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How Impact Investing is evolving
Investors are looking towards Impact Investing when deciding their asset allocation profile. Watch as four experts discuss how the space is evolving and how to take advantage of the growing asset class.
Ronald A. Homer - Managing Director, Institutional Portfolio Manager and President, Access Capital at RBC Global Asset Management
John Roberts, Esq. - Portfolio Manager, Workplace Equality IndexTM at Denver Investments
Daniel P Nielsen - Director, Catholic Responsible Investing at CBIS
Julia Kochetygova - Senior Director at S&P Dow Jones Indices
Duration:
00:54:12
Transcript:
Courtney: On Today’s Masterclass we’ll be discussing impact investing. Joining us are: Ron Homer, Managing Director and Portfolio Manager, Access Capital RBC; John Roberts, Portfolio Manager, Denver Investments, Workplace Equality Index; Daniel Nielsen, Director of Responsible Investing, Christian Brothers Investment Services; Julia Kochetygova, S&P Dow Jones Indices, Head of Sustainability Indices. Welcome to Asset TV’s Impact Investing Masterclass, everybody welcome. So, Ron, I want to start off with you, we’re going to get to the finer points later, but just broad strokes, what are trends you’re seeing in the industry right now?
Ron: [00:00:37] Well, there’s certainly a lot of discussion in the media and across institutional platforms and investors on a desire to see what’s out there in the impact investing world. In our particular field we’ve traditionally worked with banks and community foundations public funds. And we’re focused on place based investing. And that took a little hiatus when the economy went down. But now that the economy’s starting to get firm flip, we’re also seeing increased interest on how can people put money into communities that aren’t doing as well as some of the other areas and still get a good return.
Courtney: [00:01:15] Interesting. And, Julia, how about you, what trends are you seeing?
Julia: [00:01:17] I work on Sustainability Indices. And Sustainability Indices is just one of the ways how we can do impact investing. What Sustainability Indices actually are is when the index is designed in accordance to the rules where high sustainability companies are given more weight or they are just sole ones that are selected into the index which actually incentivize companies to go for sustainability. And we have seen a growing appetite towards these indices in the market. Basically as a result of two trends, one is obviously the growth of sustainability investments as a whole, which are now measured in trillions of dollars or Euros. I mean in Europe it’s close to 10 trillion Euros, in the US according to the US SIF data it’s close to almost 7 trillion US dollars. And another trend that we are observing is actually a growing interest to passive investors, as long as the each years are booming. So on the intersection of these two trends comes the interest towards Sustainability Indices. And we have seen many requests from investors, both SRI driven or mandate driven investors and very traditional mainstream type investors to actually design the indices for them in addition to what we already have. We already have the Dow Jones Sustainability Index – DJSI. We already have Carbon Efficient – S&P Carbon Efficient Index family. We already have S&P Green Bond index family. But sometimes investors come to us saying that, “Could you please do a little bit of this and a little bit of that?” Kind of a combination of sustainability plus ethical exclusions, plus for so few of a free approach, plus some other overlay that meets their individual investment strategy better, which is a very good sign to us. It means that investors are really taking this seriously.
Courtney: [00:03:13] Interesting, and 7 trillion in the US, that’s great. Hopefully it’ll catch up with Europe. John, what trends are you seeing in the industry?
John: [00:03:19] Well, yeah, our strategy is a very, very impactful focused strategy and really what we are focused on is companies that treat all their employees equally, regardless of their sexual orientation and gender identity. And really the trends we’ve seen is in the past couple of years you know, we’ve reached a little bit of a tipping point in terms of the rights for lesbian gay bisexual and transgender employees and people in the country. And you know the LGBT community has been fighting for equality for decades. And for the past 16 years my firm has been giving investors access to companies that treat their LGBT employees with equality, dignity and respect. And really what we’re very, very, you know, interested in and why we’re here today is to talk with everybody about, you know, how we can give investors who believe in workplace equality, you know, ways to express those views through their investments. And you know, for financial advisors, it’s really important because you know, we believe that we can provide, you know, a tool for them to use to satisfy a diverse group of clients and the needs of their clients because there are impact aware investors that want to invest with their values. And so that’s what we do is allow them to do that.
Courtney: [00:04:46] Interesting. So you’re seeing a lot of appetite from financial advisors. And we are going to get to that later about investor appetite. Dan, what trends are you seeing?
Daniel: [00:04:54] The first trend is significant growth in assets that have some sort of sustainable responsible strategy applied to them. So here in the US almost one out of every six dollars under professional management has some sort of sustainability criteria attached to it. And the growth over the past two years in the US has been 76%, so phenomenal acceleration in growth of assets with some sort of sustainable, responsible and strategy. In Europe the global total is 21 trillion dollars. And that over the past two years has been a 60% increase. So the acceleration in growth of assets is really, really phenomenal. And I think that’s been driven primarily by two motivations. One is that clients are increasingly demanding assets with some sort of sustainable or responsible strategy. And I think managers are beginning to appreciate that by incorporating these strategies. They can reduce risk and enhance performance in shareholder value.
Courtney: [00:05:59] Interesting. So, one out of six dollars?
