How Can You Measure Responsibility?

Audio Description

Responsible investing is on the rise, but how can you be sure your portfolio is truly delivering on this dimension? Valerie Grant, Chief Investment Officer for Responsible Investing at Bernstein, delves into the key metrics she uses to measure responsibility in her flagship strategy—Responsible US Equities. Separating anecdotal evidence from hard data takes ingenuity, but Valerie applies the same level of rigor as when she’s evaluating income statements, balance sheets, and cash flow statements. 


00:00 - 00:29

Welcome to On Purpose. I'm your host, Travis Allen, Senior Investment Strategist and National Director of Purpose Driven Strategies at Bernstein. Today, I'm delighted to share a recent interview with my friend and colleague, Valerie Grant, Senior Portfolio Manager for Responsible Investing. Valerie was recently recognized as a global leader in ESG investing by the top 100 women in finance.

00:29 - 00:57

She also plays a key role in mentoring and developing young professionals at AB through our Black Employee Resource Group. Valerie came on the podcast to discuss responsible US equities, a strategy she developed and now manages that is really at the center of our responsible investing solution set. But for starters, Valerie shared a bit of her personal path to becoming a responsible investor. The seeds were planted many years ago.

00:57 - 01:24

So going back 1994, I decided to go work for Ben and Jerry's and I was a newly minted Harvard MBA. But I said, wow, there's an opportunity to join this company that's really focused on corporate social responsibility. And I joined the company and really started to get a better understanding of how they tried to integrate purpose and profit.

01:25 - 01:56

So fast forward, my career took different paths. I joined AllianceBernstein almost 15 years ago, and in 2011, when I was still a research analyst, I went to an event actually hosted by 100 Women in Finance and it was on sustainable investing. So this is now many, many years ago. And so I said, wow, I think this is really interesting. And I could be implementing some of the discipline and investment strategies that I've been building over my career, but put them to work in a portfolio.

01:56 - 02:29

And so I really started kind of noodling on the idea, you know, that long ago. And so I was thrilled when I was asked to launch this strategy, responsible US equities, which we introduced in 2018, because it really, for me, reflects sort of a culmination of many of my earlier career experiences and, quite frankly, my passion and my values. Our discussion then pivoted to how responsible US equities, which internally we referred to as Re-USE for short, makes decisions about what is responsible and what isn't.

02:30 - 03:02

We have certain values and aspirations for the portfolio overall. And then we also look at the company-specific or stock-specific environmental, social, and governance issues for every company that we consider for the portfolio. So looking at the overall portfolio objectives, we are very much focused on environmental stewardship and so we measure the carbon emissions as actually the CO2 equivalent emissions per dollar of sales, the CO2 equivalent emissions per dollar invested.

03:03 - 03:12

And we seek to be substantially below our benchmark, which is the S&P 500. And currently I think we're at more than 65 percent below the benchmark on that dimension.

03:12 - 03:43

We also look at measures of corporate governance. So we have what we call a board effectiveness index. And this is something we actually developed internally on the team. We have over two dozen key performance indicators that relate to corporate boards. We know how many directors they have, how the committees are structured, whether or not they have sufficient independence on the board and on specific committees. We look at the diversity on the board. We look at the range of skills and on it goes.

03:43 - 04:14

And so we actually measure companies that we're considering and we seek to be better than the market on that dimension as well. And then finally, we also look at the S in ESG. And for us, this is sometimes hard to measure, but we've actually come up with some data and key performance metrics on that as well. So currently we look at the gender diversity on the board as one indicator of diversity and inclusion. We also look at the corporate equality index, which is a measure of LGBTQ equity within the company.

04:14 - 04:46

We're in the business of picking stocks. And so when we're evaluating companies for inclusion in the portfolio, we ask ourselves, what are the most important environmental, social, and governance issues for this company? So based on the sector that it's in, based on its operations, what's most important here? And then we drill in on those issues and those really do vary from company to company. Valerie mentioned metrics, and one of the key metrics for Re-USE is the ESG improvement ratio. I asked her to unpack that a bit.

04:47 - 05:05

Basically, this is the percentage of companies in our portfolio that have demonstrated improvement, meaning their ESG rating has actually improved. They've received an upgrade, essentially. And so we look for companies that are improving. We know that most companies are not perfect.

