<p>As more investors turn to ESG and Impact investing when allocating their assets, questions arise about how this strategy adds value to a portfolio. Three top experts discuss why investors should consider ESG strategies in their portfolio to enchance return. </p>
<ul>
<li><p>Kelly Tang - Director, Global Reasearch & Design at S&P Dow Jones Indices</p></li>
<li><p>Guido Guise - Head of Indices at RobecoSAM</p></li>
<li><p>Jessica Ground - Global Head of Stewardship at Schroders</p></li>
</ul>
<p>To receive CE credit please reach the accompanying white paper on ESG Investing: <a href="https://d4594f2792f2e7a5d7db-30130cc69ae08889d952f9b958d7b785.ssl.cf3.rackcdn.com/e78487043e472f6bf87d7191f0a8d4e1a8e2e6dde96889be75360817b11f4902_UnlockingESGIntegration2.pdf" target="_blank">Unlock ESG Integration</a> and complete the quiz</p>
Video Image:
Duration:
0000 - 00:38
Recorded Date:
Monday, March 21, 2016
Transcript:
KELLY TANG, director, Global Research & Design, S&P Dow Jones Indices
I think, a good index provider, you want to be driving this conversation. You want to be ahead of the curve. And yet you also want to take their comments and suggestions and their viewpoints and kind of consolidate that.
GUIDO GIESE, Head of Indices, RobecoSAM
So, we see a strong trend especially in the pension fund market, where we see increasing demand for ESG. And I think one of the reasons is that pension funds, they’re looking for long-term solutions, and I think one of the lessons we learned from the financial crisis is that short-termism in investing isn’t a good idea.
JESSICA GROUND, Global Head of Stewardship, Schroders
When lots of people think about ESG, they just consider recent controversies. And while we can go back and look at Volkswagen and think about what we’ve learned about whistleblowing and corporate governance and apply that, if ESG is going to add value to investment processes we need to be really forward looking.
PRESENTER: Well, Kelly Tang, we’re talking about impact investing, what do you mean by that?
KELLY TANG: Well I think you hear a lot of terms, and they do encompass the same thing, but you hear impact investing, sustainability investing, ESG investing, and that all falls under the arm of sustainable investing. Of looking at metrics that fall outside of your standard financial accounting metrics that one would look at, at companies, but looking at long-term type of issues that deal with the environment, deal with social issues, deal with governance issues. So I think those terms are interchangeable, but the term we’re hearing more and more is sustainability.
PRESENTER: And as an index provider what’s your interest in sustainability?
KELLY TANG: What’s our interest? As an index provider, I feel our job is to create cutting edge leading innovative indices that serve the market demand. And what we’re seeing is there is a heightened interest in the sustainability sector, and adding that sustainability piece to their investments. And so our job is to create indices that meet that demand, and do it in a creative efficient way that allows investors to tap into this market.
PRESENTER: Thank you for that. Guido Giese, what RobecoSAM’s history with impact investing and sustainability?
GUIDO GIESE: Well I mean impact investing first of all is a very recent trend in the sustainability investing space, and I think there is a simple reason for that. The reason is that on the one hand side there is an increasing number of investors who are interested in sustainability investing, that’s a good thing, but at the same time investors are increasingly demanding in the sense that they would like to see evidence, so tangible proof, that sustainability investing is actually moving the needle. And impact investing for RobecoSAM Sam basically means providing tangible evidence that by investing in a sustainable way it actually makes, you actually make a difference. And we have actually created an impact methodology, and what we’re doing is basically we want to provide indicators to investors where they can see what impact they have when they switch from a let’s say standard benchmark to a sustainable benchmark.
PRESENTER: And that moving the needle and that impact, is that about better social, outcomes for society, or is that about better returns to investors?
GUIDO GIESE: No. the way we create it is really to show the impact they have let’s say in a social way. For example, we have now indicators measuring the greenhouse gas emissions in your portfolio – you can see greenhouse gas emissions before and after you change to a sustainable portfolio – or the energy consumption in your portfolio, or waste management, so waste generation in your portfolio. So these are important measures where you can say look if I changed $100 million from the standard benchmark to a sustainable benchmark you see how many passenger cars and CO2 emissions you’re going to save, how many households and electricity you’re going to save. So it’s very tangible what you do.
