On Purpose: Responsible Investors, Time to Stand Up and Be Counted

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Hi, everybody, and welcome to The Pulse, where we cover trends in the economy, markets, and asset allocation for long- term investors. Responsible investing is having a moment. But things seem different this time. Instead of kicking the tires, many investors appear ready to take the headlong plunge. Spurred by the pandemic and protests against racial injustice and systemic inequity, there's an increasing willingness to take a long-term stand rather than wait on the sidelines for others to do the work.

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In our launch episode of On Purpose, host Travis Allen and our colleague Michelle Dunstan, Global Head of Responsible Investing at AB, discuss moving past preconceptions, the proliferation of approaches, and why we may be on the cusp of lasting change. Welcome to On Purpose.

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I'm your host, Travis Allen, Senior Investment Strategist and National Managing Director at AllianceBernstein. And today for our first episode, I'm delighted to be joined by Michelle Dunstan, the Global Head of Responsible Investing at the firm. Now, this is an important time to be talking about responsible investing, given what we're living through today in society, whether it's COVID-19, the calls for social change and racial justice across the US, the continuing challenge of climate change.

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I think that what we're living through right now has laid bare many of the inequities that exist in society and have caused investors to question how can they invest in ways that will be part of the solution and also invest in ways that do as little harm as possible to the environment and those of us who we live with.

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My part in this is to really encourage investors to evaluate whether or not responsible investing is the right way for them to manage their portfolios, because it's not the case that they have to sacrifice returns in order to invest responsibly.

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But they do have to spend some time thinking about what that means for them. What values do they care deeply about? And so I'm really happy to have Michelle here to talk to us about some of the trends that she's been seeing and and what the firm's doing to really make responsible investing a mainstream way for investors to approach their portfolios in the future. So, Michelle, welcome. Thanks, Travis. I appreciate the introduction and I'm delighted to be here today.

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I think that with everything that we've experienced in America over the past few months, that talking about responsibility and responsible investing is very timely and very critical, not only to us as a firm, but to our clients and to society in general. I think this has been a real learning moment for Americans.

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They learn new truths about themselves, their fellow citizens, and the role of government and the private sector. What we've seen over the past little while is, in addition to individual citizens and government stepping up, corporations have played a major role in speaking out and taking actions and helping to solve problems like the coronavirus crisis or even dealing with the social inequality and racial injustice that we've seen recently. I think what we've seen is this is going to be a trend going forward where people are looking to not just governments, but the private sector to help with these large issues.

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So what do you think is different about this moment? Because I have to say that I have never had so many conversations across such a broad spectrum of issues as I have in the last few months. Why this moment seems to really be capturing the attention of responsible investors? Travis, that's a really good question. I don't know that there's a single factor here, but I think it's a confluence of things coming together right now.

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People are seeing the distressing and the very severe impact of the inequalities. I think many people were aware of them on a superficial level, but not what the consequences could be. And those are being laid bare today, not just with coronavirus, but with the protests and the consequences of the racial and social inequality.

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I think it's bringing that to light and a really, a very real and visceral way. And I think what we're also seeing is Americans seeing others and themselves willing to stand up for things and willing to take a stand that is good for the long term and beneficial to all their fellow citizens, not just to themselves in the short term. So I think that bodes well for the future.

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So whether it's tackling the issues we're discussing right now, COVID-19 and social injustice, or whether it's broader issues like climate change, there's a new willingness to deal with these issues, to stand up for what people believe in and to contribute to becoming part of the solution rather than just sitting on the sidelines.

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Yeah, Michelle, I'm really glad to hear you say that because I feel like, you know, in prior times when people were really talking about responsible investing, they were more sort of looking into it. At a time when people are out in the streets and people have been forced to work from home, those of us who can work from home, and essential workers have had to don masks and, you know, try to keep themselves healthy as they go about their daily lives...

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I think people now feel like this is the time to act, that talking about things is no longer enough and waiting for governments or other public policy folks to make decisions is not enough.

