MASTERCLASS: ESG - December 2019

ESG refers to the range of environmental, social and governance criteria on which companies are measured. As investors actively seek companies due to these attributes, the trend towards ESG investment is expected to persist in the new decade across a wide range of asset classes.

In this panel discussion, 4 experts take a look at the evolution of ESG and finance trends across impact themes:

  • Jeff Gitterman, Co-founding Partner, Gitterman Wealth Management
  • Melanie Adams, VP & Head, Corporate Governance & Responsible Investment, RBC Global Asset Management
  • Jessica Ground, Global Head of Stewardship, Schroders
  • Wendy Pan, Director, Segal Marco

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  • 59 mins 13 secs

Remy Blaire: Welcome to Asset TV. This is your ESG Masterclass. As we head into a new decade there's increased ESG integration and security selection and in portfolios. And this masterclass, we'll take a look at the evolution of ESG and finance trends that are enabling investors to deploy capital across impact themes. Today I'm joined by Melanie Adams, VP and Head of Corporate Governance and Responsible Investment at RBC Global Asset Management. Jessica Ground Global Head of Stewardship at Schroders. Jeff Gitterman, Co-Founding Partner at Gitterman Wealth Management, and Wendy Pan Director at Segal Marco Advisors. Thank you so much for joining me today. First and foremost, we all know that interest in ESG has been growing exponentially, especially as we head into a new decade. So, Melanie starting out with you, let's start out with the basics. When it comes to ESG I think it's so important to start out with working definitions. We know that when it comes to ESG integration, there are differences with some of the acronyms as well as terms that are used. So, can you clarify the way that these terms are being used right now?

Melanie Adams: Yes, certainly. And so responsible investment when we think of that we think of a broad term. That means incorporating environmental, social and governance factors into the investment process. But there are different methods for doing this. And so, one method of doing this is ESG integration. This is when investors look at these factors. They look at how companies managing these factors and make a determination whether or not this has been factored into the share price as part of the investment decision. Another approach is socially responsible investment. This is sometimes the acronym is SRI. This is when we're actually screening out companies or sectors based on values. Sometimes it's called ethical investing. So, for example, some investors might like to screen out tobacco companies this would be in SRI strategy.

 And then finally we have impact. And when we're talking about impact investment, we're looking at both the financial return and we're looking at measuring an environmental or a social factor as well. So, for example, here, we could be talking about low income housing. We're measuring how, for example, how many families are being housed through a certain impact project.

Remy Blaire: And Melanie indeed, as we head into a new decade, we know that people are becoming more conscious of these ESG criteria. Now, Jessica, moving on to you when it comes to investment firms that follow ESG criteria to set priorities. It's important that performance also comes into play. So how can managers use the selection of ESG factors to help identify these companies?

Jessica Ground: One of the easiest ways of thinking about it is what we're trying to do is take the issues that you might be reading about in the front page of your newspaper, something like a sugar tax coming into play or some of this debate about the green new deal. And thinking about what it means in business terms as well. So, a lot of the times, it's just about translating the real issues of the environment that companies are operating, and the headwinds that they're facing. And thinking about what really is going to be the financial impact of that. So, one of the things that I find is so wonderful about ESG is that a lot of the issues that we're looking at are the future challenges that we're going to face. And one of the things that we've built has been away looking at academic research and actually thinking about putting $1 amount on some of the costs that are going to come from emissions regulation, but also from things like living wages and higher minimum wages coming.

 And then thinking about what the real world impacts on companies are. So, it's very easy to take that environmental and social is quite vague. Really helpful just to think about it. What is happening? How is our world changing? And how is that impacting companies? And you can see really quickly that some of these impacts are happening and creating headwinds faster than ever before. A great example of how we've seen is what's happened to the tech industry, where all sudden they've seen a lot more regulation on things like social media use where people come so aware of some of the negative impacts from that.

Remy Blaire: And Wendy moving down the line, we know that ESG is another way to invest with a conscience, yet it is different from SRI investing. So, could you tell us about the difference and your assessment of the landscape?

Wendy Pan: Definitely. As Melanie already mentioned, SRI is more about negative screening. So, taking out the things you don't want from the portfolio, while ESG is more focusing on looking at factors that could impact your return in a way. So, I definitely see a paradigm shifts from all the managers I met with from SRI to ESG. And some evidence there is I think what's driving that is really data. In the past, you could just purchase data from ESG data providers, and then screen now the companies you don't want. However, right now, some of the most sophisticated asset owners are able to do that in house themselves. So, as investment managers and investment consultants, we have to provide services that moves to the next level. And that is to do more fundamental analysis and do more due diligence on what the ESG factors can help investments. And I think going forward, we need to do more work about that. And we need to kind of invest in the fundamental analysts and also data structure to make sure this is done appropriately.

Remy Blaire: And although the viewing audience is made up of financial professionals, we know that many advisors out there might be getting questions from their clients about all the differences. So, I think this is a wonderful place to start. And Jeff, I do want to get to you and ask about ESG investing in terms of returns as well as values. And I recognize that SDG pin right over there. And that's another acronym. So, can you explain that as well.

