Lori Keith of Parnassus, Shelly Heier of Verus, Carlo Funk of State Street, Stuart Dalheim of Calvert, and Paul Yett of Hamilton Lane gathered last week for a virtual panel hosted by Nasdaq’s CFO Ann Dennison to discuss transformative trends shaping ESG investing in 2021 and beyond.
Below, Ahad Minhas of Nasdaq Corporate Platforms expands on key trends and topics from the panel.
Key Takeaways For Corporates To Consider
- Asset managers are deploying more effort and resources than ever before towards evaluating corporate ESG information, though each investor has its own integration process.
- Corporates need to be well prepared to engage with asset managers on ESG risk and opportunities.
- Global regulatory and policy shifts may increase the level of sophistication of ESG integration practices at asset managers and drive further engagement on ESG between market participants.
- Integrating ESG factors into the investment process often requires a nuanced approach based on financial materiality. Sophisticated asset managers often leverage multiple sources of ESG research and data to make informed decisions that impact their investment outcomes.
- ESG investing is at an exciting inflection point; the tectonic rise in demand from investors, availability of more comprehensive data and disclosure, alongside the evolving nature of ESG regulations and standards, may lead more asset managers to get behind the underlying ESG research and data.
One size fits all is not applicable to ESG investing
- Parnassus’ Lori Keith discussed the firm’s goal to provide its clients with attractive, long-term risk-adjusted returns by investing in good businesses at reasonable prices. Parnassus seeks to own companies that have comprehensive programs and policies in place to responsibly manage their environmental impact and comply with regulations. The firm fully integrates ESG throughout the investment process. The initial investable universe is subject to exclusionary ESG screens. Investment ideas are then explored by both fundamental and ESG research analysts and discussed by the full investment team. As part of this intensive research process, the ESG team performs a thorough assessment of each potential holding. According to research performed by Nasdaq Corporate Platforms, Parnassus uses a variety of ESG research providers (including MSCI and Sustainalytics), SEC and proxy filings, government-reported data, corporate websites, and sell-side ESG reports.
- Calvert’s Stuart Dalheim said the firm considers all material ESG factors that influence a company’s business results in their investment process. According to research performed by Nasdaq Corporate Platforms, Calvert’s ESG analysts use the raw data from roughly a dozen third-party research providers, which include MSCI, Sustainalytics, ISS, RepRisk, and CDP. Furthermore, ESG analysts contact external sources, such as experts from academia, policy, and advocacy-oriented non-governmental organizations, to inform their analysis.
- As one of the world’s largest asset managers, State Street’s Carlo Funk stated its mission to invest responsibly, while running one of the largest index books in the world, requires getting their hands on the right data. Funk said State Street leverages screening tools designed to capture a mix of company-specific data, then uses generalist ESG data from multiple providers (Sustainalytics, ISS-ESG, Vigeo-EIRIS, and ISS-Governance) to calculate a proprietary score aligned to the SASB framework.
- Hamilton Lane integrates ESG into their due diligence processes and takes ESG issues into account when making investment decisions. Hamilton Lane’s Paul Yett expressed that the importance of ESG in private markets ranges based on mandates, size, and styles of investing. Private companies are less transparent than public companies by nature. Therefore, data remains to be the largest issue for any private market investor looking to incorporate ESG. However, the private markets have come a long way with ESG over the past few years. In recent years, Hamilton Lane has strived to advance the granularity of its data collection process from general partners (GPs) and has built out separate due diligence sections for ESG in their questionnaires. Strong fundraising in the private markets has heightened pressure to put dry powder to work leading to inflated valuations. The challenges will have managers looking for new ways to create value, including through ESG. Additionally, as the public markets continue to become more sophisticated with integrating ESG, so will the private markets.
- As an institutional consultant and adviser, Verus assists investors in developing an understanding of integrating ESG into their investment process. This includes consultations on ESG implementation as well as active ownership guidance.
- Fiduciaries that invest with an ESG lens may have deeper shareholder engagements and may drive change through their dialogue and engagement activity with portfolio companies.
- Regulation, such as the Sustainable Finance Disclosure Regulation (SFDR), will have meaningful implications on ESG investing by defining ESG criteria and improving transparency around ESG rankings and ratings. As a result, investors may be forced to build out more robust ESG/responsible investment teams, differentiate themselves with their ESG integration approaches, and drive deeper engagements with companies.
A defining characteristic of responsible investing approaches is active ownership
- Parnassus aims to engage all of its holdings at least once a year on ESG topics. According to research performed by Nasdaq Corporate Platforms, Parnassus uses two types of engagement approaches. The first type of engagement involves actively communicating Parnassus’ perspectives on each company’s ESG strengths and areas for improvement to the company’s internal relations and management team. The second, coined “impact engagements,” is defined as in-depth engagements in which Parnassus advises companies to adopt specific measures to solve ESG issues. The ESG team at Parnassus engages companies directly through emails, calls, and in-person meetings to discuss the changes they expect to see.
- According to research performed by Nasdaq Corporate Platforms, Calvert has a dedicated engagement team that is responsible for driving the firm’s structured engagement strategy using Calvert’s proprietary ESG research. The firm’s engagement efforts may help uncover additional information that can be incorporated into the investment process. The engagement team directly engages with company boards and management teams, as well as policymakers and government agencies. The engagement team also collaborates with investor groups and coalitions, supports public policy initiatives, files shareholder resolutions, and defines proxy voting policies.
- As a large passive investor, State Street has been exemplary in influencing market participants through stewardship activities. In 2020, the firm engaged with 1,500+ companies and led 140+ climate engagements. According to research performed by Nasdaq Corporate Platforms, State Street tracks the impact of its proxy votes by reviewing changing trends in market practices on specific corporate governance or sustainability-related issues that are targeted for change through voting action.
- Hamilton Lane remains focused on engaging with private market investors to drive forward ESG adoption and integration. The lack of accepted standards for ESG integration and measurement in the private markets creates the benefit of having a more fluid framework for GPs and LPs to explore what fits their own strategies and goals during collaboration and engagement.
As a member of Nasdaq Corporate Platforms’ Investor Engagement practice, Ahad Minhas works in close partnership with publicly traded companies to help strategize and execute on attracting long-term capital efficiently. Nasdaq Corporate Platforms’ Investor Engagement practice leverages capital markets data and a deep understanding of investor behavior to modernize a company’s investor marketing efforts, help a company integrate ESG into its investor outreach plans, support a company’s work to drive efficiency into its investor engagement efforts, and provide guidance on a company’s shareholder engagement strategy.