ESG survey results and discussion: Understanding the new ESG landscape

hello thank you for joining us we're hosting this webinar to discuss the results of our 2023 ESG survey which we send to nearly 300 asset managers uh to get their thoughts on the ESG Trends uh on their adoption of ESG practices and principles and we use that to inform our manager research and of course we're here to share that today with you and I'm joined by two guests uh my colleague yosa Phillips who's the head of ESG fixed income investing and also by Jonathan Bailey who joins us from newberger who is the head of esgn impact investing hello Jonathan good morning Yosh hi great and thank you to the audience for being here today we're going to launch right into uh a discussion of these ESG survey results uh each of us bring a slightly different perspective to the topic and uh so I want to uh pause and and highlight those differences and so yosa and Jonathan to kick this off can you describe the most challenging aspect of your role or if you prefer a highlight I'll kick it to you first hi everyone um thank you for having me my name is Yosh Philips I am head of ESG fixed income investing at L investment I lead our ESG effort for Global fixed income team including evaluation of es uh sustainable fixed income strategy in the marketplace I've been with L investment for 22 years and much of that is in fixed income manager research I've started to cover ESG uh in fixed income back in 2013 things over 10 years ago and it's been very fascinating to see how the ESG in fixed income world has evolved so going back to your question about most challenge aspect of my law um it's also most fun part of my law which is to try identify strategy that is differentiated and attractive performance outcome we and our client seek in the fix income EST space where I said the guide post of what reasonable framework to ass criteria keeps evolving so trying to stay ahead is a challenge I agree and you know you mentioned your your 10 plus years we should give you credit as the pioneer of our e ESG survey which is in its 10th year so thank you for that uh Jonathan how about over to you well firstly um thanks so much for having me and it is always so helpful to see the results of the survey um so we can Benchmark what others in the industry are doing and thinking um so we we always enjoy participating in it um I've been with new for about seven years um and my role is to work across the asset classes with our portfolio managers investment professionals to integrate ESG into investment processes develop new Client Solutions think about our engagement with companies um and seven years ago when I when I took this role I I spent a lot of my time just trying to explain what ESG was because people didn't really know it or understand it or they were confused by it now I seem to spend my entire time explaining what ESG is not because there's lots of people on television and writing articles and tweeting and Xing uh their perspectives on on what they think it is um so that's been a little bit of the shift sometimes you have to be uh careful what you wish for um in in the adoption and interest uh in this that's happened over the last several years um but you know as a a member of a of a private employee owned uh investment manager with a long-term Horizon um we've we've seen all sorts of cycles and so we feel very confident that uh will'll be able to continue to partner with clients to deliver on their objectives um through uh Sometimes some choppy Waters great thank you I want to thank uh our audience members for participating in a poll that was uh offered before this webinar began uh closed now so don't don't worry if you miss it but I want to highlight a couple of the answers that our uh that our audience uh mentioned here in this poll question which is about their biggest challenges to integrating ESG sustainable or climate aware Solutions so that we can to try and address these points we have a lot on our agenda today but here are the top answers for that question and it's understanding the financial materiality of ESG issues its concerns about performance impact and its data challenges including availability uh and so we're going to touch on some of that if we don't get to all of it um please do reach out to us afterwards uh but let's dive in now into the specifics of our ESG survey and the first topic we want to talk about is meeting diverse client needs um we've just highlighted your perspectives yosa and Jonathan we know that new no to investors consider ESG in exactly the same way um we asked our investment managers in the survey to name the biggest challenges they face in integrating ESG uh information and 20 to 25% selected this that serving different client needs as a real challenge so uh Jonathan newberger of course is a a USU space firm with global reach you yourself or in in London how do you navigate the tension around what ESG means to certain client groups I mean absolutely the first thing I think we've tried to be very clear on is the difference between process or process and outcomes right these are these are two very different things um so if you're an investor who just purely is interested in maximizing risk adjusted returns and that's that's the case for lots of investors right um then ESG has a role to play in helping you do that if you can choose between two equally priced bonds one of which has a whole bunch