Listen to our latest “Talking Markets podcast” to hear more. A transcript follows.
Lucy Hockings: Giulio, I think we should start with you and get some of these big ideas out there so we can then all join in and discuss. It really feels like we’re living through a period of time like no other. Do you think there’s a comparable time in history or are we in some completely new territory at the moment?
Dr. Giulio Boccaletti: There are comparable times in history in the sense that we’ve gone through profound transformations as the one that we’re about to embark on before. But many of the traits that we are currently seeing are different, I think. It offers us an opportunity to really reflect on what it means to “build back better.” And I think this is a theme going into the summer and for the rest of the year. As we manage to get the pandemic under control, the real question is that we’re going to spend an enormous amount of money trying to rebuild the economy, respond to the economic crisis we’re entering, and so how do we rebuild back better? And that’s really been the theme of a lot of the reflections that have been making over the last of the last few months.
It seems to me that COVID-19 sort of represents a very interesting dry run in terms of what a response to an emergency looks like. If you go back with your memory to before the pandemic, we were all talking about the climate crisis and the environmental crisis and the sort of sustainability crisis. A lot of investment discussion was geared around this question of how would you deploy capital for a more sustainable economy? Then, the pandemic happened, and it shows us what it looks like to respond to a real emergency. And I think it gives us a few lessons that are important to bear in mind.
The first lesson that I take from the COVID-19 pandemic is this question of how do we get environmental and sustainability frameworks to be as powerful as those of epistemologists. And one that investors particularly will have to worry about how is do we get ESG frameworks to be as convincing as epidemiology is for public health?
The second big insight and lesson that I’ve drawn from the pandemic has been the power of institutions and institutional design. If you think about the response we’ve managed to elicit as we’ve confronted this pandemic, it’s been actually quite remarkable.
And then lastly, the lesson that I took from this pandemic that I think is important, it’s a historical lesson, but it’s a lesson for the future, is the power of having a constitutional settlement that governs our living together and that places public health at the heart of our contract.
If you think about it, we’ve all been housebound for the last several months and we’ve accepted it relatively benignly without particular protests, because we trust that the public health outcomes are a legitimate objective of public policy, right? How do we get to the same constitutional settlement when it comes to confronting the climate change crisis? This lesson is important cause I think people sometimes think that our rebuilding or building back better, it will be simply a matter of tweaking technologies. We’ll just substitute wind farm where we used to have a gas pump and that’s going to be it. And in fact, you know, much research shows that what expects us is a profound transformation of the landscape of the planet and in order to govern that transformation in a way that’s viable, I think we’ll have to worry about all these questions about how do we know what we know, how do we convince ourselves of the truth? How do we design institutions that can deliver change legitimately at scale? And how do we develop a constitutional settlement in a way that can accommodate the kind of authority that’s required to really transform the landscape?
Lucy Hockings: It’s going to require a huge change in the way that we all think. Mary Jane, I wonder if you’ve seen, in terms of the pandemic, the thinking around the way companies behave and their priorities. Has that shifted because of the pandemic, or because thinking has changed?
Mary Jane McQuillen: As an investor the short answer that we’ve observed is yes, that we have seen companies respond in the spirit of much more stakeholder support and around resilience. So even though we were in lockdown last March, as fiduciaries, we reached out to hundreds of companies to discuss the economic impact of the uncertainty around COVID-19 throughout the year.
And on the same company calls, where we were inquiring about the economic impact, we were also discussing our views of stakeholders. And we said to companies, “we view stakeholders as your employees, as your customers, your communities that you operate in, your suppliers you work with, your other management teams at the company, as well as us, who are your shareholders.” And so, we knew each of these stakeholder groups could endure some hardships in the coming months to year, but as long-term investors, we wanted to reiterate our support for the operations of the companies and encourage them to take positive steps to support all stakeholders.
Examples of company behavior changes were that many of the companies increased hourly wages. We also saw companies increase their health benefits and expand to include particularly around mental health given the global anxiety due to the pandemic. They also made commitments to no layoffs. They had reduction of CEO and management pay across. And, other changes included retailer companies, for example, organized early access for seniors to shop for essentials without the crowds. And broadband and telecom companies were committed to providing expanded cellular data at no charge and to maintain internet access for all, particularly for communities that were struggling. So those are some examples of where we saw companies step up and improve their behavior in our opinion.
Lucy Hockings: What about you Kim, have you seen some big changes as well?
Kim Catechis: One of the most striking ones for me is that if we think about the three main groups of actors in society, we have governments, we have corporate sector, and we have NGOs [nonprofit organizations]. Now, typically NGOs are considered very ethical and well-meaning, but not particularly well-organized. Governments are known as being not terribly efficient, but more or less doing the right thing. And corporates are known as being very efficient, but not necessarily covering themselves in glory in terms of being ethical. And that’s the historical picture, what the pandemic has done is thrown into relief this subset of corporates that have proved themselves much in the manner that Mary Jane has been outlining as being very carefully looking after, literally, their stakeholders, as well as going on and doing their business. And as a result of that, they have got themselves in a position where they have enhanced trust on the basis, not only of their clients and their stakeholders and their customers, and their staff, but literally society looks to them as being trustworthy, and, in many cases, looking or coming off better than perhaps governments are.