Daniel: [00:06:02] In the United States.
Courtney: [00:06:03] That’s incredible.
Daniel: [00:06:04] Yeah.
Courtney: [00:06:04] Wow! So, interesting trends. Ron, I want to come back to you and talk about a case study. So I’d love to hear kind of an example of what you do.
Ron: [00:06:13] Well, our goal is to increase the flow of capital into underserved communities. And by that we define it as communities where the median income is below 80% of the area median income or where there’s more than 20% poverty rate. And so we look at various ways and strategies to deploy capital, but also do it in a way that provides liquidity and safety. And so there’s a myriad of government loan programs to support these communities that are provided by large scale lenders. The problem is that many of these programs aren’t being utilized in the areas that need them the most. So we try to find originators who are focused in on the area, we provide them with a secondary market for their investments. And so for one example, when the Department of Health and Human Services first came out with a loan program for community health centers, we combined [unclear 00:07:09]] tax credit investor and we provided the debt for this community health centre in a city in Massachusetts that was a medically underserved area, federally designated. Had a shortage of physicians in it, had the highest mortality rate, the highest rate of deaths through alcoholism or drugs, highest infant mortality rate, highest teen birth rate. So this was the community that was really suffering from a lack of healthcare.
We provided this health center financing; it increased its flow of patients and clients by 200% in the first year. And actually came on board at the time when Massachusetts created the Universal Healthcare Act. And so it was great that people were finally getting insurance. But if you don’t have physicians, they go in, there’s a backlog of physicians. So the healthcare center created a great resource to the community, employment for the community grew because of the increased activity. So it’s been a really … a focal point for some of the growth in the community. And on top of that it is one of the best performing assets in our group, because when we made the loan interest rates were in the 7/8% range. We locked in at that point. And so it actually has provided a really great return also.
Courtney: [00:08:40] That’s great, 200% increase is enormous.
Ron: [00:08:43] Yeah. Well, I don’t know what the current numbers are but I know that it’s even grown well beyond that given the greater access to healthcare in Massachusetts now and the country through the Affordable Care Act.
Courtney: [00:08:57] Wow! That’s a great story. Julia, can you tell me an anecdote or an example of something that you’ve done?
Julia: [00:09:03] Sure. Indices are sometimes perceived as being just, you know, passive investment strategy. And in fact they are, but even with this passive investment strategy, if you invest into an index via ETF or a structured product or an index fund you still can achieve substantial impact. For instance, if you invest into the DGSI world, what you do is actually invest into a portfolio of companies where the carbon footprint is 17% lower than it is in the benchmark standard index. And the energy consumption is 22% lower. And waste production is 7% lower, not to mention better labor relations and better risk management policies, better ability to innovate, which is what the Sustainability Index actually represents. To give you another evidence, carbon efficient, and this is probably the easiest case to understand. The average carbon footprint within the S&P 500 index is 300 tons … CO2 tons emissions per million of dollars of revenues, of companies that are included into the S&P 500. And it’s pretty much the same for all global – big global indices as well, like the MSCI world will have the same type of exposure, STOXX 50 will have the highest exposure. Emerging Markets Indices will have substantially higher exposure, like the carbon footprint will be 500 tons of CO per million dollars. If you invest into the US Carbon Efficient Index, which is actually taking … produced by taking out the worst polluters, the worst emitters.
If you take out 25% of the worst polluting companies from the index this will be the US Carbon Efficient Index. So with this index you’re actually achieving 45% reduction in the carbon footprint. So if you want to translate it into something more tangible, more material, think about it, if you take the average, say average size car and if you take the circumference of the Earth, so basically these savings only will enable 2,500 cars to travel around the earth or one car to travel 2,500 times. So this is just the savings that’s given by investing one million dollars into a Carbon Efficient Index compared to a standard benchmark.
Courtney: [00:11:43] That’s incredible. And I’m just wondering, what sectors sort of were kind of the worst in terms of carbon footprint or was it not on a sector basis, it was on an individual company basis?
Julia: [00:11:53] When we do exclusions we do only absolute basis. We actually exclude all the worst polluters and you can well imagine who the worst polluters are basically. It’s transportation companies and the utility companies. But then we tend to neutralize to get the sector exposure closer to what it is in the Benchmark Index, because investors into passive products such as ETFs or structured products, they actually appreciate when the so-called [unclear 00:12:19] to the Benchmark Index is low. And with Carbon Efficient Indices the [unclear 00:12:24] which is the average deviation of returns from the Benchmark Index is kept within 1%, is always lower than 15 which actually creates a bridge between mainstream type of investment and sustainability type of investment, because sometimes investors are not really prepared to take big risk associated with going away from standard benchmark, they’re passive investors, they have their own fiduciary duty to perform. They have to be very conservative and very careful in doing this. So what we provide to them is the ability to actually ensure same type of risk and return profile or sometimes better risk return profile, but with substantial reduction of these negative impacts, and substantial opportunities to actually get to a more solid, more sustainable long term growth.
Courtney: [00:13:17] Incredible. John, can you give me an example?