of contingent environmental liabilities that bring additional risk and one of which doesn't you would want to consider that information in helping to determine which bond to buy if you were choosing to invest in the equity of two different automakers and you could do that on an equal basis one of which has a a plan for how it's going to transition towards selling more electric vehicles over the next decade and another has none you might want to consider that in your investment decision because it might affect the terminal value of that series of cash flows and hence the equity valuation that that you are buying it at so so those financially material environmental social and governance factors We Believe are part of a good investment process now how you do that is obviously complicated and requires data and judgment and we we'll come into all of that um but that process focused approach to ESG integration is we believe uh very suitable uh fulfills fiary obligations and and relevant uh for many uh clients around the world now there are other clients who have particular outcomes that they are focused on it could be around a climate objective they may have made a net zero commitment it could be around impact right they may have environmental or social outcomes that they are trying to address uh perhaps aligned with the sustainable development goals or some other uh priorities those outcomes focused investment strategies um will then be considering those environmental and social objectives alongside the traditional Financial and that could lead you to deciding not to own certain companies it might lead you to choose to engage with companies on particular topics and and as long as we're very clear about separating process and outcomes and making sure those outcomes are the outcomes the client is selecting and cares about I think that is a is an important North Star in being able to make sure that we're serving the objectives that different client groups have and being very transparent and clear about what they are getting from the invest solution that we are offering them and they are choosing to put their precious capital in um obviously there is an overlay which I'm sure we'll talk about of Regulation that can help shape exactly what is required in in each of those process and outcomes categories But ultimately it is for clients to make the decision about the objectives that they're setting for those investment strategies yeah thank you that was a a great explanation and I like the just ju deposition that you made between uh process and outcomes um uh our poll question one of them uh uh cited that uh our audience members view both risk and return uh as elements of ESG 71% selected risk and return uh which I think is also uh synonymous with what you're describing there um obviously ESG is a risk that many Industries face the materiality of that risk will vary depending on what industry it is and what the risk is specifically uh but then you're also describing return opportunities right where uh where we may see a a uh both a a sustainability industry emerging as you mentioned elect electric vehicles being one of the more obvious examples so and you said Financial materiality so if this were a game show you would already hit on one of our terms there thank you uh let me pass it over to Yos and yoshia maybe you can talk a little bit about how you help clients understand back to this topic of meeting diverse client needs how you how do you help clients understand the range of sustainable investing Securities and products in the fixed income space specifically yes thank you um so it's for fixed income very similar to what janathan has highlighted really more about objectives uh process and outcome what clients are looking for and Pro in terms of uh process like how es integ es information is integrated and then in terms of outcome how much of the portfolio do you want what level of outcome do you seek is that little bit or more or all Impact so it try really trying to uh understand what clients want and then on the fixed income side we have a multiple segments like corporate credit and investment grade high yield and then there's government sovereign debt and then um securitize Municipal and so forth so each application is slightly different and the starting point is different but overarching approach is similar across fixed income to other asset class like Equity looking for process what how ESG is integrated in order to achieve optimal risk return opportunity set and then in terms of outcome what specific outcome is clients looking for what's feasible and what the potential is implication is for performance which we'll talk later on right so um obviously we as you've both highlighted when we're talking about ESG and implementation implementing solutions for clients we want to focus on the issues that they think are important and we try to understand what our managers are also hearing from their clients that's from our survey that's one way we do that so let's now talk about what our managers reported in the survey specifically our survey data suggests that climate risk Remains the top client concern again this year uh while environmental issues was selected second so perhaps not much of a much daylight between these two uh uh but social issues received a lower tally while diversity remains an important topic in the USA and the UK that's a brief summary of this slide here um