Valerie Grant, the co-manager of AllianceBernstein's Responsible US Equities (ReUSE) portfolio and co-chair of the firm's ESG Research Committee joins the Pulse to discuss the evolution of responsible investing. Why invest responsibly? How has ESG evolved? And what's next in the world of responsible investing?
00:00 - 00:21
Hi, everybody, and welcome to The Pulse where we cover trends in the economy, markets, and asset allocation for long-term investors. Today, I'm particularly excited to welcome to the show Valerie Grant, who's the Co-manager of AllianceBernstein Responsible US equities portfolio and the Co-chair of AB's Environmental, Social, and Governance Research Committee.
00:27 - 00:58
Valerie joins me today to discuss the latest trends in ESG, that's environmental, social, and governance or more accurately, the responsible investing space. Valerie, welcome to The Pulse. Thank you for having me on the podcast. I'm happy to be here. Well, it's our pleasure. And Valerie, I really want to start with the big issues around responsible investing. So let me just put out there a real big picture question. What is responsible investing? And I guess what motivates people to invest responsibly?
00:59 - 01:22
Responsible investing is an investment strategy that incorporates considerations like the environment, social issues, and corporate governance. In addition to traditional considerations really based around financial parameters, you know, traditional measures of risk and return; and the motivation to invest with the focus on responsibility varies really by investor.
01:22 - 01:35
So many people seek to invest in a way that aligns with their values, that could be motivated by their beliefs around social issues, or it could be motivated in some cases by their religious beliefs.
01:36 - 02:06
And secondly, many people believe that companies, that corporations can and should do more to help solve social and environmental issues. Basically, the notion that the big problems that we confront in the world can't be solved alone by governments and nonprofits, that you need corporations to lean in and take action. And then finally, you have some investors who focus on responsible investing because they think it's a better way to invest that enhances returns and manages risk.
02:06 - 02:39
So the motivations are actually quite diverse. But the net effect of it is really that there has been this phenomenal interest and growth and responsible investing over the last several years and then really an acceleration in 2020. Well, let's stay there, Valerie, because I think that was notable that there has been significant growth in responsible investing, any way you want to measure it, whether it's assets or otherwise. Why is it in your opinion that responsible investing has become so much more popular over the last five, even 10 years?
02:40 - 03:10
Well, it's become more popular because many traditional investment managers like AllianceBernstein, as well as large asset owners, I mean, people who control large pools of capital have signed on to something called the United Nations Principles of Responsible Investing. And basically, when you become a signatory to the United Nations principles of responsible investing, you commit to evaluating environmental, social, and governance issues as part of your investment process.
03:10 - 03:16
And so that has really led to a keen focus on responsible investing globally.
03:16 - 03:39
But if you look at what's happening now, so 2020, where there's really been this acceleration, there is a real sense of urgency around climate change, social issues, and corporate governance. So starting with climate change, we've all seen the forest fires, the floods, heat waves, tornadoes. I mean, the changes in weather patterns are obvious,
03:39 - 04:14
I think to even just a layperson, you don't have to be a climate scientist to come to these conclusions. That's put a lot of focus on what companies are doing to adapt to climate change or to help prevent climate change. Secondly, social issues. Currently, there's a big focus on racial equality in the United States. But it didn't just start with racial equality in the United States. A couple of years ago, we had the Me Too movement really focused on gender equality. Several years ago, we had the Arab Spring. So these movements, I mean, the protests in Hong Kong for freedom and independence and democracy.
04:14 - 04:46
So these movements as well tend to stimulate interest in what are companies doing to address these issues. And then finally, on corporate governance and the response to the COVID-19 pandemic, we've seen a real focus again on what are companies doing to protect their workers, to protect customers, and to respond in a way to this pandemic. So those things have really put a lot more focus on responsible investing and the importance that companies make in addressing some of these issues.
04:46 - 05:21
I think your point about having a catalyst is really key. I tend to think back several decades with Nelson Mandela in South Africa, divesting from those investments. That was a catalyst back then. And the same is true today to a certain extent. And just sticking with that theme about being exclusionary, that, that's what I think about decades ago of what responsible investing was. But it's evolved so much over time, hasn't it? So, so maybe take us through that evolution and where we stand today. Sure.