PRESENTER: Jessica Ground, at Schroders, is ESG applied across every portfolio you run, or is it just to some specific mandates?
JESSICA GROUND: Mark, actually it’s a bit of both. So we’ve got a long track record of integrated ESG across asset classes. So that includes property, fixed income, as well as equities which we’ve been integrating since 1998. But also we work with clients on designing very ESG specific mandates, so about 10% of our assets have got some kind of an ethical screen. But increasingly we’re working with clients who want to measure things like impact as well across their investment. So it’s part of our standard practice but we’re working with clients to also deliver much more specific products.
PRESENTER: Well, Guido, you were saying a little earlier there about pushing the needle; for your clients are they more interested in this for the ethical or the economic benefits?
GUIDO GIESE: Well I think that’s a very important question, because actually, I mean RobecoSAM started researching ESG profiles of companies in 1999. And for us it was very important from the very beginning when we started our research that sustainability is not just an ethical dimension, but it’s also a business dimension. And for us there’s a very clear difference between sustainability investing and ethical investing. And I think it’s important to understand the difference, because ethical investing basically means you’re interested in the impact a company has on the environment; for example CO2 emissions. So it’s a one-way street. But sustainability is a two-way street. It’s basically the interaction of a company’s business with the environment.
Let’s make an example, CO2 emissions. As an ethical investor you care about whether the company is CO2 efficient, yes or no. As a sustainability investor you’re interested which company is in a better position to face the challenges from the decarbonisation. So which company might actually be more competitive because of that, and which company might actually lag behind in terms of being competitive? So it’s a business opportunity, not just an ethical dimension.
PRESENTER: Kelly, when you’re creating indices that have the sustainable element, are you reflecting what your clients want, or are you providing them with ideas that they’re then picking up? How much are you driving this, and how much are you responding to market demands?
KELLY TANG: I think as a good index provider you want to be driving this conversation. You want to be ahead of the curve. And yet you also want to take their comments and suggestions, and their viewpoints and kind of consolidate that. So I think it’s kind of, it’s both, you know. But I just met with an asset owner who said I’m so glad, we created this recent index called S&P Long-Term Value Creation Global Index. And he said I’m so glad you created that, I was thinking of somehow how do we find these companies, and it’s just really helpful that you put it out there initially because if a benchmark is there first it’s much easier for me to get my board onto the strategy, than the asset owner trying to push that conversation first. So it’s easier when the benchmark is the leader rather than a laggard.
PRESENTER: Now that particular benchmark, which I think you’ve done for a Canadian pension scheme.
KELLY TANG: Yes.
PRESENTER: Is that something that, are you seeing sustainability there as essentially almost a source of alpha, a source of outperformance in the long term?
KELLY TANG: Exactly.
PRESENTER: So would you then suggest that that benchmark should do better than whatever the mainstream equivalent index is over say five or ten years?
KELLY TANG: We’ve done the backtest to portfolios, and we have the returns, and it does beat the overall benchmark that it’s benchmarked to. The way we constructed that is, and I think the construction methodology leads to that outperformance. We used ESG, we used the G in ESG, we used the subset of the ESG metrics, and then we overlaid that with financial quality, which we feel at S&P is a factor that has proven itself to lead to outperformance. And we combined those two, and so we’re happy to say that it does lead to outperformance and it does beat its broad benchmark.
PRESENTER: Jessica, the US Department of Labor brought out a guidance note around ESG in October 2015, what impact do you think that’s going to have?
JESSICA GROUND: We think this is going to have quite a lot of influence on investors. What that guidance note does is move ESG from just being sort of a tie break consideration into something much more essential for fiduciaries to think about. Also, why we think this is so important is this can really impact people’s pension plans, which are really long-term investments. When we think about millennials who are just starting on their journey of accumulating pension assets, and we look at how interested they are in environmental and social and governance issues, we think that a lot of fiduciaries are really going to start to consider how they can integrate these investment wants and needs of millennials into this long-term planning, and this guidance really gives you a framework to start doing that.
PRESENTER: But do you think that’s been a brake on people investing in ESG up until this point?
