort of a single path that can be um uh that, that can navigate across um the, the most uh significant jurisdictions of, of uh relevant to them. I think John and Jackie, we are going to leave it there. Thank you both so much for your expertise and sharing all of those examples. Um We're really grateful that you joined us today. Thank you so much. Thank you.