Lucy Hockings: So, John, what sort of questions are you seeing investors ask right now?
John Levy: These are great topics because oftentimes people think there’s this false choice between focusing on profit and focusing on the bigger picture here. And what we’re seeing is more and more, especially in the private sector and the private markets, startup companies acknowledge that the world’s problems are getting bigger and these are addressable markets. Profit-seeking enterprises can be trusted and can create scalable solutions to a lot of the world’s problems. And so, it really comes back to that trust theme here, which is typically we have not trusted companies to do well with common goods. It’s this tragedy of the commons for economics and political science majors out there. It’s this idea that we need governments to take care of the common goods, but more and more we’re seeing that companies are building out business models that are again scaling solutions that typically have been left to the purview of governments and philanthropies and doing so while making attractive profits.
Lucy Hockings: John, do you think we’re seeing valuations changing or are you witnessing this if corporates eem to be good citizens and doing the right thing at the moment?
John Levy: I think that’s a great question. I think we are, but I think some of the excitement is when you don’t see that reflected in the valuations today, but you know these risks are going to manifest themselves in the future and the opportunities as well. I think across all types of investments, we all have an anchoring bias. We get comfortable fighting against the risks of events that have already happened. We get comfort in business models that existed 10, 20 years ago, because there’s a track record and we can say, well, that worked. Whereas the real risk is what’s next. And so, backing companies built for today and built for the future, companies that are addressing the big risks, the future, including climate change, including inequality, things like this, these are where the real opportunities are. And I think that’s why impact investing and an ESG focus in investments really gives you in fact a competitive advantage of backing companies built for today and for the future. And so, yes, we are seeing the valuation. Certainly, there are bubbles in certain parts of the market as a lot of people are chasing these themes. But, if you look across all the sustainable development goals, which is this global list of the world’s biggest problems, there are so many different ways to address them that there’s always attractive opportunities to invest for a better planet.
Lucy Hockings: How do you approach this, Mary Jane? I mean, reconciling the investment element, growing your clients’ assets, preserving capital, but also making sure that, you know, this whole package looks to improve society as well—it’s quite an ask.
Mary Jane McQuillen: We’ve had about 30 years of ESG investing in sustainable experience, which has taught us a lot of lessons. Also from our view, sustainable investing overall has evolved and continues to evolve like John just alluded to. So, we can’t emphasize enough that the investment process is as important as the societal impact, meaning that we’ve observed that if the investments themselves do not endure or sustain that investors cannot support that indefinitely, they need to have the return as well as supporting solutions to society.
Our view has been ESG integration, which is integrating the material, environmental, social, and governance factors into our fundamental analysis, has been the process that we prefer. And this allows us to identify investments that are providing sustainable solutions, which could be in the form of products and services, or it could be in terms of the operations are highly sustainable. And by the proper and prudent due diligence in thinking about each investment and the potential societal impact, that reconciles back to this idea of being a long-term investor and thinking in the future.
Lucy Hockings: So, Kim, do you have like a gold standard of ESG, something that you said that we’d like to lift everything to meet that?
Kim Catechis: No, I think not, not because it’s impossible, but because it keeps changing. I think the more we learn, the more we get better, the more, at quantifying these things, the more we understand about what we can do and the more solutions we find, the benchmark keeps getting higher, right? So, corporates that want a gold star for governance even, you know, fairly straight forward you would think, element of ESG 10 years ago, would not win them today doing what they did then. So, I think this is a moving feast. And at the end of the day, for me, there is no contradiction, this is investment in its fullest sense. I mean, you’re stewarding your client’s money. You’re looking for investments that are sustainable in the broader sense of that sense of that word. And that means taking into account all these factors that we may have considered in the past, very difficult to quantify. Their still not easy, but you can and it’s part of the whole package, as far as I’m concerned.
Lucy Hockings: John and Mary Jane, culture and D&I [diversity and inclusion] are increasingly becoming factors that investors and asset owners are paying high attention to when they’re selecting an asset manager. So what would you suggest as a potential framework or potential factors that they should be taking into consideration when assessing these?
Mary Jane McQuillen: So similar to how investors have been asking corporates about their D&I policies to ensure racial and gender equality in their approach to recruiting and hiring and promoting talent, we as asset managers have also received that question from our clients where they’re asking us “how is your D&I, how are your D&I policies set up? Who is managing the money? Is there equal representation or some representation across race, ethnicity, and gender?
We know that the studies have shown us that women in investment management tend to be very good investors. They have a lower tolerance for risk. They are very high on return on equity in their performance metrics, and they are also highly innovative in their process. And so, the idea that investors are looking at their asset managers makes a lot of sense to us, and we think we’re going to be asked more regularly going forward who makes up the people who are running this money?