Jeff Gitterman: So the SDG pin is the representation of the sustainable development goals that 193 countries in 2015 agreed upon as this 15 year goal for achieving more harmony and well-being on the planet in general. So, it addresses areas like diversity and poverty and food shortage and climate risk and all the issues that are important for us to really have a viable system that we're operating in. And those targets are set for 2030. And they're reviewed annually. A lot of companies that are doing impact today are trying to tie their data back to the sustainable development goals because right now, the numbers say that there's about a two and a half trillion dollar a year shortfall in capital needed to achieve the sustainable development goals by 2030. And well, that's a scary thought. It's also a huge opportunity for the right businesses that will come to the market with solutions.

And when you think about ESG, versus the SDGs, it's the difference between really analyzing the data of a company and how they might be either contributing to or benefiting the problems that we're dealing with the SDGs are the framework of the problems. So, it's a good idea to kind of look at the two of them together and see how one lens can actually fit into the other lens. And when we talk about performance, there's 100 articles out there arguing whether there's alpha in ESG or not. And I've been very vocal about the fact that the way that you look at that is suspect by data we said, "Figures always lie and liars always figure." But you can pull data sets in hindsight that benefit your argument or help your argument or hurt your argument.

  And to us, there really isn't alpha, specifically in ESG. I think there's a great ability to avoid tail risk and hazards in companies that might not be visible through the more traditional data sets. And ultimately, over the very long term, if you're looking specifically company by company and using ESG data to analyze that company, there might be benefit to the manager who's operating the fund. But ultimately, if ESG fund is underperforming, it's the managers fault. It's not the ESG data's fault. And we can't keep harping on the idea that because one benchmark index beat their traditional index because they added some ESG data to it that ESG as alpha or doesn't add alpha, that's a pointless argument. ESG is really beneficial in analyzing companies. And it's another richer data set that makes your analysis of a company better and that's really the bottom line.

Remy Blaire: I think this is a great time to take a look at the evolution of ESG. So, Melanie, I'll throw it back to you, what are some of the investment shifts that you've witnessed? And why do you think investors are using this integration?

Melanie Adams: Well, I think what we've seen over time is that ESG, integration response investment has been around for a very long time. But it used to be more about socially responsible investing. When we would screen out particular sectors or companies. But now what we're seeing is increasingly a shift in looking at ESG integration. So, assessing the ESG factors and how they might play into the investment decision. And as Jeff just mentioned, this is part of the richer data set that's available in making an investment decision. And I think that's what's motivating investors in this regard. So, for example, if you think about a company who treat and how the company treats their particular employees, that's a really important piece of data in retention, and how the company might do over the long run. So, this data can all help make better investment decisions.

Remy Blaire: And Jessica, moving on to you when it comes to value investing. Is it just the ESG that matters? Or what about the S and the G?

Jessica Ground: So great question. Because I think sometimes people find it easier to focus on environmental factors. And definitely they become quite popular at the moment and are front and center. And people tell us they struggle quite a lot with what does a social mean. I think when you break it down, it's how well people are treating their customers, how well they're treating their workforce. Whether their relationship like with the regulators, as well as with their relationships with wider society. And when it's come to our value investing teams, they found it incredibly helpful and looking at the strength of those relationships we're helping them avoid value traps. And it goes to what Jeff was already talking about, about this richer data set. So, when they're looking at value opportunities, perhaps current retailer at the moment, they will absolutely be looking at how they're paying their workforce. Where do they think that goes in the long run? And then what do the margins mean for that?

So, a lot of people think that ESG can just be a proxy for quality. And it's helping you about finding the best companies. But what we have found it is equally applicable for quantum investing. And it's also really helpful for value investing. And as it's been said, it's about building a better toolkits, and making sure that you're looking just beyond what a company does to how it's doing. And that's how you make great investment decisions.

Remy Blaire: And Jessica, before I move away from you, you did bring up an important observation and it does seem as though the S and the G seems to be harder to get a grasp on, so why do you think that is?

Jessica Ground: I would definitely disagree because a lot of what we all started it was looking at the G was looking at how well what was the governance and what was the oversight at a lot of our companies. And I think we would all agree that companies with really strong governance practices are actually managing those environmental and social risks well, the right risks, emerging risks, like cyber risks are making it up to the board. But of course, that can be much harder to measure. And now we're starting to get ESG data so a lot more data in the environmental front. And I think perhaps sometimes some of the social governance data hasn't caught up. But I really would advocate a holistic approach. And that's one of the great things about ESG is that putting companies into that context and looking at every aspect of how they are doing. So, don't ignore the S and the G or else you'll be ignoring some more important things.

Remy Blaire: And Jessica, we will be taking a closer look at cyber security and also all of us will be addressing some of the myths as well as misconceptions surrounding ESP later on in this master class. Now, Wendy move it on to you when you're assessing asset managers, how have their approaches to ESG implementations evolved?

Wendy Pan: Definitely. I think asset managers have been moving from product to process to philosophy. So, in the past, we see a lot of asset managers they offer ESG as a product, meaning I have this ESP product for this set of investors, and I have all the other product for other set of investors. And the team's offering these products don't necessarily talk to each other. But now we see more and more asset managers start treating ESG as part of their investment process. So, no matter if you're on the investment team offering ESG product or if you're offering any type of investment product, you have to do ESG analysis. I will give an example in private markets. So, one of our real estate manager no matter what product, what property, what projects they're doing, they always assess the environmental footprint of their properties.