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People are really active in this moment. And I think that that's one of the really big differences that I think will sustain and provide momentum to responsible investing. Now, has there been any changes in terms of some of the public policy questions and

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whether or not governments are going to take the lead, or corporations will take the lead? I think in the past people have felt like there's only so much you can ask corporations to do without the pressure of regulations. Have you seen corporations start to step up and be more active? Because I think I've noticed that trend as well. Absolutely. I think corporations are starting to think more broadly than just the bottom line. They recognize they have customers to attract.

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Customers, younger people in particular are making more value- based decisions about what products they buy, the companies they choose their services from, and even their own employment decisions, making value-based decisions. And companies are realizing this and reacting to it.

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I think companies are increasingly considering a greater array of stakeholders when they're looking at their decisions, not just shareholders in the bottom line, but how do employees, customers, communities, other factors factor into the ability to create value over the long term. And when they think about these things, they're thinking more broadly and deeply about that value creation. So I think that is leading companies to take a different and more forward looking lens on how these environmental, social, and governance factors are impacting their long-term ability to maintain and generate business.

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I think one of the other changes that I've noticed, if you just pay attention to how the media is covering responsible investing, is that there have been a lot of talk about the fact that responsible investing strategies have performed pretty well during the last several months since the sell-off began in February. Do you think we're finally past that perception that you have to sacrifice returns in order to invest responsibly? I hope so, Travis. I mean, you're absolutely right. Across the board,

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sustainable, responsible funds have outperformed since the beginning of the year. So I think what we've seen now is they don't perform before this, but that was in a period of very positive market conditions. We've now seen that responsible funds can hold their own or even outperform in a down period.

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I think what we're also getting over is the historic perception of what responsible investing is. People have either thought it's widespread exclusions, where you're excluding a third of your market and therefore it's impossible to generate returns or they've thought it's thinking about these touchy-feely issues, like does the company have a therapy Koala on board? It's all cute and everything, but it doesn't really contribute to value in any meaningful way. That's not what responsible investing is.

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What it is is thinking deeply and broadly about environmental, social, and governance issues that are going to have a long-term impact, material impact on the company. So if you take carbon, for example, are there carbon taxes today or could there be at some point in the future that impacts the company's value? Is that company going to have to upgrade its equipment, install scrubbers? That's going to cost the company money. Our competitor is going to develop lower carbon alternatives whereas this particular company is going to lose market share.

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And remember those employees that I mentioned earlier, are they going to choose not to work for this high-carbon company and is not going to impact this company's capacity for technological innovation or cost control? Those are all things that we should be taking to account in our investment decisions. They have material impacts on the financial outcomes of that company. That's what ESG or responsible investing is. It's thinking about the long-term risks and also the long-term opportunities and incorporating those in an enhanced investment decision.

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So Michelle, if AB ever launches a therapy koala program, please sign me up.

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That sounds like it could be helpful right now. But from an ESG standpoint, I know one of the things that we focused on is looking at companies and trying to figure out how to hold them accountable. What are some of the things that you've been doing in order to make sure as we look at ourselves, that we hold ourselves accountable as well? Absolutely.

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Travis, the tools are getting better. We don't rely a lot on third- party systems because we feel that they're inadequate. They try and boil everything down into a single measure across environmental, social, and governance dimensions. They're backward-looking and very mechanical. So we've developed a suite of our own proprietary tool sets to help us evaluate that. And what you said about us also matters.

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Responsibility begins at home. It begins at the top. If we are asking our portfolio companies to do better and to do things differently, our own practices should mirror what we're asking those companies to do. So we are continually evaluating our own environmental and social governance metrics across the same dimensions that we evaluate our portfolio companies. We're not perfect. Neither are our portfolio companies. It's a journey and what we're striving to do is continually improve and try to be the best that we can be. But that starts at home with our leadership and our own practices.

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I'm excited to hear that because I think if we're going to really mainstream responsible investing, that really is up to each individual corporation to, as you said, start by looking at themselves. It starts at home and into evaluate how they can take steps to improve the way they interact with the environment and society more broadly.

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Now, one of the things that I get asked a lot is about how do you compare different approaches? Because there are, unlike 15, 20 years ago, there are today a lot of different responsible investing approaches, platform, strategies out there. And I'm just wondering, what do you think makes AB's approach different or unique?

