Hello, and welcome to the Fisher investments Market Insights podcast, where we discuss our firm's latest thinking on global capital markets and current events. I'm Naj Srinivas; I'm the Senior Vice President of Corporate Communications here at the firm.
The task of investing often involves researching and evaluating fundamental, economic, political and sentiment factors that can influence the company or the broad market. Over the last decade, though, more and more investors have been including non-financial factors in their analysis in an effort to identify emerging risks and growth opportunities. For many of the largest institutional investors, and for more individual investors, this expanded view has incorporated, for example, environmental, social, and governance factors to expand how they evaluate a company's prospects.
On today's episode, we'll look at what's commonly known as ESG investing. We'll examine the history of ESG, its various forums, and the intricacies of incorporating an ESG approach or mindset into your investment approach.
To help us understand the world of ESG investing, we'll talk with Aaron Anderson. Aaron is the Senior Vice President of Research at Fisher investments and a member of our Investment Policy Committee. Through his years of experience with Fisher investments’ institutional and private clients, Aaron has built a wealth of knowledge about ESG.
And before we get into our interview with Aaron, I'd like to remind you to check out the market insights podcast page, where you'll find a full transcript of today's episode, along with older episodes, you can find the link to the page in our episode description.
I'd also encourage you to engage with Fisher Investments on all of the major social media channels. You can find us on LinkedIn, Twitter and Facebook. And if you have questions about investing or capital markets that we can tackle on the Market Insights podcast, email us at firstname.lastname@example.org. We'll answer as many questions as we can in an upcoming listener mailbag episode.
So with that housekeeping out of the way, let's get to our interview with Aaron Anderson on ESG investing. Enjoy!
We’re here today to talk about the very interesting area of ESG investing or environmental, social, and governance investing. Let's start at the top. Can you explain what ESG is, and maybe where it came from and how we've arrived in the investment industry to where ESG is today?
Oh boy. You know, the arc of ESG investing is a very long one. In fact, I would say that the moniker ESG, or the acronym, is relatively new in that process. I mean, various forms of ESG investing literally go back decades and decades and decades. It’s gone through multiple iterations of being called SRI—socially responsible investing. It's been referred to as other terms.
Today, the more common one is ESG, but the concept is really the same. It's for investors who want to try and align some of their social interests or their environmental considerations that they feel strongly about, and they want represented in their portfolio. It's managing assets in a way that reflects both financial considerations, but also those environmental, social, governance considerations that's important to people—and increasingly important to people these days.
So the United Nations provided a big boost to the ESG investing space when they helped co-found the Principles for Responsible Investment. Can you explain a little bit about what that is and how they serve to promote ESG investing?
Yeah, it's true. You know, what was previously the UNPRI is now just the PRI, although it's still supported by the United Nations. And they've really been one of the foundational organizations that's helped propel ESG investing here in recent years. And I think that's been one of the big changes that's taken place.
Years and years ago, ESG investing was sort of obscure. It mostly involved avoiding certain categories that you didn't want to be investing in. For some, that might have been things like tobacco. It might've been things like gambling stocks, other categories that people just didn't want exposure to in their portfolios.
And so the extent of SRI or ESG investing at the time was just to avoid those categories where you had some of the worst characteristics, some of the less favorable actors there. But ESG investing has really evolved since then to include not only those types of exclusions—that’s still a part of it to be sure—but also focusing on companies to promote them to make more positive environmental, social, other impacts. And organizations like PRI, among others, have really been key and helping propel that.
It's really creating a sort of a standard way of thinking. I should say standard very loosely because ESG investing really means many different things to different people. The amount of emphasis they want to put on it differs. The parts they want to emphasize differs. But at least now there are organizations like the PRI that not only promote ESG investing, promote things like the sustainable development goals, but help establish a framework that asset managers and owners can work off of and really highlight some of the positives.
One of the best examples of that is the sustainable development goals, the SDGs. So PRI was key to putting together a group of goals, societal goals that they feel like not just publicly traded companies, that society as a whole should shoot for. You know, there are a whole list of them, but it's things like improving the air, improving poverty, improving literacy, life on land life on water, lots of different specific goals that they have helped identify as being some of the key ones that many believe we need to get to for a more sustainable future.
And so it's just creating those frameworks that other individuals can work off of. They don't need to adopt every single component of that, but at least it gives people a starting point to start to implement that type of thinking and start to, you know, actually make decisions that might push society further in that directions into something like an investment portfolio.