JESSICA GROUND: I think what this does is brings ESG onto the agenda of pension fiduciaries. And yes of course it has been a brake, and I think policymaker encouragement of people to take a more holistic view of risks, and looking at financial risks and also how ESG issues can impact those financial risks, really paves a way forward for people doing long-term thinking into investment plans.
PRESENTER: Kelly, picking up on that, was the Department of Labor saying it’s OK to invest in ESG even if it underperforms but it’s got a social benefit, or it’s OK to invest in ESG, it might produce higher returns?
KELLY TANG: I think they’re saying more the latter. Because remember we are fiduciaries, or those people that the Department of Labor were directing it to are fiduciaries. And they have to abide by ERISA laws that we’re trying to generate, they’re trying to generate returns and performance. So I think it’s more the latter that you can factor in ESG, and what they quoted is it’s a tie breaker. If you have two investments, two alternative investments, and they seem, they have equal merit on a lot of financial metrics, but if you then add in the ESG overlay and one certainly seems like a better investment, then by all means use that ESG overlay to pick that in a tie breaker scenario. But I don’t think it means that if, again they’re fiduciaries, they’re mandated by ERISA laws to generate returns for the investors.
PRESENTER: Jessica, we hear a lot about the performance of ESG, but is there any academic proof that ESG mandates should outperform over time, or are we in a world where people are just cherry picking the data to suit themselves?
JESSICA GROUND: Well there’s been an incredible amount of academic research into this area, and actually it is really supportive. So a very recent report from Oxford University showed that companies that exhibited strong sustainability characteristics outperformed operationally 88% of the time. That really shows me as an investor that seeing how a company’s operating sustainably is something that I should be looking at in my investment processes. Additionally MSCI put out another really interesting study in 2015, and that looked at ESG issues in two ways. It looked at portfolios that had higher weightings towards companies with better ESG characteristics, and they outperformed, but what was really interesting for me as an active fund manager was that there was an increased outperformance if you invested in those companies that were improving their ESG performance. So both MSCI and the universities are really agreeing what instinctively makes sense that companies that really think about all of their stakeholders and manage them really well deliver operational and financial returns.
PRESENTER: Well, Guido, we hear a lot about factor investing and smart beta these days; is ESG a factor?
GUIDO GIESE: Well that’s a question we heard quite often from investors. And we actually decided to start a research project internally to analyse that question. So what we did is, we have been researching ESG scores, or ESG ratings since 1999, and of course the obvious question is well let’s take those ESG ratings and put them into a factor model, or into factor engine. And what would the factor model say? Would the factor model say yes it is a factor, or would it say it isn’t? Now we did that, and the first results we got they were a little bit frustrating, because what the factor model basically said look the date you uploaded into the factor engine is highly correlated to existing factors. So it’s highly correlated to size because typically large companies do better in ESG scorings than smaller caps. It’s tilted towards Europe. It’s even tilted towards low volatility. So it’s a cocktail of existing factors which basically means it cannot be a new standalone factor is it’s so correlated to existing factors.
So what we did is OK we said if we want to create ESG as a standalone factor, the first thing we need to do, we need to unbias it. So we ran it through a statistical model to clean out all these biases. So we created a score, an ESG score that is not correlated to all these other factors but is a standalone signal. And then we reran the test again, and we realised oh it looks much better. There is actually a slight outperformance in the data. That was appealing of course. And then we thought OK but can we do better than that? Because we wanted to create a factor that is as good as the traditional small beta factors, like value, growth, momentum and so on, and then we realised there is one problem in ESG research that probably explains why there is no clear conclusion on whether ESG can outperform or not, and the problem is in ESG you aggregate too much data. You have hundreds of different data points, ESG indicators that you aggregate into one score, and whatever useful information about alpha is in the data gets kind of diluted in this cocktail that you’ve built, which is basically a cocktail of main indicators.
So what we did is then instead of testing the top level, so the top ESG scores, in the factor engine we tested each single ESG indicator. And then we realised there’s a lot stronger evidence in the data that some ESG indicators have stronger potential, but it is very industry specific. So for example we see in the banking sector there’s very strong evidence that governance indicators contribute to stock performance. But then you look in the airlines business and the airlines business it’s not so much governance, it’s actually environmental issues. So the fuel efficiency of the fleet that shows alpha in the airlines business. So it’s very sector specific and indicator specific, and that’s where you get more alpha than at the top level score.