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How are we going to be innovative in this space and really help push it to the next level? Yeah, that's a good question, Travis. I don't think this is one size fits all. There's a lot of work to be done here and there's a lot of opportunity. So we are approaching this from a number of dimensions. A lot of strategies,

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some of our own included, are focused on the future, investing in those companies that are going to take us there, whether it's carbon capture and sequestration, electric vehicles, companies that are the best of the best. That is one very valid way to approach it. Another way, and we think this is a little bit more innovative and unique approach, is to look at the improvers, the companies that are on that path, that have entered it on their journey, that are vital to the way the world is today. And we need them around. Let's encourage and engage deeply with those companies in order to force them to do better.

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Well, that's interesting. So now you're sort of getting at something that I think has been a challenging conversation for a long time.

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How do you utilize your ESG environmental, social, and governance research in order to drive better returns? Because I think a lot of times people focus on it in terms of reducing risk. But in terms of driving returns, this idea of focusing on improvers is really appealing and interesting. So maybe give us an example of what that looks like in real life.

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Yeah, absolutely. So what we have is our analysts focus on the factors that are most material to driving value. That's going to vary by company and sector. But what they're doing is digging deeply into those issues, trying to quantify what that means for the company over the next three to five years and incorporating that into their investment decision.

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So one example might be a company like Norilsk Nickel. Norilsk is the world's largest manufacturer of class one nickel. That's what gives an electric vehicle battery range. We are using more and more nickel both as the market for electric vehicles grows, but also as customers are demanding more range and we're using more nickel in the battery. We need Norilsk in this world to provide us that nickel. On the other hand, it was built in remote Siberia in the 1940s.

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The soil in remote Siberia is very sulphurous and emissions technology at that point was virtually nonexistent. This company was one of the world's largest emitters of sulfur dioxide. What they've done, though, over the past few years is really quite astounding.

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They have rebuilt much of their equipment and opened a new smelter. They've shut down the 1942 smelter. So now what they're doing is throwing less dirt in their furnace to produce the same amount of nickel ore, and the technology that's actually smelting or burning that nickel ore is much better. So what you're seeing is much less emissions at the top to produce the same amount of nickel. Once they did this, overnight, their emissions in Siberia went down by 35 percent.

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That is a huge impact on the globe. And this is a company that we need. So what we've done with them over the past 10 years is engage with them, told them what we wanted. We led every meeting that we did with them, with environment, not with what their bottom line is, but what are they doing to clean up their operations. And they listened.

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They've spent a lot of money on doing this, but there's a lot of benefits on the other side, not just to the environment, but they now have a much more efficient operation. They've also gotten tax breaks based on the fact that they've reduced their emissions. So what we're seeing is something that's value creating for the company has been quite good for the stock price and is good for the world too. Thank you for that example, Michelle.

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I think what really excites me about that and excites me about the conversations we'll be having on the podcast going forward is that it's evidence that there's a proliferation of approaches to responsible investing. It's no longer just about trying to figure out the companies that you want to exclude from a portfolio. It is really now taking strategies like what you just mentioned and trying to figure out how to deliver outperformance by identifying improvers before they're recognized by the markets, which I think is fascinating.

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But also there are going to be core ESG portfolios. They're going to be portfolios that focus on the United Nations Sustainable Development Goals. They're going to be portfolios that are more impact and... And I think, again, this is a great time to be launching the podcast because there are so many different approaches, so many people really thinking seriously about how to expand our ability to invest responsibly while also getting attractive risk adjusted returns.

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So, Michelle, I'll stop there. Thank you for being part of our very first episode. And I reserve the right to call you back for further conversations in the future. We'd love to have you back. No problem, Travis, I think it's really important to continue to discuss these issues and happy to come back any time. Thank you all for listening. This has been On Purpose. I look forward to continuing the conversation with all of you around responsible investing.

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We all have values that we hold dear, and today we have increasing ways that we can make sure that our investments reflect them. Thank you for listening. If you enjoyed this episode, please rate and subscribe to On Purpose, new podcast about responsible investing,

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Anywhere you listen to podcasts, please e-mail us with your thoughts, or questions, or feedback to Insights@Bernstein.com and be sure to find us on Instagram or Twitter @BernsteinPWM. Bernstein: Making money meaningful for individuals, families, and foundations for over 50 years. Visit us at Bernstein.com.