PGIM’s experts offer perspective on how financial markets may respond to the ongoing economic and humanitarian crisis, and more.
Institutional investors are increasingly evaluating their portfolios and asset class exposures through the lens of ESG, a trend that has only grown in the wake of the COVID-19 outbreak. While there is still a wide variety of opinions as to the best approach to Environmental, Social and Governance investing, the integration of various ESG factors into portfolios is here to stay. PGIM brought together a handful of thought leaders to discuss the rapidly evolving ESG space and to review the changes in the approach investors are taking towards greater sustainability and impact. Following are some highlights of the conversation.
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>> Hello everyone. Thank you very much for joining us for today's webinar. I'm Raj Shant, and I will be your moderator for today's discussion. I'm a managing director at Jennison Associates. Now just to introduce the topic, because issues are often seen as a very daunting topic, an alphabet soup of acronyms and conflicting definitions, a vast topic that can seem to encompass everything, and yet sometimes so amorphus. It can feel like nothing in particular. Well, there's no question that it is a young field, developing rapidly in the world of finance. And so if you consider the fact that double entry bookkeeping was invented 500 years ago, yet even now today, people are arguing about the right approach to depreciation or goodwill. Of course, it's going to take some time before ESG really defines and settles on some clear definitions and terms that are standardized throughout the industry. But what we're aiming to do today is to cut through some of the jargon and the complexity, and give you some clear insights on approach and responsible investing across asset classes in the world that we're facing today. ESG investing has evolved considerably over time from its origins over 100 years ago, with many charitable organizations that had simple exclusionary rules. But there's still no single one size fits all approach to ESG across asset classes, or even within a single asset class. Because investors have many different kinds of goals, and many different requirements for the ESG lead portfolios. The detailed application of ESG principles rests within each of our autonomous businesses. By tapping into the deep expertise of our affiliates, PGIM can take asset class specific approach to developing and implementing ESG solutions. So I'm delighted to introduce some of these ESG experts to you today. We have with us Gavin Smith, who is head of equity research for QMA. Lisa Davis, who is a portfolio manager for US impact investing for PGIM real estate, and Eugenia Jackson, who is head of ESG research for PGIM fixed income. Now before we dive in just a few housekeeping points. On your screen, there are multiple boxes. The most important of these is the Q&A box. We encourage you to submit questions at any time. We will try and answer them all during the webinar. But if we don't get time today, we will get back to you with answers by email after the event. Also, there will be an on demand version of the webcast available after today's event if you have any colleagues who may be interested. So with that, and without further ado, let's dive into the discussion. So Gavin, may I just start with you. What do you think ESG means in your asset class? And why would you say that it's relevant or beneficial to investors?
>> Thank you, Raj, and hello, everybody. So when we think of ESG in equities, we think ESG means recognizing that the success of a company depends on its relationships or its interactions with key stakeholders. Think the employees, customers, the community, the environment suppliers. So for us ESG is a batch trying to measure the strength of these relationships or the quality of these relationships. So ESG really means and thinks that long-term value creation for company can be impacted by these key stakeholder relationships. So from investment perspective, then one of the benefits of incorporating these ESG insert well from number 10 perspective, ESG can be an additional return drive and a compliment other drivers in your portfolio. It could be some big impacts now but we expected to be much more influential as a return driver in the future. Now ESG, by incorporating these insights, it can also help from a risk perspective, these ESG insights can help you avoid tail risk exposures in your strategies. But there's also another really important benefit of incorporating ESG insights into your investment process. And this really relates to this positive feedback mechanism that can occur. And what I mean by this is that as we start to use more ESG insights and information in our decision-making process, companies will recognize this. And for those that don't have an attractive ESG profile, they can take steps to improve their ESG standards. And that's where the positive feedback mechanism come. And they can be these positive flow and effects to improving outcomes for employees, customers, suppliers, and the environment and so forth.
>> That's great. Thanks, Gavin. And Lisa, can I turn to you? Oh, could you just take yourself off mute?