PRESENTER: And at Schroders, Jessica, do you put the same weighting on the E, the S and the G, or does it vary by sector?
JESSICA GROUND: Because we’ve got a long track record of doing this, we’ve built up a very sector specific approach; in fact it’s so sector specific we look at 170 different subsectors. And what we do for each of those subsectors is we identify what are the most relevant factors in the environmental and the social and governance. We don’t want to be thinking about long shopping lists of issues; we really want to focus our attention on the ones that are going to impact the investment case; but we spent a long time building up this expertise doing it.
PRESENTER: And, Guido, just coming back to what you were saying there earlier. When you did the tests what was your exposure to banking back in 07/08 when you ran the models?
GUIDO GIESE: Well I mean let’s say the good thing is that the indices that we created based on the research, they are basically sector neutral, because all the indices are based on the best in class approach. Meaning that you don’t overweight once sector versus the other, so you have all the sectors, but in each sector you select the ones with the highest ESG rating - which turned about to be good because we don’t want to have active sector bets in the indices.
PRESENTER: So you would argue that your model threw up the least bad banks.
GUIDO GIESE: Yes.
PRESENTER: Or the fewest number of bad banks.
GUIDO GIESE: To put it that way yes.
PRESENTER: Well picking up on that from the product providers point of view, Kelly, when you look at these scores, when you apply them to your own business, how do you score?
KELLY TANG: McGraw-Hill, which is the parent company of S&P DJI, we score very well. And I think we’re in the index that we created, the S&P Long-Term Value Creation. We’re actually in that index so I’m happy to say.
PRESENTER: You passed through the model.
KELLY TANG: We passed our own test that we created. And again that index uses the G component of ESG. But when you look at the G component along with the quality factor that I talked about earlier, McGraw-Hill Financial does fit in and passes muster.
PRESENTER: So why look purely at the G, why not the E and the S?
KELLY TANG: That’s a good question. As Guido I think, he raised a good point; when you look at the score in total, ESG score, there’s a lot of dilution. There’s so many factors that go into it, or so many criterion that go into that score it kind of dilutes some of the key drivers of outperformance. Governance was a good way to start. It’s much more of a tangible way to judge companies. Governance issues are big in America. I mean I think governance issues are big everywhere but particularly in America, and I think the US market has been at the forefront of looking at governance to try to evaluate companies. And so when we were working with the Canadian asset owner we felt that the G part or the governance part was a great way to start. It’s more tangible. And again remember sustainability investing, it’s still somewhat of a nascent investment theme. And I think starting with the G factor was a good way to start in this area.
PRESENTER: And Schroders itself Jessica, how well does that score on ES and particularly G factors these days?
JESSICA GROUND: Well how we incorporate ESG gets well rated by the UMPRI A-plus. Definitely as a business we’re seeing the need to have more transparency around what we do. We’re reporting around in particular on governance and voting in a much more transparent way than we’ve been doing. We’re also looking at environmental issues and considering whether we purchase more of our energy, renewables. We think about the COP21 climate change targets. But finally social for a fund management business is a huge issue. How do we really recruit the top talent and get the right kind of diverse workforce that we need? So that’s something that we’ve been working on, thinking about issues like diversity and inclusion.
PRESENTER: And, Guido, coming back to when you tested your data, and you’re trying to separate out noise and signal, how did you guard against the fact that it might have just been post-factor rationalisation on your part of what was signal rather than noise? And in another three years you might run that again and say oh it looks a bit different now.
GUIDO GIESE: Yes, that’s an important thing. Because you’re absolutely right, you should never overmatch your model to past performance. Because otherwise you always drive the car with the rear view mirror but not forward looking. And our what we call financial materiality framework has two components. A backward looking component which basically means you’re on a factor model where you look historically about the correlations of the ESG indicators and stock performance, and it has a forward looking perspective where we have basically in each industry ESG analysts who try to understand forward looking which ESG indicators will be important in the future? And that’s very important.
Because for example if you look at CO2 data, you might say that historically CO2 might not show correlations to stock performance simply because the regulators never charged companies for emissions. Of course then it probably didn’t matter that much. But now with regulators moving towards decarbonisation it will have an impact in certain industries. And that’s in fact you can only foresee, and we have analysts who try to predict in which industries will the impact be hardest? And in those industries we basically either overweight kind of carbon indicators, or we introduce new carbon indicators to take care of that.