John: [00:13:20] Sure. You know, we started screening companies back in the late 90s for one of our clients which was an LGBT focused foundation. And they asked us to only invest in companies that treated their lesbian gay bisexual transgender clients with equality. And if you think back to the late 90s, there wasn’t much information available out there, there wasn’t much disclosure. And so we created screening metrics that eventually morphed into what we now have, which is the Workplace Equality Index, which is an equal weight index of companies that have shown support and equal treatment for their LGBT employees. Obviously what we have been seeing socially around the country in the last few years lends itself to more and more companies accepting that LGBT workplace equality is a value that they’re adopting. And we’ve done a lot of research around the effect of adopting LGBT inclusive workplace policies. And what we’ve found is, is it leads to long term outperformance for the companies that do embrace everybody equally.
Courtney: [00:14:36] Wow! And, Dan, tell me a little bit or give me an example.
Daniel: [00:14:40] Sure. Our approach really involves two different strategies. The first involves Do No Harm. And we employ a set of negative screens to avoid investing in companies that engage in activities that violate teachings to the Catholic Church. Then the other strategy is Active Ownership, and that’s where we look at our portfolio companies and we engage those companies on other issues where we see there’s an opportunity for improvement. So for instance, we may engage a company on their environmental footprint and try to get them to adopt policies and practices to improve how they’re managing environmental risk. And through doing that, we’re helping the environment. We’re helping local communities around where the companies have operations. And we also feel we’re reducing risk of our portfolio and enhancing shareholder value.
Courtney: [00:15:27] Interesting. You know, I think the common thread here is … that I’m hearing is that not only are you doing a social good but that your returns are outperforming your peers who don’t have that social overlay, which is really incredible. And I want to pivot to performance. Ron, tell me a little bit about how do you measure, not just your returns, but your impact performance. I know you said 200% impact, but is there a kind of process that you use?
Ron: [00:15:55] Right. Well, we actually screen every one of our investments for its impact, because our returns are driven by the impact, so it’s not separate. So actually our strategy is to find or to deploy these government loans, they have higher spreads than traditional treasuries or agencies. And they trade well against other parts of the Barclays Ag, so we like the assets, it’s non-credit related. So when there’s a disaster you have a bond fund that really acts like a bond fund and doesn’t go the same way that the stock market goes. So people looking for non-credit correlated and non-economic correlated product, we’re a great example. We do home ownership. We do affordable rental housing, healthcare facilities, educational facilities, job creation, small business loans. And every one of those has to either be in a low income [unclear 00:16:52] services needed in that area or it has to be to a low and moderate income individual. And so that’s how we track that. In terms of performance, actually we’ve been doing this for 15 years, so we have a 15 year track record, through a lot of different economic cycles. And ironically during the 2008/2009 crisis, we have a number of public funds customers who told us that we were the best performing asset in 2009.
And it’s very simple, right, in the case of mortgage backed securities that we custom make, customize and make them from ground zero, it turns out that working class and low and moderate income homebuyers, they tend to buy homes for shelter, they’re not speculating. They tend to want to keep their home for as long as they can, no matter what their circumstances are. And when they do fall into tough times they have support mechanisms that allow them to do that. So we found that they prepay their loans less frequently, are not refinancing all the time. And they actually have had lower default rates during the crisis contrary to some of the popular opinions that standard underwritten 30 year mortgage loans to low and moderate income homebuyers perform very well.
Courtney: [00:18:08] And is this because they’re the actual homeowners versus investment or investments?
Ron: [00:18:12] It’s a combination of that, but it’s also because it’s shelter. They’re not buying it because [unclear 00:18:17], and so their alternative to not paying the mortgage is being homeless because it’s not that much different than renting an apartment or doing something to the alternative. And usually … and they was priced right to begin with when they went into the home. So if it’s the right price for the loan, it’s based on their affordability, they just perform well. And because they are underserved in some communities, they don’t have … they’re not refinanced, then they don’t have the temptation for refinance every time there’s a little take down in interest rates.
Courtney: [00:18:52] Interesting. So that’s kind of a shock absorber?
Ron: [00:18:54] And the cost of refinancing too, for them is maybe prohibitive.
Courtney: [00:18:58] Right. And, Julia, tell me about performance, how do you measure? I know how you measure it in the traditional sense, but how do you measure the impact that you’re creating?
Julia: [00:19:08] Well, in the world of indices everything is measurable. And clearly you always try to make sure that the impacts that are produced by a Sustainability Index are substantially better than what is produced by a benchmark. And you always have an opportunity to compare because here is the benchmark and here is the relevant Sustainability Index which is basically derived from the benchmark by either selecting best in class companies or innovating companies in the benchmark index. And in addition to measuring some of usual measurable things such as carbon footprint, water consumption, waste production and everything, you can also make sure that some more qualitative things also get measured and get controlled in this index such as anti-corruption track record for instance, of companies or their business conduct. Or even reputational, brand related issues, safety issues, everything, because everything is translated into scores here. The way how we do our indices is that we get sustainability scores from our analytical provider, a company called RobecoSAM, they are based in Switzerland. And then we can make sure that the average scores of the index are always better than discourse in the benchmark, for all of the key parameters that we are measuring here. And the difference is usually from 50% up to 100%, like twice better in their DGSI world. We have other indices as well and we always make sure that the average impacts are substantial, positive impacts I mean.