 They will look at the energy consumption, waste consumption, water consumption of all of their properties. And they also install smart meters in the home for energy and for water not we help them kind of save cost, it also helps them detect where the leakages are going to be. Because certain homes have leakages if you don't install this devices, you wouldn't find out. And then the cost to have electrician or water pipe workers on site will be $1,000 every time you call them. So, through that these manager actually see the cost saving and advance in their profits and return the profits to investors. And the last stage is philosophy. And I think that's probably the hardest one to get to. Because there are all sorts of managers who really from top down to organization buy into the ESG the kind of factor some people will say argument but buy in to the next trend basically in investing.

And they will do macro research, they will train all their investment teams and to have people like in legal and regulatory and compliance to check on if the investment teams do the work. And we think that's the final stage.

Remy Blaire: I think it's helpful to have that observation and those insights as well, Wendy. And Jeff, moving on to you, I know that you refer to ESG as the GPS of investing. So that's another acronym I think all of us know. But can you explain that for us?

Jeff Gitterman: We try to explain to advisors that ESG is a big data revolution before it's anything else. And the best comparison or metaphor or analogy that we could come up with was a GPS. So, it used to be 25 years ago that if you took a road trip, you pulled this thing out of the glove compartment called a map. You could barely see the road in front of you because you were trying to look at this giant thing and find the right route. But it was missing a lot of relevant information. It didn't have traffic, it didn't have road hazards, road closures. It didn't tell you about cops hiding in the bushes. And now today, you jump in your car and you have this GPS that tells you all of these additional factors about the trip that you're about to take. And to us, that's the best comparison of what ESG is. It didn't throw out the old map, you're still looking at your 10k’s and your quarterly reports and your financial data. That's all baked into the map and the GPS.

But now you're getting live feed data. And the best way to explain that is to think about Pacific Gas and Electric. Pacific Gas and Electric had a really rich amount of data as a company that you can look at. And if you just scored them on how well they were converting people to alternative energy, Pacific Gas and Electric got a really high score that was included in just about every passive ESG fund that you could find. But if you really read the data and looked into it, you would find that Pacific Gas and Electric was self-reporting that their risk of fire to lines because of increased droughts in California, was off the charts. There was no other utility company in the country that had its much risk baked in.

That was all in the ESG data, you didn't find that in the financial reports you didn't find that in the 10K, and an active manager who was reading that sidestep Pacific Gas and Electric and all the problems with it. And just as a last factor in 1975 85% of the S&P 500 market value was based on tangible assets on the balance sheet that you can read in financial statements. Today, that's reversed. Today 85% of the S&P 500 its market value is based on intangible non-financial disclosure items that ESG gives you a lens into. So if I told you that 85% of the data you needed to make smart decisions about a company was missing in your current reporting, but that there was another data set that you can look at, I find it hard to justify that you can be a fiduciary and not look at that data set.

And we have examples even today we're peloton is down 10% in stock price because they made a add that didn't sit well with our consumer. So, when you think about what's driving the market today, it's much more non-financial disclosure items than financial disclosure items. And ESG helps give us a lens into that.

Remy Blaire: I think that analogy comparing the GPS to it old school map is a good way to wrap up this section on the evolution of ESG and move on to some of the risks and rewards that are in the space. Now, Melanie, do you think the fact that there are different strategies and approaches when it comes to this criteria, do you think it creates opportunities or challenges?

Melanie Adams: Well, I think first of all, it's really important that there are some baseline consistencies across. One is that there are, you can see this very much in the G and the governance. There are some baseline corporate governance principles that I think all investors adhere to we all like, for example, one vote per share, or certain level of board independence. These are pretty basic corporate governance principles. We also need consistent data across industries across sectors, we need to be able to compare companies against their peers. But there is some room to apply that data differently across different strategies across different regions and sectors. For example, we know that our emerging markets team at RBC Global Asset Management is very concerned with supply chain risk, because that's a particular risk in that market that is very relevant to them.

We also know that fixed income, for example, is different than equities. And we're looking at how company is assessing its ESG risks, and what its ability to repay its debt will be, so this is a little bit different. And, that's okay. And the difference is in the application actually allow for a bit of choice and they also allow for customization of different investment strategies for consumers. So, for example, client may prefer to have ESG integration but may also want to screen out certain sectors or certain industries and having that ability to do that, and to customize that for clients is very important.

Remy Blaire: And Jessica, moving on to you. Why is ESG integration not just about managing downside controversy? And what insight do you think it can bring when it comes to future growth?

Jessica Ground: That's a great question because you're building on this analogy that we've just had. This is a richer data set, but it's not only a risk data set. So, let's think about this issue around intangibles, which I absolutely agree with is more and more of the value of the investment markets. And it's rare these days to meet a company that doesn't say something like our people are our greatest assets. When we've been looking at a number of semiconductor companies, one of the things that we've consciously looked at has been workforce, how quickly the workforce is turning over, how much is being invested in workforce training. And we've definitely been able to identify some longer term winners of those companies that aren't cycling through loads of employees that are investing in their employees. And then as a result, they're being able to deliver greater and greater levels of innovation.

So, the assets at a company's disposal, as we said, are increasingly intangible ones. And these ESG data sets are great way of bringing rigor to this. So that when a company comes in, and I've yet to meet a management team that doesn't think their workforce is really happy and all that you can have an evidence based way of challenging it and then really picking those winners.

Remy Blaire: And Wendy moving on to you when it comes to this risk and reward, how is ESG as well sustainable investing applicable in private equity as well as real assets investing?