So we have a forward looking perspective introducing new indicators to keep up with the trends, and then we test them backward looking to see whether we actually do see these correlations that our analysts had predicted three or four years ago.
PRESENTER: And looking to the future, Jessica, how do you work out what the key E, S and G issues are going to be not today but in two, three, four years’ time, and how do you factor them in now?
JESSICA GROUND: You’re right. When lots of people think about ESG they just consider recent controversies. And while we can go back and look at Volkswagen and think about what we’ve learned about whistleblowing and corporate governance and apply that, if ESG is going to add value to investment processes we need to be really forward looking. So let me give you an example of something we’ve done recently. We’ve had a discussion is sugar going to be the next big tobacco? Did you know in the US that sugar is labelled 42 different ways on food packaging? When you think about the global obesity epidemic that it’s had, and the litigious society that there is in the US, it’s quite easy to think that this could start being a major issue for some of the food producers.
So that’s the type of forward looking work that we’re trying to do: trying to spot things in the market that people haven’t considered, and really think about how those things will impact the investment case, on the equity side but also on the fixed income side.
PRESENTER: Well, Kelly, when you’re looking at constructing indices, how can you trust the data that’s coming off the underlying companies?
KELLY TANG: That’s a good question. We use data providers such as RobecoSAM, and we also use data from an environmental data consultancy firm called Trucost. And they’ve been in business for, I mean RobecoSAM Sam’s been doing their sustainability surveys since 1999, so they have, despite what I said earlier about it being a nascent industry they’ve been doing it for quite a while. Trucost has a history going back about 17 years also. So when we did the due diligence of these data providers, you know, we got the comfort level that they’re all very quantitative, a lot of PhDs. They have a good data history. We really do the deep dive in the due diligence of how the methodology is conducted, and how the surveys are conducted. And we run our own backtest with their data also.
So I think if you look at that due diligence stuff that we conduct before we partner with these data providers, that gives us the comfort level that the data that we’re using is data at a quality that we’re comfortable using.
PRESENTER: Guido, how do you, I mean for example when the issues hit with VW recently, was that something you knew about before that story came out from the research you’d done and the questionnaires they must have filled in?
GUIDO GIESE: Well unfortunately not. We get that question quite often now from investors. I mean what role do research providers play in this scandal basically? And I think it’s important to mention that I think as a research provider you always rely on data delivered by the company. And what Volkswagen was basically it was fraud. So Volkswagen frauded, I mean not only the research provider, they also frauded their own auditors, they frauded their own management, and of course everyone who relied on the data to some extent that the company provided basically took the wrong conclusions. And I mean that’s very clearly, I think also we had to reassess our judgement and our position on Volkswagen once we realised that some of the data really wasn’t correct that they provided, delivered to the public.
PRESENTER: So do you, not just take back the data that people give you, but to what extent are you looking for other signals like whether anybody at board level for example has an interest in ESG issues; to what extent are you looking for somebody owning them within the companies that you’re judging?
GUIDO GIESE: Well we do look at things, for example independence of the board and whether the board has oversight over the risk management function in the company and so on. So these are important things that we look at for every company we assess basically.
PRESENTER: Now, Jessica Ground, a little earlier you mentioned the millennials, that generation born in the late ‘80s, the ‘90s, the early 2000s; how important are they to the development of impact investing and ESG?
JESSICA GROUND: Millennials are incredibly important. There was some really good polling data on millennials done last year. And it showed that they really consider investments. Over 65% of them consider investing as a way of expressing their social and environmental beliefs. On top of that we know that millennials will inherit, they’re quite likely to review their current wealth arrangements. Finally they’re much more likely to believe that climate change and other issues are really pressing ones. So when you consider all of those, they’re much more socially aware, they look at their investments as an extension of themselves, and the chances are they’re not going to be investing the way that their parents did. Designing products that really meet their needs is a very important priority for us as a fund management business.
PRESENTER: That’s the millennials, but Kelly, picking up, in terms of some of the other drivers, apart from new generations coming through, what else is driving this interest in ESG?
