Jenna Dagenhart:         Hello, and welcome to this Asset TV ESG Masterclass. We'll cover some of the top environmental, social, governance issues for investors to consider, different ESG strategies, and ways that advisors can proactively introduce their clients to these topics. Joining us now, we have Adam Slakman, Vice President, Global ESG at Hines, and Rick Smyers, Managing Director, Head of ESG Pro at Fidelity Investments. Hello, everyone. Thank you so much for being with us. Rick, kicking us off here, what are some of the top ESG issues right now? What are some of the areas where advisors are seeing a lot of interest?

Rick Smyers:          Sure. Yeah. We're seeing advisors get a lot of inquiries about environmental issues in particular. Global warming is top of mind for many people right now, and that's been fairly consistent, I would say, over the last few years that we've been tracking this. Some of the social issues tend to come and go sometimes with the prevalence in the news. When we first started doing our research, it was at the height of the Me Too movement a few years back, and so gender issues were top of mind for some advisors, the recent school shootings have caused weapons to come into the minds of a lot of investors. But I would say that the environmental issues and global warming in particular have been consistent throughout this whole time period.

Jenna Dagenhart:          Yeah. Building off of that in terms of environmental issues, Adam, I know this is top of mind for you all. Could you share a little bit more about Hines net-zero carbon goal?

Adam Slakman:             Sure. We recently released our net-zero carbon target, or goal, of being net-zero operational carbon by 2040 in line with a science-based target initiative, which we'll be formally applying for in the near term. So what that basically means is we're going to strive to achieve net-zero across our global portfolio by 2040, really without the use of emissions, so really investing in the portfolio to get to net-zero, but create value along the way for all of our investments. So it's ambitious. We looked at a host of different years and how that would impact returns and the portfolio globally, accounting for things like portfolio growth over time, and worked with several global consultants to make sure that we were making the right decision. And I think what was important for us was not greenwashing our net-zero carbon target, saying something like 2025 or 2030. We felt like we'd be purchasing offsets in order to achieve that, but really creating value for the portfolio while achieving net-zero at the same time was important for us.

Jenna Dagenhart:          Yeah. Those are great points. And is there anything that you'd like to add in terms of other top ESG issues right now?

Adam Slakman:             Yeah. I mean, we've really re-envisioned sustainability through the lens of ESG over the last couple years and we identified 16 focus areas, four of them specific to carbon, which I think we'll talk some about later. The others include things, again, for a real estate investment portfolio around building certifications that recognize both the efficiency, but also the health and wellbeing for the occupants in the building, things around indoor air quality and occupant satisfaction across all of our asset classes. And then also, to Rick's point previously, I mean the social aspects are important. Some investors ask about different parts of the social initiatives we do, but I think for us, it's generally very important both for our own employees to attract and retain the best talent. Things like that make social higher than I think they otherwise would be.

Jenna Dagenhart:          Rick. I see you nodding your head. Anything you'd like to add?

Rick Smyers:                 No, that absolutely resonates with me. The fact that Adam is looking at so many different metrics underneath the label of environmental, that's a consistent theme of you can't just go by the label. You have to dig deeper and look at what do you actually mean by that label, and it's great to hear they're doing that so effectively.

Jenna Dagenhart:          And Rick, could you explain the different ESG mindsets, investor mindsets, that Fidelity has found?

Rick Smyers:                 Yeah. So this was some research that we did early on when we were designing ESG Pro, and it was really striking. We found that investors really thought about sustainable investing in pretty dramatically different ways. Many were, as I mentioned before, emotional about their investments, others were much more analytical and numbers driven. So that was one way they were very different. The other factor was whether they were primarily thinking about the outside world and their investments impact on the outside world, or whether they were thinking about themselves, the outside world's impact on their investments. So if you put those two variables together, we came up with these four different mindsets.

 One of them is what we call the impact seeker. These are people who really want to see a tangible difference in the outside world and they want data and numbers to prove it. So that's a very analytical mindset. Probably the most common, we call the alignment seeker. This is somebody who might not really think that their investments are going to change the world, and that's okay, but they'll sleep better at night knowing that their investments are aligned with their core beliefs. It's more of a emotional driver for them. There's another one we call the security seeker, who is mostly focused on just risk and return, and they use ESG factors to potentially get an opportunity or avoid risks in their investments.

And then the last one, we call the expression seeker. These are people who are very passionate and want to make a statement with their investments. They're sometimes the types of folks who would engage in a boycott or go to a rally, and they just want to have their voice heard. So as you can see, these are really different ways of thinking about ESG, and we find that as an advisor, it's really helpful to know who you're talking to so that you can frame some of these issues in a way that resonates with them.