And how it translates into financial performance, obviously it should because, you know, this is the way how investors are motivated to invest in such products. We always try to make sure that the risk parameters of these indices are attractive to investors. So there wouldn’t be any such index that would really be not meeting these expectations, which is quite obvious because, you know, if you invest into more sustainable companies then they should definitely be better protected from downsize risks, even in financial terms. When something bad happens it usually happens with companies who don’t take proper care of their sustainability practices.
Courtney: [00:21:36] Interesting. And, John, tell me how you measure performance.
John: [00:21:39] Well, I mean there’s obviously there’s the benchmark performance in the Workplace Quality Index, benchmark performances, it speaks for itself. Last year the index outperformed the S&P 500, it was up for the year ending December 31st 2014, up about 1% more than the S&P 500, if you look over three years were about 600 basis points year over the S&P 500. You know, and obviously past performance doesn’t guarantee future performance. But you know, our thoughts around creating the Workplace Quality Index were that, you know, if … we believe that investing in companies that can foster social change and reward shareholders with meaningful returns, it has the best impact. And really the Workplace Quality Index invests in companies that help foster social change through their progressive workplace policies toward their LGBT employees. When we first started doing the screening back in the late 90s we could find a couple of dozen companies that met the requirements. To give you an example, there’s a Supreme Court case that’s coming up on marriage equality, 379 companies including the Workplace Equality Index, filed [unclear 00:22:55] brief to the Supreme Court in favor of marriage equality. That’s social change.
Courtney: [00:23:00] Wow! So you’ve actually not only … of course your performance is great, 600 basis points over those years. But you’ve actually influenced companies to make real change.
John: [00:23:11] That’s what we see happening. And again, we’re giving investors a way to drive that social change through their investing decisions. Because a lot of the broad popular indices contain many companies that actively campaign against LGBT equality. And there are a lot of equality minded people that don’t want to invest in those companies.
Courtney: [00:23:32] Yeah. So the dollars are really driving social change. Dan, tell me about your … how performance is measured.
Daniel: [00:23:39] Sure. There’s really two ways that we measure performance at CBIS, first is when we look at our negative screens. And we continually monitor the performance of our funds, employing negative screens and compare them to the unscreened portfolios that our managers oversee. And from that we can see what the cost of the screens are. Sometimes it’s down and sometimes it’s up. What we’ve seen over our market cycle is that the cost is very, very minimal. It’s usually within just a couple of basis points. So, proof that negative screening doesn’t have to cost performance. The second way we measure performance is really through our active ownership work. We have a very robust program to engage companies and push them to improve their practices. And we monitor any progress that companies make towards achieving the goals that we set out for that engagement. And that’s a little bit more qualitative. It’s easy to measure say if a company improves its efficiency. So they can publish how much cost savings they have in doing that. And that’s certainly going to impact shareholder value. But there are a lot of other ways that companies can improve performance, and that’s more qualitative. And it tends to be more risk mitigation. And it’s hard to measure what the impact of a bad event might have been. But we know that if we’re reducing risk, in the end for long term investors, that’s a way to really improve performance.
Courtney: [00:25:04] And can you give an example of this, you know, the qualitative screening that you do, just give an example?
Daniel: [00:25:10] Sure. One company that we’ve been engaging for a number of years, ABVi, we’ve been talking to them about access to medicine. And in December, ABVi made a public commitment to license some HIV medications for a generic production to address pediatric HIV Aids. And currently in the world there are about three million children with HIV Aids, 90% of whom are in Sub-Saharan Africa. So ABVi making this significant step to provide its medications to increase generic production of HIV medications, so that’s a real positive step that’s going to impact lives around the world.
Courtney: [00:25:49] Wow! That really does. You know, and I want to … and I think you mentioned before you had an oil spill, could you just tell us quickly about that, how you worked with that, you had an oil spill, right. A large company had an oil spill and you helped effect change around that.
Daniel: [00:26:06] Well, so one engagement that we had in the past was with BP, and following the Gulf oil spill, CBIS was very involved in a group of investors, addressing the company, and wanting them to improve how they’re monitoring environmental risk and how they’re managing that risk. And through that engagement with senior people at the company, BP made some positive steps as far as changing some government structures and appointing additional people to oversee environmental risk. More recently, CBIS was part of two different shareholder groups that filed climate change resolutions at BP and also at Royal Dutch Shell. And earlier this year both companies came out and recommended their shareholders vote in favor of their shareholder resolutions. And that happens very, very rarely. And I think that’s really indicative of not only CBIS, but other investors engaging the companies in a very productive and respectful way so that companies see the benefit of really listening to shareholders and considering what those requests are, and when appropriate agreeing to implement those requests.
Courtney: [00:27:12] Interesting, these are all incredible stories, Julia.
