Matt Orton: Welcome to Markets in Focus, a podcast discussing the latest market developments and insights from Carillon Tower Advisers. I'm your host, Matt Orton, Director of portfolio Specialist at Carillon. ESG has been growing in popularity in recent years and asset flows and client interest has certainly grown along with it. And after a turbulent summer of racial justice protests, interest has grown beyond the environmental to the social and governance aspects of the strategy. How are portfolio managers taking advantage of these trends? How are they taking these trends into account when analyzing possible investments? Well today I'm lucky enough to be joined by Sheila King, Portfolio Manager for tax aware and ESG fixed income strategies at Eagle Asset Management and Joy Facos, Head of Responsible Investing at Carillon Tower Advisers, to break down how they analyze social and governance and environmental concerns where investors might seek future opportunities in the ESG space.

Matt Orton: So welcome Joy, welcome Sheila. Thanks so much for being here today. Joy, I know you've been involved in socially responsible investing before it really became mainstream in the US. It's been extraordinary to see the growth of ESG over the last five years or so with institutional and retail flows accelerating every single year. Do you want to start by maybe providing our listeners with a quick overview of some of the assets and inflows into the ESG space?

Joy Facos: I'd be delighted Matt. Thank you and thank you so much for hosting this. I think this is a really important topic particularly now. So for a little bit of context, let's just go back to 1995 for example. US SIF, the Forum for Sustainable and Responsible Investing, has been tracking assets that are invested in either a socially responsible way, responsible way, or employs some kind of shareholder advocacy program. So back in 1995 when they did their first report, the assets that fell into this category totaled $639 billion. So let's fast forward to their most recent report that was published in November of 2020 where the assets that were invested professionally in some kind of a sustainable and or responsible manner and in some way incorporated shareholder advocacy, those assets totaled $17 trillion.1 That's right. That was a T. And we've really seen amazing growth. From the last US SIF report that was published in 2018, that number was $12 trillion. So even in that two year period we saw a 42% increase in those assets.

Joy Facos: So as you noted Matt, I mean there really accelerating interest in this field. And so even looking at what we've seen in 2020 through the end of the year, well actually through third quarter, Morningstar came out with a great report that stated that inflows, net inflows into sustainable funds for 2020 totaled $30.7 billion. And so they were averaging about 12 billion inflows, net inflows, each quarter.2 So we're seeing that trajectory continue. And again, those are just sustainable funds, those are not total sustainable assets. So it's really pretty amazing.

Matt Orton: That's quite significant growth. And I'm just going to ask one follow up question then. Is there any themes or specific areas that might be garnering more interest than others?

Joy Facos: Well there really is interest across the board, but I have to say that there is greater interest in climate change for example, just because we have been seeing record temperatures over the planet. 2016 was one of the hottest years on record. 2020 pretty much continued that. So I think what we're seeing is a greater focus on climate related issues. But that's also not to say that social issues are not gaining in importance and interest, particularly after this summer when we experienced pretty significant social unrest around racial issues. So those kinds of things are really taking greater scrutiny. And the other thing I'd like to just highlight during the pandemic, COVID, it's really been important to see how companies are treating their employees, how are they dealing with their customers, how are the health and safety issues being addressed. So I think it's going to be interesting to see how companies are addressing these issues going forward, but they all are really important.

Matt Orton: Yeah. Joy you've hit on some really big themes right there. And arguably, going back to the climate change theme that you mentioned, that's something that we've been seeing some activity from many large public pensions and institutions starting to divest from the energy sector overall. I'd love to get your thoughts on this, I call it a black and white approach, or is there any gray that's in the middle?

Joy Facos: Wow. Yeah, it's a really big question that asset owners in particular really struggling with. It's the question of do you divest entirely or do you hold onto some of your holdings so you have an opportunity to engage with corporate management on some of these issues. There's definitely a push to divest fossil fuel companies and we've seen fossil fuel free options out there in terms of funds and new funds coming online. So for those investors, for whom it's really important to just get rid of fossil fuels and speed up the transition to a lower carbon economy, I mean that's definitely an option. On the other side of the spectrum, it really is that opportunity that shareholders have to engage company managements on issues like setting science-based targets, how are they addressing the transition to a lower carbon economy, what is their business plan for potentially dealing with stranded assets down the road where they can't pull out and monetize the assets that they currently are recording with respect to fossil fuel reserves. So being able to talk to companies and perhaps influence decision-making, that has some significant value. So it really is up to the asset owner and the investor to determine which option is most appropriate for them and their goals.