Jenna Dagenhart:          Yeah. Financial advisors have a lot of different clients, so it's no surprise that they have a lot of different investor mindsets as well.

Rick Smyers:                 Absolutely.

Jenna Dagenhart:          Now Adam, circling back to carbon, which you mentioned earlier, could you define embodied carbon for us?

Adam Slakman:             Sure. So carbon is really defined in two categories, the operational carbon and the embodied carbon. And embodied carbon is really all the carbon unrelated to the energy use in a particular building. So that is the materials that go into it, the transportation of those materials, that is the build-outs inside, so that would be your carpet, your elevators, your walls. And then at the end of the day, it also accounts for how you might deconstruct a building at the end of its life and how those materials might get reused, so that is things like can you reuse the steel, or the rebar, or the concrete of a building? So for Hines, as both an investor and a developer, it's pretty critical that embodied carbon is accounted for.

It's not part of our 2040 target yet. As the science-based target initiative evolves their own thinking and as they begin encompassing embodied carbon within their framework, we'll likely enhance our own target to include that. But I think what's important is as the operational carbon becomes a lower part of the overall carbon footprint of a building, as the grid gets greener and the operational carbon becomes lower and lower, the energy is greener and cleaner, the embodied carbon will become the bulk of the overall footprint of any piece of real estate. So for us, it's been a really critical part of our carbon journey, which is getting our hands around embodied carbon, measuring it, tracking it, and in the near future, setting targets on it.

Jenna Dagenhart:          Now how do you regulate something like this? How is embodied carbon being regulated?

Adam Slakman:             It is not being regulated at all. So I don't think that will be the case in 10 or 20 years. I think, as the industry matures and as we get our arms better around the idea of embodied carbon, as it becomes more scientific and quantitative, I think we'll see regulations put in place. You're already seeing operational carbon being regulated in places like New York City through Local Law 97, and the UK, across the EU, and parts of California as well. So I don't think embodied carbon is far behind from a regulatory perspective, but in today's market, I couldn't tell you of a single embodied carbon regulation anywhere in the world. Certainly not in any of the nearly 30 countries in which we do business.

Jenna Dagenhart:          So a ways to go there.

Adam Slakman:             A little bit. Yeah.

Jenna Dagenhart:          Now Rick, what should advisors keep in mind as ESG is scrutinized by regulators?

Rick Smyers:                 Yeah. There have been a lot of announcements recently from the regulators about some of the activities that they're undertaking. And I'll preface this by saying this is not legal advice, I'm not a lawyer, but in my mind, a lot of what this comes back to is the basics of say what you do and do what you say when it comes to being an advisor. If you say you're doing something, you should be able to back that up, and if you took some action, you should be able to explain why. So for example, you should probably be able to explain what your clients have asked you for when it comes to ESG, specific issues that they're concerned about, for example. If you say that you selected an ESG investment for your client, you should probably be able to explain what you mean by that and the process that you used to select those investments.

Regardless of the labels you use, you should probably be able to have some more detailed reporting behind those labels, like Adam was describing the actual definition of embodied carbon. What does that mean? And I guess finally, if you are relying on third parties for any of this, you should be confident that they can back up their methodology and their process. So this sounds like a lot, but in my mind, it's not necessarily that different from any other investing advice. You should always be able to back up your recommendations. You just have to take this seriously, like you take the rest of your practice.

Adam Slakman:             No, I mean, I think Rick and I have probably spent a lot of time with our respective compliance and legal departments discussing, whether it's the taxonomy in Europe and implications to our firms or the proposed SEC regulations. And it really is what Rick says, which is you have to do what you say you're doing. And if you only do it 95% of the time, that's still not doing what you say you're going to do. So you really have to be thorough. You really have to put the governance structures in place to manage it. But I think to Rick's point as well, it's not difficult. It's business as usual. It's just making sure that ESG is part of that business as usual.

Jenna Dagenhart:  Yeah. Turning now to governance, Adam, what constitutes good governance?

Adam Slakman:             Well, so for us, good governance is really the foundation for our entire ESG framework. It literally includes things like the policies, the procedures, the codes of conduct that you have to have in place to just be a typical, good corporate citizen. I think in addition to that, there's a level of accountability and transparency that's pretty important in today's environment. Hines is a privately held firm. We have everything from institutional investors to retail investors. And I do think for us, as we go down the ESG path, it's creating reports for each of these investors and for all of our stakeholders. It's making sure we're accountable and really providing progress to track against our targets, whether that's around carbon or goals set around DEI.

