1Not for distribution to the general public.
Confidential and proprietary information.
Not for distribution to the general public.
Confidential and proprietary information.
ESG Investing
Robin Freeman
Vice President, Portfolio Specialist
November 14, 2019
2Not for distribution to the general public.
Confidential and proprietary information.
Agenda
1. ESG Investing has many names
2. The beginnings and where are we now? What does the industry encompass?
3. The 5 myths in public equities ESG investing
4. How to cut through the noise? True ESG integration
5. Questions
3Not for distribution to the general public.
Confidential and proprietary information.
An Industry With Many Names
“clothespins” by Barbara Eckstein is licensed under CC BY 2.0.
4Not for distribution to the general public.
Confidential and proprietary information.
An Industry That Continues to EvolveFrom Black & White to Shades of Grey…
5Not for distribution to the general public.
Confidential and proprietary information.
But There Remains Skepticism
• A Performance Trade-off
• Breaches Fiduciary Duty
• Only Negative Screens
• Not Enough Assets
• No Real Impact
The 5 Myths of Public Markets ESG Investing
6Not for distribution to the general public.
Confidential and proprietary information.
Performance Question Has Been Answered
“Sustainable strategies have performed the same or
slightly better than traditional strategies with
volatility equal or lower than traditional strategies.”
– Audrey Choi, CEO Morgan Stanley Institute for
Sustainable Investing, October 2015
“High Sustainability companies significantly
outperform their counterparts over the long term,
both in terms of stock market as well as accounting
performance.”
“We find that High Sustainability firms also perform
better when we consider accounting rates of return,
such as return-on-equity (ROE) and return-on-assets
(ROA).”
– Harvard Business School study, 2013
“We show that employee satisfaction is associated
with positive abnormal [stock] returns in countries
with high labor market flexibility, such as the U.S.
and U.K.”
– Wharton School of Business
working paper, 2014
All investing involves risk and you may incur a profit or a loss. There is no assurance that any investment strategy will be successful.
Asset allocation and diversification does not ensure a profit or protect against a loss. Past performance does not guarantee future results.
Perception
A common objection of asset owners and consultants is that “Holding companies to high ESG standards means sacrificing performance”
Reality
Third-party studies and our own experience confirm that stocks with strong ESG characteristics perform as well or better than stocks overall
7Not for distribution to the general public.
Confidential and proprietary information.
Financial Analysis
.
Perception
ESG factors are superfluous or only qualitative in nature
Reality
ESG factors are critical components of financial and risk analyses
• 90% of the studies on the cost of capital show that sound
sustainability standards lower the cost of capital of companies*
• 88% of the research shows that solid ESG practices result in better
operational performance of firms*
• 80% of the studies show that stock price performance of companies
is positively influenced by good sustainability practices*
* Source: From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance, Gordon L. Clark, Andreas Feiner and Michael Viehs, March 2015.
All investing involves risk and you may incur a profit or a loss. There is no assurance that any investment strategy will be successful. Asset allocation and diversification does not ensure a profit
or protect against a loss.
8Not for distribution to the general public.
Confidential and proprietary information.
ESG Becoming a Fiduciary Priority
All investing involves risk and you may incur a profit or a loss. There is no assurance that any investment strategy will be successful. Asset allocation and diversification does
not ensure a profit or protect against a loss.
Perception
Fiduciary duty is a barrier to asset owners integrating ESG issues into their investment process
Reality
Many countries have added regulations requiring institutional investors to consider ESG issues in their investment due diligence
“The literature on SRI is robust enough to say that there is a
serious question around whether or not ESG issues are
important to investment performance. This suggests that, at a
minimum, due diligence processes must include assessment
of the need to take account of these issues in investment
decision making.”
- Larry Beeferman (Director, Pensions and Capital
Stewardship Project, Labor and Worklife Program,
Harvard Law School)
9Not for distribution to the general public.
Confidential and proprietary information.
Key Findings From Investors
Source: Legg Mason ESG Investment Survey.
High Net Worth Millennial
The concept of ESG investing holds similarly high appeal with both millennials and high net worth investors.