Wendy Pan: Definitely, I think private equity and real assets has a little bit of difference in public markets. For one, they are long term hold. So, you have to do due diligence and when get into these funds, you have to hold them for 10, sometimes 15-years. So, when you do due diligence, why wouldn't you want all the information about these companies since you're going to be a long term holder? So, I think that naturally fits with the long termism that ESG and sustainable investing brings. And second is private equity has this unique opportunity to do a lot of value creation, and they could do it very early on without too many owners involved. So, they could execute certain plans effectively and very quickly. So, a lot of ESG plans could be part of this value creation process. And that will generate the value for the shareholders.

Last definitely, but not least is in private markets you have to prepare these companies ultimately for public listing. So if these companies go IPO, and like, Melanie and Jessica will be sitting across the table and ask them questions about the governance structure or ask them questions about environmental social metrics, private equity firms and investors have to prepare companies for eventually that day when you're sitting across from the public shareholders and broader shareholder base to have to explain what's happening. So, I think it's very applicable in the private space.

Remy Blaire: I think you brought up a lot of distinctions that are very helpful to understand. Now, Jeff, when it comes to advisors out there, how can they differentiate themselves when it comes to growing assets as well as client portfolios?

Jeff Gitterman: All the studies that are being done today, whether it's JP Morgan, which does a great signals or trends report is showing that the customers interest or the end clients interest is in the mid 80% to 90%. That they want to see their values and concerns addressed in their portfolios. When you look at the advisor market only 6% of the advisor market is really actively engaged in doing ESG or sustainable investing. So, if you look at it just from a business opportunity for a second, would you rather be swimming in the pool where 94% of advisors are competing with you and with a limited client base? Or would you want to be swimming in a pool where there's only 6% of advisors with a huge client base that's searching for demand and interest. So, we see advisors really as the stumbling block, we like to look at an hourglass image and at the top of the hourglass is all this product proliferation that is coming to market. Some of it good, some of it not so good, but still tons of new product more fun launches and 18 and 19 than any prior years combined.

At the bottom of the hour glasses all the client that man that wants to see their values more represented and wants to see ESG integration in their portfolios. And that bottleneck in the middle of the hourglass is the advisor community. So, they can really differentiate themselves at a time where differentiation is hard, competing with ROBO Advisors and accountants and attorneys or all investing Investors at this stage of the game. And then when you think about the great transfer of wealth, whatever number you want to take, I've seen from $15 trillion to $70 trillion in assets are going to transfer intergenerationally. Right now, the capture rate of advisors when the second spouse of the clients dies and the transfer to children, that capture rate is only around 2%.

So, 98% of those assets, either they get spent or they get transferred to another advisor. And if the advisors want to engage with that next generation, they really have to adopt an ESG strategy, bring in a younger advisor that can lead that theme at the firm. And they'll see the great increase in the capture of those intergenerational transfers.

Remy Blaire: I think you brought up generational wealth transfer, which is something that advisors are really paying attention to. But when you mentioned that bottleneck that's happening, what do you think can happen from an educational perspective, to resolve that?

Jeff Gitterman: Well, you can have that master class at asset TV that helps explain the nuances of it. I think the problem is a lot of the advisors in the marketplace today are feeding off of an 11-year bull market. So, they've got pent up huge capital gains in their portfolios. The idea of converting these strategies to new funds and new portfolios is difficult. They're also the bulk of this community is at or near retirement. And the idea of learning something new taking a risk, a lot of them got burned and SRI by not holding tobacco companies and oil and tobacco and oil did well. So, they really need a complete reeducation about the marketplace. But they also need to understand the risk. Those advisors will come to the market and we get calls from them when that $5 million client is walking out the door because they're not dealing ESG or the new prospect that they just met asked about their ESD diligence process. That's when you'll see the engagement kick in.

So, the more we could teach consumers to ask their advisor about the ESG, the quicker we'll see this transition and that bottleneck open up.

Remy Blaire: And as you mentioned, we are in extensive bull market. And as we head into the next year, it is also a new decade, so many people will be taking a closer look at what happens from a fundamental perspective. But when it comes to the ESG outlook, Melanie, can you give us more definition regarding engagement versus divestment? And also, tell me whether you think what method is more appropriate.

Melanie Adams: Certainly, sometimes in the responsible investment in this area, we hear the term divestment and it's certainly one thing you can do if you don't believe in a company, you don't believe in how it's managing its risks, you could choose to divest from that company. However, if you think as an investor that the company does have a strong business and that management, is appropriate and it's in place but perhaps you disagree with how management is thinking about a particular environmental social governance factor. That's an opportunity for engagement. And you can engage with the company, you can hear how the company's thinking about that particular risk, and you can express your view. And so, at RBC Global Asset Management our view is generally when we do believe in a company, we won't divest over its management of an ESG factor. But what we'll do is we'll have a seat at the table with management and we'll sit down, we'll discuss how they're thinking about that particular risk. And we will let our views be known as well and so that we can have a better understanding of how they're thinking about this.

Remy Blaire: And Jessica moving on to you, why do you think it's so important to fully integrate all the factors environmental, social, and governance analysis across all fund assets?