>> First, thank you all very much. I think if we don't do that, at least once in every virtual event, it might not qualify as a successful virtual event. So happy to be the first one. Thank you very much, Raj. It's a pleasure to be here with you. So as you said in the introduction, I work with PGIM real estate where a global debt and equity business and I sit in the US equity business. And for the real estate, equity business ESG has long been a way that we believe that we achieve the outcomes that our investors are looking for. Certainly, the environmental aspect is often what we lead with. Buildings account for about 40% of greenhouse gas emissions in the US. So improving the energy efficiency and carbon footprint of those buildings is critical to addressing climate change. It's also a great way to improve the net operating income of a building, if you have lower energy usage, lower water usage and more ability to successfully deal with waste produced. We've had a sustainability program at the company for a long time. And in many ways, the sustainability aspects of real estate development have become beta in terms of energy efficiency. So what we're looking to now, what we often talk about is not just ESG, but also ESG and R. And R stands for resiliency. That's resiliency, the ability to withstand any kind of shocks in the market. And originally it was conceived of to address climate change shocks. But now I think in this current moment, we also see that resiliency is about addressing social needs, and specifically in the US in addressing inequality. This also, of course, relates to the A. And s and that is primarily what I focus on in my work. I'm a portfolio manager for a relatively new investment strategy at PGIM real estate called impact value partners. And this fund has a dual mandate of creating competitive returns for our investors, but also having a positive social and environmental impact. And for impact investing, which is in some ways one step further from ESG. We're not only speaking to screen investments, and to enhance our risk management by looking at ESG factors, we're also seeking to proactively, have a positive impact on social outcomes and the environment. And so, impact investing really is leading the charge for our firm, in some ways around the social aspects, particularly in this moment. And then finally, the governance aspect, sometimes a little bit boring to talk about risk management and due diligence processes. I think it really has come to show itself as a distinct advantage in a crisis situation like we are experiencing now. So that transparency with investors and rigorous investment processes have a big impact on investment performance and our positioning in the market.
>> Thanks, Lisa. And Eugenia can I pose the same question to you?
>> Sure. Just to introduce myself. I'm head of ESG research for PGIM fixed income and an active global fixed income measure. Now we don't have any equity component printed to come. And we invest across all fixed income markets and have portfolio managers and research teams with all. Now, I would fully share everything that Gavin settle for the equity asset class. And it's definitely that ESG factors matter for fixed income investors, they can be and often are much credited. And therefore they can impact the performance of our investment portfolios. And ESG has always been part of fixed income of credit assessment on. Historically it's been a very strong focus on governance for very good reasons. But the materiality of environment and social factors increase. And as the environmental risks are becoming much announced and have a stronger impact on the issue that [inaudible]. That's increasing the ESG is becoming stronger and much more important for fixed income investors. Now because they're important and because you can have a real material impact on our internal credit assessment and the performance of our investments, we degraded ESG across [inaudible], and that goes straight into investment analysis. That goes straight into investment analysis internal credit ratings. And they apply to strategies which have kind of ESG lies across all of ours mandate. So, and really what is relevant or beneficial, or why it is relevant and beneficial to our investors, it's simply because it helps us to deliver risk adjusted return. So that's why we assess ESG factors for all the issues we cover, and that includes governance environmental social factors. And that applies to all fixed income assets.
>> That's great Eugenia. Your microphone was just cutting out a little bit. So I don't know if there's any adjustment you can make on that. And for my own part, I will try to keep my comments as different to the other speakers wherever possible, and not repeat whatever they are saying. So for my part, Jennison's fundamental equity approach. I guess the reason why some of our investors care so much about ESG, is really because it's becoming more and more accepted that as companies have become bigger, the gaps between the owners of capital and the managers of companies have gotten bigger. The gap between the managers of companies and the workers, and the gaps between the workers and the ultimate consumers have grown bigger. And into those gaps, those agency problems start to appear, dysfunction start to appear. And what our investors are increasingly saying is, what are you doing to address that? Are you exercising your vote? Are you engaging with the management teams? Are you addressing these issues as active owners and stewards of capital? So that's one point and I think on the other side, more pragmatically, in terms of improving risk adjusted returns, as the other speakers have all led into, I think, in the age of the smartphone, bad practice, even if it's taking place on the other side of the world, can be on people's social media feeds on their desktops, can be in front of politicians and regulators in home markets, within a matter of hours. Just ask that Anglo Australian mining company that built up the aboriginal religious site. It really isn't the kind of world where you can hide bad practice egregious behavior. And so if your company depends, as most companies do on the brand, the reputation, and the goodwill of regulators and society at large ESG is just an intrinsic factor in the analysis of the value of the equity of that company. So I'll stop there and move our conversation on to the next question. So having laid out what ESG broadly means in your category, and I think it's great that if you have slightly different take in their asset class. How -- Have you think about integrating ESG into your investment process? And why do you think it's well suited -- your approach is well suited? May I sought in reverse order this time to Eugenia, I'm hoping your microphone is just working a little bit on that. Can we start with you? So how you integrated ESG into the process, and why do you think that works well for you.
