TruValue Labs’ first ESG Investing Forum on October 25, 2017 was held at Thomson Reuters’ world-class event space in Times Square, New York and was sponsored by State Street. We’ll walk you through some of the sessions and highlights from the forum.
Keynote: The Investing Enlightenment
“Technology breakthroughs, like artificial intelligence (AI), are breaking the through the final barriers to ESG Investing,” stated Dr. Robert Eccles, Visiting Professor of Management Practice at the Saïd Business School. He continued,
“Due to advances in Big Data and AI, corporations will need to decide if technology alone will report on ESG for them, or if they will disclose more themselves.”
Eccles demonstrated that three receding barriers still exist today — the first two based largely on myths:
- ESG Investing hurts financial performanceEccles shared a number of examples to disprove this myth. Later in the day, Dr. Stephen Malinak, again proves this one to be false when using strategies with TruValue Labs’ data vs. S&P 500 historical data.
- ESG Investing is against fiduciary dutyBecause of the myth above about financial performance, many investment managers believe that they can’t incorporate ESG Investing or data in their investment decision-making process, because they, incorrectly believe that it won’t generate the best returns or outcomes for their clients/investors.Conversely, ESG factors can actually help identify investment opportunities and uncover risks, it is imperative and part of fiduciary duty to incorporate ESG factors and data into investment decisions, because it’s providing a more complete view, particularly, if that data comes from outside of the company versus just what’s disclosed and known to all.See “Fiduciary Responsibility in the 21st Century” from the UNEPFI (United Nations Environment Programme Finance Initiative) for more information.
- ESG Investing doesn’t work with too-short time framesEccles acknowledges that there is indeed a disconnect between the timeframes in which corporate executives’ compensation is assessed (short-term) and decisions that they want to make for the long term on ESG factors. Many CEOs complain that they want to set strategies for the long term, but that they are burdened by short-term goal posts set by shareholders that don’t align with long term goal setting.The chart below shows the issue with short time frames for awarding compensation — a structure that needs to change.
The full “Investing Enlightenment” report is available here.
Text Mining for ESG, Intangible Risk and New World Alpha
Dr. Stephen Malinak, Chief Data and Analytics Officer, TruValue Labs, shared exciting research results from initial testing of TruValue Labs’ ESG data vs. the S&P 500.
Using proprietary ESG Momentum, Insight and Volume factors in TruValue Labs’ data, Dr. Malinak discovered outperformance versus the S&P 500 when compared to traditional smart beta factors.
If you’d like to learn more about the Data API or Dr. Malinak’s testing, contact us here.
What is the Meaning of ESG Materiality?
As moderated by Tim Youmans, Research Director of the Strategic Investor Initiative at CECP, the panelists discussed how the Sustainability Accounting Standards Board (SASB) and the United Nations’ Sustainable Development Goals are leading the conversations around sustainability in the financial world.
Eli Reisman, Senior Product Manager at TruValue Labs, shared the correlations between how building standards have changed after LEED standards became ingrained in the architectural and construction world. “SASB is aiming to do the same for the financial world that the LEED standards did for many of the buildings you see across Manhattan today,” stated Reisman.
Janine Guillot, Director of Capital Markets Policy and Outreach, SASB, spoke about how if companies have standards, they’ll compete to improve on these metrics. When asked by Youmans on whether or not standards will be adopted by the financial community, Guillot commented with confidence that she is 100% that it can be achieved.
Switching gears beyond the discussion around standards, Gianna McCarthy, Director of Corporate Governance, New York State Office of the Comptroller, stated,
“ESG data now shows opportunities for alpha. That’s new.”
Guillot added that it’s important to show how ESG factors relate to both risk and return.
Overcoming Perils in Practice of ESG Integration
Hendrik Bartel, CEO and Co-founder of TruValue Labs, engaged in lively conversation with a panel of industry practitioners on the challenges with integrating ESG factors into the investment process and why it’s necessary to do it.
When Anthony Valente, Managing Director, Wealth Management SVS Team, Morgan Stanley, first heard about ESG Investing years ago, he said he thought it was a side topic that was important for a subset of clients and “environmentalists”. Over time, his opinion has changed,
“Now we know ESG investing is not just about hugging trees, it’s also about making money.”
Several panelists agreed that ESG factors helps them find opportunities and identify risks that they might have otherwise missed without having ESG data in hand. You can have it both ways now.
Bruce Kahn, Ph.D., Portfolio Manager, Sustainable Insight Capital Management, noted, for example,
“Investors know people want to work at the companies where they’re treated well. ESG is about companies being well managed.”
On another topic, the panel addressed the marketing challenge of the terms “ESG Investing.” “When talking to smart advisers and clients, explaining ESG metrics is one of our biggest challenges,” noted Anna Snider, Head of Due Diligence, Global Wealth and Investment Management, CIO Office, Merrill Lynch.
All four panelists agreed that “ESG Investing” is less understood than “sustainable investing” or “impact investing” by individual investors and advisers. “ESG Investing” suffers from a marketing problem, as it’s too complex to explain outside of the team using ESG factors to make investment decisions.
The Global 250 and Sustainability
The final session of the day was based on Thomson Reuters Global 250 report on the top 250 global corporations that create the vast majority of the world’s total greenhouse gas emissions. With the top 100 emitters producing over 70% of the world’s total greenhouse gas emissions, many asked Thomson Reuters to increase the scope of the prior report. Robert Jenkins, Global Head of Research, Thomson Reuters, moderated the session on this important topic and how ESG is impacting both investment decision making and actions by some of the world’s most important players, those that emit the most.
David Lubin, Co-founder and Managing Director, Constellation Research and Technology and report collaborator declared,
“The top 250 emitters will determine how we manage our future world.”
An overriding theme wove through the discussion on how companies that don’t work on ESG practices would no longer be viable investments in the future — making the inclusion of ESG factors a critical part of the investment process. Michael Garland, the Assistant Comptroller for Corporate Governance and Responsible Investment, New York City Office of the Comptroller, noted,
“Regarding nonfinancial metrics like ESG, failure to manage non-financial metrics, like ESG, is hugely risky.”
Douglas Beal, Director of Social Impact, The Boston Consulting Group, added, “Companies that do ESG well also have good alignment between the Head of Corporate Governance and the business units.”
Mark McDivitt, Managing Director, Head of ESG Solutions, State Street Global Exchange noted that ESG data is just another way to gain information on the health of a company, adding that TruValue Labs is providing a new source of ESG data using Big Data that wasn’t previously available.
The Global 250 report will be available on Thomson Reuters’ Sustainability blog this week.
We are excited that our ESG Investing Forum was well attended with nearly 150 participants. We thank everyone who helped make it happen from the speakers to our event partners, State Street and Thomson Reuters.