End of Week Notes
ESG Integration at the Morningstar Investment Conference
For the 2,200 attendees at this week’s Morningstar Investment Conference in Chicago, sustainable investing was a hard topic to miss.
We started out on Monday with a packed room for our Research Showcase session entitled “New Tools for Sustainable Investing” during which we discussed the Morningstar Sustainability Rating, the Morningstar Low-Carbon Risk Scores, and our latest initiative on fund intentionality.
Setting the stage for the session and conference, I discussed how to define the field. A number of terms are used to describe it: sustainable, ESG, impact, responsible, and so on. My advice for advisors: Pick a term that resonates with you and your clients, then develop an elevator pitch describing what you mean by it that can help you start the conversation.
I prefer the term “sustainable investing.” It connects with the broader concept of sustainability, which I think is what’s driving so much interest in this type of investing. I define it as follows: Sustainable investing is about incorporating environmental, social, and corporate governance (ESG) considerations into investment decisions designed to help generate long-term, competitive financial returns along with positive societal impact.
After the Research Showcase, Morningstar CEO Kunal Kapoor discussed ESG in his opening remarks from the main stage, calling it part of investing’s “new normal.”
Now I know that the elephant in the room is that many of you are either not convinced that ESG is real or you’re not sure how to impactfully integrate it into your practice. That’s just the reality. I hear that from many of you when I go out and talk to you. I want you to know that you don’t have to choose between returns and sustainability.
Also on the main stage, at lunch on Wednesday, Ariel Investments President Mellody Hobson delivered an impassioned argument on the benefits of diverse decision-making groups:
We think that diversity is a competitive advantage for Ariel, and it’s shocking to us that other people don’t see it. We really want to challenge each other and make sure we are looking at every conceivable angle and idea. The only way you can do that is by having people come with different points of view.
After lunch, in the Exhibit Hall, Jensen Investment Management sponsored a standing room-only talk on how it considers ESG factors in the Jensen Quality Growth Fund. This fund has had a five-globe sustainability rating since day one even though it is not an “intentional” fund that includes ESG in its prospectus.
The connection is quality. Jensen invests in companies with strong competitive advantages and continued growth potential. Jensen says that it began thinking about ESG in 2014:
We explored ESG to better understand why our strategy scored well and determined that much of our Fund research process implicitly considers ESG factors. We saw an opportunity to further consider ESG as an enhancement of our core strategy and took steps to integrate ESG principles in our investment process.
I think we’re likely to see more “ESG-aware” funds like Jensen Quality Growth. That’s a good thing. Many investors say they are interested in investing with a sustainability lens, but that doesn’t mean all of them want a full-fledged outcome-oriented sustainable portfolio. They may simply think it’s a good idea for their asset manager to be considering ESG in the investment process. Some investors and some advisors will find ESG-aware investing to be an appropriate solution. It’s a good thing to have a range of approaches available to meet investor demand.
Next up on the main stage, for Tuesday afternoon’s keynote, GMO’s Jeremy Grantham. His topic: climate change and the need for capitalism to adjust to the realities of addressing it.
We deforest the land, we degrade our soils, we pollute and overuse our water and we treat air like an open sewer, and we do it all off the balance sheet.
Anything that happens to a corporation over 25 years out doesn’t exist for them, therefore, as I like to say, grandchildren have no value to them.
Grantham urged investors to do more than just advocate for green causes. Divesting one’s portfolio of oil and chemical companies, he argued, is unlikely to harm future returns much and may well help them. Investors can benefit from focusing on companies positioned to profit from sustainable technologies and renewable energy, and from pressuring companies they own to be more sustainable.
My colleague Alec Lucas summed up Grantham’s speech as follows:
Investors who realign their portfolios along these lines will both be able to leave their grandchildren a planet they can live in and some money they can live on.
That’s a pretty good definition of what sustainable investing is all about.
Finally, our Wednesday breakout session titled, “Including Sustainability in Your Practice,” with Michael Jantzi, CEO of Sustainalytics and Kristina Van Liew, a Morgan Stanley/ Greystone advisor.
Jantzi noted that while large asset owners, like sovereign wealth funds and pension funds, led the initial growth in ESG, wealth management clients are starting to drive the market in the U.S.
“Looking at ESG issues is just smart investing. It should be part of your process, but investors are also now more interested in the impact that their portfolio is having on the societies in which they live and on the environment.”
Van Liew, who runs a Chicago-based firm with more than $7 billion in assets under management, believes sustainable impact investing is the single biggest growth opportunity for advisors today:
“They are seeking a different conversation with their advisor, and it has created an incredibly attractive opportunity for advisors who have pivoted to this area because you sound very, very different when you walk into the room.
“A millennial thinks a lot about the world and making a difference. It affects their decisions about who they work for, it affects what they eat, it affects where they shop. To think that it’s not going to affect their selection of an investment advisor is just naïve.”