Julia: [00:27:14] Yeah. I can just add to the ones we have touched, the topic of engagement, that Sustainability Indices can be an interesting tool for engagement as well, even though it’s considered to be a tool for passive investment. But still, when the company’s into the Sustainability Index or it is out of Sustainability Index, it kind of raises attention to its sustainability practices. And we have seen a few such examples. One, I won’t name the names, but there was a situation when the company was out of their Dow Jones Sustainability Index. And basically because RobecoSAM, the analytical company who produces these scores, they also actively engage with companies. They were talking to them and explaining the situation, why they’re out of the index. And the response that they got was that, “We’re going to take this very seriously. Our top management will be focused on the goal of getting back to a Sustainability Index.” And it actually took them three years to get back to the Sustainability Index by improving the whole spectrum of their sustainability practices. So this type of engagement and this type of incentive that’s created to be on Sustainability Indices by virtue of really balancing your financial goals with your goals in relation to environment and society is really amazing. We have been observing it for a number of years now. And DGSI is by the way, 15 years old this year.
Courtney: [00:28:42] Oh, wow!
Julia: [00:28:42] Yeah, it’s the first ever global Sustainability Index on the planet.
Courtney: [00:28:49] Wow! Incredible. Ron, I want to ask you, where are you seeing demand? I mean we’ve seen really huge inflows, you’ve all talked about it, into the impact and sustainability space, but are you seeing most demand from retail or institutional investors?
Ron: [00:29:05] Well, we primarily offer our product through an institutional platform. So our investors are institutional, although we are seeing increased inflows in some of the retail shares of our mutual fund, also through, and some activity through RIAs. But you know, I think that banks who have a Community Reinvestment Act requirement, they are beginning to emerge more and consolidate, they’re getting [unclear 00:29:30], their focus is increasing. Community foundations, you know, our strategy is based on people who want to make a place based investment in a targeted … to a targeted population. So community foundations are now looking at ways as they’re looking to have more impact with their resources and to stretch their resources, they’re now looking to the corpus as well as the grant making as ways to better their community, so if they can make an investment in their community as well as compliment that with grants it makes a lot of sense. A lot of public funds are also finding as they were under pressure with the workforce and scrutiny on public pension funds etc, but the workers are, a lot of them are retiring, the fact that they can use some of their resources to provide access to services, some starting small businesses after they retire or home ownership, so a lot of public pension funds are interested. I’d say the one damper is the fixed income market, people are a little concerned about relative performance of bonds and equities and so that’s the one drag I’d say in the area. But in general people are very interested in the strategy. And the fact that people are talking more about, can your investments make an impact on returns, then helps people to become educated, that there are products out there that combine the two and actually it is possible.
Courtney: [00:31:05] Yes. All those are really good points. Julia, what are you seeing, more interest in your indexes from institutional or retail investors?
Julia: [00:31:13] Well, it really depends on the regions. Here in the US we see quite substantial interest from retail investors as well as institutional. But on a global basis, institutional investors are probably the leaders, particularly because with pension funds, you know, sustainability really resonates well, given the alignment of their long term goals and their philosophy to actually secure the future for their beneficiaries. Sustainability is a prerequisite to a better future and on a long term basis if you think about it, climate change for instance, imposes one biggest risk for their security of long term investments and their protection. So pension funds actually lead this battle towards low carbon investments towards lower carbon economy. The Montreal Carbon Pledge is one such illustration. This is their pledge that has been announced in September last year during the time of the UN Climate Summit in New York. And it started with a few pension funds subscribing to it or signing it. Now we have more than 3 trillion dollars of joint capital of their signatories which are again mostly pension funds.
Courtney: [00:32:34] And is it public or corporate pensions or both?
Julia: [00:32:37] I think they’re both, yes.
Courtney: [00:32:40] Both?
Julia: [00:32:40] Yeah, both.
Courtney: [00:32:40] Oh, okay, interesting. And John, what…
Ron: [00:32:43] And one area, on the corporate pension funds, they fall under the ERISA requirement. And so, and many have used that as maybe a challenge to say can you take other factors other than pure return when you make a decision. So I think the corporate pension funds, because of the ERISA requirement have been a little bit more slower to take steps.
Courtney: [00:33:10] That makes sense, yeah, interesting.
Julia: [00:33:12] I probably should explain what Montreal Carbon Pledge actually is. It’s a commitment of pension funds to disclose on an annual basis their carbon footprint of their whole portfolios. And when you disclose it, it means actually that you are very well incentivized to reduce it over time, and so it’s quite a huge step forward.
Courtney: [00:33:30] Yeah, that is, wow. And, John, you talked about interest from retail investors, are you seeing both, interest from both institutional and retail?
John: [00:33:38] Yeah, absolutely. You know, both retail and institutional investors have interest in values based investing, and especially the values about workplace equality. You know, we can … we see that, there are multiple ways to invest in our index. You can go to the index website workplaceequalityindex.com and you can find licensing information and other ways to invest and instruments that track the index. And we do see a broad variety of interest. It’s interesting that our original screens were created for an LGBT focused foundation that wanted to fulfill their fiduciary duty to have screened impact investing. But also understood the need for a broad equity exposure, and they did not want to underperform in the market, they wanted to fulfill that fiduciary obligation. So I think you can do both.