Jessica Ground: Well, it's like, if you found GPS, do you just use it on long trips or you use it on short trips, are you using it when you're planning a trip, and because of the data set can really help you make better investment decisions. You just start to put it into everything that you're doing. And what's so fascinating that we're seeing is, let's be really clear this started with equities. There were fewer fixed income products. But when we're thinking about downside protection, additional data for that it makes complete sense. We've touched on the private asset space, which is very popular right now people hunting for yield. But because these are less liquid, then that due diligence around all aspects of a company's performance is so important.

 So, what we're kind of recommending it traders is that people definitely do a full portfolio MOT. And sort of realize where all their asset classes are on the spectrum that we've already talked about, and just making sure that everything either, reflects the kind of best possible tools that there are there when it comes to integrating ESG in that asset class. Or also more fully reflects their values or where they want to be focused on. And don't be fooled. It's definitely a portfolio tool rather than just about one kind of sustainable equity fund.

Remy Blaire: And Wendy, moving on to you when it comes to innovation, what do you see on the horizon?

Wendy Pan: Yeah, I think there are two things we're doing on ESG side, I think it will be worth watching for. One as Jessica and Jeff already mentioned, it is the data innovation. How can we proliferate and use more data in investment process? It's already hard on the public side on the private side when a lot of companies are not yet sharing the data with investors, it's more challenging. So, firms that could solve that problem for investors will thrive. Another thing is ESG has to be tied to innovation because in private markets, ultimately in venture capital, private equity, in some format private debt, we have to fund entrepreneurs. And these entrepreneurs will be... We're about to turn to next decade. These entrepreneurs will be representing what the 21st Century, what will bring to us. These entrepreneurs are the names that everyday people in the millennials now recognize.

And last century we have another crowd of entrepreneurs and their business and now mature and some of them are doing very well and thriving and some of them of gradually phasing out of the picture. So, it's our job to as investors pick out which are the companies for the future and which are the companies of the past.

Remy Blaire: And, Jeff, do you think that with the right screening as well as portfolio construction and other tools that advisors out there can provide returns with minimum volatility?

Jeff Gitterman: Volatility will always be derived by the market segment that we're going through. I don't think that you can look at ESG and make promises with the ESG data about reducing volatility risk in a portfolio. What you can do is, you can reduce sustainability risk in a portfolio. So, you can invest in companies that long-term is going to be left standing once we deal with all the issues in the world that are cropping up, and as millennials start voting with their money more and more. So, it's critical that you create portfolios with this data set to get long-term equity growth in your portfolio. But I would not counsel anyone on the idea that adding ESG data will reduce short term volatility. Short term volatility always washes out all boats in a very democratic way. But in the long term ESG data, I think, is right now the most relevant data set that we have to the add into portfolios for long term risk and sustainability of your portfolios.

Remy Blaire: And very briefly, Melanie I want to touch on cyber security. We mentioned it earlier in the segment. And while we're talking about innovation, as well as data and millennials, cyber security is a good place to go right now. So why is it a top ESG concern for investors?

Melanie Adams: Well, we actually, just to reiterate your point about it being a top concern, we did release recently our fourth annual institutional investor survey and on a global basis, this was the ESG factor that was identified as being of most concern for investors. And I think the reason why is that cyber security is an emerging risk, where you can see profound financial and reputational impacts on a company. We've seen a number of high profile cyber security breaches in the past several years where, companies have lost sensitive information, whether it's strategic information, client information or significant reputational risk when client information is lost. Financial information for a company we've seen significant fines levied against companies for this. And so, this is why it is incredibly important factor right now. It's also very highly technical, so it's sometimes difficult for investors to understand and sort out what a company is doing to mitigate its risks in this area.

Remy Blaire: And what do you think needs to happen for a better understanding of cyber security and what can happen from a risk mitigation perspective?

Melanie Adams: What we look at, when we're looking at a company and assessing how they are thinking about their cyber security risks, we will look at whether they have the appropriate level of expertise on the board and at senior levels of management. And then we will also look at the company as well as engaging with company, but we also look at what policies they have out there and whether they're robust in dealing with this. And this is particularly true for companies where this is a real material risk. So, for example, financial institutions that store a lot of sensitive client data. This is particularly important there.

Remy Blaire: And now that we've covered cyber security, I want to quickly touch upon our climate risk as well as climate change. Now, Melanie going back to you climate change does bring up a host of reactions and does require risk management, but how are investors looking at climate change related risks and opportunities when it comes to portfolios?

Melanie Adams: But when we think about climate change, there are a couple of different risks that we need to be mindful of: 1) are the physical risks, and these happen if we're doing nothing about climate change, and we're letting the global temperature increase, then we're going to see physical risks. This will take place in the form of wildfire risk, flooding risk. And so, it's important to know, at a portfolio level, what companies and securities could be more vulnerable there. And as an example of how you could look at this, we have done a geospatial analysis on our mortgage portfolio to look at which particular properties are at risk for flooding or wildfire. And on the other end of the spectrum, you've got transition risks.

And what this means is that as a world as global citizens, we all take measures to keep the temperature under two degree warming scenario. But this means that we're looking at regulatory initiatives. Governments regulators will step in. And there might be policy initiatives, there might be carbon pricing. And so, as investors, what we're looking at here are how companies be impacted by this particular if we're on a two degree scenario, what does that look like for the portfolio?

Remy Blaire: And before we move away from this topic, Jeff, in a nutshell, can you tell me how climate risk relates to investment risk?