05:21 - 05:49
So let me try to to paint the picture, if you will. You're right. So where sustainable and responsible investing started over 50 years ago was focused on negative screening, basically what to keep out of your portfolio. Right. And the way that things have evolved now is people want to focus on what do I want to have in my portfolio? What do I want to own? And so there's really been a pivot in that regard.
05:49 - 06:19
And so this is not your grandmother's responsible investing, if you will. This is really a fresh approach focused on being more proactive than reactive. And so engaging with companies directly on their environmental, social, and governance performance is very important, particularly for active managers, given the access that we have to the senior leadership of companies as well as the boards of directors, and then incorporating what you learn about environmental, social, and governance issues into your investment process is very important.
06:19 - 06:48
I also sit on the firm's proxy voting committee and we take very seriously the responsibility we have to vote our proxies in a way that is independent and also again tries to move companies forward on important social issues. That doesn't mean that we vote in support of everything that's put in front of us, but we absolutely take a close look at those shareholder proposals that come before us and vote our proxies independently. I'm very, very proud of our efforts in that regard.
06:50 - 07:11
And Valerie, responsible investing, I have to admit, a lot of folks have or at least provide some pushback when we talk about responsible investing because they feel like they are giving up return in order to invest responsibly, in order to marry their values with their return objectives or with their investments, the return objectives have to come down.
07:11 - 07:41
Is that, is that still - or was it ever - a fair categorization of responsible investing in terms of return and risk and that objective? I don't think it's a fair assessment of how responsible investing is implemented today. I would say that historically when the focus was only on negative screening, what not to own, there is some evidence that that really can compromise returns.
07:41 - 07:58
And here is why. If you limit the investment universe too dramatically, you end up with higher levels of volatility and generally lower returns. And it doesn't matter whether you limit the purchase universe for environmental, social, and governance reasons or other reasons.
07:58 - 08:24
We actually did back-testing to test different scenarios. Basically, the problem is you don't have enough diversification in the portfolio. But the way that people think about responsible investing today really take that into consideration. It's a known risk, if you will. And those of us who are constructing portfolios today are generally able to mitigate that by finding other ways to ensure that there's enough diversification in the portfolio.
08:24 - 08:51
So you don't necessarily have to give up return now, you don't. It's an important nuance about being exclusionary or the negative screening, as you said, historically, would limit your investment universe to the extent that it then increased your volatility and reduced your return. But not so today. The investments have evolved enough in the approach and the philosophy that folks like you take now has evolved enough. Let's keep going with that.
08:51 - 09:19
Valerie, you now manage or co-manage our responsible US equities portfolio, or as we call it around here, we give everything an acronym, Re-USE, responsible US equities. So what can you tell us or tell our listeners about your approach within Re-USE and your philosophy? So in Responsible US Equities, we are looking for stocks that have a couple of core characteristics.
09:19 - 09:45
We want companies that have strong competitive positioning, companies that have distinctive environmental, social, and governance performance. And that can mean that either they are best in class or they are improving and likely to continue to improve on a forward-looking basis. And then finally, we're looking for opportunities for value creation. We want to look for stocks that are going to outperform over time.
09:45 - 10:13
And so we're constantly seeking to balance those three considerations - competitive positioning, distinctive ESG performance, and an opportunity for value creation. And when we think about the ESG performance, we're looking at environmental stewardship, ethical corporate conduct, and strong corporate governance. And we have developed some ways to actually measure that at the portfolio level and at the individual stock level.
10:13 - 10:46
I want to talk about some of that performance and the disclosures that you can get. But before I go there, let me just ask a follow-up question of what you just said. Many people, again, often think about responsible portfolios or ESG investing as if you are investing only in the best performers. It's like a green portfolio. This is not that, is it? It's much different. And in fact, you're using engagements often to make companies improve upon what they're doing at the moment. Right. That is an important distinction.