what's interesting is that the uh climate risk and environmental issues were consistent that response was pretty consistent around the globe and it was pretty consistent across asset classes and so we definitely want to dig into climate risk here in this conversation then for our audience and Jonathan maybe I can ask you can you give us a sense of what newberg's view of climate risk is uh and what kinds of conversations you're having with your clients on this topic yeah absolutely I mean clearly if you're gonna think across different business models and sectors and geographies you know climate is one of those topics that is potentially financially material to many different businesses geographies and sectors so I'm not surprised by by the the result and it being so so prominent um it's also one that you know many of the um impacts of climate both from a transition and from a physical risk perspective are very obvious and and manifesting themselves um so so we think it is you know very sensible for clients to be asking about it thinking about it you know clearly it's not our role as newberger to to dictate a particular top down um you know view on on the the climate transition it's really our role to have the tools the measurement capabilities the analytical Frameworks to then be able to evaluate how climate from both a physical and a transition uh perspective may impact particular Securities and Investments um and just to give you some examples you know one of the things that you at Russell do you know amazing job with many of your clients on is is thinking about strategic asset allocation um you know but traditionally strategic asset asset allocation will be done using Capital markets assumptions that are based on sort of historical uh returns uh for certain asset classes now if we think forwards climate could actually lead to some of those assumptions about returns for particular regions and asset classes being disrupted um and so one of the things we've done is to model out climate adjusted Capital markets assumptions that can then reshape a strategic asset allocation that can be used as a bit of a sort of stress test for an for a client to be able to say well do I really want that highly levered exposure to very fossil fuel intense sub asset classes or maybe actually once I consider the climate risk embedded in that asset class take for example us high yield debt uh maybe I've got to be a little bit uh more careful about the risk that's embedded there so so that's that's a tool that can be used to help understand the risk that may actually be embedded uh in in an existing process similarly you know we might say that um uh we want to look at a sector and look at a range of different companies in that sector and understand which of them seem to be better positioned for the transition now there's there's obviously lots of of of different ways that one can measure that and so on but the key is to have a way to compare particular companies and then come to a conclusion about you know where your risk adjusted opportunity is most attractive uh from a climate transition perspective um so so that's a capability we've built uh through our Net Zero alignment indicator But ultimately you know this is all about being able to understand the the the way in which uh the climate risk is manifesting itself in in cash flows um and so there will be periods where you know there'll be a dislocation between uh the buzz around a particular sector and the reality of those cash flows right we've seen that with the runup of climate Tech um uh you know whether that's solar offshore uh wind whether that's EVs and then uh the correction that we've seen uh in in the last year or two where some of those uh companies have have found that with higher interest rates and uh perhaps some of the challenges of getting whether it's grid infrastructure in place or adoption by consumers of EV a little bit of a of a correction in valuation so it it has to be ultimately part of an investment decision it's not I'm investing in climate it's I'm making smart Investments understanding how climate might shape secular demand for particular products and services and hence shape free cash flow generation and hence impact security valuation so so our role is is in helping clients to think through all that all the way from strategic asset allocation at the top down to you know which particular EV manufacturer is likely to win out at the micro level and I think that's what's so exciting about this topic is that it does require you know that top down and that bottom up understanding and the right tools and data to be able to then make the right decisions about how to position a portfolio thank you yeah you touched on a couple of really important points and um on climate modeling um maybe some of our audience members dialed into the webinar that we hosted in October on energy transition and there we talked about some of the challenges of that climate modeling and how you roll that into your asset allocation framework right um but that's of course yeah a capability that is really important to be able to to deliver to to to clients um and you also mentioned transition risk and physical risk and I want to um pause on those for just a second because of course if you're used to talking about uh CL in aware investing then those phrases are very familiar but uh just to highlight a little bit for our audience the physical risk