>> Yeah. Absolutely. Can you hear me better now? So because as I said ESG is essential to our creditors and we have gone down the route of integrating sectors, specific industries specific, credit machines with factors to our fundamental research process. So it's not a separate process. It's part of every credit analyst, when they do their credit assessment, when they look at the issue they have to look at the broad range of ESG factors, identify those that might be potential material, analyze those, and then come to the conclusion whether and to what extent that impacts their credit assessment, that impact -- and whether it impacts the internal credit ratings. And we went down the route of asking all of our 100 plus fundamental research analysts with this job and not relying on just my team, the ESG team to be able to do that. But it's importantly, we are doing a bottoms up fundamental analysis. We aren't relying on external ratings. In that sense, we are obviously having access to economic data annex research. But ultimately, it is our own view and part of our analysis. So we also have done enough, we've enhanced our ability to analyze ESG factors by introducing the ESG Impact Assessment approach. So, and that's our new ESG impact ratings that we have come up with recently. So in here, we are looking not just that -- we're not looking at the ESG factors that are material from the perspective, but we're looking at how the issuer impacts the environment and society, so how their business activities, their practices, their products, having the external act on the environment, on the society on the planet as a whole. And we believe that gives us an additional component that allows us to look and making sure that we've more realistically. On one hand, looking at the economic factors than the economic value, on the other hand, looking at how the issuer impact the environment and society. And that is -- That gives a better perceived and maybe tails with what Lisa was talking about earlier, it gives us a sense of different risks, because very often, you know, the risk to the issue or concept, the impact that they have [inaudible] or be mental. So two is a much better picture of holistic perspective but also we see our [inaudible] using initially as a tool to also help them to express their ability view preferences in the mandate that they have.
>> That's great. Thanks, Eugenia. And, Lisa, can I pose the same question to you?
>> Sure, Raj. So we embed ESG practices throughout our investment process, our asset management process, our risk management process in our talent management process, I think, just like the other speakers on the panel. I think, you know, what's different for us is where -- that we're able to have a much more direct impact on the trajectory of the investment than we would if we were, you know, making a part of an investment in a company or in public securities. Because we are owners and operators of the real estate, ourselves, through asset management and asset management that's focused on ESG, we're able to change the trajectory of that individual asset. So for example, to add renewable energy as a component of the project or to increase energy efficiency or provide affordable housing, you know, during our ownership project process, so it's not just for us about selecting the right assets. That's obviously a big part of it, or mitigating risk through some sort of ongoing risk management is really about how do we incorporate ESG in our day-to-day management of the assets. And I would say that that's really our bread and butter. That's the -- That asset management process and that ESG focus in the asset management process is what sets us apart in the market and makes real estate such an important component of an ESG oriented portfolio because of those direct impacts.
>> That's great. That's fascinating. And Gavin, the same question to you?
>> Yeah. Absolutely. So within our approach at QMA, ESG integration process can really be thought of being comprised of two parts. So the first part is how we go about evaluating ESG information? How do we evaluate those stakeholder relations and create an ESG score, if you like. So for this, we don't rely on data vendors, we do it all in house. And so how we do it in house, there are some parallels for Eugenia described with fixed income. So for us, we do focus on those ESG issues that are most important in certain industries, that basically we recognize as stakeholder relationships, the key ones vary across industries. Now, we also -- when we're focusing on the most important issues, we focus on those where there's a clear rationale or motivation that they should have a financial impact on the firm to impact revenues, costs, assets, or liabilities for status. Now, where we do differ is that we go around this whole approach in a very objective data driven manner. We are quantitative investors, after all. And from this, we can come with the score for every company in our universe and an ESG score that's very transparent, and intuitive. Now, this takes me to the second part of our process, how do we combine these ESG insights with other risk and return drivers then in our investment process. So from a return perspective, what we do is that if we're evaluating two stocks, and they have equal attractiveness from a return perspective, we'll favor the stock with a more attractive ESG attributes. So ESG comes into play as being like a tiebreaker if you like. Now, when we're also evaluating investment opportunities using ESG information, we do compare firms against other firms in the same industry. And this is a really important point, because what we do is we don't exclude whole industries or sectors based on ESG insights, or like, we think that can introduce unnecessary costs on the portfolio. So instead, this more refined, and I'd say a sophisticated approach to how we integrate ESG inserts, it leaves you with a portfolio that's nicely risk controlled, positioned to outperform, and it's got meaningful improvements in its ESG profile. And just to give you an appreciation that meaningful improvement in the ESG profile, these risk control portfolios are positioned to outperform they can have a 70% reduction in the carbon footprint relative to the benchmark as well. So pretty nice outcome by taking this more refined approach. Raj.