82% 88%
56%
47% 60%
74% 84%
20% 10%
High net worth awareness most often driven by press
43%
Millennials cite self-directed research most frequently
62% 51%
Would like to learn more about ESG investments
Would like to invest more in ESG
Believe ESG investments are likely to perform as well as or better than non-ESG investments
Informed about ESG investments from their advisor
10Not for distribution to the general public.
Confidential and proprietary information.
Key Findings From Investors
Source: Legg Mason ESG Investment Survey.
Nearly 90% of advisors cite ESG investment discussions are most initiated by their clients
66% indicate that most clients don’t believe ESG options perform worse
90% indicate that most clients don’t believe ESG options carry more risk
69% of advisors feel the importance of ESG investing has increased over the past five years and expect this to
continue over the next five years
90%
66%
90%
69%
11Not for distribution to the general public.
Confidential and proprietary information.
Investors Can Create Impact Via Public Equities
• Capital allocation can drive change (hint: impacting cost of capital)
• Investing in companies whose end-product/service benefit society
• Investing in companies whose supply-chains impact the world at scale
• Engaging with companies to drive change in environmental and social practices
* Source: From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance, Gordon L. Clark, Andreas Feiner and Michael Viehs, March 2015.
12Not for distribution to the general public.
Confidential and proprietary information.
ESG Integration Models
Model 1: Model 2: ClearBridge:
Third party
ESG research
firm
Segregated
internal ESG
research team
One team integrating
ESG and fundamental
research
Preferred approach to ESG integration:
• Same person (investment professional) doing fundamental ESG research
• ESG considerations influence fundamental view of company
• ESG issues brought up in CEO/CFO engagements vs. separate ESG engagements
13Not for distribution to the general public.
Confidential and proprietary information.
ClearBridge’s Approach
A dedicated ESG program with the resources and performance of a mainstream firm
• A legacy of specialized ESG expertise starting in 1987
• The scale, access and infrastructure of a long-term investor with $146.4 billion in assets under management1
• Sustainability Leaders and eight additional style-specific ESG strategies
Combining active investment with active ownership
• Selecting investments and managing portfolios
• Advocacy via proxy voting and engagement with company management
• Client and public education about ESG best practices
True ESG integration
• Firm-wide fundamental research incorporating ESG perspectives across industry sectors
• Research analyst compensation based in part on evaluating ESG factors linked to company performance
• An ESG ratings system facilitating systematic research and engagement with companies
Strengths and Distinguishing Characteristics
1 As of June 30, 2019.
14Not for distribution to the general public.
Confidential and proprietary information.
Five Main Segments of ESG Integration in Practice
Portfolio construction and ESG integration
Company and thought leader engagement
Advocacy via proxy voting
Client interactionPublic
education
15Not for distribution to the general public.
Confidential and proprietary information.
Key ESG Factors by SectorFundamental Research Team
As of June 30, 2019.
