Funds Europe – Padmesh, you mentioned that there is data, but how do you view the growth of what constitutes financial materiality when we look at some of the real-world events that have taken place last year; for example, companies’ lobbying activities, and whether that matches up with some of the social claims that they might make in public?
Shukla – That’s a very fair observation, and I go back to the point that we made about the pros and cons of, for example, the EU SFDR legislation – prescriptive, a helpful aspect in terms of standardisation, but prescriptive to a point that it may make the outcomes quite binary, i.e. green or not green, when in truth many sectors and companies are somewhere on that spectrum and it is too early from an innovation and technology standpoint to be slotting them in boxes.
The world of investment is quite dynamic and things are moving all the time, so being very prescriptive about what is good and what is bad sometimes may hamstring you from thinking more effectively around the questions that you have raised. Likewise, every sector will have its own nuances, and in our case, we use the Sustainability Accounting Standards Board (SASB) as a tool to determine what’s important and what’s financially material for a sector. You still have to look around for best practices and some of these may not be coming from these regulatory nudges that we are seeing – whether it’s the EU or someone else.
Håkansson – What’s very important when it comes to data is context – you can’t just aggregate numbers and provide KPIs and different metrics without really understanding the context. If you have a broad, global and well-diversified portfolio, it’s likely to have a different footprint or KPI performance than if you are investing in an actively managed equity fund in the Nordics. There are regional differences, and there are also different investment strategies and styles, all with different ESG outcomes. That discussion is lacking when you are trying to aggregate data at a portfolio level. For us, if we were to just provide KPIs at an aggregate level, it wouldn’t really say anything because the devil is in the details. You need to dig deeper and understand the context for the data to make sense.
When it comes to using and collecting ESG data, it’s also important that investment managers use data which they believe is most relevant for their beliefs, processes and strategies. We don’t expect our portfolio managers – internally or externally – to use the same data or use the same ratings or scores, for that matter. Different ratings should be used for different purposes. It’s therefore important for rating and solutions providers to be transparent as to what their products and services do and don’t do, because there are pros and cons to each methodology, and they can be used for different purposes.
When we work with our internal portfolio managers on defining their ESG strategies, it’s important that they buy into the data. That is to understand it, know what it does and doesn’t do, and how it can be combined with the other aspects they are considering as part of the investment process. We use different data points for different purposes both internally and externally.
When it comes to disclosures, we are mainly interested in understanding if the performance of a manager is actually what we were expecting. If we buy into a product which has a specific ESG strategy or way of integrating ESG, then the outcome of the fund’s ESG performance should be in line with the specific strategy. We don’t expect the fund to show something completely different. There are multiple ways of doing things and in the age of standardisation, we believe it is important that we continue to allow for different ESG strategies.
Murphy – I think back to the point around mandatory versus the additional data points. Initially we thought that the legislation would have more data points that would be mandatory, more like 32, when in fact at the end, it was 18 data points, but in total there are 66 data points. It depends on your strategy in terms of looking at not just the mandatory data points, but also the additional data points, and it’s a requirement for all the investment managers to understand all of them and think about what is most relevant for their strategy and how they would apply them.
One of the things we’ve been focused on is helping our asset managers. If that’s in the public space where there are a lot of data sources that already exist, it’s about helping them to identify those data sources, looking at the best coverage for their portfolios, aggregating that data and then helping them apply that to their portfolios – it’s very important to provide ESG transparency to underlying investors. In the private market space where the data does not exist, it’s important to go out and help them collect, analyse, monitor and report on that data, so this is a key requirement in terms of helping our clients to understand and report that data.
Guirey – Data is something that MSCI does and I absolutely hear what you’re saying with regards to coverage and data quality, there are lots of providers, lots of data. To Magdalena’s point, the portfolio managers or asset owners knowing the difference, understanding the difference, utilising different providers for different means makes sense if you truly understand the nuances between providers and the data.
The market is striving to provide coverage into private assets. In the listed space, the coverage has improved significantly and is in a much better place now than it was a number of years ago, but the private asset space is a challenge. By its very nature, being private makes it challenging to provide that coverage, but providers like MSCI and others are working to try and achieve better coverage in the private asset space. Real estate is an area where the coverage and the models are good, particularly if you’re measuring the portfolios, but into private equity, private debt, etc, whilst models can exist, without data it’s a challenge.
O’Hara – It’s important to remember why we require this disclosure and why we require this data. Ultimately the case for ESG is that it provides fund managers with an opportunity to differentiate themselves from others, to find edge, to generate alpha, to manage downside risks better, to identify opportunities that are going to provide attractive investment returns, and that’s ultimately why we’re trying to get additional data and disclosure from corporations. There’s a recognition that corporates aren’t going to give us everything we need to know because they’re not going to necessarily give us a relative view, they’re not going to volunteer information around some of the challenges and the headwinds that they’re really concerned about, so we need to go out and get some of that ourselves from different sources – regulatory bodies, news and other sources – and where there are gaps in disclosure, we go and get that from the companies and ask them additional questions.
In terms of materiality – and I speak in terms of the active equities space more than other asset classes – fund managers generally have a good feeling as to whether something is material or not and what the gaps in their knowledge and understanding are, and part of the role of ESG is to help them go and find that additional information. This is one of the dangers with regulation and mandating regulation, it establishes de minimis levels and we think perhaps the job is done, but there’s always a need for investors to go over and above that and find that edge. It goes back to what Magdalena said – it’s about how you analyse that data then and how you interpret it that gives you the advantage over other investors.
There are other activities that we will do to be good stewards of those companies in terms of engaging with them about their negative impacts. There are plenty of opportunities to improve the performance of corporations that don’t necessarily provide, in the short term at least, upside in terms of financial performance or share price improvements, but they certainly don’t provide downside risk, they’re not going to detract from the corporate performance, there are things that they can do better, and that falls within the remit of our stewardship activities and our voting.
Overall, in the long term, we think managing these issues better will help to enhance or maintain corporate performance, but it is hard to quantify the benefit. We shouldn’t just be voting on corporate governance issues; we should be voting on the whole ESG performance of the corporation and where it might be lacking or where disclosure might be lacking. You can vote against the report and accounts, that’s ultimately the conduit through which we have a vote and that talks to corporate disclosure, and if you think these things are material then that’s where we can vote against or abstain. You can also vote against individual directors or the chair.
Funds Europe – We have been living with the Covid-19 crisis for a year and have seen both sustainable and unsustainable business practices. How are you reflecting sustainability metrics into manager compensation as a result of what’s taking place at a micro level within companies? In our roundtable discussion last year, Patrick, you mentioned that at this year’s AGMs, things that will be factored into discussions are things such as remuneration and how workers have been treated and whether they were put in a situation that compromised their health and safety.
O’Hara – Last year’s voting season was a little bit early in some respects to gauge the corporate behaviour during Covid-19, and now we can look back on how the corporates behaved and were managed during that period. Did they get government aid? Did they cut the dividend? Did they lay lots of people off and furlough lots of people and then did they pay enormous remuneration packages to senior management which was really inconsistent with what they were telling us about how the business was challenged during that period? We can now gauge the consistency of the message and the behaviour over the period and integrate that into our voting.
I don’t know how well we will be served in terms of the proxy voting providers and the other ESG research providers out there in terms of engaging and understanding that, maybe we’ll have to do some of that work ourselves in terms of the newspaper articles and what we were told at the time, but I think it’s an important consideration now in terms of how not only did they behave during that period, what’s the plan going forward as well?
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