>> That's great Gavin. And for the main part, just as if I ran this off with the Jennison approach to integrating ESG into the process. You know, as fundamental investors, we've always done ESG research. But what we've started doing more recently is breaking it out into separate ESG research notes for each stock that we hold. And what we're doing there is exactly what we do on the financial analysis side, which is start with the consensus, and then do our own fundamental research, do our own independent thinking, much more holistic picture of the company of all these multi-dimensional issues that affect the company's ESG profile, and decide for ourselves what we think the real risks on the ESG side are, where the real opportunities on the ESG side are. So then we have that as an ESG analysis alongside the financial analysis where previously, it was embedded within the financial analysis. And then what we're doing more and more of is showing our proxy voting by firm level by strategy level. And indeed, it's sometimes by portfolio level, and also capturing our engagements to give investors a real sense of where we're interacting with management teams, what the issues were interacting with the mirror about you rather, like many really active managers with dedicated research analysts, we've had a lot of engagement going on, but we haven't necessarily thought of it as part of the G of the E, S and G. So we're really trying to capture much more of what we've generally always done, and to be much more transparent with our investors, the way that we're expecting investi companies to be with us. But you know, we think that this approach is very congruent with our philosophy of fundamental holistic approach to analysis and investing. Now, moving on to the topic and the title of this webinar. You know, we've all lived through extraordinary times a pandemic rolling lockdowns. Can I invite each of you to maybe offer some comments on what you think the impact of the pandemic and the ensuing lockdowns has been on ESG in general or more specifically in your asset class and the approach that you've been taking? So maybe Lisa, as you've not gone first, on the previous couple of questions. Should we start with you?
>> Sure, thank you. So I'm going to start at a high level, and then dive a little bit into what I think this means for impact investing. I think COVID has forced us to see the connections between the health of the economy and social factors, and specifically in addressing inequality and racial justice. One of the terrible outcomes of COVID around the world is that it has had a much worse impact on marginalized and vulnerable communities, both in terms of deaths and in terms of transmission rates. And to be clear, this is not due to any inherent difference in the people in marginalized communities, but rather the conditions in which they live and they work and they receive their health care. In the US, this is manifests itself in a much higher death rate and transmission rate in communities of color. And, you know, again, this is connected to underlying factors of discrimination that result in a different quality of medical care, in unstable or overcrowded housing, and in dangerous, or highly exposed work conditions. And, you know, this has, I think, especially for me, made us realize that, if any one of us has COVID. And if it's more manifest in some communities, rather than others, then all of us are in danger. And as long as those conditions that further community spread exist, we are not going to be able to get this virus under control. So as a -- at a high level, that means that investing in addressing inequality, in doing things in the way that we invest, in the way that we live, live our lives to address racial inequality, we will help to address this pandemic. Specifically for impact investing, the ways that the -- the types of investments that we do help to address all of those things. So in the impact investing strategy that I lead, we invest in affordable housing, and in transformative real estate development, and that those -- both of those types of investments are targeted to help people of modest means have access to stable affordable housing. And to live in communities where there's access to the things required for a healthy lifestyle, healthy fresh foods, parks and open space and that sort of thing. And what we've seen in the course of the pandemic, in real estate, is that in many ways, this segment of real estate, specifically affordable workforce housing has been the best performing, it's outperformed Class A and luxury housing, it's certainly outperformed retail in this cycle. And that's consistent with a pattern of resiliency of financial performance of affordable housing across market cycles. That was true in the global financial crisis and it's proving to be true now. And there's a lot of reasons that we could talk about that or that might be behind that. But one of them is that when you're fulfilling an essential human need in the way that you invest, that those returns and financial performance tends to be more resilient over time.
>> Thanks very much, Lisa. Gavin, are you happy to go next? The same question.
>> I am. Thanks, Raj. When we think of the impact of the pandemic on ESG and equities, I think the first thing to note is that ESG strategies have actually performed quite well through the crisis. And so if we think through the year, for instance, ESG strategies performed very strongly in the sell off in the first quarter. So some people will say, well, ESG performed better because it's more defensive in nature. But it's more than that. We saw ESG keep up during the market rebound in the second quarter. So what we've seen through this crisis period is broader sustainability being rewarded. And because of that, because of this better performance, you're seeing a big increase in interest in ESG as a whole concept, and I say that as a whole concept, because pre-COVID crisis, much more of interest within the E component, specifically carbon emissions. Now there's interest across E, S and G. And this is so important, because ESG investing can have such meaningful positive impacts not just on the environment, as a society as well, everything that Lisa was speaking of, but as we look forward as well in terms of the implications for responsible investing in a post-pandemic world. We see the opportunity for some very significant change on the data front. And I'd be remiss if I didn't touch on that being a concave investor. So what we're seeing through this crisis period is a lot more data or a lot more ESG insights becoming about there's a lot more transparency, a lot more visibility into company's sustainability practices. Think of how they're treating their employees, and how they work and get their employees to come back into the office, are they laying off significant portions of their workforce, for instance, we've got a lot more visibility into these practices, independent of what companies are disclosing themselves and that's key. And now as a quantitative investor, we can actually use different techniques to go about capturing these different insights from different information sources. And so for us, as we look into responsible investing in this post pandemic world, we actually see some interesting opportunities for a situation where computational investing meets ESG. It's a very interesting opportunities arise as a result of that.