And lastly, I think for us, from a good governance perspective, just because it aligns with this whole piece around transparency and reporting and accountability is really a robust data management system as well. So that could be things like carbon accounting, but it can also just ensure that everything's tied together in a data management system, Rick, to your point previously, that you can really back up and track and have the quality assurance and the auditability that third parties can bring to the table as well. So it's several different factors, but having that transparency in the system to ensure that you're doing it. I think for us, that's the key to good governance.

Jenna Dagenhart:          Yeah. And transparency can be difficult sometimes in these conversations around ESG for advisors, because ESG can mean very different things to different people. Rick, how can advisors manage that?

Rick Smyers:                 So I think first of all, they need to have the conversation with their client. We've seen reports and talked to many advisors who don't even bring up the topic with their clients. I think that's a big miss. It's sometimes a touchy subject for some advisors to bring up. They may be worried that this is a political topic or it borders on religion and you don't want to bring those things up in an initial conversation. So what we actually did with ESG Pro was that we made it a little bit easier for them. We provided a little quiz that they could send out to the client, and that way they can discover what's important to their client before they enter that conversation, and if there are issues that are not important or that they absolutely don't want to discuss, they can let their advisor know that and the advisor won't have to bring it up.

But once you get into that conversation, you do start to unveil some of the things that are really important to your client, and they may have deeply held beliefs and values that can really help you to build a relationship if you understand that about your client. And I think it's really important to dig below the labels, as we've said before. If the client says that they're concerned about global warming, there are a lot of different ways you can address that through your investments. You could divest from fossil fuels. That's probably the thing that your client might have in mind, I just want to get out those fossil fuel companies, but there are other approaches.

And as an advisor, when you understand what they're really trying to accomplish, you can guide them to a solution that may make more sense. For example, investing more in alternative energy companies, or investing in companies that have a lower carbon footprint rather than divesting from the energy companies. So it's an opportunity for you to have a great conversation with your client, understand what they really care about, and then guide them towards a solution that makes sense.

Jenna Dagenhart:          Adam, are there any misconceptions when it comes to ESG that you would like to address?

Adam Slakman:             Sure. So from a misconception perspective, I mean, I think the term gets thrown around a lot is greenwashing in the market, and I think it's easy to muddy the waters with vague comments, or goals, or policies. I think to Rick's point, you have to dig a little deeper and you have to get into whether it's a real estate investment or a company you're going to invest in, whether it's a venture capital type deal, you really have to dig pretty deep to understand the values, the principles, the processes. From a greenwashing perspective, I think we hear, I'll focus on carbon for a minute, but these very lofty carbon goals or decarbonization goals. And when you read the fine print and it says, "We're going to pay $5 million a year for offsets to achieve that," to me, I think you really do have to get into the fine print.

And people just don't do that, and they don't have the time necessarily, so I think you got to be more upfront and more transparent to get over the greenwashing, because I also think look, people are getting tired of ESG being thrown around, but it being this very big thing, and so I think we've got to be more direct. I think our investors, I have no doubt Fidelity's investors and all the big asset managers, I mean, these are smart people. So I think if you tell them in a succinct way what is really happening or what they're really investing in, I think they want to appreciate it because they want to invest their money in a way that aligns with their own principles and investment goals. But too, I think they'll really understand what they're getting themselves into. So I do think greenwashing is the biggest issue of the day right now.

Jenna Dagenhart:          Rick, what about you?

Rick Smyers:                 Yeah, I think a lot of the controversy comes back to those mindsets that I was describing earlier. People have different motivations, even on the supply side in the industry. You may be designing a product to get better returns, for example. You may be a security seeker as an employee of a fund company, and you're designing an index or a fund that's going to get great returns based on using ESG data.

And somebody may come along and see wow, there's an oil company in that index or in that portfolio. That person may be an expression seeker who just wants to punish the oil companies and question, "Why did you build it that way?" You also may have academics come in and say, "Well, whether the oil companies in there or not is irrelevant for impact," because in the public markets, you're not going to have a huge impact, but that person's an impact seeker. So they're all talking past each other, and I think that's what leads to a lot of the confusion. It's really important to understand what are the goals. What is your client's goal, what is the goal of this investment, and make sure that those two things align.

Jenna Dagenhart:          And circling back to one of your points that you just made, Adam, how can the industry continue working to make ESG less vague?