Daniel: [00:34:37] Well, I think you can and just I think the … the hurdle for getting a corporate plan to adapt some of these things are a little harder because lawyers throw up a lot of question flares.
Julia: [00:34:53] Yeah, the investors are not driven by just moral satisfaction. They are driven by their expectation of getting better returns out of their policy to invest into better companies.
Courtney: [00:35:03] And if you’re getting better returns though, why not get the moral satisfaction. I think you have the double bottom line?
Daniel: [00:35:09] Yes.
Courtney: [00:35:09] Yes, so I think that’s such a great term.
Daniel: [00:35:12] And certainly here in the US there is more of a focus on fiduciary duty. And there tends to be a reliance on that by some institutional investors in particular, as the reason why not to incorporate sustainable or responsible strategies into their investments. That doesn’t exist nearly to the same extent, for instance, in Europe, where there is a much broader understanding of what’s relevant, what’s material when assessing companies. And I think increasingly here in the United States, we’re seeing that non-financial material factors are obviously very, very relevant when deciding whether or not to invest in any particular company. And as that continues to develop and as academic research continues to come out supporting the relevance of non-material financial factors, I think it’s going to become a question of if you don’t think about environmental social governance issues, are you violating fiduciary duty.
Courtney: [00:36:07] Interesting point. But what do you think about from the retail investors’ perspective? I mean I think in your particular business is the majority of your investors are institutional, right, or…
Daniel: [00:36:19] Yes. At Christian Brothers Investment Services, we only invest for Catholic institutional investors. So we are seeing a lot of interest on behalf of retail investors that are looking for ways to invest in alignment with Catholic values. And that doesn’t … that’s not only negative screening but also a way to invest and know that their investments are having some sort of positive impact on environmental issues, on human rights issues, etc. And I think there’s a lot of interest amongst investment managers now to try to develop products, to try to develop solutions to respond to that retail interest. I think as retailers are increasingly … retail investors are increasingly thinking about values in other aspects of their lives, for instance, what they buy in the store, willing to pay a little bit more for sustainably grown products in their grocery store for instance. They are beginning to see that they can also have that mindset and apply it to their investments.
John: [00:37:15] I think on the retail side too, you’re going to see it in 401K plans and on more and more companies are looking in target date funds and to have some aspect, because it depends on in some institutions the employees want to see that. And so they’ll ask, because most of the retail assets to invest in are in these retirement plans now. So TIAA-CREFF has … won’t give them a big commercial, but they’ve been offering social choice products within their platforms to many of their educational facilities and hospital employees.
Courtney: [00:37:53] Oh, interesting.
Daniel: [00:37:54] I think what we’re seeing is that some investors are really motivated by their values. And that’s what they don’t want to invest in and what they do want to invest in. Other investors are motivated by value and they really see that investing through a certain lens can enhance returns and reduce risk. And that’s not mutually exclusive, there’s a big overlap between investing with values and with value. And increasingly investors are seeing that as the sweet spot, the opportunity.
Courtney: [00:38:24] That’s an important point.
John: [00:38:25] And I think what we represent here is, you know, that trend of investors thinking about, okay, how can I impact social change through my values, whether it’s LGBT equality or Catholic values. We’re trying to give advisors tools to address the diverse needs of their clients and give them the right tools to align their investments with their clients’ values, which I think is very important. And a lot of advisors need to be thinking more along those terms.
Courtney: [00:38:56] Do you think there is a kind of ramping up in education of advisors that needs to happen or is it just a lack of access at this point to the products?
Ron: [00:39:06] I think it’s having ways in which advisors become aware of the products because some of the products are being offered in relatively small scale or in institutions that aren’t spending millions of dollars advertising etc. So it’s a matter of time and education forums. But we’ve noticed that almost all of the major wealth management platforms are actually investigating how they can find managers that they could put onto their platforms. So I think it’s just a matter of time when you’re going to see some of these products become more well publicized and more widely used.
Daniel: [00:39:42] In addition I think there is a big movement against investment consultants to figure out what are the tools we need in place to be able to evaluate managers on their sustainable of responsible spending strategies. How do we know whether it’s credible or whether it’s just green washing? So it’s not just the advisors, it’s also investment consultants that are really trying to figure out this space. And I think there is a big education need, particularly amongst client facing investment professionals to be able to, not only understand the products, but then to be able to talk about the opportunities with clients. Sometimes that can be a very uncomfortable conversation to have, bringing up values when the conversation when the relationship thus far has just been on investments and performance. But there’s a big opportunity, I think, to incorporate these other aspects of the relation, you know, of investing into that relationship, a big opportunity to make that relationship stickier and to provide enhanced value to the clients.