>> That's great, Gavin. Thank you. And Eugenia.
>> I think it's very hard to add anything new to what Lisa and Gavin have said. But I would just say that indeed, the pandemic has brought ESG home to very many people, investors and just, you know, ordinary people all over the world. And I would totally agree that it's really helped to sort, you know, the companies that report well, versus the ones that actually do well, in the situations. It showed us very clearly, the ones the issues, who could manage the crisis effectively, and not drop the high standards that they set for themselves in terms of employee relations, in terms of focus on the environment, focus on reducing the carbon footprint and other sustainability objectives. And the ones who had to really who struggled a lot, but also who couldn't manage this so effectively. So, but I would also highlight that, indeed, the focus on S has increased significantly. I totally echo what Gavin said, you know, before the pandemic, we had big E, we had middle G, and we had just this low case s at the end. And now I think it's a lot more equal. And I think this is very, very -- if there is a positive to come out from this -- from the pandemic that this focus on, as is a thing, this one.
>> Thank you very much, Eugenia. And I would just echo all three of you, I think you summarized the issues very well. And all that I would add is that, you know, it's really important that this increased emphasis on ESG does continue and it's not just a flash in the pan. But certainly the indications are that the increased emphasis on s, in particular, may well have come into the mainstream of investing. And hopefully, our industry will continue to have a benign influence going forwards. So let's move on to the next topic. This is -- This is one where I might start with you, Gavin, because you mentioned data vendors, and not relying on data vendors already in one of your earlier answers. But just the question of the biggest bull market over the last few years, I think it's probably been in the ESG data vendor kind of market. So, you know, obviously, that's in response to an explosion in investor interest in ESG strategies. What do you think, you know, for our audiences listening in that may not be focused entirely on ESG? What do you think of the pros and cons? What do you think separates good data vendors and data services from bad ones? You're the data guy as the four of us. Let's start with you.
>> OK, good place to start. Thank you. So I've got to say, first of all, working with ESG data is incredibly difficult. There's so many challenges. And when I do look at the data vendors, I have a bit of a tip of the hat to them. They do make a very solid effort in a very challenging space. But there is one big problem that I need to start off highlighting, that spans all the different data vendors and the audience needs to be aware of. And this relates to the lack of agreement or the lack of consistency in the ESG scores that come out of these data vendors. And what I mean by this is that you can have a situation where a company rates highly on ESG from one data vendor, and lowly on ESG from another. And that's extraordinarily confusing for an ESG investor, what is ESG? What am I actually getting exposure to? And that's one of the big issues that the audience needs to be aware of. But then the question is, and the right questions, well, what's causing that lack of agreement, that lack of consistency between the vendors and it's actually really hard question to answer because of a lack of transparency into the methodologies of these data vendors. But from our work, what we can do is we can deduce that these differences arise from different issues. For instance, the data vendors consider different ESG topics or different ESG issues, they're defining E, S and G differently. They go about using different metrics to capture certain E, S and G ideas, they use different metrics to measure diversity for instance. When they're measuring issues as well, the role of analysts comes into play, where analysts can introduce subjectivity into the evaluation process that creates differences. But there's also other concerns that can contribute to these differences stemming from conflicts of interest, for instance, where these data vendors, where they're rating companies, they're also doing business with those same companies. And so there's many different issues that can contribute to these is lack of consistency among the data vendors. But that's where for us we've done this work, we've evaluate the different data vendors, because those issues, we've opted much more to create our own in-house ESG score. And that's where for us we've used the SAS B framework is the foundation for our framework. This is a framework where there's a lot of agreement in terms of what it's actually capturing in terms of sustainability attributes. It's very transparent. It's very intuitive. And so this framework, we apply all of our quantitative expertise to translate that, that framework into a more proprietary ESG score, which underpins our ESG investing approach.
>> So Gavin, can I ask you a quick follow up. So do you apply equal weightings to the E, S and G when you do that -- when you do your proprietary scoring? Or do you change that according to the industry, just a quick word on that, please.