Adam Slakman:             Well, I think there's the ratings and the rankings and things like that from various organizations, so I think that's one way. I think like any other investment, though, you have to do your due diligence. You have to spend a little time and dig deep. I mean, I think look, to Rick's point, can an oil company be an ESG investment? And I'd say in certain instances, yes, it absolutely can be. I mean, the oil companies, as an example, or some of the oil companies, are some of the largest investors in renewable energy because they understand that their own industry is going to have to pivot that direction. So I do think it is about just more transparency, and not data for the sake of data, but transparency of data in the context of some type of story. And I think most organizations can figure out ways to produce materials that go beyond the glossy brochure, but really provide some real information about how the investments are leveraging ESG in some way.

Jenna Dagenhart:          Yeah. And going back to your point about innovation, I mean, Netflix comes to mind here. If Netflix was still a mail-in DVD service, they would not really be in business right now, yet they've evolved, and we're seeing a lot of oil companies trying to do the same thing here and pivot. Now, going back to your point about ratings and more accountability, Adam, what's the Global Real Estate Sustainability Benchmark, and how is that advancing ESG?

Adam Slakman:             So GRESB is a benchmark that real estate and infrastructure funds can submit their information to around ESG performance. And when you submit that information, they basically rank it across each of the categories within GRESB, and then the rankings and the full information gets disclosed to all of the investors in that particular fund. So that could be institutional investors, that could be retail investors. It's across all different categories of real estate and infrastructure investing. So as an example, our own REITs and many of the publicly traded REITs also submit to GRESB in addition to the institutional funds. I think what's been interesting about GRESB is that it lifts all ships pretty quickly.

So by that, I mean it's not like a building certification where you accrue a certain number of points and you've achieved silver, gold, platinum, or some level of certification. It's really you accrue a certain number of points and then they rank you against whatever cohort they've defined. So if you are a REIT, you may be ranked against all the other US REITs, let's say, or the US office REITs, or the US industrial REITs, something like that, and every year it gets a little harder, because every year your competitors are going to do the next thing. So as an example, we took one of our funds and we decided to look at can we buy green energy for these buildings now, whether from their direct suppliers, or through a power purchase agreement, or something like that. And again, that's how you maintain what GRESB defines as sector leader, but you constantly have to do that next thing.

And what I would say is typically for the first year or two, you're getting that low-hanging fruit and you're able to get a pretty good ranking, but at some point, what GRESB requires you to do if you want to maintain a really good ranking is you have to start investing in ESG in an actually meaningful way within that fund. You have to set targets, you have to really incorporate ESG into your strategy as a fund or as a REIT as a complete investment vehicle. So it really requires that ESG become an important part of the strategy, and not just complements the investment strategy, but is really part of that.

Rick Smyers:                 Yeah. That approach of ranking against your peers is really valuable. We found in ESG reporting the question that always comes up when you show a number to an investor is, "Well, is that good or not?" So having a ranking against your peer group, say that well, it's in the 90th percentile of the US-based REITs. Wow, that does sound pretty good. But that's the kind of thing that you have to do to translate it, to make it meaningful. What we did in ESG Pro was we show everything in terms of percentile rankings versus your peers, and then we even color code it, so green is good and red is bad. And at a glance, you can quickly see how does that compare? So just throwing the numbers out there can be overwhelming for investors, even pretty sophisticated investors, but especially for retail, you need to show them, at a glance, is that good or not?

Jenna Dagenhart:          Yeah, Rick. I mean, building off of that, anything else you'd add about what end investors really need when it comes to ESG reporting? It sounds like that context and putting it into perspective is critical.

Rick Smyers:                 Yeah. I think the other thing beyond the data is just having some stories that go along with these investments, having some tangible examples, going with the real estate example that the building materials being replaced, or the air filtration systems working better, little things like that. Even though it's not a comprehensive data point, it gives investors a feeling for the types of things that are happening, and it can really make a difference in terms of how excited they are about the investments that they're in. And that's important, especially as markets are volatile. Having an emotional tie to your investments is one way to get investors to stay the course. So sometimes having things like that can be really helpful for their financial outcomes as well.

Jenna Dagenhart:          Mm-hmm. If they've got that long-term vision in mind when it comes to sustainability, then maybe they'll keep the long-term goals in mind in terms of staying invested.