Matt Orton: And Sheila, I'd love to pull you into this conversation. So we focused a lot on just the E. How do you look at a lot of these aspects, especially with respect to the S or the G in your potential investments?

Sheila King: Well before we get started on that I just wanted to add to Joy's point, literally today, New York City, three of the largest pensions announced that they were going to be divesting fossil fuels from their portfolio. So it's very timely question as well.

Sheila King: So certainly the S or social pillar of the ESG pillars rose up in the ranks in 2020 due to the tragic death of George Floyd and other black Americans, but it also was as a result of the COVID-19 pandemic. So for me, I think is very important in how we follow companies. Are they making statements against social injustice? And I always say no statement is a statement. Are they also making sure companies are backing their words with actions by maybe donating to the black communities? So those are really important things. And I've created a spreadsheet of our companies that we follow and the way I look at it, it's important to track this. Not only that, but how are they handling the COVID-19 pandemic. As Joy mentioned before, are they keeping their employees safe, are they providing proper PPE, how are they treating their customers? I mean I think those are all things that are very important. Are they offering flexible work schedules for employees who work from home and if not, if they're frontline workers, again, making sure that they are safe. So these are things we think are very important. We're also trying to take a look at this and say, are they really backing up and donating to communities, whether it be local food banks, pantries, et cetera, we think that's very important.

Matt Orton: And how do you go about getting all of that information? It's one thing to engage with corporate management, but to really dig in and see if they're actually putting their money where their mouth is. What tools do you use at your disposal to really investigate it and make sure that these companies are doing what they say?

Sheila King: Exactly. I think that if you look at a lot of the company websites, first thing you can go to is news, press releases. So are they putting press releases out talking about social injustice and how they feel about it, their impact that they're talking to their employees about it, that they are really, really versed in it. And then you can also track, usually they will have we are donating money to the black communities and they will have a dollar attached to that. So I'm literally building that into the spreadsheet. So a lot of times it is they have corporate responsibility tabs on their websites, news releases you can find, and you have to go in a couple of times to check it, but realistically that's where you can find most of that. Many of these companies also have reports based on their sustainability investing and how they're doing.

Matt Orton: Yeah, I think as you dig in a little bit deeper too, so we've talked a lot about I'd say the S now if we go to the governance side of the equation, so even going back to the energy topic that we had earlier. So you see a lot of divestment like you mentioned Sheila, New York Pensions divesting now from energy. But when they reallocate that money, say if you're going into some of these more startup solar companies, anything tied to EV (electric vehicles), how do you make sure that you're properly assessing those governance risks and how is that potentially balanced? Maybe I'll throw that over to Joy to give some thoughts on.

Joy Facos: Okay, great. Thank you Matt. So for the governance side of things, a lot of startups can be a little bit challenged in the governance side just because they've been focusing on their product and getting their product out to market or their technology out to market. And so this is where the engagement part is really important, where a young company might not have, for example, a fully independent board of directors or have diversity on the board of directors or have fleshed out completely their management oversight practices. And so as an investor you can engage the company and have those conversations, understand where they're going to be going.

Joy Facos: It's really important to recognize the fact that there is no perfect company and whether it's a well-established company or a startup, it's really recognizing that there's room to improve for everyone. So it's having that opportunity on the governance side to have those conversations with management and perhaps members of the board of directors.

Joy Facos: But what you're looking for and what we would be looking for in companies is that they do have that board independence, that they do have diversity on the board, and that diversity would be gender diversity, racial and ethnic diversity because it can bring very different perspective to decisions that the company might be making down the road. But it's also good to know what the company's roadmap is. So again, there is no perfect company, but you do have the opportunity to have a conversation with them and to help to move them along. So it's definitely a balancing act, but if you are really looking at a company's potential, I'd say the G is probably the most important thing to take a look at.

Matt Orton: Well thanks Joy. So if we take now collectively what we've been talking about with the E and the S and the G, I'd love to get Sheila's perspective, especially managing a municipal portfolio where there aren't that many managers who are really active and looking at ESG. How do you look at all of these trends and how do they impact your decisions for investments within the portfolios?