>> OK. It's the latter point that you made where the E, S and G issues do vary across industries. So if we're looking at more of a resource intensive industry, the E issues do come to the fore a lot more. If you're looking at more of a consumer oriented industry, then the S issues tend to come to the fore in terms of issues with the customer, customer privacy, employee related issues, and so forth. So the industry level, there are differences. Once we come back to the overall portfolio level, you do see more of a balance and across those attributes at the portfolio level.
>> Understood. That's great. Thank you. Eugenia, would you like to go next?
>> Yeah, sure. I would like to add to what Gavin said. It's really, really important to understand what the ratings are actually designed to measure. Because when you look at the rating providers, so data providers that are commonly used by the industry, most of them would say that they're focused on identifying and measuring financial immaterial risks and opportunities and for issues. However, if you start digging deeper, you realize that, you know, there's a whole set of indicators, and some of them, you would normally -- you would agree that they are potentially financially material. But then you have the whole indicators that are going into that trading, where you don't really have evidence, maybe, as yet, they're financially material. So you kind of end up with a real soup, if I could use your previous reference where some ingredients are suitable for credit assessment and from an economic perspective, but some are completely not. Yet they're all sort of together and influencing that the end rating. So and for this reason, we don't use external ratings. I mean, we don't use external ratings for fundamental research, and we don't use ratings for ESG research. We obviously have access to data providers. As you said before, it's very interesting and important to understand where the consensus might be, you know, in the market on ESG. However, as Gavin pointed out, it's very rarely that you see a full consensus, there's usually significant departures between different providers. But this based on the sizes, [inaudible] of doing our own analysis, taking, you know, doing our own due diligence in terms of the key and the accuracy of the data or taking a look others are saying about the individual issue and doing our own analysis. Also, you know, another point about the external rates, they are very influenced by the extent of disclosures than issuers produce. Sample, look at the investment grade issuers then there is a trend of having higher ESG ratings by third party rating providers because they tend to produce it's bigger companies, you know, they have more resources, they tend to produce better disclosure. In fact, you hire yielder bank loans where we invest, then the disclosures are very poor. And that's impacts negatively their ratings given to them by external providers, either. So we feel that we need to do our own research and not trust the third party ratings. And probably the last point is on the ratings -- the certain parts of ratings tend to be backward looking whereas we like to look at our investments from a forward looking perspective. To give you a simple example, we have if an issuer say improve their ESG performance, or they make the strong commitments set out, you know, they're launching and credible targets, that may only be picked up by a rating agency, maybe six months, or maybe the whole year down the line. It doesn't immediately, you know, get translated into their ratings, whereas active managers like PGIM, fixed income, we pick up on this much, much faster. And this is something that I think is worth keeping in mind.
>> That's great. Thanks, Eugenia. And, Lisa, over to you, what would you say?
>> Great. Well, I mean, I think the framework that we use is a little different. I mean, many of the data providers out there, don't really look at private securities the same way or the private investments the same way, the data is not that deep or meaningful. For us, it's sort of superficial. So we, especially for the E tend to go with a very sector specific framework, which is called GRESB, the Global Real Estate Sustainability Board rating system. And we -- This is a fun level rating, so we rate each of our funds, large funds with this, and it's a way that investors can compare what we do to what our peers do, and what you know, even different funds within the company are focused on. Same with Gavin and Eugenia, there are some real gaps in it. Priority is always an issue. GRESB is primarily an environmental rating system. Until this year, it had exactly four questions on the s. That's changing, because I think all of the rating systems are coming out of this circumstance that we're in now, thinking a lot more deeply about s, the social aspects and how to address them in their frameworks, but it's still very much nascent. And the governance aspects of GRESB are also not as robust. What we often probably the most relevant governance framework for us is the UN PRI framework, we do very well on that, you will probably use that, use those as well. And then, when we want to look at impact and social impact, there's a whole other series of metrics that people use. I would -- I say metrics, and that's a little bit different than ratings, because metrics really just tell you how to measure discrete series of outcomes or outputs rather. They don't tell you how to prioritize them, or how to score them per se. And in impact investing, investors tend to be looking for particular things. And if you have the metrics, say, percentage of affordable housing, in a portfolio or jobs created or, you know, something like that, then you can, as an investor, can make your own decision about which one of those you prioritize, without looking to sort of a black box of a score that includes a composite of all of those things.