Rick Smyers:                 Exactly. Right. Yeah, if they realize that there's a long-term trend here that's very favorable. This quarter, it didn't look so good, or this month, it didn't look so good, but I'm here for the long-term and I've got these bigger, broader goals. It's a great way to reassure investors that they're on the right track.

Jenna Dagenhart:          Adam, what are some ways to foster healthy communities? Any examples or stories you could share there?

Adam Slakman:             Yeah. I mean, healthy communities is pretty broad, so let's try to define it a little bit more, because I'm in San Francisco. So I think in San Francisco, a healthy community becomes an affordable or an attainable community, because the wealth disparity here is off the charts. So I think within this region, there's a big focus on how do we invest in affordable housing as an asset class? I think not only does that provide to us strong risk-adjusted returns, but it does create something that the community needs, desires. We've done that in multiple cities around the world, and I think we're trying to see not only how do we create affordable housing, but is there opportunities to provide affordable office, affordable warehouse, affordable retail. It could be to low or middle income businesses or communities.

It can also be an expression of our own DEI philosophy, our diversity, equity, and inclusion philosophy, which is upstart restaurateurs who might be women of color, as an example, so maybe affordable retail is a concept that could be embraced by the community. I think the other thing that comes to mind that can be interesting is decarbonization can create more healthy communities. So by that, as an example, in New York City at 555 Greenwich, which is coupled with an existing building called 345 Hudson, as we electrify that building, as we get rid of the cooling towers, and the chillers, and the boilers, and we'll put in an extensive heat pump, an electric heat pump system. So not only will that provide really efficient heating and cooling for all the occupants, it provides much better acoustics, it provides much better air quality. There's no more on-site combustion, there's no more noise coming from the ceiling. And in addition to that, by getting rid of the cooling towers, we're saving over half a million gallons of water every year, and it becomes a lighthouse project that the community can point to.

So I think there's a whole host of different ways, but I would say for Hines, at least, as a real estate investor, I think a focus on attainable housing and a focus on decarbonization we think will create the healthy communities. And the last thing I'd mentioned that we are looking at is really starting to quantify a social return on investment. Within Hines, we always talk about IRR, or equity multiple, or cash yield, but there is an emerging methodology on social return on investment that we're starting to go down that rabbit hole, and not from a marketing purpose, but really see if we can start quantifying the impact we're having in the communities in which we [inaudible 00:28:39] business.

Jenna Dagenhart:          And speaking of different communities, that was a great example with San Francisco and in New York. Rick, are you seeing different ESG conversations take place in different ways in different regions, in different cities around the country?

Rick Smyers:                 Yeah. I would say there are definitely different ways to frame the ESG conversation based on what resonates in your particular community. We have some clients who are in places like San Francisco and New York where the conversation could be handled in one way, and then there's other clients we have who are in Iowa or in Louisiana and they frame the ESG conversation a little bit differently. The one client I'm thinking of in Iowa has a fairly religious community around him, and so he frames ESG in terms like instead of saying environmental issues, he says stewardship for natural resources. It's the same concept, but it's just phrased slightly differently in a way that might resonate a little bit more with his community. So I think it's important to hone your message. With the social issues, rather than saying DEI in Iowa, he talks about just treating workers well, doing right by your community, including people. It doesn't have to be a very different conversation, but sometimes the labels might mean different things to different people. So like I said, honing your message to match what resonates with your audience is really important.

Jenna Dagenhart:          Mm-hmm, depending on where someone's from or what they're used to hearing or their religious beliefs, as you mentioned. Now Rick, many advisors wait for their clients to ask about ESG, but should advisors introduce the topic of ESG to their clients proactively, and I mean, how do they do this?

Rick Smyers:                 So I absolutely think that advisors should be bringing this up. We sometimes hear advisors say that, "Well, my clients aren't interested in it. There's no demand for this with my client base." But survey after survey shows that the vast majority of people are interested in sustainable investments if you frame it properly. So who's right? Is it the surveys that are right, or is it the advisors who say, "No, no, no. My clients aren't interested." My answer is well, in the survey, they actually ask people, "Are you interested in this?" and they get an answer. Advisors, we know, aren't actually asking their clients and just assuming that they're not interested. So you can draw your own conclusions, but I firmly believe that most advisors would get a very positive response if they did ask their clients.

And if you don't bring it up, you're missing an opportunity. It's an opportunity to have a deeper discussion about the things that your client really cares about, their most deeply held beliefs. So just because they don't bring it up, I would not assume that they're not interested. They might not know that this possibility exists. They might not know that you can offer this kind of a service. And the worst thing, of course, is if you don't bring it up and your competitors do, it may be too late for you at that point.