So you've talked a little bit about the evolution of ESG investing and where it came from, some different flavors that existed before. You have, kind of, the construct of ESG as it exists today. When you look at ESG, what do investors have to choose from? What are the various flavors of ESG?
You can look at that it's almost a spectrum. At the one end of the spectrum, in terms of execution, is just basic screening out some of the commonly known less-ESG-favorable categories. All the way towards making that a primary determinant of the companies you might invest in – what are their environmental, social and governance policies? How well are they outlined? How well are they reported? How much positive change are they actually making? It really runs the spectrum in both regards, in terms of interest in ESG, and, from an asset management standpoint, how you incorporate that into an investment process.
So what's our approach to ESG, and how do we incorporate it for those clients who are interested in it?
Well, I think for one of the keys for us is making sure that we are at the forefront of ESG investing not to tell people that they have to have a heavy emphasis on ESG in their portfolios, but certainly we'll want to have all the capabilities to provide whatever level of ESG integration is important to our clients.
Now, often that does mean helping them decide how you might execute on that in a portfolio. And what are some of the ways you can go about that. But in terms of the level of emphasis, some people want a lot, some people don't want any, there are a lot of people in the middle as I mentioned. We want to make sure that we've got the research capabilities. We want to make sure we've got the data, the screening tools, everything that we would need to provide any level of ESG integration that our clients might want.
And so what that's meant for us is we've developed a number of different ESG-oriented portfolios, covering all different types of equities. You know, we've got broad global strategies that would incorporate ESG considerations into the management. We've got impact strategies that puts a much heavier influence on things like carbon reduction and the sustainable development goals. So again, really what we want to do is work with our clients to determine what level of ESG consideration is right for what they're looking to accomplish. We want to make sure we're very clear to them if we think that there are going to be performance implications to that, that they're very aware of what those would be. But then to have the capabilities to customize a portfolio to whatever level of integration that is most appropriate for them.
And, you know, for us just given our investment approach where we're more top-down focus – we're looking at countries and sectors first before we're thinking about the individual companies. We've got some unique opportunities to look at ESG through more of a top-down lens as well. So most of ESG analysis has done at the company level. It's whereas a company sourcing its materials where it's labor practices, what does its board structure? All these things that would comprise company-level ESG considerations, you can look at that from a top-down perspective as well. So as you're looking at a country, you can ask, well, what are their social policies? What are their environmental policies? How is their economy set up to provide, you know, more or fewer opportunities for individuals to come out of poverty and so forth.
Are there sectors, countries, regions where implementing an ESG strategy is easier or harder or, for example, more important than others?
Yeah, certainly in some of the areas – areas that have some of the biggest environmental challenges – are going to be areas like the energy sector, where being part of the energy sector is involved in fossil fuel production. And to the extent, you know, carbon reduction is an important ESG consideration to many people, that's going to be area that's going to tend to be looked on less favorably and probably be more restricted. And it's likely to impact the way you look at the sector more than say the technology sector, or sectors that just aren't involved in those business lines.
Materials is another one, particularly things like metals and mining companies where mining operations themselves, of course, tend not to be very environmentally friendly. Some are better than others, of course, but that tends to be a pretty heavily impacted sector.
From a geographic standpoint, I think it largely falls in line with “how many of those types of companies that I mentioned do you have listed in your equity markets?” So as an example, Russia is a country where fully 50-plus percent of the equity market is in one form of an energy company or another. Just that heavy influence by a sector that tends to be less ESG-favorable often means that Russia is a bit more challenged from an ESG perspective. Not all the companies there, but certainly a big component of their equity markets.
So when you're considering this area of investment, Aaron, how do you weigh environmental, social and governance factors against each other in the investment process?
Well, I think there are a couple of ways to look at that. One is more from a purely ESG perspective in terms of what are the good and bad that a company might be doing? And sometimes there are competing forces there. You can have a company that's got great environmental policies doing a great job there, but maybe not so great on the social. Maybe their labor relations aren't that good, and so forth. And so you do have to weigh one versus another to come up with a more holistic view of a company.
But I think it's usually the “E” and the “S” that get most of the attention, right? I mean the environmental policies, the social policies, those are the ones that people are mostly focused on. But I would say the evidence that better or worse environmental and social policies actually impact performance – that's a little bit of a harder case to make relative to governance.