05:05 - 05:28

Right. So very few companies are perfect when it comes to corporate responsibility. But we want to invest with those that are actually on the right path or improving. Obviously, that makes good sense from a responsibility perspective. But we've also done some analysis internally that shows that improvement in corporate responsibility really goes hand in hand with excess return as well. And so that's one of the reasons why we include that metric.

05:28 - 05:57

We look constantly for new sources of data that give us insight into how companies are actually performing, because, as you know, Travis, because we work together for a while, I'm a numbers person, so I'm always looking for the data, I want to see the evidence actually that companies are performing, not just reassurances from the management teams. What would you like to be able to report on that you don't have data to report on today? So what's next? What are some of the things that you really want to to be able to to add to the measurement?

05:57 - 06:07

My focus right now is on the S in ESG, particularly as it relates to labor management practices and employees and how they're treated.

06:07 - 06:37

What we've seen with the COVID-19 pandemic is a real focus on employee safety and employee welfare. And we are actually evaluating a database now that would give us a lot of information on corporate practices as it relates to employee welfare, everything from the size of the retirement plan, whether or not there is a matching component to the plan, the level of participation in the plan, the benefits that relate to employee mobility, including things like tuition assistance, et cetera.

06:37 - 06:49

And so, again, while we have some anecdotal evidence about what companies are doing, we're really seeking to look at this on a more systematic basis and to incorporate that into our portfolio construction process.

06:49 - 07:19

That's very promising. Stay tuned. Valerie's reference to ESG ratings prompted me to explore the wisdom of solely relying on third-party ratings. This has come up a lot lately as we've seen a proliferation of ESG products, including ETFs, but we consider active management better suited to responsible investing. Here's a bit of our exchange. So in full disclosure, we subscribe to the ESG ratings data providers. We subscribe to a range of data.

07:19 - 07:37

But one thing we found with ESG ratings in particular is that many of them are actually backward looking, meaning what they're documenting is what a company has done in the past. What they are less able to capture is what a company, the path that a company is on and what they might be doing in the future.

07:38 - 07:55

Moreover, for the most part, the ESG ratings are not put in the context of the overall drivers of equity value. And so we don't rely on third-party ratings for investment decisions. We simply view ESG ratings as one of many sources of data.

07:55 - 08:18

You know, I've had some conversations with clients about this question around, you know, what's the ESG rating for your portfolio? And I talk to them about the fact that if you want to invest in change, sometimes you have to own companies that don't have stellar ESG ratings today. But as you said, there's evidence that they're making investments that are going to improve their ESG ratings in the future.

08:18 - 08:53

So one of the questions that I usually get from ESG, environmental, social and governance, skeptics is around concrete examples where ESG research has changed the portfolio decision. So I was wondering if you could share one or two examples just to bring it to life of how we utilize this ESG research in order to perhaps have a portfolio that looks different than it would if we didn't have this focus on environmental, social, and governance issues. We have many examples of how our ESG analysis has informed our investment decision making.

08:53 - 09:27

I'll pull just one example, Johnson & Johnson. Johnson & Johnson is a company that screens very well for us based on its valuation, the dividend yield, a host of other financial characteristics. But at the time they were actually confronting significant litigation risk as it relates to talcum powder. And so we said, OK, well, let's look into this. So that's our first step is not to jump to conclusions, but to actually do the analysis. And unfortunately, what we found is that there has actually been a pattern and a practice of product safety issues across the enterprise.

09:27 - 09:59

And that really called into question for us the culture of compliance within the organization as well as board oversight. So that was an instance where we decided not to own a specific security. We then pivoted to diversity and inclusion. Given what we've been living through here in the US with the calls for racial justice, I wondered how Valerie evaluates diversity and inclusion when making portfolio decisions. We really look at diversity and inclusion primarily at the board level, but not exclusively. So at the board level,

09:59 - 10:09

we have very good data on the composition of the board of directors of all of the companies in our purchase universe, and we look at diversity broadly.

10:09 - 10:37

So not just gender diversity. We look at racial and ethnic diversity, the diversity of skills represented on the board, the number of board members that have financial experience and financial acumen. And we're really looking for evidence of diversity of thought and diversity of perspectives at the board level, because we know that companies can't anticipate everything that might happen in terms of implementing their corporate strategy, but

10:37 - 11:12

if you have the right people around the table, you should be able to respond and be nimble and act accordingly when you have issues that come in your path. Now, if you take it down to the senior leadership and the rank and file within a company, the data is much harder to get. And believe me, I've tried. And unfortunately, there's not a lot of disclosure about the diversity characteristics inside of companies. We ask, and so we do engage with companies on these issues. There are some that have very good reporting, but there are others that are really lagging. And for those that don't have good disclosures, we ask even more questions.