Jeff Gitterman: It's across the spectrum. So, when you're looking as a bondholder, for instance, and you've got a 20-year commercial bond on a property in South Miami right along the waterfront, that's a real different position to be in that even an equity holder. Because what happens in the reinsurance world is reinsurance renews regularly usually two to three year periods where bondholders in for 20-years. So, we've talked to bond houses recently who have literally come out and said that there will be abandonment strategies where there will be properties, especially along the coast where they will understand that the minute the reinsurer walks away from that property, the bondholders stock and that property becomes worthless. The equity holder might get to jump out quickly, but the bondholders in it for the long term. So that risk is huge.

And then when you look at real estate portfolios, there are companies out there for 27 was recently acquired by Moody's because they're looking at flood risk across the entire real estate spectrum of the globe and 40 square foot measurements. So, you can look at to read portfolios that have had the same past performance, but one read portfolio has 70% exposure to flood risk and hurricanes and the other read only has a 35% exposure to flood risk. If you're sensible about the risk of climate change that are coming, you would opt for the portfolio that has 35% risk to flood. So, in all areas that we look at and physical transition risk in the US at least will be a factor before the economic transition of climate change.

Because we also have the whole regulatory process which in Europe is probably 10-years ahead and we are today. But before we get the political will at America to actually act on carbon taxes and carbon pricing, we're going to see more and more physical transition risk, like Pacific Gas and Electric going bankrupt. Like flooding in Houston that no one expected where there were millions of dollars in uncovered damages. So, someone wise told me the other day that the two words you need to think about most in climate change is, floods and droughts. And at the end of the day, we're going to see more of both.

Remy Blaire: And so far, I think we've covered a lot of ground in this ESG masterclass, I want to move on to the section which covers myths and misconceptions. We know that there are plenty. So, starting with you, Melanie and moving down the line, are there any myths or misconceptions that you want to address and dispel.

Melanie Adams: Yeah, I think one of the most important myths out there is that you are sacrificing returns when you're looking at responsible investment. And as we've discussed today, if you're looking at a richer data set, it doesn't make sense that you're sacrificing returns. What you're doing is you're investing with more information. So, you actually should be making better investment decisions based on that.

Remy Blaire: And, Jessica, what about you?

Jessica Ground: I think one of the biggest miss is that ongoing to be able to deliver your portfolio of perfect companies. The fact is, they do not exist, but hopefully, through using this much better data set that I can have a much more forward looking understanding of which companies are going to survive under something like climate change and which companies are going to die, quite frankly. And then the other thing which we haven't spoken very much about, which is so important is the power of engagement and the power of encouraging companies to change. So, interestingly, we've talked a lot about Pacific Electric, we had already identified that as one of the top 5% companies globally, there was supposed to physical risk well before the fires. And it started at engagement with them to get more big data and didn't have exposure to them as a result.

So, there's always going to be risk in portfolios, we can't eliminate that. But I hope is that through ESG data and ESG engagement and pushing companies to improve that, over those longer terms that we can really deliver, in that everybody's very long term horizon, the kind of assets that you need.

Remy Blaire: And Wendy, what about you?

Wendy Pan: I think one of the biggest misconception is because the ESG framework ask a lot of companies to serve stakeholders, that we don't serve shareholders anymore. A lot of people are saying, well, because you're looking at environment, you're looking at society, you're looking at employees, are you ultimately serving the shareholders? And the truth is yes. Because if we look back to the last financial crisis, like our industry, exist on the pillar of trust, society have to trust us. And finance has to have a positive function for society to society for our whole industry to exist. And I think ESG is a way to bridge that. Because since the last financial crisis, we've asked the average person in America do you trust finance? Do you trust finance in the industry is positive for society is doing the right thing? And not all of them will say yes, and I think ESG is really a bridge to think about how companies can service stakeholders and at the end services shareholders.

Remy Blaire: Jeff, what about you?

Jeff Gitterman: So not necessarily a myth, but I think a misperception is that we had just talked about ESG is the GPS of investing. And that's this rich data set that can take any route, but it wants to take the best route. What it doesn't do is it's not by default exclusionary. So, the difference between ESG as a standalone as a rich data set an SRI or responsible investing. SRI would be like the route preferences that each individual plugs into their GPS. So, one person might want to take those toll roads, one might want to take scenic route, one might want the fastest route. And the same way some investors might want no firearms in their portfolio. Some might want no tobacco, that data is layered on top of ESG and not to be confused with ESG.

And too many people that assess the alpha or the non-alpha of ESG, pick on SRI funds as that and if you add tons of SRI restrictions, if you had no guns, no nuclear, no tobacco, no fossil fuel, you're going to absolutely have an impact on your trip. But just like in the GPS, when someone picks the scenic route, they know it might take a little bit longer to get there, but it's a value that they want to express. Same thing in investment. So ESG is one thing. It's the base. It's the data. It's the richness of more information about all companies, fossil fuel, tobacco, everything. SRI responsible investing is the second phase where a person can institute their personal values and their portfolio, but they're not the same thing.