From purely an investment standpoint, I would argue that governance tends to be one of the more influential factors. And that goes back well before the advent of ESG investing or SRI investing. I think doing governance analysis has always been part of, uh, investment analysis. But I do think that not only is that particularly important in having the biggest influence on returns – better-governed companies, you know, over time are likely to produce better results – I think one could argue. But I think it also goes in parallel to developing better environmental and social policies as well: better-governed companies are more likely to put more emphasis in some of those areas that are increasingly important. And so the two go hand in hand. But I think often when people think of ESG, they think a lot less about the governance than they do about the environmental and social practices. But I think just in terms of which is most influential on returns, I think there's a strong argument to be made that governance is really one of the more important factors there.
And that's not new. That's been the case for quite some time. And I think the increasing interest in ESG investing – even though it has focused a bit more on the environmental, social parts of things – it's bringing more of those governance practices to light.
So for an investor who's interested in ESG, how do they go about evaluating if that's something they want to incorporate into their portfolios? And if they do decide it's right for them, how do they actually go about accomplishing that?
Well, first I'd say investing, isn't the only way to accomplish some of the goals that people with ESG interests might want to do that. Which brings up the question, how much influence can an investor in a public equity actually have on promoting better ESG practices by companies?
I think there are multiple ways that that can happen, but you have to weigh the impact you're likely to have through something like an investment portfolio versus other things you could be doing, like maybe lobbying on your own or the way you vote, or other organizations that you're involved in. And so forth.
ESG analysis, you know, requires looking at lots of different companies over a well-diversified portfolio. It's really just not practical for an individual investor to get all the information that they need to make the ESG decisions that they'd want to. To be sure. And so I think in terms of building out a portfolio themselves, that's more challenging.
Now there are a lot more ESG options today than there have been historically. More comingled funds, whether they're exchange-traded funds, mutual funds and so forth, that do that type of thing.
But a lot of those, particularly the passive ones, a fault I've found in them is that they rely on some preset number of rules. And how the ESG fund an investor might consider lines up with their personal values really depends a lot on the rules that are built into the fund, the data that they're using, and the third-party providers that they're using. Because there's no uniform set of standards here, you know; the way one ESG organization might view a company can differ wildly from how another one might.
And so it really is going to ultimately come down to how much does the ESG exchange-traded fund that align with an individual's personal goals? Well, that has a lot to do with what third-party resources they're using and so forth. And there's a huge spectrum of differences there.
Sort of like how produce can be defined as organic, any number of different ways.
Yeah, certainly, certainly. But then I think ultimately this is an area that proves to be ripe for active investment management. Because having an investment manager that can customize an ESG strategy to a client's needs, that has the resources to do their own proprietary ESG analysis – I think all of that is critical to accomplishing what most ESG investors want to accomplish. So there are multiple ways to go about it. But I think the one that is most likely to align a portfolio with an individual investor’s ESG goals probably involves working with an investment manager who's got those types of capabilities.
So Aaron, for any topic as complex as ESG, for our listeners I always try to summarize three important takeaways. So from your experience and given your perspectives on ESG, what are the three most important considerations that our listeners should think about when considering ESG?
Well, number one, I think, as we said at the onset, ESG investing isn't just one thing there isn't a uniform set of rules you have to abide by. ESG does mean different things to different people. And there are different levels of in ESG integration that you can have in a portfolio. And so make sure you're having those conversations.
Two, I would say that all this is still relatively new. I mean, it's come a long ways, but ESG, I would say is most definitely here to stay. And if anything, interest in that is going to be growing over time. But as that interest grows, the tools and options you have for ESG investing are likely to grow as well. And so if you're frustrated by the options that are out there today for ESG investing, those are very likely to improve as we go forward.
And then three, I would say just reiterating the point that there are a lot of different ways you can have a positive societal impact. If you're concerned about the environment, investment decisions are one way you can reflect those views, but there are a lot of other things that you can do, organizations you can be involved with, in the steps you can take just personally or on a broader scale, to have a positive impact on these things. And, of course, I would encourage people to do that as well.
Well, Aaron, thanks so much for sharing your time and perspectives on ESG investing with our listeners today.
Yeah. You're welcome Naj. Thanks so much for having me.
Well, that was my conversation with Aaron Anderson on ESG investing. A big thank you to Aaron for joining us. If you liked what you heard today, remember you can subscribe to Market Insights wherever you get your podcasts.
And I want to remind you about two other places you can look for our latest content. You can check out our Fisher Investments channel on YouTube. And of course, for our latest capital markets insights go to the MarketMinder section of our website: Fisherinvestments.com.
Join us for our next episode. When we'll look at how to be a more literate and informed investor with Michael Hansen. He's the Senior Vice President of Research at Fisher Investments and the host of the new podcast The Well-Read Investor.
Until then. I'm Naj Srinivas. Thanks for tuning in. Be well.