KELLY TANG: I think it spans the entire spectrum of age group, millennials to older retirees. I think just the information that’s out there of what we are doing to the earth, resources, population growth, just other secular trends. And I think investors want to feel more engaged, that they are part of, you know, I call it they’re making an impact or that they have an interest in what’s going on. And where they put their assets is one way to show that impact and what statement they’re making about what do I care about, you know, and I want my investments where my money goes into, into those companies, I want them to share some of those principles that I have.
So I think it spans generations, it’s not just an age group. And I think it spans type of investors too. It’s not just retail investors that you’re hearing this from, but you’re hearing this from the institutional side of pension funds. So I think it spans the whole scope. And so I think that’s good for us because I think this is an investment area that’s going to continue to grow, and you’re going to continue to see innovative indices, and you’re going to continue to see more data and refinement of data. And I think you’re going to continue to see asset come into this area.
PRESENTER: And what’s driving the interest of the institutions? Why are asset owners now getting more interested in these issues?
GUIDO GIESE: Well we see a strong trend especially in the pension fund market, where we see increasing demand for ESG. And I think one of the reasons is that pension funds, they’re looking for long-term solutions. And I think one of the lessons we learned from the financial crisis is that short-termism in investing isn’t a good idea. I think we learned the lessons from the financial crisis, and we know see pension funds asking the question whether ESG can be a tool to create more long-term focused investment solutions. And I think that makes a lot of sense, because when you look at what ESG research is about it’s basically about being able to identify the management quality of companies. Because when you want to invest in a company long term I think you do want to make sure it’s a well-managed company. And I think that’s what ESG is about. And that’s why you see that demand especially in the pension fund market.
PRESENTER: So what’s the take on things like tobacco stocks? Because you can get some very well run tobacco stocks but it’s possibly an industry that isn’t, doesn’t come top of anybody’s list of what an ESG company would be.
GUIDO GIESE: Yes that’s true. I mean traditionally the way we looked at that is traditionally for the Dow Jones Sustainability Index family that we launched 1999, we took a strict best in class approach where we said look we understand there are different industries, and you might say one industry is cleaner than the other, but we never wanted to discriminate one industry against the other. So we always looked at which are the leading companies in each industry. So which tobacco companies are leading in terms of ESG? But we’re also looking at, especially in tobacco but also in the oil and gas industry where you have the same problem, where you might say look the business model is disappearing. It’s in tobacco but also in the oil and gas industry. And there we also look at which companies have a long-term strategy to diversify their business model.
So which companies are looking forward maybe 10, 20 years to understand what is this company doing in 20 years? And saying we do look at these long-term trends and try to understand which company has a long-term plan to diversify their business, and which doesn’t.
PRESENTER: Well, Jessica, we’ve talked about a couple of sectors there, tobacco and oil specifically, but as an investor do you want to be taking bets against these industries, I mean they’re big parts of the benchmark?
JESSICA GROUND: So we manage a variety of mandates for clients, about 10% of our assets have got some kind of an ethical screen. Some of that’s no tobacco and no carbon. But ESG integration is important for us across asset classes. So yes we have positions in tobacco stocks. But actually what we’re doing with tobacco stocks is looking at the risk in the supply chain; we’re looking at business ethics issues around bribery and corruption; and if you don’t own those stocks you can’t be engaging those companies, making sure that they’re marketing responsibly. Of course in our investment cases we anticipate long-term decline as smoking rates fall especially in developing economies, but it’s really important that we’re holding those companies to account. And exclusions is quite a blunt way of looking at these things.
PRESENTER: I want to move on now to the issue of cost. When you put together an index where you’re obviously adding a bit more resource around it perhaps, do the costs go up considerably to investors?
KELLY TANG: Does the cost go up for investors by having ESG overlay or?
PRESENTER: Yes.
KELLY TANG: I think ESG lends itself to, you know, we create indices and then products usually follow, where investors can invest in an ETF or some type of product that tracks our index. I think it lends itself in, one of the key benefits of indexing that’s well known is a low cost approach, but I think it lends itself well to an indexing strategy. We always say indexing is transparent, it’s rules based, because ESG has these type of scores it’s not, there’s not going to be additional cost to incorporate that. It’s again low cost, it’s rules based and it’s transparent, so I don’t see…
PRESENTER: At the index level there shouldn’t be any extra fees.