John: [00:40:42] Yeah, I think you’re right there. You see, we see the value of education and the need for education around as, you know, you’ve got all these various indices that are very specific, our index is very specific. And we literally did research around having 16 years worth of data, of managing portfolios, we released a white paper last winter called Return on Equality, the real ROE. And it’s the shareholder case for why companies should adopt LGBT inclusive policies. But we walked through in a way that your investment advisors or consultants can see the data and we showed that, you know, looking at companies, how they perform versus their sector peers before and after they adopt LGBT Inclusive Workplace Inclusive policies. And our [unclear 00:41:33] index and again as I said earlier, when we first started doing this in the late 90s, we could find a couple dozen companies. And so the datasets are fairly sparse going further back. But what we saw was an identifiable trend of companies outperforming their peers, three, five, seven years after they adopt LGBT Inclusive Workplace policies. And I mean … and it’s hard data, it’s the kind of thing that advisors and consultants want to see. And again available on our website, you can download the paper, workplaceequalityindex.com. It’s that kind of education is needed for all of us that are impact investing.
Ron: [00:42:11] Plus, you know, as the capital has become much more global, it flows more freely. So there’s more products, more allocations being made to emerging markets specifically or to global equities specifically. And I think the fact, particularly in the US, if you’re investing in emerging markets, you want to … it only makes sense that you might look at their environmental, social governments policies because that’s going to affect their performance in their sustainability and how they’re viewed and the risk factors. So in some cases, it’s almost essential to deploy some of these screens or factors. And as you mentioned, in the UK, they’ve been doing this quite some time. We have a lot of European managers who, particularly in emerging markets, they wouldn’t think of making an investment in an emerging market company without going through that ESG screen, because they think it’s just as important as the product itself.
Courtney: [00:43:13] That’s incredible. And I assume in time that will adopt elsewhere, here and elsewhere. And I think, you know, we talked about … we touched on it, kind of this institutionalization of this space. And Audrey Choi, the CEO at Morgan Stanley’s Institute for Sustainable Investing recently told the New York Times when speaking about manager selection, “If we want this market to really grow we have to make sure we go into this in a best in class way.” And we’re almost out of time but I just want really quickly everybody’s comments on this. Dan, I’d like to start with you, what do you see in terms of how that’s taking place?
Daniel: [00:43:49] Well, I think the focus on best in class really makes sense. And this is a new involving and emerging strategy here in the United States. A lot of people are still trying to figure out exactly what strategies to employ. And in that sense there really is opportunities for managers to distinguish themselves and come up with something unique and have a competitive advantage there. So being able to identify what strategies are best in class, how do you measure that? How do you figure that out, identify that and be able to invest in that? So that’s something that I think is receiving a lot of focus right now.
Courtney: [00:44:24] John, what do you see?
John: [00:44:26] Yeah. For us, we see an emerging trend that we’ve been focused on for 16 years, you know, we think that more and more investors are going to demand, you know, to have a value based alternative for their investing rather than just go out and buy an S&P 500 or a Russell 1000. They want, in our case, broad market access, broad market representation, but they don’t want to support the companies that don’t support them or their values. And that’s really what our Workplace Equality Index provides is a way to get broad market access, broad market exposure in a way that is only supporting companies that share values with clients.
Courtney: [00:45:14] Interesting. And, Julia, what do you see here?
Julia: [00:45:15] Well, speaking about index investing, I think it’s already best in class in a way, because it’s transparent. It’s relatively easy to understand. It’s very well diversified, so it’s kind of, you know, less risky than anything else. But at the same time there is still scope for improvement for ourselves as well, particularly with all these new concepts, like smart beta concept for instance, where indices become kind of less passive, a little bit more active. They step into the active territory. They invent the rules where quite complex sophisticated strategies are being implemented. And with Sustainability Indices we can actually do the same. And we have done that already, for instance, we have tested a concept where you take a Sustainability Index universe, DGSI Europe was the example here. And on top of that you also expose this universe to a factor strategy. The factor strategy here was low volatility. With low volatility we actually select companies that are less volatile in this universe and we weight them in a way that’s adverse to their volatility. So that lower volatility stocks get the biggest bite. And the incremental performance impact is amazing here. We actually reduced the risk by 17%. And we added returns by 3%. Something that you will not be able to do with, you know, simple market cap based weight approach, so indices as an industry has become so innovative.
And we have to explain ourselves really well to advisors, to all those people who want to know about the index rules because even though they are quite transparent, they’re so complex now that they’re almost, you know, active passive, something in between active and passive, that it really takes a lot of effort for investors to understand how the index really work.
Courtney: [00:47:11] They’re very worthwhile to have them [unclear 00:47:13].
Julia: [00:47:13] Yeah. Yeah.
Courtney: [00:47:14] And, Ron, what do you see?
Ron: [00:47:16] So I think the biggest challenge in terms of the growth of the field is defining what class means, because when you say best in class, is it a core fixed income, or are you comparing yourselves to small cap, large cap? Is it private equity? Is it venture capital? Is it real estate or is it none of the above? And so in our case we make it clear we’re a core fixed income manager. We have a portion of the egg that we concentrate in. And so it’s relatively easy to track us and for the public funds that we have as clients, they selected us because we’re a top quartile manager and that’s their policy. That’s all they look at, so. But as some of these, the other strategies that have impact or employ some of these, the real issue is what … who do you compare it to and what’s the market rate return compared to what other non-impact investments might be.