11:12 - 11:34

So unfortunately, we don't have a database we can tap into, but we do have virtually unfettered access to the management teams and we most certainly do ask them about their diversity and inclusion policies, as well as practices. For a lot of our responsibility focused clients, climate change is probably their number one issue. So Valerie explained how Re-USE helps abate climate change.

11:34 - 11:46

First and foremost, we actually limit our exposure, so we limit our exposure to companies with excessively high emissions. So we explicitly screen out companies that are high in that regard.

11:46 - 12:10

But then when we look at companies that do have CO2 equivalent emissions, we look for specific targets for reduction over time and we measure and monitor those reductions because we want to ensure that the companies are actually, you know, held accountable for what they've said they will do. And in addition to that, we look for companies that are really enabling, you know, the low carbon future.

12:10 - 12:32

So as an example, I was just on a conference call with the chief financial officer of NextEra. NextEra is a public utility company based in Florida. So they provide electricity, but they also are one of the largest providers of wind and solar power in the country. So their capex, their capital has been deployed to literally build renewable energy.

12:32 - 12:57

And it was such an inspiring conversation with the CFO. First of all, their numbers are fantastic. But then she was very optimistic about the adoption of renewable energy by more and more segments of the economy. And so that really gave us a lot of confidence, first of all, in their strategy, but secondly, in the fact that there is some sign of hope as it relates to a lower carbon future.

12:57 - 13:20

Are there still any companies that do not have a clear climate goals in place? And what can we do in order to to get those companies to to move forward and adopt some clear metrics? The answer is yes. There are most certainly companies that do not have clear climate related goals in place, and the reasons for that vary.

13:20 - 13:48

So I would say that as you look at companies that are more small cap or mid-cap, right, they may not yet have a chief sustainability officer or a senior executive who is squarely responsible for not just that information, but the operational implications of those goals. So we find usually with companies that are a bit smaller that they may not be as far along.

13:49 - 14:02

But most of them, quite frankly, are moving along because many more investors are asking them for this kind of information. We've had those conversations where someone said, well, somebody called and asked me to report on my carbon or whatever.

14:02 - 14:11

I just deleted the email. We were like, no, don't delete the email. We need that data. And they said, oh, you know, so again, it's generally a resource constraint.

14:11 - 14:42

But again, what we're finding is that as companies are being asked these questions by more and more investors, they are beginning to respond. One of the other questions that I always hear relates to the power of engagement. Valerie brought this to life by sharing what engagement really looks like in practice. I'm going to build on next year in just one moment, because remember, I said that the chief financial officer told us that many of their customers, so whether they're in industrial, all the large users of electricity, were really focused on renewable energy. We said,

14:42 - 14:54

so what's driving that? She said because they're trying to be more ESG friendly because their investors are putting pressure on them. And so I said, yes, it's working and that's exactly what we wanted to hear.

14:54 - 15:17

And so that's but that's a very significant observation, because I would say that two years ago that was not the case. And so, you know, whether it's [...] us, our competitors, other asset owners, the more we ask questions about these issues, I think the more motivated companies are to, first of all, be more transparent and then secondly, to really come up with responsive strategies.

15:18 - 15:32

So one of the stocks where we recently had, I would say, a somewhat contentious engagement is Facebook. So Facebook is a company that we we've owned in the portfolio in the past. We've traded out.

15:32 - 16:00

We're now back in. And we had some concerns, quite frankly, about the efficacy of their content monitoring policies and practices, and so this was an instance when our concerns were such that we actually reduced them to writing and we requested a meeting with the senior leadership of the company, as well as with the lead independent director. So we started with the senior leadership of the company and expressed our concerns. We heard what their perspective was, which was actually quite informative for me.

16:00 - 16:22

It gave me a sense of the magnitude of what they're confronting, meaning the scope and the scale of that platform and the challenge that they have in actually trying to moderate content responsibly. We didn't let them off the hook. Right. But it did give us a clearer understanding of the challenges that they face. And so the next step will be to engage with the lead independent director.

