End of Week Notes
Time for another Q/A session
Answers to questions from this week’s webinar
A couple weeks ago I answered several questions I had been asked during a couple of on-line presentations and panels. This week I tackle some of the questions posed by the 600 or so attendees of our Sustainable Investing webinar on Wednesday. We only had time to answer four or five during the session itself but many more were submitted.
How should we think about ESG and investing through a racial lens?
I covered this question in a recent article and in a MarketWatch video that came out this week:
How can we help clients articulate their ESG values/priorities?
Many people in the world today have significant sustainability concerns that they bring to the table in their decision-making as consumers, as employees, as citizens, and now — increasingly — as investors. But I think advisors should beware of expecting their clients who bring such concerns to the table to want to go much deeper in articulating the exact nature of their ESG priorities.
I think the best approach for an advisor is to provide clients with a clear view of what sustainable investing means, how it is practiced, what its impact is, and what a sustainable portfolio would look like. In other words, conveying to them, “I understand your sustainability concerns and here is how we can address them in your investments.”
That will either spur questions that help clients better articulate their priorities, or will elicit a “go-ahead” response and a decision to move forward. Keep in mind that everyone who would like to have their sustainability concerns reflected in their investments doesn’t necessarily want to spend a ton of time figuring out all the specifics. That’s why they are seeking financial advice. They are just like most other clients in that regard.
Should we evaluate ESG funds vs. the Morningstar category or vs. other ESG funds within the same Morningstar category? Should ESG funds be evaluated strictly on their performance profile or should criteria be loosened given that we are fulfilling a client’s ESG mandate?
I think it’s reasonable and prudent to evaluate ESG funds alongside otherwise comparable non-ESG options using the appropriate Morningstar category. That gives you a general sense of how the ESG options stack up. If they aren’t competitive with conventional funds, then that may require additional consultation with your client about trade-offs. The good news here is that ESG fund performance has been very competitive across most categories, with more outperformance than underperformance in recent years. Your assumption should be that ESG funds, on the whole, should be performing in line with non-ESG funds that are in the same category.
Next, move to a comparison of ESG funds within the same Morningstar category that considers performance as well as assessment of the specific approach(es) to ESG employed by the funds. Not all ESG funds implement ESG in the same way. Some may focus on ESG risk mitigation and exclusions. Others may seek out ESG-leaders across sectors. And others may pursue more thematic or impact-oriented approaches. Very important these days is an understanding of a fund’s responsible ownership activities — which usually are conducted at the asset-manager level. Some ESG funds may be more comprehensive in their approach than others, using several or all of these techniques.
Some clients may be fine with a relatively light “ESG-aware” approach, while others may prefer a more-detailed approach. I would try to optimize for both performance and comprehensiveness in ESG fund selection. Keep in mind, as well, that an overall portfolio of sustainable funds can include funds with different approaches.
What factors are considered by Morningstar analysts when rating a fund company’s ESG commitment level?
Here’s a link to the methodology, and a video explainer:
What is active ownership beyond voting on shareholder resolutions? What makes strong stewardship? Who does it well? Do you think there will be a way to quantify or roll up different types of dialogues that an asset manager has with companies on ESG issues, in addition to proxy voting?
Sustainable investors should expect that the asset managers running their funds practice responsible ownership, which can be evidenced by their proxy voting record, not only on ESG-related shareholder resolutions, but on other issues like director elections and Say on Pay.
Another key component is direct engagement as shareholders with companies they own about ESG concerns. As the question implies, it is much harder to quantify engagement activities or to assess them qualitatively. Beyond direct engagement, asset managers may also join investor coalitions seeking better ESG outcomes, such as Climate Action 100+, or participate in public policy discussions about ESG issues.
Asset managers should publish full reports on their active ownership activities, including engagements and proxy voting decisions. These reports should include specifics about the nature of the engagements, their outcomes and what action was taken, if any, when the outcome was not what the asset manager was urging. In general, though, these reports need to become more transparent.
My colleague Jackie Cook wrote about climate engagements last year, noting some best practices, here:
Her takeaway:
Engagements are often private and multiyear, spanning more than just one issue For this reason, it can be difficult to judge how effectively asset managers conduct engagements based only on what they claim in their engagement reports. Transparency is an important part of investment stewardship and, in general, engagement reporting does not provide enough insight into climate-engagement measurement and outcomes.
Still more questions on my list, but it’s almost time to start the holiday weekend, so I’ll save those for later. Let me know if you have any questions about sustainable investing you’d like for me to answer!
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On the Exxon vote
A couple weeks ago, I noted that the impact of increased shareholder support for ESG-related proposals on companies has the potential to be profound. Even moreso when it’s not an advisory shareholder resolution that’s being voted on, but Board of Director elections, as was the case at ExxonMobil’s annual general meeting this week when two directors were elected who were nominated by activist climate-concerned shareholders.
Here is BlackRock’s statement on its Exxon votes:
Investors are saying in greater numbers than ever before that they want public companies to do more on climate and do way more to help dismantle systemic racism.
In effect, they’re saying to companies: We want you to care not only about profits, but about people, planet AND profits. It’s the same thing other stakeholders are saying — customers, employees, communities, and policymakers. It’s helping put capitalism on a more sustainable path.
Happy Memorial Day, everyone!
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