um as an example the insurance industry Property and Casualty they're going to be very concerned with physical risk to the assets that they're insuring right um and on the other hand transition risk is often comes from a regulatory standpoint so if you're shipping uh you've got freighter going into Europe and Europe is now tightening the emission standards for for those um those long hole transports then you've got got to retrofit your ships and put more scrubbers on to make sure that you're you're uh under the emissions thresholds in Europe so that's an example of transition risk where regulatory change will affect ultimately the operations and possibly the p&l of a company so uh uh hopefully those terms are are if not familiar before they're familiar now and and thank you Jonathan for introducing them into this conversation uh I want to segue from climate RIS we talking about Net Zero and Net Zero initiatives because of course um some parts uh of of the the global economy and and some parts of the investment Community some clients are are uh keen and have eager have eagerly adopted or have set Net Zero targets uh uh Russell Investments is a net zero asset manager initiative participant or signatory and we do that so we can support clients who have opted into Net Zero aims uh Jonathan can you give us a short explanation of Net Zero uh for those who might not know and then also tell us why you felt why newberger felt that it was important to do this yeah so you can think about Net Zero starting off at the planetary level right ultimately Net Zero means that uh we emit certain amounts of greenhouse gas emissions whether that's from cars or power generation or from eating meat or uh even just walking around every day right and so Net Zero means getting to a point not walking we're not come on we're biking ultimately gets to a point where whatever those emissions are that we're generating um are offset by emissions that are being extracted from the from the air that could be through things like the rainforests and trees that are planted it could be through uh sequestration um but ultimately getting to a balance of any emissions that we're we're generating are being offset so we get to a net level of zero doesn't mean that we're not emitting anything there's going to be some emissions but it's a gap about getting that into balance right now obviously we are not in Balance we emit a lot more uh greenhouse gas emissions uh as a planet than are soaked in from the atmosphere so that's at the global level then obviously you can think about what is a company doing so a company will have emissions that it is uh generating maybe it's a cement company and in the process of cement you emit CO2 uh you probably have to burn coal or some other fuel source that emits uh CO2 so so you have emissions that you're generating as a company so you can get to Net Zero by either reducing the emissions yourself maybe switching from using coal to a less carbon intensive fuel source or by actually sucking CO2 out of the atmosphere to get to a balance and that um could be done through uh capturing it at the cement manufacturing site and putting it underground or it could be maybe by planting trees and using offsets lots of debate about how to do that effectively and then the third way you can think about it is well as an investor I have a portfolio I own many different companies um and so can I get to a point where those underlying companies each of them are getting closer to Net Zero um and potentially ultimately I as the investor might need to offset some remaining emissions um if all of my portfolio companies have not got themselves to Net Zero so uh the planet the company and the portfolio each of them ultimately trying to get to this balance of emissions uh that are emitted versus being soaked up and abated and and to your other point Chris I mean so why why did we think this was important a number of our clients um had made Net Zero commitments and uh if we go back now sort of three four years ago some of them had joined various organizations like um U like the nzero asset owners um Alliance and other initiatives um and so we responded to their encouragement uh to be part of the Nets asset managers initiative and to start managing uh their uh uh strategies um both in some commingle Vehicles like our sustainable and impact funds and separate accounts with Net Zero objectives and we felt that there was a benefit of being part of these broader initiatives in terms of best practice sharing um and being able to have a degree of transparency because one of the things that we ask of the companies we invest in is don't just sort of come out with a a 2050 Target and sort of wait until three CEOs have passed and and then maybe do something about actually trying to achieve it you know show us what you're doing in the interims uh and have a transparency around how that is going um and so I think that's one of the things that's helpful uh about initiatives like the Net Zero asset managers initiative is the transparency in the reporting so any client can see have you committed what assets have being committed how are you implementing it um and the progress that is being achieved 2050 seems a long way off but to your point companies need to start strategizing today and thinking about how they're Capital allocating uh in order to make sure that they're they they stay on Pace with changes in the global economy