10:46 - 11:07
And so especially if you're investing in mid and large cap equities, not all of those companies are going to be sort of best in class, if you will, in terms of their environmental, social, and governance performance. But what we look for companies that are on the right path and the way that we uncover that is really through our fundamental research process.
11:07 - 11:39
We obviously scour the disclosures in the corporate social responsibility report and the SEC filings, but we also use third party data and alternative data sources to really identify the most important environmental, social, and governance issues and then to engage with the companies around what they're doing to improve. And it's really been a fascinating process when you actually sit down with companies and learn about and also influence what they're doing in that regard. And oftentimes you find that companies are actually doing a lot, but they may not be publicity seeking.
11:39 - 12:14
And so we seek to really find those companies that may not be in the headlines, but are really committed to integrating environmental and social performance measures into their operations and their strategy. Well, that's great, and let's keep going on measurements, so as investment managers were always trying to quantify performance and quantify certain metrics, as a responsible investor, how do you measure performance inside your portfolio and the impact that these companies have responsibly?
12:14 - 12:39
We look at several key performance indicators at the portfolio level. So let me start there. So obviously what the focus on climate change, we look at the carbon emissions and that's really the CO2-equivalent emissions. So whether the emissions are methane or something else, we are able to get our data aligned so we can compare companies, and we look at the CO2 emissions relative to sales, the CO2 emissions per dollar invested.
12:39 - 13:01
And then we look at what we call the board effectiveness. We've actually developed a proprietary measure of board effectiveness. We've licensed some data from a company called ISS and developed a way of rating companies based on board independence, for diversity, the instruction of the committees, and the focus of the board on corporate governance.
13:01 - 13:20
And it's a very robust measure that we can use to evaluate companies. We do look at the gender diversity on the board as a separate key performance indicator as well, because that's also, I think on a standalone basis, something we feel is very important and actually has continued to improve over time.
13:20 - 13:45
And then we think about the S in ESG. We've just started looking at LGBTQ equity at the enterprise level, meaning within the company. We found a very compelling data set there that is published by a nonprofit organization, and we can now actually evaluate companies on their policies and practices in that regard. So that gives you a sense for what we're looking for at the portfolio level.
13:45 - 14:13
And then as we look at individual stocks, we recognize that the issues that are most important will really vary by sector or vary by industry. And so we look for what's most important for this company and how is this company performing. And so those tend to be very stock specific. It can relate to employee safety or their water usage or whatever the specific ESG issues are that are relevant for the business that they're operating in.
14:14 - 14:45
I remember when it was several years ago, there was a retailer or at least was in the retail industry. There was a terrible accident where many of the people who are working in this apparel manufacturing lost their life. And I think, it was a fire. Is that a good example? I would have to think a good example of where responsible investing can maybe root out some extra risks that are inherent in either an industry or a stock and then sidestep those issues? Absolutely.
14:46 - 15:00
I will never forget that. I was covering retail at the time. And the incident you're referring to is this, is a fire that took place in Bangladesh that actually killed over a thousand people. It was staggering.
15:01 - 15:18
And what it revealed were some of the horrendous working conditions that existed in these factories that a lot of apparel manufacturers and apparel retailers relied on to make their garments, and that
15:19 - 15:49
horrible incident led to a lot of scrutiny around supply chain management and labor safety standards throughout the supply chain, and I would say that it also revealed which companies were earning unsustainable margins because they were relying on these horrific work conditions to get very, very low price in terms of their cost of goods sold or their landed cost of goods sold is what we used to call it.
15:49 - 16:10
And if you look at those companies today, by and large, they are struggling. And the reality is that what they were doing was not sustainable and many of them are actually going out of business. So that's a very good example. And again, like I said, one I will never forget. A thousand people dead. Right. A tremendous human toll.
16:10 - 16:29
Valerie, you talked about a couple of things that you can measure carbon footprint, diversity, either at the corporate level or in the boardroom. Are there things that either can't be measured or that you don't yet have measurement or at least the industry doesn't have measurement for that you would love to have at some point?