Jenna Dagenhart:          And being able to see some of the tangibles and had witnessed the social impact that projects are having can sometimes help people form a better attachment to concepts like ESG. Adam, what kind of social impact are Hines projects having?

Adam Slakman:             Hopefully a large one, but I'll give you a couple examples. I mean, from an attainable housing perspective, as an example, we recently developed and sold a multi-family property in Berlin where we not only did affordable housing, but we did housing for special needs, so the units were designed a little bit differently, and that was a first for us. And the goal for us with attainable housing is it's meant to build a community. So it's not here's one entrance for the affordable piece, and here's an entrance for the market piece, and here's an entrance for the special needs. It really is bringing the people together in the community through events and amenities and things like that.

The other thing is partnerships. We can't do it on our own, so we're partnering with groups like Habitat for Humanity across our affordable housing portfolio. And really, they can do better in that than we can, and so we recognize where our skill set lies. So partnering with groups like that, or even universities, has been important for us. I'd say a couple other examples has been around just amenities and occupant satisfaction, that could be around things like beehive programs. So not only are we supporting bringing bees back into the urban environment, but also providing tenants with honey at the end of the year and things like that. There's things like quiet rooms, and meditation rooms, and lactation rooms, and just making sure we're providing the space for really the health and wellbeing of our occupants, whether that's in an office, or a multi-family, or even in a warehouse where there's only a handful of workers. But I think for us, we found that it's really important.

And then lastly is around community building. So again, Habitat for Humanity, we're doing mentorship programs with Big Brothers Big Sisters, charitable supply drives, and then also down through our supply chain and looking at creating a more diverse supply chain globally, and one that also is starting to incorporate ESG factors as we think about who we're going to use. Whether that's a security company or the subcontractor that's going to provide steel for our next development, those are factors we're going to start considering as well. So all of that are different ways that we're trying to have a much larger social impact.

Jenna Dagenhart:          Now Rick, how should an advisor think about selecting ESG funds or ETFs? There can be a lot of information out there.

Rick Smyers:                 Sure. Yeah. I think first and foremost, you should apply all your traditional financial screening criteria. In ESG Pro, we have a relatively standard framework that looks at cost, performance, style consistency, process consistency. And then I think you're going to want to apply another screening beyond that to look at the ESG commitment of the fund to avoid the greenwashers that might just be slapping a label on an ordinary product. So you want to look at things like the managers' intent, their commitment, their consistency over time in terms of their ESG application. In ESG Pro, we have two different ratings. There's an investment rating, and then there's an ESG rating, so you want to make sure that both of those are satisfactory. And then depending on what your client is looking for, you can customize a little further. So if you know that they're interested in gender issues, for example, or alternative energy, you can look for funds that have a higher proportion of women on the board of directors or exposure to those alternative energy companies in the portfolio.

And then finally, you might want to consider their mindset. For an impact seeker that really wants to see a tangible difference in the outside world, you might want to have funds that have a history of engaging with the companies in their portfolio to get them to change their behavior. And some of these companies have a great track record of this, and they'll have stories that they share every quarter, every year, about things that we're doing something that wasn't quite optimal, they engaged, they got them to change their behavior, and it's a great example of the world actually was different because of this fund. And because you were invested in it, they had a little bit louder voice and were able to make that happen. For an expression seeker, that may not be as interesting to them. They may want to just avoid certain industries completely, and there's plenty of funds that will do that as well. But try to understand what's motivating your client could be helpful as you hone in on the exact fund that might be right for them.

Jenna Dagenhart:          Adam, how would you describe your strategy and framework over the last, say, three to five years?

Adam Slakman:             Completely re-envisioned. So we started as more of a grassroots effort around sustainability, really the E piece, and it didn't mean S and G wasn't important, but Hines is a privately held firm, and the third generation of leadership is coming up through the ranks. Laura Hines-Pierce was just named co-CEO a few weeks ago. So they had really tasked our ESG leadership to say, "Figure out a strategy for the next generation, the next 20 or 30 years." So that's what we spent the last couple years doing until about a year or two ago, and it has created an entirely new strategy, an entirely new framework. It's not meant to be necessarily a top-down, controlled approach. It's meant to create flexibility across our regions so that some of the areas that may be more progressive like New York or London, they may move ahead, and then places like India may learn from what they're doing because they're moving a little bit slower in certain geographies.

