Interview: It’s cool to be an ESG expert

Amid an ESG backlash, Texas should be recognised for its contribution to renewables, American Century Investments’ Sarah Bratton Hughes tells Piyasi Mitra. She also discusses her preferred ESG investment approach.

“I have not been this popular since high school,” jokes Sarah Bratton Hughes. As head of sustainable investing at American Century Investments, she associates her rise in popularity with the rise of ESG investing. The same applies to others in similar roles, she says.

“Initially, nobody wanted to take my meetings. I have suddenly gone from being in the broom closet to one of the most in-demand people in my field!”

The firm, which manages around $218 billion (€204 billion), is headquartered in Kansas City, Missouri. Bratton Hughes joined it in January last year and is based in its New York office.

Before that, she’d been with Schroders in New York, joining the UK-based asset manager as a product executive for US equities in 2011. The first mention of ESG in her job title came in 2018 when she became Schroders’ investment director for US equities and sustainability/ESG.

Best-in-progress

Explaining how the ESG landscape has changed, she says: “Last year saw fund managers striving to achieve real-world outcomes juxtaposed with long-term financial returns, giving rise to the concept of best-in-progress over best-in-class.”

This best-in-progress idea is important. There is a need, she says, to ensure realistic transition programmes for businesses that can deliver real-world outcomes and compelling financial returns.

The investment approach that excludes ESG laggards while focusing only on best-in-class performers has not delivered tangible results worthy of mention, Bratton Hughes says. “Only a well-diversified portfolio can meet long-term liabilities, so the best-in-progress approach tends to have a better value tilt from a portfolio perspective.”

Texas backlash

Given the current groundswell of opposition to ESG in the US, her comments are significant. The best-known pushback has been in Texas, where Republican leaders in the oil state have vociferously challenged asset managers over fossil fuels divestment. Last year, the Texas Senate Committee on State Affairs scrutinised sustainable investment practices.

In Bratton Hughes’ view, Texan decarbonisation endeavours deserve a measure of recognition. “Texas is neither anti-ESG nor anti-environment. The ‘E’ that it finds offensive is exclusion,” she says.

“Initially, nobody wanted to take my meetings. I have suddenly gone from being in the broom closet to one of the most in-demand people in my field!”

Indeed, Texas is a key player in renewable energy. According to the state’s comptroller, it is a leader in wind-powered electricity – producing nearly 26% of US wind energy in 2021, for example.

Bratton Hughes says: “There are more renewable jobs in Texas than legacy fossil fuel jobs, which is indicative of a transitioning economy.”

She adds: “Some of our [American Century] companies, particularly the ones that have historically been offshore-rigged, are transitioning to offshore wind. They are able to do it quickly owing to their embedded worker base that knows what they are doing.”

Based on research, she says, American Century Investments envisages sustainable investing will become recognised as not only a risk mitigator but also a generator of alpha. Calling this concept Alpha-plus, the firm believes that integrating ESG factors into investment processes has the potential to provide market-beating returns. These will be driven by how effectively companies pursue sustainability, as well as by traditional financial alpha.

Bratton Hughes thinks the current energy and food crisis will drive global emissions upwards in the short term. However, the need for energy independence and rapid innovation should accelerate the transition to renewable energy and generate attractive investment opportunities.

Biodiversity and food were among American Century Investments’ focus areas last year, and she is confident that a combination of the two will gain further traction in 2023. Some 55% of the world’s GDP – that’s $41.7 trillion – depends on biodiversity and functioning ecosystems, according to Bratton Hughes, making them important factors in risk management when assessing investment opportunities.

Nordic to drive best-in-progress

As she sees it, Nordic countries will help the best-in-progress view of companies to prevail. “They have been driving change for a while now. I think their evolution from best-in-class into best-in-progress will set the tone in Europe for years to come.”

Internal research, she says, shows that asset owners across Nordic countries and the Netherlands mostly choose Article 8 and 9 funds – those with a higher level of sustainability factors, as categorised by EU sustainable investing rules. It is only a matter of time before Article 6 funds – those with no sustainability features – are out of the picture.

Sarah HughesMore broadly, she expects Europe to continue leading on corporate disclosure. In contrast with US attitudes (a debate highly pertinent to the Texas saga), the European notion of fiduciary duty often includes a ‘double materiality’ perspective. “It is not just about what the company is doing for your investments, but what those investments are doing in terms of producing a societal return,” she says.

Europe would continue, therefore, to lead on corporate disclosure, particularly concerning the climate, she says.

The shift in the regulatory environment is palpable, with the Sustainable Finance Disclosure Regulation taking greater effect. But leaving the EU aside for a moment, she says the industry is also witnessing an influx of proposals from the US Securities and Exchange Commission, the Financial Services Agency in Japan, the Financial Conduct Authority in the UK, and Australian and Canadian regulators.

This should ‘concrete’ the regulatory pathway towards the normalisation and standardisation of sustainable investing. That pathway was first “like standing on sand, but now it is like standing on quicksand”, she says.

Bratton Hughes considers herself part of the “second generation of women” to influence the ESG landscape. Highlighting the rise of ESG education, she envisages a point where ESG is considered core to investing so that job titles like hers aren’t needed.

“Many leading business schools today are offering courses on environmental sustainability topics,” she says. “It is great to see an entire generation getting educated differently.”

© 2023 funds europe

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