Speaker 1:

Maybe it's the pandemic that has caused a realignment of values. Maybe it is a growing collective consciousness that we need to get more involved that the health of this blue marble we call home is dependent on all of us shareholders and corporations, collectively mobilizing to make a better world. What began in the sixties as Sri or socially responsible investing has today morphed into ESG, environmental, social, and governance, three pillars supporting an ethical structure for conducting business. It's too big to ignore assets. Now exceed 7.8 trillion in us dollars worldwide across dedicated ES G mutual funds, ETFs, institutional mandates, and private funds. And it's accelerating more than 1.3 trillion of net inflows into these strategies have materialized since the start of 2019 Broadridge estimates that assets could grow to 14 to 19 trillion by 2025 and 20 to 30 trillion by the end of of this decade. But it's complicated.

Speaker 1:

New regulations increase scrutiny to root out greenwashing and a focus on net zero goals. Just to name a few items makes this type of investing complex and hard to understand. Welcome to the point. I'm your host, Matt Schiffman of principle with distribution insight. Today, we're gonna look at the current ESG landscape to help make better sense of it all. I've invited JAG Alexia to join our podcast. JAG is head of ESG insight at Broadridge financial solutions where he advises asset management firms on business strategy, product innovation and global distribution with a focus on sustainability. Welcome to the point Ja,

Speaker 2:

Thanks Matt.

Speaker 1:

So Ja let's start here from your point of view, what's driving ESG adoption in the us marketplace.

Speaker 2:

Well, Matt, I'd say there's multiple factors first and foremost, it's recognition by asset managers and corporate issuers and institutional asset owners that ESG factors are financially. These factors have an influence on corporate performance and on shareholder value. And that's really been the sea change that we've seen occur over the past decade earlier, approaches to ESG or socially responsible investments were more based on ethical considerations. And we'll call that you ESG 1.0, but it really took off with ESG 2.0 when financial materiality and risk considerations came into the picture. And I'd say, this came about with increasing awareness of the magnitude of certain ESG risks, for example, climate change and energy transition risks coming really visible. And it's that awareness along with a growing conviction that investors might make a difference with their capital and that they could do so through various means. So let's take the issue of climate. For example, it's not just through avoiding companies with high carbon emissions, but by engaging with those companies as shareholders to drive transformation and also investing in other companies that create products and solutions that could drive the energy transition. And of course not just environmental issues or climate issues, but these considerations also play a role in social issues to which people have much greater sensitivity today. One additional point, I would add that in addition to asset owners and asset managers and corporate issuers shaping the conversation, regulators are on the cusp of helping to drive adoption.

Speaker 1:

So I'm curious, Jack, do you think the pandemic has had any impact on this? Did it accelerate the awareness?

Speaker 2:

It certainly did. I mean, the pandemic did have an impact and the reactions of corporate executives to the pandemic and especially their reactions vis a V their workforce practices raised awareness among the public as to the social issues and the importance of not just the social issues within the company, but across the supply chain, uh, human rights and all the companies that provide goods and services that consumers end up purchasing

Speaker 1:

ESG seems to be on the lips of everyone everywhere, from the points of distribution, the broker dealer community, to the asset managers, to the financial advisors and the, the end investor. Can you share the, the different approaches to ESG from a asset manager point of view?

Speaker 2:

There are several different tools that manager use to achieve their ESG objectives. The most familiar one is exclusionary screening, getting rid of something in a portfolio that an investor sees as harmful or controversial or risky, but screening or divestment is not seen by some asset managers or investors is the best way to affect change. You basically get of up shareholder rights. So a different angle or approach is shareholder engagement or active ownership by which manager will work with investee companies to identify risks and transform their operations and improve their ESG performance over time. So another approach that managers take is positive screening or best in class screening, where they choose to invest in firms with better ESG profiles or improving ESG profiles. But by far, the most common approach is systematic holistic integration of ESG factors in the investment decision making process and through shareholder engage.

Speaker 2:

And this puts emphasis on understanding the risk and valuation dimensions related to ESG in every company or asset in which a manager invests. And it's typically coupled with active ownership. Now at the end of the ESG spectrum, you also have sustainable and thematic strategies investing in companies that create products and solutions for more resilient future, which also might offer significant wealth creation opportunities. Over time. Examples include renewable G diversity and inclusion or, or broad themes related with the sustainable development goals. Often there's also overlap with impact investing, which takes sustainable investment a notch further by emphasizing measurable positive outcomes.