Sheila King: Well you're right Matt. There is very little ESG data on the municipal side. I think that's one of the challenges. But we're really taking approach in a different aspects. So as I mentioned, it's qualitative for versus more quantitative and qualitative for corporations. So we're really, our analysts are combing over, not only the official statements when municipals have a new issue, offerings out, also financial disclosures, muni website, so they're specific websites to see and local news articles. And so we're really digging through those to kind of pull out the information or the data that they are doing something on the ESG front. And what we're doing is building a scoring. So we might have an ESG one, an ESG two, ESG three, one being the best. So those three entities or anything that falls into those three categories can be brought into our portfolios.

Sheila King: ESG, if there's a zero or whatever, it literally is not invested, we are not investing in it. So that's important, but we don't give up on it. I think the thing that for us, sometimes municipalities, they may be smaller ones that don't have the ability to have one individual person like a sustainability director out there putting the data or information out so we're really trying to do, kind of make it a win-win approach.

Sheila King: So when we're looking at new issues, let's just say that we are investing for our traditional accounts, but we couldn't find data or it wasn't readily available for E, S, and G. We're literally trying to send the municipality a letter saying, hey, we were able to buy some of your bonds for our traditional portfolios, however we were not able to find data on ESG. Is it available and if so, could you point us in that direction? And if not, we strongly encourage you to do something on that ESG front because over time there will be more funds coming into municipalities that are investing or have really taken a look at their ESG aspects. And it should really lower their interest costs over time because the more demand, that really will create less yield that they would have to pay or less interest costs. So we think that's important. We're really trying to not shame anybody, but to encourage and build from there. We're all in this together.

Matt Orton: Yeah. I think that idea of encouragement has definitely helped and I think a statement of how much people are looking at ESG going forward is the agenda even for the world economic forum. You look at the agenda and there's a ton that's focused on ESG and maybe, to help wrap up this conversation, Joy, maybe you can talk about is there anything that's a particular interest on that agenda that could have an impact for the markets that's tangible to what we do in investing.

Joy Facos: Yeah, that's a great question. One of the things that's been really interesting to see, and this is being touched on at the virtual Davos, is the idea of the 17 UN Sustainable Development Goals3 and how are companies and communities addressing those goals. And those are very tangible. They run the gamut of education, eradication of poverty, climate change adaptation, water quality, including sanitation, and sustainable cities. So if you look at The World Economic Forum, one of the tracks, and I'm sure this is of real interest for Sheila and her team, the sustainable cities in particular, how they are dealing with transportation. Another is sustainable industry. What does that look like and how can industrial economies transition to lower carbon economies and maintain sustainability goals with respect to the environment as well as their populations? So I think the focus on the 17 Sustainable Development Goals, which were established in 2015 and will run through 2030, I think to have communities, countries, companies address a lot of these issues in very tangible, real ways will be very exciting and will help determine pretty much the international trajectory of development.

Sheila King: As Joy mentioned on the Davos, The World Economic Forum today, I literally was listening in on the building at net-zero cities. So this is from the World Green Bond Council and one of the things was actually somebody in Singapore talking about public transportation and their goal to make it more carbon efficient, talking about subway stations having 10 measures away from 80% of the population, moving into electrification of vehicles by 2040, the entire fleet and making public fleet, 50% of buses, electrified by 2030. So these are things that are very, very important that are already being talked about. And again, Davos, there's a lot of agendas Joy said talking about sustainable cities that is really near and dear to my heart. And so I'm really looking forward to hearing more discussion on that topic.

Matt Orton: Absolutely. We're seeing it at Davos. Those 2020 Morningstar flow numbers certainly I think tell the truth and speak volumes for where this ESG movement is going. And with that, Joy, Sheila, I want to thank you for your time today. This has been very, very insightful. And until next time, take care everyone.

Joy Facos: Thank you very much, Matt.

Sheila King: Thank you Matt.

Matt Orton: Thanks for listening to Markets in Focus from Carillon Tower Advisers. Please find additional episodes and market insight at marketsinfocuspodcast.com. You can also subscribe to our podcast on Apple Podcasts, Spotify, or your favorite podcast app. Until next time, I'm Matt Orton.

1. “Report on US Sustainable and Impact Investing Trends.” US SIF Foundation, biennial report published November 16, 2020. https://www.ussif.org/blog_home.asp?Display=155

2.John Hale, PhD, CFA, “U.S. Investors continue to endorse sustainable investing.” Morningstar.com, published October 29, 2020. https://www.morningstar.com/articles/1007284/us-investors-continue-to-endorse-sustainable-investing

3. THE 17 GOALS. UnitedNations.org, Department of Economic and Social Affairs – Sustainable Development. https://sdgs.un.org/goals