>> That's great. Thank you for that Lisa. And I think for my own part, as an active fundamental investment house, you won't be surprised to hear that I'm going to echo some of the sentiments of then we find the ESG ratings and scores, deeply flawed. They're backward looking, you know, the sustainability reports often come out months after the financial reports come out. They usually reporting things from the previous year. And going right back to my introduction, you know, the definitions of these things are just not agreed yet. So you know, you get some companies reporting very good carbon footprints because they've outsourced all the dirty work to someone else. So it's still part of the value chain, but they just look great. And our company's been very diligent in trying to report the whole thing together. And so if you just take it on the on face value, they just look worse. So we use data vendors with great caution. The same way that we use Bloomberg or IMS consensus earnings with great caution and then we try and build our own view, a much more holistic, forward looking view of what we think the ESG qualities of that individual company are. And we think that makes much more sense. So just putting numbers on what I think, yeah, a couple of years ago already mentioned. But I think in the bond ratings world, the consistency of you know, what counts as a triple A or a junk, is well over 90%. In the ESG, world, the overlap of ratings is barely just over 60%. So it shows you how much work there still is to do to standardize these definitions, to standardize the metrics to actually get to more meaningful scores. So you know, I think there is no alternative to actually doing it ourselves and trying to get a more holistic, fundamental picture of it. Now, I'm conscious of the time so what I'm going to do is I'm going to skip one or two, the questions. But before we move on to each speaker, summarizing their thoughts on ESG, maybe just one last question, which is the one of the biggest push backs in previous years less over the last two, three years? But in previous years was ESG, responsible investing? It's got to be a tax on returns, surely? And what would your response be? And Lisa, given that your approach to responsible investing is quite different to the three of us, should we start with you? What would you say to people who say, well, you know, surely you're going to rule out property projects or investments that that could do well, and therefore it will tax my performance?
>> Yeah, I mean, I think that it's a false dichotomy. I don't -- I think it's possible to make investments that achieve, you know, ESG outcomes, and also achieved financial performance. And I think, in fact, we're seeing that if you look at investment performance, over the market cycle, and over time that ESG investments are going to do better. And then I would also say that for impact investing, where you're proactively trying to have a positive social and environmental outcome, and that front, not everything is impact investing, right, not everything is able to enhance financial performance by social performance. But there is a particular way of impact investing where you select for those investments that do have that those dual qualities of social and environmental positive outcomes, driving positive investment performance.
>> And Eugenia, what would you say to that pushback in the world of fixed income? Should it be a tax on returns?
>> I would say that it can be but it doesn't have to be. So I think what is really important in this discussion is to emphasize that ESG mandates are very similar to other investment mandates that they can have different investment objectives. And that can be both financial and nonfinancial objectives. And they will perform differently over different periods of time. So it depends, you know, on how we look at it. But what I would say is when one looks at an ESG strategy you need to understand what the ESG component of that strategy actually seeks to achieve, right? Could it be to integrate crave material ESG factors into an investment process? Or maybe you want to capitalize on ESG related structural trends using semantic investing for example? Do you want to express your ethical values through ESG investing? Or do you want to achieve positive social environmental impact? I mean, in my view, depending on what the answer to those questions is, it will mean different investors approach, it will mean different ESG methods, and will probably lead to different range of outcome in terms of performance expectations. It will also measure whether you have an active approach or a passive approach. That could make a fair bit of a difference. So I suppose the answer here is not to make some generic conclusions or perceptions about ESG. But you really need to look into individual is just strategies, you know, their expected outcomes methodologist, and also track records.
>> That's great. Thanks, Eugenia. And Gavin, what would your response to that kind of pushback be?
>> Yeah, say in the past, there has been evidence of these more poorly designed ESG strategies have experienced attacks on performance because of ESG, and exclusions of one aspect of a poorly designed ESG strategy from our perspective. If you exclude a whole sector or industry that can introduce this cost attentive, higher active risk, and if you exclude a lot of names from your universe, then you can truncate your alpha opportunity set directly impacting alpha. There's other elements of employee design ESG strategy that we need to touch on, as well. It's about do these strategies incorporate other return drivers, are too high rated ESG stocks equal? I'd say no one's more expensive, one's more attractively priced. Simply designed strategies don't incorporate those other return drivers into the decision making process. More naive pointers ideas to strategies can fall victim to greenwashing invest in ESG traps, low quality ESG companies, they can also take a one size fits all approach to how they evaluate ESG at the stock level missing a lot of those nuances in ESG. It's a combination of these issues that can contribute to that drag on performance. But better designed ESG strategies can overcome those hurdles and deliver better performance. And that's where we strongly believe that quantitative investors will soon be developing these design strategies and can actually carve out a niche in this space. For instances quants were well suited to sourcing and cleaning data and constructing factors. This is what we're applying to ESG to construct better ESG factors that don't negatively impact performance. But we're also applying our expertise in portfolio construction to best integrating ESG insights with other risk and return drivers. And the result is in terms of how we go about designing better ESG strategies is that for us in QMA our ESG strategies have a return expectation and a risk expectation that's comparable, if not more attractive to a non-ESG strategy. So there's no reason in well designed ESG strategies to expect any tax on performance.