Name Sector(s) Covered Key ESG Factors
Chuck Harris
Director of ResearchIndustrials
Environmental impacts of products; labor management; governance; health and safety; environmental regulation and compliance; fuel efficiency
and optimization
Neal Austria Consumer DiscretionaryLabor management; product quality and safety; health and wellness trends; governance; raw material sourcing; supply chain practices; data
privacy and security
Robert Buesing, Jr. Consumer Staples/Durables Health impacts of products; supply chain practices; environmental efficiency of operations; clean vehicle technology; product safety; governance
Dimitry Dayen, CFA EnergyOperational safety; environmental efficiency of operations; governance; community relations; environmental and climate change regulation;
alternative energy investments; geopolitical risk
Tatiana Eades UtilitiesFuel mix; renewable energy exposure; emissions and carbon intensity; operational safety and efficiency; governance; environmental regulation
and compliance
Hilary Frisch, CFA SoftwareData privacy and security; governance; labor management; products to address environmental and social issues; impacts of automation;
environmental efficiency of operations
Erica Fufaro Media & InternetData privacy and security; content responsibility; governance (especially shareholder rights and capital allocation); social impacts of services;
labor management; data center efficiency; environmental impacts of e-commerce
Miguel del Gallego, CFA Financials Corporate governance; Compensation structure; Lending practices; Regulatory compliance; Talent acquisition/retention; Corporate responsibility
Marshall Gordon Health CareAccess to medicines; addressing unmet medical needs; governance (especially capital allocation and executive compensation); drug safety and
efficacy; quality of care and patient satisfaction; privacy and security of patient data
David Hochstim, CFA FinancialsGovernance; customer privacy and data security; lending practices; transparency and fair advice to customers; financial inclusion and access;
gender diversity
Deepon Nag Technology HardwareEnergy efficiency of products and services; data privacy and security; labor management; supply chain practices; governance;
environmental efficiency of operations; product life cycle management
Humphrey Oleng Basic MaterialsHealth and safety; environmental impacts of products; business ethics; environmental efficiency of operations; governance; labor management;
supply chain practices; raw material sourcing
Hannah Whang IndustrialsEnvironmental impacts of products; labor management; governance; health and safety; environmental regulation and compliance; fuel efficiency
and optimization
Nick Wu, PhD Health CareAccess to medicines; addressing unmet medical needs; governance (especially capital allocation and executive compensation); drug safety and
efficacy; enabling research and products that improve health care outcomes
16Not for distribution to the general public.
Confidential and proprietary information.
ESG Considerations Vary by Sub-SectorSample Sector Considerations
Oil and Gas Exploration Production Software and Technology Services
Environmental
Greenhouse Gas Emissions
Air Quality
Energy Management
Waste and Wastewater
Management
Social
Community Relations
Security and
Human Rights
Data Security
Governance
Accident and Safety
Management
Systemic Risk Management
Competitive Behavior
17Not for distribution to the general public.
Confidential and proprietary information.
ESG Integration into Fundamental Research at ClearBridgeProprietary ESG Rating System
ABeginner
AAIntermediate
AAABest in Class
BFlagged
Company has integrated ESG strategy into its business model, usually with full CEO and/or employee support, formally measures sustainability efforts and proactively communicates to investors. Often, these are companies that are providing goods and services that have a positive effect or impact on society or industry.
Company sees value in ESG factors, has begun to incorporate sustainability into business operations and products, and has started reporting its progress.
Company recognizes potential to capitalize on ESG improvements.
Company that has not focused on ESG, has a poor ESG record or operates in an unsustainable industry.
Progression
18Not for distribution to the general public.
Confidential and proprietary information.
Company Engagement
Work with
management as
long-term owners
Identify
key areas for
improvement
Establish baseline
and monitor progress
Focus on
ESG leadership and
prudent financial
management
19Not for distribution to the general public.
Confidential and proprietary information.
ClearBridge Investments ESG Engagement Reports
• Long term holding periods and large asset base enable access to senior management
• Bespoke, collaborative engagement identifies areas for improvement
• Transparent client reporting demonstrates meaningful progress
Annual Portfolio-Level Statistics and Commentary
20Not for distribution to the general public.
Confidential and proprietary information.
Case Study
UN PRI Report: A Practical Guide to ESG Integration for Equity Investing
Neal Austria, ClearBridge Global Consumer Analyst, authored a
case study that was selected for inclusion in the landmark report.
21Not for distribution to the general public.
Confidential and proprietary information.
Leadership Positions in ESG Organizations
Sources: www.riacanada.ca, ussif.org, ceres.org, cdp.net.
The Responsible Investment Association (RIA) is Canada’s leader on responsible investment (RI). RIA is a national, membership-based organization composed of
financial institutions, mutual fund companies, investment firms, financial advisors, and various organizations and individuals who practice and support responsible
investing.
ClearBridge is a Member.
The Forum for Sustainable and Responsible Investment is the U.S. national nonprofit membership association for professionals, firms and organizations
dedicated to advancing the practice and growth of socially responsible investing (SRI). Forum members support SRI by integrating environmental, social and
governance issues into portfolio selection analysis, shareholder advocacy, and community investing.
ClearBridge is an Active Member.