Speaker 1:

So Jack there's a lot of conversation as managers begin to tilt their investment offerings to a more ESG thematic approach. There's a lot of conversation about greenwash. Can you explain that to us? What is it in what's the concern

Speaker 2:

Greenwash in essence is a misalignment between investor expectations and what the, that management company does or what the financial intermediary or financial advisor is delivering. So oftentimes it's a misunderstanding of what ESG is about and the spectrum of different ESG investments. And it could be intentional or non-intentional green water that arises from a number of different factors. It's become the focus of, uh, investigation for European supervisory authorities. The recent sustainable finance roadmap, for example, has put it as a centerpiece of what they're trying to understand and how to improve ESG investing.

Speaker 1:

Do you think that the us will look more like Europe in terms of its movement of capital in this direction and even the regulatory environment in five years or 10?

Speaker 2:

Yeah, to answer that question now, let's think a little bit about what Europe looks like today. Uh, most noticeably more than a hundred, hundred percent of net flows to local European funds over the last year or so, went to ESG products. And, and that's an incredible number. If we add cross border international funds, it's about 80% or so still very high compared to about 15% in the United States. Second, as you mentioned, Europe has embarked on extensive ESG regulation, most prominently for asset managers. This includes the sustainable finance disclosure regulation, or S FDR, which aims to increase transparency by specifying what disclosures are required of asset managers. These disclosures include the principle, a impact indicators, which will be a, a real challenge to deliver at a product level in coming years. And then this summer on the regulatory front, we have the method amendments that come into force where distributors will need to ask clients about their sustainability preferences.

Speaker 2:

So will the us look more like this in five to 10 years? Probably not. To that extent. However, as mentioned, there is movement on the regulatory front, the department of labor Dool is easing restrictions on the use of ESG in retirement plans. And the SCC of course, is looking at improving climate and ESG disclosures from both corporate issuers. And on the asset manager side, I would say that it's important to keep in mind the underlying structural differences between the us and European markets that will play a role, how are financial solutions delivered and how are funds sold in each of those regions? For example, in the us, you have the distinctive and extensive use of model portfolios, and you also have a much greater reliance on passively managed building blocks, especially ETFs in Europe. The business remains largely actively managed. So these kind of structural differences will keep the us from looking too much like at Europe, one additional factor I'd point out is to what extent large global managers will carry their best practices around ESG across borders. So in the past, this might have been prevented as us executives dismissed. ESG has probably not relevant into our marketplace, but the growth and the flows in the past year and the conversations everyone's having makes it clear that ESG is now a priority. So you will likely see increasing convergence.

Speaker 1:

Can you envision a time downstream that an asset manager will have say two different type of offerings, one non ESG and one E G? Or is that just a, a branding possibility?

Speaker 2:

Well, you have that already today. And I don't think that is ever going to go away. There are many different approaches to investing, and it's about being clear on what you are trying to achieve as a steward of assets for a different client base. And it's not all or nothing, but as you suggest, yes, it is something that needs to be managed very carefully, especially on the public relations and the, on the media front, because there will be continuous scrutiny as to what a company is doing. Let's say on their market cap way, indexing book of business versus their sustainable investment business. I don't see a reason necessarily why those can't exist together in one place. As long as the company is very clear to all stakeholders as to what they are offering and what they're trying to achieve.

Speaker 1:

Why do you think there is so much con fusion on defining ESG in the marketplace?

Speaker 2:

Part of the reason is that you have many different roots to the practice whose branches have grown in multiple directions. So the topics become quite complicated around various issues and the objectives and the tools and the approaches that we've mentioned. There's a ding array of material ESG issues that you have to map to any given company and often this conflicting data. So it's really hard with just one issuer. I imagine putting all of that together in, in a large portfolio, and then there's divergent views on how these issues should be addressed, whether through investment management decisions or through stewardship, the biggest source of confusion is really the long learning curves and the different levels of understanding among investors, advisors and the media, and, and this adds to the confusion. So there's a risk that how investors think of ESG might be misaligned with what a manager does.