Remy Blaire: Well, I think that highlights a lot of the different perspectives we have here around the table. And Jeff, I think those analogies were very helpful and giving us a better understanding. Now as we wrap up this discussion, I want to get to our final takeaways and Melanie starting out with you when it comes to diversity in particular board gender diversity, what's your approach in terms of encouraging this on corporate boards,

Melanie Adams: Board gender diversity is incredibly important to us at RBC global asset management. We know that having at least 30% women, multiple studies have shown this in senior management or on the board can lead to directly to better financial results. You're bringing different perspectives around the table. However, on a global basis, we are not far enough. We're not as far as we should be. And so, what we do, where we really are trying to push the needle in this area is through our active stewardship. So, this means both how we proxy vote, and we build the proxies for our investment companies we require their work currently require there to be at least two women on the board. But we increase this every year. And we are working with companies very actively, who are lagging in this area. We engage in a lot of discussions with them. We have a number going on right now to discuss what their policies are with respect to recruitment, and to looking at different targets and metrics to bring more women on board.

Remy Blaire: And Jessica moving on to you. There may be no universal standards to define an ESG holding or whether positions and funds align with their stated mission. So, from an industry as well as educational perspective, what do you think needs to happen to improve transparency?

Jessica Ground: So one of the things that you will also get when you kind of finish during the journey on the Google Maps app is kind of an overview, how fast did you go? How did you get there? And to some extent, I think we need to be able to build the tools that will show you the similar outcomes. So, some of the things that we're working on building on this idea of diversity is a tool that for every portfolio shows you how diverse are the boards of the companies that you're invested in, compared to the benchmark. What are their climate change policies of the companies that you're invested in compared to the benchmark? So, what we can really start to do is map this kind of ESG data that we've all agreed is this really rich data set and showed in the same way that we might be looking at the price earnings ratio or the dividend yield of a portfolio. So, what we really have to move from if we're going to make this industry standard behavior is instead of just telling it, showing it in a systematic really transparent way.

Remy Blaire: And Wendy, moving on to you, as we head into the new decade, we're expected to see growth in terms of ESG investing, but what do you expect?

Wendy Pan: Definitely continuous growth in the sector. I think one of the very important indicator of growth is where the smartest people have gone into, where are the human capital of the future going into. And if today you go on university campuses, especially MBA programs, they are more individual students demanding impact investing or sustainable investing classes than the traditional corporate finance class. Not to say that traditional corporate finance class is not important. It is very important, but more talent will be wanting to go into this field. And I think this will be a very important tool for asset management industry as a whole.

Remy Blaire: And Jeff, as we head into your end, I know that you're gearing up for a gathering of advisors, as well as industry professionals to discuss some of these trends that we're seeing surrounding ESG investing. So, can you tell me what's on the agenda and a little bit about what's on the schedule for this event?

Jeff Gitterman: So December 10th, is our fourth sustainable investing conference to be held at the United Nations and it coincides this year with Human Rights Day. So, John Ruggie is our speaker in the morning, and he helped write the human rights principles at the United Nations and Caroline Rees is done interviewing David Yawman from PepsiCo about how Pepsi has looked at human rights issues through their supply chain. So, the morning is focused on human rights and how in public equities human rights issues can be addressed. And the afternoon is much more focused on climate risk, physical transition risk and climate change. Spencer Glendan who was at Wellington and now works with Woods Hole Research Center is our keynote speaker in the afternoon. And then we kept the end of the day with Ron Garan, the astronaut, really speaking at a more holistic higher perspective of the world and get much higher perspective of someone that's been in space.

I like to say as more frequent flyer miles than anyone, I think he's traveled 78 million miles around the Earth while he spent six months in space. So, it's really full packed day. And then we're looking at active versus passive and ESG integration and both of those strategies. So, we're trying really hard to educate that advisor space that bottleneck and get them moving. And to your point, it really is going to be critical for advisors that want to recruit that they have the ESG, because these kids that are coming out of college all are interested in sustainable investing. If they're interested in finance at all, and we're competing with the tech world for the top talent in the space but you're starting to see some of that top talent move into the sustainable finance because they seek some of the social issues with tech that are cropping up this day.

So, there's a real opportunity to recruit top talent. But if you're an advisor that's not focused on ESG, or you're an asset management firm that's not focused on it, you're not going to have a shot at recruiting these people. So, I think it's critical from both ends.

Remy Blaire: And last but not least, before we wrap up today's ESG masterclass, I would like to go down the line, starting with you Jeff. I think you brought up a key point in which that education and the next generation is very important. So, what do you think needs to happen from an educational perspective, that's not happening right now?

Jeff Gitterman: Well, in the advisor world, we're not educating them on how to bring the practices into place. And I think the asset management firm has to help with that. We're doing our best but we're one firm trying to educate an asset TV and doing a great job in educating but the asset management firms really have the ear of the advisors. They have to show them how integral ESG is becoming in all of the investments that they're doing to get advisors to understand that this isn't a fad, this is a trend that is here to stay. They need to hear from the shoulders and the RBCs of the world that this is becoming integral to everything we do. And the train has already left the station. It's not whether you're going to... If you're not on, you're almost behind at this point. So, we really been pushing and working with Schroeder's and RBC and a lot of other firms on just how do we go back in with these firms to show how they're utilizing the data and why it's going to be so important to the advisors practice going forward.

Remy Blaire: Since seems as though there are a lot of transportation as well as mapping and geographical analogies and in today's discussion. Now, Wendy, I know that you mentioned the popularity of some of these classes at the higher education level, but what do you think needs to happen when it comes to education?