John Levy: Yeah. And I’ll just add to that. I mean, I think we’re really proud to be a female-led organization ourselves. And in terms of frameworks, there are a lot, especially around what’s called gender lens investing, which really tries to create comparable ways of looking at D&I, at least on the gender lens spectrum. But also from a culture perspective, that’s not always quantifiable. That is something where you need to get to know the organization and understand is this an organization really values diverse ideas, diverse backgrounds on multiple, by gender, by ethnicity, whatever it may be? And I think that’s something that it doesn’t need to be quantified, but can be seen through that engagement.
Lucy Hockings: But John, do you still have to work hard to sort of say, look we need to get a balance here—it makes economic sense to invest in women, to invest in climate change all of these things make sense? Or is that almost a given now, are we at that point?
John Levy: No, it’s definitely not a given. I think there’s still a lot of discussion. We feel firmly that again, this is a competitive advantage. We have data that shows that in the startup world, women founded companies outperform, and yet they’re massively underfunded. That’s a market inefficiency. That is something that objectively is attractive financially and it happens to be something that creates a huge impact. We know that investing for climate change is investing for the future. And we do see these very, very much as opportunities, but there’s still this, I believe, misconception that to focus only on these types of companies means you’re missing opportunities.
But there’s still a lot of problems that can’t be solved by markets. And so we have to acknowledge that to address some of those issues maybe you do need concessionary capital, or you do need philanthropy or government funding, but we try to use a logic model to identify those solutions that are addressable with market rate capital, and those that are very attractive for investors. And that’s what makes us really optimistic that there’s a lot we can do here materially in support of, and in conjunction with governments and philanthropies. We need all parts of society working together to address our biggest problems.
Lucy Hockings: Kim, just listening to all this, is it inevitable then that some corporate citizens are going to come out of this pandemic so much better than others with an enhanced trust in their brand that is deeper and greater than many others?
Kim Catechis: I think that’s absolutely right. And, what I would say is from an investor’s perspective, I was taught that a company’s valuation premium is something that builds over many, many years as that company keeps producing earnings to the tune of expectations in the market. And today what I can say is that there’s going to be a valuation premium baked into those companies that are viewed as being not only the best category, the best deciles of corporate citizenship in every aspect that we’ve just been discussing, as well as delivering the earnings and fighting that natural fade of returns for longer.
So, yeah, I think it’s an obvious reason why investors should be excited. There are a number of great opportunities that are rolling out just now. And, you know, this is what the next decade or 20, 30 years is going to look like.
Lucy Hockings: So, Giulio, in your mind for investors, what is the sort of framework that they should be looking at? What are the key questions they should be asking before choosing an investment?
Dr. Giulio Boccaletti: I think that this has been a really interesting conversation. It’s a very micro-economic conversation, so we opportunity by opportunity, right? But I want to bring us back to the pandemic which sort of made the famous Mike Tyson saying of “everybody has a plan until you get hit in the face” real right? We got suddenly hit in the face and we had plans; some of them worked and some of them didn’t. I think the investors coming out of the pandemic need to take that experience into account and think hard about what are the risks associated with, what is likely a very significant transition ahead of us. One that is unlikely to be plannable quite in the same way that we probably thought 10 years ago.
I would advise investors to worry as much about individual companies as they worry about the measuring infrastructure that governments are putting in place to make sure they know what is actually going on on the ground. That there are institutions that can govern you know, transitions in infrastructure. Otherwise, all those companies won’t have the water and the roads they need to function. And citizens come to accept the changes that are going to have to happen. If we have wind farms or solar plants over on the landscape, it’s going to look different. Somebody’s backyard is going to look different and that will become a serious political point when it becomes a scaled solution.
Lucy Hockings: John, what would you say to that around, you know, that sort of the macro framework considerations?
John Levy: Yeah, I think two things. I think one, again, it comes back to this we’re better together. I think it’s this idea that we need consumers to demand certain things of their products, of their services. We need companies to provide that and we need governments to support that and create the rules of the road to support that transition to a better future. And so, I think you need all three ingredients to really be lower case “s” sustainable, in order for a solution to come to scale, to create real meaningful material impact you absolutely need all of that.
I think that we should all be optimistic. I think the last year and a half has been tough to be an optimist. With lockdown, all of our personal situations, all the negative news, it’s really gives us a sense that there’s nothing we can do materially to help address these problems, but there is. With ESG-focused strategies, impactful strategies are gaining a lot of momentum and as investors we can take action. And I think that knowing that you can do something about it is what fuels optimism. We can have our portfolios be part of the solution, not part of a problem. And I think that should leave us all on a happy note at the end.
Lucy Hockings: Good optimistic rallying cry from you at the end, John, thank you very much. Thank you to all of you for our fantastic panel.
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