right make sure that the capital that they're spending doesn't become part of a strand asset base right uh as we shift towards uh cleaner energy sources right so yeah and and as you said these Frameworks help investors help asset owners get started on that because it certainly is a long a long and um at sometimes opaque path but but these Frameworks are certainly helpful in that so um thanks I think that was a a good overview um we've noticed uh and this result shows up in our survey that um uh the global conversation around Net Zero is in different places depending on where you sit in the world and so from our survey 30% of the managers in uh indicate indicated that they were already Net Zero signatories or they were intending to sign up in the uh coming 12 months so uh that's a global survey as we've said interestingly 80% of the respondents domiciled in Europe indicated that they're already signatories and 58% in the UK said so 40% in Japan and 20% in the US so the US is just beginning to embark on this conversation uh but we do see that there's from our survey results good momentum behind uh asset managers who are working to make sure they can support clients in these aims so I want to talk also to you Yoshi about how we translate the concept of Net Zero into actual investment practice what does that mean at the portfolio level even from a bottomup basis can you talk about that in fixed income specifically yeah um so transition to uh low carbon economies happening and and as uh Jonathan has highlighted on the fixed income side it is happening too uh househ so um energy transition Focus strategies are often seen in corporate bond and green Bond strategies um I'm sure you all are heard you all heard of soal green Bond as a refresher um green bonds are the bonds aiming to support energy transition um and proceed green bone late can only apply to finance project that with posi environmental uh impact and the green Bond principles for corporate bond strategy focusing on Nal we saw more of investment grade proedit applying the net concept but recently we are seen increasing number of product offering in net application in this area like high on bond strategy as well the point it wor highlighting is that we talked about client uh interest in performance implication and this is wor highlighting that net B Concept in investment practice can have performance implication especially for shortterm and depending on which Market segment you are applying and jonatham Nation for instance um so uh high yield is uh for us high yield energy makes up uh 12% of the market so many net cedit strategy tend to uh shy away or um screen out those segment and so if you screen out then that depending on how that particular Market performs and that can have a quite um material deviation especially in the short term so um net investment and then also net Z investment also focus on engagement activity I'm sure we're going to talk more about that anding entity to encourage energy transition yeah I think you've highlighted a couple of key points and obviously the sustainable and green Bond markets the issuance uh fluctuates right and and some the the yields will fluctuate but speaking of performance can you find uh attractive Bonds in those markets so um we talk about you're talking about Green gum so yes uh there is a lot of development in fixed income world where labored Bond uh which is used to proceed uh attached to specific project the issuance has exploded over the last few uh several years and then there is creating more Supply um demand imbalance and could um impacting the pricing so there is some pricing aspect but then there is also uh demands and the continue to grow that gives uh spreads even tighter so going back to your question about can you find attractive opportunities um for there is some yeld difference between labeled Bone Green bone in particular and traditional Bond but then uh those bondes tend to uh so far gum has been stayed and even tightening so there is some uh but those premium is we're talking very small so in a very high level and um big um scheme uh performance implication H little bit but for investment grade we haven't seen big that much okay so it sounds like a couple of years ago that was more of a conversation but the difference is tightened is what it sounds like it might still fluctuate based on issuance and supply and man of course that's normal but but uh it sounds like there's a there's a market there if you if you select carefully yes a market is uh expanding so the opportunity Set uh it's growing so diversification uh in the past green bone Market there has been discussion about do can you find enough of diversification fix income world and then it's getting uh more so great thank you um H uh and on on that topic of course uh it the you mentioned energy and in high yield so let's return to that for just a second that some Net Zero strategies might exclude some energy companies in order to to um achieve specific uh uh emissions goals in the portfolio so obviously that's a decision that that we think needs to be taken with care certainly if clients want to implement that we can do that for them I know newberger can do that for them uh but uh it does have implications for exposure for risk return Etc and so that's that's something that we feel um doable but but uh uh with with uh strategy and with guidance yes so expectations yeah right so the expectations