Wendy Pan: I think for one for higher education institutions, it's tougher to find the type of individuals who like finance, like have the drive to work long hours to get that education, and people who want to work for government or nonprofit, and have the heart to wanting to go into the field. So, you have to combine these two fields and provide a more holistic education for individuals. And that's a tough one. And on the point of just education in general, for our industry, I think it has to come to a full circle. Because there are companies, we have to educate our own industry peers, and then their government and other constituents and also the broader society of people who elect these governments, people who work at these companies. So, it has to be a full circle of work. It's not a one day's work.

Remy Blaire: And Jessica, what about for you and your position at shoulders? What are some of the observations you have?

Jessica Ground: So I think one of the things that we need to do which I think a lot of us would all agree with, is that we sometimes need to start seeing ESG as this kind of separate part of investment, and realize how integral it is to generating long term investment returns. And a lot of that means it needs to be woven into all the materials, all of the questions, not like a sort of checklist at the end of a due diligence process. And whether that's for a conversation that as an advisor is having with a client, or that we're having to explain our investment processes. I think there's a whole lot that we can do across the industry to make that happen. And then I completely agree, not be afraid to separate out but still have that discussion on values, but seeing them as two different things, and not starting with okay ESG means let's throw a whole load of things out that I want to exclude. But actually, ESG is about how we're investing in generating long term returns.

Remy Blaire: And Melanie last but not least, what is your perspective?

Melanie Adams: I think education is one of the most important factors right now in this area. We've spoken about all the acronyms and some of the myths and misconceptions in the space. And I think it's really important that we're educating not just our investment teams, because they need some education as well on some of these different factors. And it's very quickly evolving space as we start to get into some areas like human capital, for example, how could we be looking at supply chain risk? What does that mean? All these different factors, we need to bring a lot of education for teams. We need to bring in education to our distribution teams, that they understand what these factors what this means, and that we can dispel any of the misconceptions. But I think that, industries working together to put together a lot of education and to help with this.

I know the CFA has been piloting some courses on ESG that have been fantastic. We've been partnering with universities and their MBA programs to put together some sustainable programming for them as well. And so, I think that and I do think we will see a proliferation of this type of education going forward, and I think it's critical for everybody in industry to understand this.

Remy Blaire: Okay. And as we wrap up this discussion on ESG, I do want to get your insights or perspective on impact investing. So, Jeff starting out with you give us your perspective.

Jeff Gitterman: So we always say that impact investing has to be intentional and measurable. And right now, that's really true. So, most impact is done in private companies, you can do with some of the municipal bond market. But when we think about how to have real transformational impact, if we look at large companies like Pepsi, which is going to be at our event and think about what they can do by looking for more granular information down their supply chain, they're working with sugar farmers and people all over the third world, and how granular they are on, who's working those fields? Are those workers getting paid a decent wage? Are they documented workers? Are they working the right number of hours? That company like Pepsi can have an impact on hundreds of thousands of lives across the globe. So, as ESG becomes more granular as blockchain starts helping track data track employees, I think we'll see that public companies can have a huge impact in the world.

Remy Blaire: And Wendy moving down the line, what is your perspective when it comes to impact investing?

Wendy Pan: I think one fear I have is we're not putting enough money into impact investing. So, some investor will say I were already doing SRI. I was already doing some ESG investing, why do I need to do impact? Because think about the world, there's so many problems waiting to be solved. We have to climb the risks we talked about earlier cyber security risk. We have, people working a lot more however, technology is replacing part of the workforce. And if we don't retrain them, they might never be employable. And those are all creating negative externalities in our financial world. If we're not putting more money into impact investing, some of these externalities might not be able to quickly reverse. So, I think it's important that we do that faster.

Remy Blaire: And Jessica, what about you?

Jessica Ground: We have a two pronged approach to impact. The first one is we recently required a majority stake and blue orchard, which is a leading microfinance organization. And we have a number of other private assets impact strategies that we've launched or bringing. But one of the things we also think is really important is impact reporting for all of our assets. So, what we are working on is really trying to assess the impacts of companies on society in quite a granular way. So actually, calling out and giving positive values for things like training and workforce development, but also giving negative values for emissions or lack of diversity in their workforce. So how do we mainstreaming this idea of impact measurement? Not just in the good news stories but being really honest about the negative externalities that can be generate as well.

Remy Blaire: And Melanie, what's your perspective over at RBC?

Melanie Adams: So at RBC Global Asset Management, we do have impact capabilities. And in particular, we invest through access capital that invest directly in impact projects. And we also have impact bond capabilities, where we look and I know this has been discussed, the data, we look in depth at the data of the issuers that we're investing in and impact requires a really detailed in depth analysis at what companies are doing and what their impacts are. Because sometimes the company you don't expect might actually have a significant revenue line, for example, tobacco. And you don't want to invest in that something that you don't want to have as part of that you need to understand and be really clear about what the company's impacts are what both good and bad. Because no company, very few companies have only good. So, you need to understand what are the negative revenue lines as well and assess those. It's a really, really thoughtful process that needs to be put in place there.

Remy Blaire: Well, ladies and gentlemen, thank you so much for joining me for this masterclass today and as always, thank you so much for your perspective and insights. And thank you for watching. I was joined by Melanie Adams, VP and head of corporate governance and responsible investment at RBC global asset management, Jessica Ground Global Head of Stewardship at Schroders and Jeff Gitterman Co-Founding Partner at Gitterman Wealth Management and Wendy Pan director at Segal Marco Advisors. From our studios in New York City, I'm Remy Blaire for Asset TV.