Ceres is a nonprofit organization with a mission to integrate sustainability into business practices for the health of the planet and its people. The organization leads
a coalition of investors, environmental organizations and other public interest groups working with companies to address sustainability challenges such as global
climate change, deforestation, and water scarcity and support a sustainable economy.
ClearBridge is a Member.
As a project of Ceres, INCR (Investor Network on Climate Risk) is a network of investors from across the globe dedicated to advancing the investment
opportunities and reducing the material risks posed by sustainability challenges such as climate change. It consists of nearly 100 members managing more than $11
trillion in assets.
ClearBridge is a Member.
CDP is a nonprofit organization that collects climate change, carbon emissions and water data from more than 2,000 companies worldwide. As an investor signatory
since CDP’s inception in 2003, ClearBridge Investments has joined hundreds of other institutional investors in supporting disclosure on GHG emissions data and
transparency on climate change policies and strategies. As a company member, our parent company, Legg Mason, has also committed to collecting and disclosing
critical climate change data as well as the risks and opportunities presented by climate change to our organization since 2008.
ClearBridge is an Investor Signatory.
22Not for distribution to the general public.
Confidential and proprietary information.
Leadership Positions in ESG Organizations
Sources: thegiin.org, iccr.org, unepfi.org, accesstomedicineindex.org, fsb-tcfd.org.
The Global Impact Investing Network (GIIN) is a not-for-profit organization dedicated to increasing the scale and effectiveness of impact investing. Impact
investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a
financial return.
ClearBridge is a Network Member.
Through the lens of faith, the Interfaith Center on Corporate Responsibility (ICCR) builds a more just and sustainable world by integrating social values into
investor actions. Harnessing their power as shareholders in the world's largest and most influential corporations, ICCR members work in coalition to promote
corporate practices that ensure long-term business growth while measurably improving environmental and social impacts.
ClearBridge is an Affiliate Member.
The Access to Medicine Index analyses and independently ranks the top 20 research-based pharmaceutical companies on how they make medicines, vaccines and
diagnostics more accessible in low- and middle-income countries. Two billion people in the world have no access to medicine, and the index gives insight into what
the pharmaceutical industry is doing to improve this situation. Funded by the Bill & Melinda Gates Foundation and the UK and Dutch governments, the Index has
been published every two years since 2008.
ClearBridge is a signatory to the investor statement as of 2016.
Climate Action 100+ is an investor-led initiative to engage systemically important greenhouse gas emitters in curbing emissions and improving climate-related
disclosures.
ClearBridge is a signatory as of March 2018.
The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) seeks to promote the voluntary company disclosure of decision-useful
climate-related information. Such disclosures are intended for use by investors, lenders and insurers, and take into account several risks associated with climate
change across industries. The TCFD aims to help companies understand what financial markets want from disclosure in order to measure and respond to climate
change risks and to encourage firms to align their disclosures with investors’ needs.
ClearBridge is a supporter as of Sept. 2018.
23Not for distribution to the general public.
Confidential and proprietary information.
Sample Publications
Used with permission. The information in these publications is based on sources believed to be reliable, but no representation is made by ClearBridge Investments as to their
completeness or accuracy.
Integrated Analysis (2013)
Produced with the UN PRI Public Equities
Working Group
The Impact of Sustainable and
Responsible Investment (2013)
Produced by the US SIF Foundation
Fiduciary Duty & Responsible
Investment (2009)
Produced with UNEP FI Asset
Management Working Group
The Materiality of Climate Change (2009)
Produced with UNEP FI Asset Management
Working Group
Responsible Investment Performance (2007)
Produced with UNEP FI Asset Management
Working Group
Pension Funds (2007)
Produced with UNEP FI Asset Management
Working Group
Report on US Sustainable, Responsible
and Impact Investing Trends (2016)
Produced by US SIF Foundation
Driving Revenue Growth (2015)
Produced with IRRC Institute
A Practical Guide to ESG Integration for
Equity Investing (2016)
Produced by Principles for Responsible
Investment
Integrated Governance (2014)
Produced with UNEP FI Asset Management
Working Group