I think what's been really interesting is we have found incredible interest in Asia-Pacific, and not just Australia, but China, Japan, geographies where I think there had not been as much traction around ESG in the past, but knowing that there's now a strategy, and a team, and people focused not only on ESG, but technical people focused on carbon, technical people focused on innovation and technology. I think that's getting people excited, Hines employees excited that they can start delivering decarbonization, higher indoor air quality, social impact to all of our projects. So really, the last three to five years has gone from having a couple people focused on ESG to having a dedicated team, a new vertical, and a top-down strategy that's going to guide our regions toward execution.

Rick Smyers:                 It's interesting you say that your employees are getting excited about participating in this. That's something we see with advisors as well. As you're trying to attract the next generation of advisors and the next generation of a client, having an ESG practice, we think, is a big differentiator. If you're a young advisor just coming into the industry, that's an area that you're very likely to want to get your feet wet because it's such a growth trend and so many younger investors are interested in this. So there's a nice advantage there on the recruiting front.

Adam Slakman:             Yeah. I do have to add, I mean, as important as it is to meet things like the IPCC and UN 2050 goals, the Paris Accord, and things like that, but I do think my generation, the generations that come after, there's no way to attract and retain the best talent, I think, anymore without having a really structured approach to ESG. They don't want to hear you've achieved a lead certification on your building. They want to hear the real story now. And just like the investors, and some of them are investors, even though they're young, they're more sophisticated on this topic than I think anyone was 10 or 20 years ago.

Jenna Dagenhart:          What do you think has led to all this growth, particularly among younger generations, Adam?

Adam Slakman:             I think it's in their face. I mean, look, you have a war in Europe right now that we probably would not have envisioned a couple years ago. It's led to gas prices, at least where I live, being $6 plus per gallon. You've got heat waves. California has a fire season now. That did not exist 10 years ago. I think the implications of climate change and the impacts it has, I think, are now more in your face than they ever have been.

I also think kids are now raised where they say, "Okay. I have a trash bin, a recycling bin, and a composting bin." That's the norm for them growing up, and so I just think they're more sophisticated in their everyday life. I think they see it on TV now. I think they understand that the changing climate is going to be a negative for most of the world. And look, they're experiencing the culmination of 100 years of progress in certain ways, but maybe unsustainable progress. So I think they just want to see that at the end of the day that they're going to be in their middle ages in 2050, so it is on their generation whether we achieve it or not.

Rick Smyers:                 Yeah. I'd just add that many, many younger folks, and older folks as well, are expressing their views through their purchasing decisions every day. They'll shop organic, or they'll shop at certain stores because they support the way that store is run. So I think it's just natural that that type of behavior is expressing in other places, like where they want to work, what employer they want to have, and then also how they want to invest their money.

Adam Slakman:             I'll just add, too, I think there's companies and products now that better express ESG. You can go get a jacket from any company, but now you have, let's say, a Patagonia jacket that all the materials are reused. The car my wife and I have completely went out on us a few months ago and we went and got an electric car, because why would we get a gas guzzler again? So I think that didn't exist 10 years ago. And you look at it and you say, "These are not clunky old things." I mean, Teslas look really good, and renewable products not only look good, but feel good and last, and so I think all that's kind of new as well in the last 10 years.

Jenna Dagenhart:          Mm-hmm. I was reading something that we could be at a bit of a tipping point with electric vehicles, and hitting that 5% or so threshold makes it go from, "Oh, so-and-so is really into the environment and they have a Tesla," to, "Oh, my neighbor has a Tesla. Maybe I should get one too." It's just much more mainstream.

Adam Slakman:             Mm-hmm. Absolutely.

Rick Smyers:                 I think I saw that same article. 5% seems to be that magic point on the S-curve where it starts to really accelerate.

Jenna Dagenhart:          Mm-hmm. A good thing for ESG indeed. Adam, you mentioned that you're already thinking about the next 20 to 30 years or so. What do you think the future of ESG looks like?

Adam Slakman:             I think for all the people focused on decarbonization, I really hope they work themselves out of a job over the next 20 to 30 years and that we do achieve more of a net-zero world. I don't think we'd get to 100% net-zero, but I think there's a long road ahead of us to do a lot of work across a whole host of industries. And I think while we're focused on the built environment that has implications across transportation infrastructure, and logistics, and urban farming, things like that. So I think there's going to be a huge focus on decarbonization. It's going to have a lot of knock-on effects in terms of healthy communities, and social impact, and air quality, and just a whole slew of different, hopefully, solutions and just really more sustainable progress. But for us, at least, I think that decarbonization plays a very central role, and a lot of these other things that we are focused on are going to spring out of that.