KELLY TANG: No.
PRESENTER: And what about at the product level, Guido, I mean all of these employees you must have looking at these companies, going through their questionnaires, where’s the proof that’s adding value rather than adding cost?
GUIDO GIESE: Well I mean ultimately the proof point is the financial performance, as we mentioned before right. And that’s why as I mentioned before we have done a lot of research recently to create better ESG solutions, meaning that understanding which part of our ESG data can be used in which industry to create better performance. And I mean our data is basically used in many indices of S&P Dow Jones indices at the moment. But it’s also used by our parent company Robeco who manage over $70 billion in active funds. So it is used in a broad level I would say.
PRESENTER: And your parent company Robeco, is that an active voter when it owns equity?
GUIDO GIESE: Yes, they also do voting engagement. The reason is that in some areas we believe that voting engagement can be an additional or even a more efficient tool to deal with certain issues in the ESG space.
PRESENTER: And how active a shareholder is Schroders, and how publicly vocal a shareholder can Schroders be?
JESSICA GROUND: We’re pretty active. We had last year 500 engagements on ESG issues alone, as well as over 14,000 company meetings globally. And we’re finding that we’re being more transparent about this. We’re collaborating with other investor groups, and we’re willing to be more open about the discussions that we hold with companies. We’re finding that our end investors are very interested in what we’re doing, not just in the buy and sell process but in the ownership process of how we manage their investors. And it’s important that we’re accountable and transparent about that.
PRESENTER: But if a company ignores your views entirely, do you just sell out or do you just live with it and hang on to the stock?
JESSICA GROUND: In those cases we look at the individual situation. Valuation definitely comes into it. But if we think that companies are really ignoring major business risks the chances are that we’re reassessing how attractive that company is as an investment.
PRESENTER: Well we’re almost out of time, so just a final though from everyone. Kelly, where do you see ESG and impact investing being in five, ten years’ time?
KELLY TANG: I think sustainability investing is here to stay for us at S&P DJI or McGraw-Hill Financial our parent company. Sustainability is one of our key business initiatives. So I definitely think it’s an investment theme that’s here to stay. You’re going to see more products, you’re going to see more indices, innovative indices. I think it transcends investor types, it transcends institutional types, and also it transcends asset classes. So right now we see a lot on the equity space, but I think you’re going to see, you’re starting to see it on the real estate space, in the fixed income. So it’s going to really cross many different asset classes too. So given those drivers and how wide of a path it’s covering I think it’s an investment theme that is here to stay and you’re going to hear more about it.
PRESENTER: Guido, would you go along with that?
GUIDO GIESE: Yes, I think there will be an increasing demand for impact investing solutions. At the same time I think the trend will also continue that there will be more diversity. So as Kelly said for example some clients want to strip out the governance score, and I think we’ll see more of that. That investors are interested in a particular angle so that we will strip out a certain part of our data to trade dedicated investment solutions.
PRESENTER: So you see it becoming more bespoke for clients.
GUIDO GIESE: Yes, definitely.
PRESENTER: And, Jessica, a final thought from you, how will the impact investing and ESG world look in 2020?
JESSICA GROUND: Well one of the fellow panellists just mentioned fixed income, and we definitely see increase in demand from our fixed income investors to think about these long-term thematic issues. Especially as they’re worried about liquidity, they want to be ahead of sustainability issues. But I think the real issue is that ESG investing is going to be increasingly mainstream, and that’s because ESG risks are real risks. It’s risks about understanding cyber security and data protection. It’s looking at things like banking culture and thinking how that’s going to impact growth rates and fines and provisions.
So we wonder if there really is going to be a separate section for ESG investors. Especially as we think about younger investors, they’re demanding much more. They just don’t want us to buy and sell stocks, but they want us to own companies and hold them to account. So whether or not we just have a separate ESG bucket, or whether it just becomes smart investing, I definitely think it could be smart investing.
PRESENTER: Jessica Ground, thanks for joining us; Guido Giza, Kelly Tang, thank you for being with us in the studio. That’s all from us here in London. Do please keep an eye out for other Masterclass programmes. From all of us here goodbye.
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