>> That's great, thank you. And if I may, I would just build on what you've just said Gavin, and also Eugenia's comments. And, you know, in the way that we're approaching ESG in Jennison, we are effectively using it as a way of bringing out non-financial data that can shed more light on management quality. So understanding non-EPS type of metrics, looking at management teams in different ways can really shed light on magic teams that cut corners, because if they're cutting corners on these things, you can bet your life or cut corners on other things. It can act as a form of risk mitigation. And really, in some companies, there is no meaningful issues to worry about, in some there are opportunities. And of course, in others there will be negatives, but overall is you should act as a means of enhancing analysis, and enhancing your understanding of a company, the quality of the management team. And so over time, it should be able to support better risk adjusted returns in the long run. If that is your objective, going back Eugenia's point. There are many different approaches to this. And there is many different approaches to ESG, as there are investors who demand them. So, you know, we said at the beginning, we wouldn't -- we wouldn't indulge in the jargon, the complexity, but we have to not to -- pen nod to that, you know, there are a lot of different approaches that are valid for certain kinds of investors. Now, what I'd like to do is offer each speaker a couple of minutes, just to summarize the points I'd like to bring out after this 50 minutes or so of discussion. And maybe, again, if I pick on you, Lisa to lead the way, just because what you're doing is the same materially different to the three of us, but would you like to just sort of make some concluding comments?
>> Sure. You know, I think what I've heard from each of the presenters today that is very relevant for what I'm working on is that social impacts have become more important in a post-pandemic world. And that addressing both social risks and potential positive social outcomes is something that investors are thinking about. And that we're all paying close attention to in the types of investments that that we have made. You know, I think we used to believe in ESG circles, that climate change was the great systemic risk to financial markets that we needed to find a way to account for. And the challenge was to connect the individual investments that we were making to addressing climate risk at a systemic level. I think the challenge now that I see is that inequality around the globe is an equally important systemic risk, often connected to climate risks that we have to address in financial markets. And I'm interested in finding out more and learning more and doing more investment in ways to address those risks of inequality.
>> Thanks, Lisa. And Gavin, maybe if I could turn to you next, as just your concluding thoughts.
>> Sure. And I'll touch in what you said in your introductory comments that we're in very early days of ESG investing. We've got so much and we still have to learn and understand about ESG investing. But the good thing is that this space is building momentum, because of unfortunately the crisis, because of other regulatory changes. But we have to recognize that there's so many challenges in this space and many challenges for institutional investors, [inaudible], as they go about trying to incorporate these ESG insights into their own investment frameworks. That's for us, we think you need to as we move forward with ESG investing move beyond just a product mindspace to more of a solutions oriented mindset in terms of how we approach ESG. And that's where for us, we think active investing is important, but quantitative approaches can be incredibly useful to help engineer those specific ESG solutions.
>> Great. Thanks, Gavin. And Eugenia, some concluding comments from you please.
>> Sure. I would like to emphasize maybe what we talked about in the last few minutes, which is, you know ESG is a new area for very many investors, and there are no established standards or common ways of assessing ESG approaches. So for those who are considering ESG investing as we know, many of our listeners are, so it is really critical to do your own due diligence and not to rely on off the shelf things by external providers. As we talked about ESG comes in various forms, and definitely comes in different shades of green. And so this excess -- key to successful ESG investing is, one is to know what you want to achieve by investing the considerations in mind. Two, do your own due diligence and look for strategies actually embed ESG in their investment process, rather than use it as a quick overlay or as a quick add on. And then really, you know, anything that that's the most important part when you want to invest with ESG in mind.
>> That's great. Thanks, Eugenia. And I have the unenviable task of trying to summarize our hours of discussion here, as we approach the one hour mark. And I think what's really come out to me over the last hour is that when investors are looking at approaches to ESG, what you really have to think about is the asset class that you're investing into, the investment philosophy that you want to invest with. And then when you look at the approach of the manager, is it authentic? Is it congruent with their philosophy with the way they approach their broader investment strategies? And therefore, you know, is it actually fundamentally a part of what they're doing, as opposed to being as you just mentioned, a sticking plaster a bit of greenwash added on at the end as an afterthought to make the marketing materials that nice. I think, you know, if you can bear those things in mind, then you will have got some good insights over the last hour, and a good sense of what you should look for when you're thinking about making your next investments and the kind of managers that would be well placed to deliver if she's part of the investment solution that you're seeking. So thank you very much for your time. Thank you to all of the participants and their presenters. It's been a real pleasure to have this conversation with you.
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