Courtney: [00:48:16] Interesting. And we have another viewer questions, it’s Deborah Nieman of Nieman & Associates Financial Services. Deborah, go ahead.
Deborah: [00:48:24] Thanks for having me on your show. And my question is this, as a financial advisor who’s served the LGBT community, I understand the appeal of the Index for my clients. But why do you think the Workplace Equality Index will appeal to others apart from LGBT investors?
Courtney: [00:48:42] John, would you take this?
John: [00:48:43] That’s a great question, Deb. You know, we think many investors are interested in equality, and not just those within the LGBT community. It’s a broad trend that we see expanding in lower ages. I have teenagers there, to them equality is a given. You know, a great example, you might be familiar with the restaurant chain, Chick-fil-A, it’s a private company, not in our index. A couple of years ago, the CEO of Chick-fil-A, Dan Cathy made a … some would say, a somewhat boneheaded, but anti-gay remark. Chick-fil-A saw its Brand Likeability Index score, which is a measure of how brands are liked in the US, drop from 69 to 35 in a couple of weeks. So their Brand Likeability Index score dropped 50% after making an anti-gay remark. There aren’t enough gay people in the country to do that to a brand. That is the ally marketplace, and that is … shows the broad appeal, if people around the country said, “We don’t like Chick-fil-A after he said this.” That tells you how broad the idea of workplace equality appeals. So really it’s an index that appeals to anybody who believes in treating your employees equally, regardless of race, religion, ethnic background or who you love.
Courtney: [00:50:10] I think it’s great that we’re seeing, you know, we’re seeing tangible momentum behind this, but there’s also this intangible momentum behind all of these … everything in this space. And we’re just about out of time, so I just want to get really quick your final takeaways, and, Ron, I’ll start with you.
Ron: [00:50:26] Sure. I think as we look at this area, and it gets back to the sustainability, one of the issues in this country has been, as the economy grows, whether or not everybody has the same access to good jobs and employment, healthcare etc. And so we’re hopeful that the performance is there and that as people become more sensitive and understand that we’re all in this together, that they’ll also appreciate strategies that do both, to provide a double bottom line of both a good return and helping their community.
Courtney: [00:51:05] Double bottom line. And, Julia, what are your final takeaways?
Julia: [00:51:07] I think that we all at this table agree that sustainability pays back. And it’s really good that we are able to demonstrate this with our indices that sustainability based economy and low carbon economy for us is an example of this, is able to grow at least at the same pace as the usual carbon intensive economy. And I would like this trend to continue and to become more noticeable and to become more encouraging for investors to actually join this trend.
Courtney: [00:51:45] Interesting, and, John.
John: [00:51:47] Yeah. Our Workplace Equality Index is a combination of about 16 years of screening companies for workplace policies toward their LGBT employees. And you know we’ve seen that forward thinking companies outperform their peers over time. And we have research to back that up. And you know we feel that companies that treat everyone with equality and dignity and respect offer their investors’ sustainable, long term returns, and it gives people something they can feel good about. And we see that trend continuing to expand.
Courtney: [00:52:21] That’s a great trend. And, Dan, your final takeaways?
Dan: [00:52:24] I think too often investors view their investments as separate from their values and their beliefs. And there really is an opportunity to think about investments through the lens of who you are, what your faith is, what your values are, what you believe and incorporate that into your investments, so that not only can you avoid investing in companies or in things that you disagree with, but so you can have a positive impact. Investments should really be a tool, not just for financial return but also for social and environmental return.
Courtney: [00:52:56] Interesting. These have all been such great points, and I love to hear … I think values are actually doing a service to the investment community which has, you know, values have such a great reputation, I think it’s really an elevation to investing. So, thank you so much all for being here. This has been such a great panel. And we want to continue this conversation about impact investing, check us out on social media, Twitter, LinkedIn, Instagram, or our blog and let us know what you think. If you’re interested in learning more about Masterclass or want to provide a viewer question, reach out to me at courtney.woodworth@asset.tv. Thanks again for watching, and I look forward to seeing you soon.
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The information contained herein is for informational purposes only without regard to any particular user’s investment objectives, risk tolerances or financial situation and does not constitute investment advice, nor should it be considered a solicitation or offering to investors residing outside the United States. Denver Investments makes no representation as to the advisability of investing in any investment fund or other vehicle. The addition, removal, or inclusion of a security in any Denver Investments index is not a recommendation to buy, sell, or hold that security, nor is it investment advice. Prospective investors should not make a decision to invest in any investment fund or other vehicle based on the information presented or contained on its website, and Denver Investments shall not be responsible or liable for any advice given to third parties or decisions to invest in any investment fund or other vehicle by you or third parties based on the information.
It is not possible to invest directly in an index. Index performance does not reflect the deduction of any fees or expenses. Data for the index is back-tested. Back-tested data takes a set of criteria and applies it rigorously at each historical rebalancing to select constituents. Back-testing has been performed by Solactive AG, an independent third party. The S&P 500® Index is an unmanaged capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy. Past results of the Workplace Equality Index™ are no guarantee of future performance.
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MASTERCLASS: Impact Investing - April 2015
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