are so you make sure that the risk and return uh parameters still fit what the client wants yes okay good I wanted to make sure maybe I just add on that I think you know I think this is one of those things that's really important right is to is to Think Through the implications of a decision like excluding you know whole sectors or uh you know or types of issuers um you know because that may be appropriate for the object but understanding the type of tracking error that brings against a traditional Benchmark um the types of concentrations that that can create in a portfolio and so on and that may be what what the client's um objective is you know um but also in fixed income particularly one of the things that that I've always thought has been quite powerful when we talk about Net Zero is that we're going to need to finance many companies to transition and so you think of a utility company that might have Legacy uh generating capacity related to fossil fuels whether that's in thermal coal or natural gas um but given the cost competitiveness of of solar and uh and and particularly onshore wind in many geographies right but those are relatively High upfront Capital Investments that are required to to be able to make that transition so fixed income is a is a natural asset class to provide uh some of that capital and so engaging around use of proceeds and around making that happen can in some cases and for some clients be you know more approp rate way to achieve the their climate transition objectives than than a purely an exclusionary or or divestment approach um but obviously these are things that um that that each organization kind of comes to and debates themselves yeah right so both of you have now um touched on the the topic of divestment and engagement and you also talked about data we definitely we're gonna get to data watching watching the clock here uh making sure that we can get to that so on the issue of divestment Engagement I I think we're aligned on on this Jonathan and that um we would not advocate for investment or exclusions from a wholesale or a or an A a an a an unnuanced uh uh uh angle uh instead uh the aims for for clients that want to ascribe to Net Zero and the aims for clients that perhaps want to minimize their exposure or their risk from fossil fuels or from climate uh it requires a slightly more uh nuance and active approach right we are Advocates of engag M because if your aim is to uh uh reduce the real world emissions then you want to couple your investment strategy with engagement with companies to encourage them to make sure that their again their Capital allocations their policies and practices Etc are going to be able to adapt to a world that's experiencing climate change so I think I I'm sure we're relying on that I know we are maybe I'll leave that topic as is for now and segue to talking about data since uh since uh uh in the interest of time so um uh so uh actually I think next we make we've got a uh uh lost my place here sorry so we gonna scroll back up a little bit here we're GNA talk about Dei beforehand because this was also cited on that client concerns slide and as I said it came up mainly in the US and in the UK but I know from our standpoints we're seeing a lot more clients asking about Dei and wanting to understand uh what their portfolio looks like and what their opportunities are in this space uh and so let's start with um and we're seeing we're getting some of this data through our ESG survey that's one of the reasons why we do send this survey out to to money managers uh we found I'll share a little bit of those results before I turn it to you we found that um Equity managers are a little bit more transparent than fixed income and then than private or Alternatives managers are but the transparency is increasing we're seeing more uh managers that are willing to share this data uh and our year-over-year results from the survey suggested that there has been an increase in diversity on boards I mean a couple of theories for that right a board membership turns over naturally it's a smaller group perhaps and easier to to um to implement practices that might look for that candidate that brings both diversity of thought perhaps diversity of experience as well uh diversity of lived experience that is so we are seeing what we think is a slight and actual uptick in divers on boards but we didn't see a change uh materially in the other diversity metrics which we uh track which include ownership and Senior leadership among our asset managers and so of course it does reflect the ongoing Challenge and Yosh maybe you can talk about your efforts to promote transparency among the asset managers sure so first ATL investment We Believe well executed diverse SE and prospective in investment decision- making process can generate favorable investment outcome so we introduced uh Dei uh criteria into our manager research evaluation process back in 2016 and uh so the the yeah that transc challeng yeah um yes so um but so how are we um tackling di data transparency there are several Avenues um for one doing our due diligence process with asset managers uh we are increasingly touching on the effort at asset manager and by ass manager evaluator and talking about that topic we believe that can signal to asset manager that about the importance of the data transparency and we know that more managers are including uh their di profile in their standard