16:29 - 16:57
Oh, my goodness. Yes. So the reporting is, how can I put this? The reporting is lacking in many cases. There are some companies who are doing a really good job. So let me give credit where credit is due. However, it's very inconsistent. And I also belong to what's called the Standards Advisory Group for an organization called SASB, the Sustainability Accounting Standards Board.
16:57 - 17:22
And this is an organization that is really seeking to improve disclosure on material environmental, social, and governance issues. Now, there are some companies that have adopted those principles and they put out reports that are very detailed with numbers and are great, you know, from a research perspective. But then there are other companies that don't really put a lot of substance in what they disclose.
17:22 - 17:55
So there is room for improvement there and makes our job a little harder. But I am convinced that it will get better over time as these standards become more widely adopted. Just to maybe put this into baseball terms, I don't know what inning we're in, Valerie, but maybe it's the third or the fourth. It's certainly not the ninth. It's not the first. But as you look out over the next 10 or 15 years, where do you think responsible investing is going? What are we going to be able to evolve to at some point in the future? All right.
17:55 - 18:22
Well, first of all, I think we will see some level of what people call integrated reporting, meaning you could, you could pick up an annual report from a company and look at the income statement, the balance sheet, and the cash flow statement. And then you could look at a set of key performance indicators for that company on their material ESG issues as well. And it would just be right there for investors to consume and analyze and use that as a basis for making investment decisions.
18:22 - 18:54
I think we will get to that point. The second thing I want to say is things are actually getting better, right? So when we looked at this board effectiveness index, we were actually able to go back and get historical data and look at trends over time. And it's really remarkable. The trends are, in fact, positive. Boards are becoming more independent, boards are becoming more refreshed, boards are becoming more diverse. And so I am encouraged, particularly when it comes to corporate governance.
18:54 - 19:18
And I think the next area where we will see a lot of improvement is around climate change, again, just because of the level of urgency, for obvious reasons, given the impact that we're already experiencing on the environment. And then the social issues, I think, quite honestly will lag, just because they're a little harder or more difficult to tackle. It's not because they're less important, but I think that those will improve over time as well.
19:19 - 19:33
And Valerie, to make those improvements over time, admittedly, maybe talk a little bit about engagement and how important that is to moving the ball down the field for you and the industry. It is absolutely critical.
19:34 - 20:06
So as firms like AllianceBernstein and our peers begin to ask questions about these issues, companies are compelled to respond. So let's go back to the example we talked about a bit earlier, Matt, the fire in Bangladesh that killed all those apparel workers. I remember being at an investor conference and asking the CEO of a major retailer what exposure he had or what exposure the company had to these types of vendors.
20:07 - 20:18
And again, this is in the thick of this crisis. And he had no idea, he could not answer my question. He eventually did. I mean, he sort of dispatched somebody to look up the answer and they called me later.
20:19 - 20:47
But that is not what would happen today. Today, because so many investors, like AllianceBernstein, our peers, you know, there's a lot of focus on these issues, generally, the CEO and the CFO are on top of these issues. It's not just the chief sustainability officer or the chief human resources officer. These issues are now really front and center for the CFO, CEO, as well as the directors of the company at the board level.
20:48 - 21:20
When you talk to some companies and you ask them, well, why are you launching these initiatives or why are you focusing on these issues? And they'll tell you, they say, because investors care about it. And so it really does make a difference. I think that engaging with companies in a way that's constructive is very, very powerful. Well, Valerie, we're going to have to leave it there, unfortunately, but thank you very much for taking the time to join us today and to share your perspective on this ever more important world of responsible investing and for all of the good work that you do with your portfolio, responsible US equity.
21:20 - 21:41
So thanks for joining us on The Pulse. Thanks for having me. Thanks so much. And thanks to all of you for listening to us today. I hope Valerie's insights have helped to shed a light on responsible investing for you. And so please stay tuned to The Pulse for more on our views on what's shaping the economy and moving the markets. And until next time, thanks for listening.
21:43 - 21:52
Bernstein: Making money meaningful for individuals, families, and foundations for over 50 years. Visit us at Bernstein.com
- Matthew D. Palazzolo
- Senior National Director, Investment Insights—Investment Strategy Group