16:22 - 16:42

Speaking of big tech firms, we all know that the S&P 500 has become more and more concentrated in the top five tech giants. I asked Valerie how she views big technology companies. Are they good for society or not? So I'll tackle this in pieces. OK, so first of all, let's talk about social media.

16:42 - 17:16

Social media, on the one hand, certainly has ESG risks, which we've already talked about. But they also provide certain benefits, so for small and medium sized businesses, right, that can't afford television advertising or radio advertising or other forms of attracting customers, social media is actually a very affordable way to expand your business and attract customers. People often forget that Facebook actually serves small and medium sized businesses.

17:16 - 17:42

So while they most certainly have areas where they could improve, I think that an entrepreneur has ability to use Instagram, Facebook, and other platforms within the Facebook family to actually grow a business is really revolutionary. I mean, it really enables many more people to reach larger and larger bases of customers. Another example, similarly, would be PayPal. So PayPal is one of our core holdings. And there are obviously a payment processing platform.

17:42 - 18:13

It's absolutely a big tech company, again, serving the needs of small and medium sized businesses. And so while on the one hand, I think people are skeptical, perhaps because of the size of these companies, if you look at what they're actually doing, their underlying business and who benefits from it, oftentimes it's small and medium sized businesses. Amazon is another company that is controversial for a number of reasons. Well, Amazon actually is a company that, you know, employs huge numbers of people.

18:13 - 18:42

And so one of the areas that we scrutinize is their labor management practices, employee safety. And again, while they do have an opportunity to improve, they've actually been investing in things like COVID-19 testing for the employees in their warehouses. We've seen them raise wages and offer enhanced benefits. So we are now looking to companies like Amazon the same way we look to other large employers to help set the pace so that people have more social mobility.

18:42 - 19:15

So, again, I mentioned earlier that I was focused on the S in ESG and I think this will be an increasing focus for these large tech companies. Because they are under scrutiny, I think they're going to have to demonstrate really to society that they are actually behaving responsibly. And so we on the Re-USE team, and I would say at AB more broadly, are very much a part of holding them accountable for their ESG performance. Beyond just the large technology companies, have corporations in general learned valuable lessons about the role that they're expected to play in society?

19:15 - 19:36

How are we as investors going to hold companies accountable for some of the things that they've been committing to? These were the final questions that I put to Valerie. One of the ways that we hold companies accountable is by investing in vehicles and investing in portfolios that are focused on environmental, social, and governance issues.

19:36 - 20:01

Right. And I say this, I know it sounds self-serving, but the reality is, as this whole sector has grown, and it has grown dramatically, companies are being forced to respond. I think that the focus on responsible investing has a sort of a positive cascade effect or a positive domino effect on corporate behavior, because it's not just AllianceBernstein, quite frankly.

20:02 - 20:07

It's a lot of asset owners. It's individual investors, you know, our competitors.

20:07 - 20:40

But we all, because we're all asking them these questions, and we're asking that the CFO or the CEO or the lead independent director, we're saying, you know, help me understand again what you're doing in this area, they are beginning to respond. So please keep asking and we'll keep the pressure on your behalf. And I think we'll get to a better place. This has been On Purpose. Thanks for joining us. And remember, we all have values we hold dear. Now you can ensure that your investments reflect them. You can reach me on LinkedIn.

20:40 - 20:59

If you enjoyed the podcast, please rate us on Apple Podcasts Spotify, or your podcast service of choice and be sure to subscribe. Thank you again. Bernstein: Making money meaningful for individuals, families, and foundations for over 50 years. Visit us at

Travis Allen
Managing Director

The information presented and opinions expressed are solely the views of the podcast host commentator and their guest speaker(s). AllianceBernstein L.P. or its affiliates makes no representations or warranties concerning the accuracy of any data. There is no guarantee that any projection, forecast or opinion in this material will be realized. Past performance does not guarantee future results. The views expressed here may change at any time after the date of this podcast. This podcast is for informational purposes only and does not constitute investment advice. AllianceBernstein L.P. does not provide tax, legal or accounting advice. It does not take an investor’s personal investment objectives or financial situation into account; investors should discuss their individual circumstances with appropriate professionals before making any decisions. This information should not be construed as sales or marketing material or an offer or solicitation for the purchase or sale of any financial instrument, product or service sponsored by AllianceBernstein or its affiliates.

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