Speaker 2:

And another source of confusion I'd say, has been linguistic laziness in this space. Oftentimes responsible investment ESG and sustain investment has been used interchangeably to refer to the same thing. You know, the topic is complicated and confusing. When, for example, in Europe, regulators have worked meticulously for several years to craft the SFD R and printed ink on hundreds of pages. And even one year after it's come into force, there's still no consensus whether a fund that promotes ESG characteristics. That's the essence of an article eight fund, whether that type of product is in fact, an ESG fund. So we have a long way to go

Speaker 1:

Jack, our surveys show a pickup and interest by retail investors. Why do you think that is

Speaker 2:

The public today has a greater awareness of a wider range of issues that they care more deeply about issues such as climate change, social and economic inequality. I'd say the treatment of workers and human rights in the supply chains for producing goods and services that we consume. All of this is on their minds. And the media has up on that zeitgeist and has amplified it. And that awareness is coupled with a growing belief that as consumers and as investors, we might have the power to help affect change organizations such as three fifty.org. The divestment movement deserve a lot of credit for raising the level of awareness and for empowering investors and stakeholders. For example, students at universities to push endowments towards greater accountability. And no matter what you think about divestment, the movement itself has elevated the discussion on climate risk and brought us to where we are today. Focusing on decarbonization in Paris, alignment and net zero. So overall I'd say it's been a long road and an evolution as investors and asset managers have gone about identifying financially material ESG issues, dialoguing with corporations about it, and the corporations themselves connecting the dots between ESG and shareholder and stakeholder value every day. CEOs. Now talk about sustainability, the media amplifies that message and all of this translates into a pickup of interest by retail investors.

Speaker 1:

I know you are advising the asset management community. What kind of questions are they asking you and what are you telling them?

Speaker 2:

Well, they're asking what do we need to do to build our capabilities, to respond to the increasing demand for ESG? They're asking about how do we align our existing businesses? It's the concept of sustainability? What data sources should we access to be able to effectively integrate ESG and to pursue active ownership and stewardship activities? They're asking about collaborative engagement opportunities. So for example, how do we join the net zero asset managers initiative? And what do we need to bring the table to build greater credibility in the space? In the end, they're really looking very closely at the different products and solutions that are being created and trying to figure out, well, what are the gaps in the marketplace and where do we need to go next to fill those?

Speaker 1:

What are the three things? Every advisor financial advisor should know about ESG

Speaker 2:

First, that there's not one approach to ESG, but many the topics become more nuanced and advisors need to continually educate themselves. And at the same time, try harder to understand client preferences. So do clients want to invest in companies that are making a better world, or do they just want market exposure and avoid the most harmful issuers or most controversial ones as mentioned earlier, there's a giant risk of misalignment of that understanding and expectations between the clients and the advisors and the advisors need to very carefully manage that. Second. I would say that there is evidence that performance does not suffer through ESG, and this concern really should have been late to rest a long time ago. But luckily now we have countless studies, the on both by asset management companies and by the academic community and a few big Maita studies that put it all together.

Speaker 2:

And it shows that ESG does not necessarily result in worse performance and that it could actually improve long term shareholder value. So advisors should be more proactive and pro pair to share that evidence, to put these concerns to rest. And finally, third, I would say six out of 10 financial advisors use ESG in their solution set and that number's growing. So if you're one of the four that don't, you're likely putting yourself at a competitive disadvantage, it might not be evident today, but a few years down the road with wealth trickling down to younger generations that seem to care more about this topic. It's likely to become a game changer for them.

Speaker 1:

So let's get to the point, how can asset manager help educate advisors and their clients

Speaker 2:

Managers probably need to be more creative about how they engage with advisors. There's a lot of information about ESG now, noise and clutter out there today. And it's increasingly hard to digest. What's important. Most asset managers are producing thought leadership on ESG topics and that's needed, but it's not enough to reach and engage with the advisors and the clients. So the question really is how do you produce easy to understand focus content that financial advisors can push to clients? For example, case studies of how top tier advisors have rounded out their suite of sustainability solutions could be really useful for those advisors that are just starting out on their journey in ESG and perhaps workshops with advisors so that they can share their experiences that they've had with clients. Also, firms should be ready to deliver information in different ways, aligned with how people process information, some preferred print, some preferred digital others, podcasts, and webinars and videos. And in the end, what matters is the authenticity and the transparency and giving that information on the process, but as well as the outcomes that a manager is able to achieve and the impact that they're having in the real world by pursuing these ESG and sustainable investment strategies, and to share those stories from portfolio managers and stewardships on how they are really making a difference, despite all the challenges,

Speaker 1:

You know, Jack, we would agree with you 100% because in our surveys, which you are aware of the advisors tell us that they look to the asset management community first as the number one source of information. So the asset management community has a great opportunity to further educate advisors and their clients on this most important topic. Jack, thank you for sharing your thoughts and educating us on ESG, and we will be coming back to you as this whole topic evolves. Thank you.

Speaker 2:

Thank you, Matt. It's been a pleasure to be here.

Speaker 1:

Thank you JAG for joining me and thank you to those listening. Please tune into our next podcast where we'll further explore the front lines of where data intersects strategy.