Jenna Dagenhart:          And Rick, what are some specific challenges specific to ESG portfolio construction and some ways to overcome these challenges moving forward?

Rick Smyers:                 Yeah. Portfolio construction can be tricky if you're trying to build a multi-asset class portfolio that's consistent in terms of the traditional financial metrics as well as expressing certain ESG preferences. That can be a bit of a challenge. Some of the things that we see is that certain ESG data providers have biases in the data towards certain asset classes or sectors. For example, large-cap stocks tend to get rated higher than small-cap, developed markets companies tend to get rated better than emerging markets companies. Now that may be because they actually are better, or it may be because they don't have the resources to report the data that they need to report to get a better score. But regardless of the reason, if you're constructing a multi-asset class portfolio, your emerging markets sleeve is going to look worse than your developed international sleeve, so that's important to understand.Don't try to just eliminate the emerging markets to get a better ESG score. Again, it goes back to what we were talking about earlier in terms of compare to your peers. Pick a good emerging markets, pick a good REIT, pick the ones that within each asset class perform pretty well. The other challenge with that, however, is that there are limited opportunities in some of these. In some of these asset classes, there aren't a lot of great products. So emerging markets is one where, particularly right now with the war in Europe, it's really hard to find a good emerging markets ESG product, in our opinion, right now. So those are some issues that you'd have if you're trying to build this multi-asset class portfolio that scores well across the board. Just be aware of some of those tendencies and biases. What we've done for ESG Pro is we've prebuilt some multi-asset class portfolios advisors can use as a starting point, and then they can customize from there. If you're trying to do it from scratch, just be aware of some of those gotchas.

Jenna Dagenhart:          Mm-hmm. Now given everything that we've discussed today, Rick, would you say you have a pretty positive outlook for ESG adoption moving forward?

Rick Smyers:                 I do. Yeah. I think we're beyond the inflection point where it was a niche five years ago, and it's going mainstream now. If you think about it at a certain level, if you define ESG investing as considering ESG factors when you make investment decisions, it's hard to argue against that. Would you really want to ignore all the E, S, and G factors, even if they're materially important for your investment decision just because you're not an ESG investor? I think you have to incorporate some of these things. These ESG factors have an impact on a company's brand, clearly, so you can't just ignore companies or data points that are pointing to bad practices in some of these areas.

So I think increasingly, the question is not going to be do you want ESG or not, it's going to be how would you like me to apply these ESG factors to an investing strategy that fits what you're looking for as an investor? To what extent do you want me to apply these things? For some investors, it may be, "Well, only apply these factors if you think it has a material impact on the risk and return," and that's fine. For other investors, it may be, "Do that, and then also I'd like you to tilt towards companies that have a certain profile, if you can. On the margin, try to invest in companies that treat their workers better, or try to invest in companies that pollute a little less." And that's a great way to meet your client where they're at, if you can change the nature of the conversation from yes or no to to what extent do you want me to do this for you?

Jenna Dagenhart: Adam, any final thoughts that you'd like to leave our viewers with?

Adam Slakman:             Yeah. I mean, I think what Rick and I have been talking about the whole time is really just do your due diligence, I mean, like any other investment, whether that's going to be a Hines REIT you can invest in, or a Fidelity product, an ETF you can invest in, but really understand what you want and what's being offered and see how they align. There's a lot of different ESG products on the market across every asset class, and so really, just have an idea of what your investment strategy is and also what's important to you from the E, S, and G world, and you can find the right product that's actually making the impact and the return that you want.

Jenna Dagenhart:          Rick, anything you'd like to leave the financial advisors watching this with?

Rick Smyers:                 I would just reiterate you've got to ask your clients about it. Ask them what they're concerned about, what they value the most, and you'll be surprised by how the conversation goes. Many, many investors are delighted when their advisor first asked that question.

Jenna Dagenhart:          You'll never know if you don't ask.

Rick Smyers:                 Exactly.

Jenna Dagenhart:          Well, Adam, Rick, thank you both so much for joining us. Great to have you.

Adam Slakman:             Thank you so much, Jenna.

Rick Smyers:                 Thank you. It's been fun.

Jenna Dagenhart:          And thank you for watching this ESG Masterclass. Once again, I was joined by Adam Slakman, Vice President, Global ESG at Hines, and Rick Smyers, Managing Director, Head of ESG Pro at Fidelity Investments. And I'm Jenna Dagenhart with Asset TV.