Bloomberg, the NYSSA and The CFA Institute recently held a sustainable investing conference titled “Sustainability and Value – Using Data and Valuation to Drive Returns.” The day included panel discussions from a variety of participants including the Chief Investment Officer of the State of Connecticut, institutional asset managers, a partner from Jeff Skoll’s family office, Capricorn Investment Group, a professor from Yale and Stanford Universities, and sustainability professionals from Waste Management, Huntsman Corp. and Lockheed Martin.
There was widespread agreement that following good corporate behavior will lead to uncovering better-performing companies. Whether the data is quantitative or qualitative does not matter, it’s the avenue of inquiry this process stimulates that is ultimately important, and integrating fundamental and sustainable analysis is critical. Currently, there appears to be an opportunity to generate alpha through better access to data. But as data is standardized and the cost of access to this data declines, this alpha will be competed away. At the end of the day, embracing ESG isn’t a yes or no decision, it’s a “way of looking at things.” It is a holistic approach to long-term investing.
Deborah Spalding, the CIO of the State of Connecticut, offered attendees a view from the asset owner’s perspective. A former sustainable finance portfolio manager, Deborah is attempting to integrate sustainable finance into the state’s asset allocation, security selection and asset manager due diligence process. However, public pension plans face challenges to achieving this goal that foundations and family offices do not, such as:
- It’s difficult to integrate the long-term nature of sustainable investing with the liability duration of the state’s retirees. Many foundations and family offices have intergenerational mandates that require them to think long term, whereas pension plans like the State of Connecticut need to invest with a focus on the short and medium term;
- Fees are an issue as many ESG managers continue to charge premium pricing, especially on public equities. It’s difficult for public plans to pay these fees especially when a sizable amount of their equity exposure is invested in traditional index funds.
- Putting investments to work at scale is a challenge. A $30 billion public pension plan like Connecticut’s needs to execute $100 million in investments at a minimum in order to be meaningful (and the CIO indicated that Connecticut’s pension plan is not considered large). Ultimately, the state would like to integrate sustainability throughout its portfolio, but in order for the approach to go mainstream, investment managers need to be able to state the way in which ESG metrics “impact assets, revenues, margins, existing businesses, future businesses”, and so forth.
Participants on a panel titled, “Sustainability Factors & Methodologies” discussed how managers incorporate ESG into their process and the usefulness and reliability of current ESG data providers. While the quality of the data is not standardized across industries and is inconsistent across time periods, participants agreed that it is improving and that having some data is better than having none at all. As with traditional financial data, however, it’s incumbent upon the investor to dig further and not accept ESG data at face value. As one panel member pointed out, a number of larger well-capitalized companies understand how to present this nonfinancial data. These companies have established the correct committees, have filed the correct forms, etc., in order to rank well in some of the ESG databases. (Volkswagen being the poster child of this dynamic.) One participant discussed the desire to be able to get behind these numbers – not to have a static presentation where the numbers just sit there – but to be able to drill down and understand how these factors interact.
As investors, the ultimate decision of whether to invest in a security or not does not depend solely on the data; it’s the mosaic an analyst builds from the data that’s the key driver. ESG needs to be embedded into the fabric of the firm through the integration of fundamental and sustainable analysis at the security level, alignment of compensation programs and improved transparency, all to foster a focus on the long term. The CIO of Connecticut’s pension plan stated that achieving this goal may require better integration of the investment people and the programmatic people. At the investment manager level, one participant stated that the market remains bifurcated, with older firms attempting to overlay ESG analysis onto their traditional investment process and newer firms building ESG into their process from the ground up, weaving it into the core fabric of their company.
Bottom line: There was universal agreement that integrating nonfinancial metrics into the investment process helps drive investment into higher-quality companies — it’s how these metrics are integrated into the process that participants are trying to solve for. To cite a traditional and perhaps overused saying, it’s the journey that’s important, not the destination. It’s the avenue of inquiry stimulated by employing sustainable finance factors into the investment process that’s the key to investing in good companies and generating attractive returns.
David Dusenbury, CFA, serves as Managing Director and Senior Portfolio Manager at Cornerstone Capital Group, where he is responsible for strategic corporate business development. He also serves on the Executive Committee and Investment Policy Committee for Cornerstone Capital Investment Management (CCIM). David has spent 25 years on Wall Street, analyzing and investing in financial services companies.