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Podcast: What is socially responsible investing?

The Gordon Asset Management Podcast welcomes Megan Fielding to the show.  Megan is Senior Director of Responsible Investing for TIAA/Nuveen.  On the episode Megan breaks down what Responsible Investing (also known as ESG or Sustainable Investing) is and the potential opportunity it has created for investors.  For more information about Megan or TIAA/Nuveen, please visit nuveen.com.



Intro  0:01  Welcome to the Gordon Asset Management podcast, a show for savers investors and entrepreneurs helping you to stay informed, invest wisely, and achieve the unimaginable. Now, on to the show.

Todd Zempel  0:20  Welcome to the Gordon Asset Management podcast. This is your host, Todd Zempel. For those who know me, z. With us today, we have a very special guest, Megan fielding. Megan is Senior Director of responsible investing for nuveen, which is the investment arm of TIAA. TIAA, it manages about 1.1 trillion with a T, and assets and roughly 37 billion of those assets are in socially responsible strategies, which is why we invited Megan to the show today. So Megan, welcome to the show.

Megan Fielding  0:58  Thank you so much. It's a pleasure to be here with you and all your listeners.

Todd Zempel  1:02  Thanks, Megan. Um, let's start at the basics. Can you describe for us what exactly is socially responsible investing?

Megan Fielding  1:13  Yeah, sure. So So nowadays, really, the, there's been so much terminology entering the marketplace over the last, you know, couple of decades. And so the industry has really migrated from what they used to call socially responsible investing to what we call responsible investing. And so what do we mean by that? It's really an investment approach that incorporates environmental, social and governance factors. That's the acronym for that is ESG. So you'll hear us talk about that quite often. But ESG factors are incorporated into an investment analysis into the portfolio construction into the ongoing monitoring of an asset class, like public equity, with the objective of enhancing long term performance, managing the risk of the portfolio, and creating opportunities.

Todd Zempel  2:03  Thanks for that summary. Megan. Now, you guys have been doing this since the 70s. Right, so that's before millennials before the quote unquote, woke culture. Is that correct?

Megan Fielding  2:13  Yeah, we started literally in 1970.

Todd Zempel  2:16  Wow. So what did it mean to be socially responsible? Back in the 70s?

Megan Fielding  2:22  Yeah. So back in the 70s. You know, it was really, so if you think back in time in 1970, TIAA, which had been set up really to help educators, teachers, various people working within academia, set aside funds for their retirement plans. So in the 70s, teachers, different folks associated with academic institutions started to come to their investment advisors, their investment managers, like TIAA to express their concerns around certain things in particular, at that time, South Africa and the Vietnam War, were major areas of concern. And so we started working with our investors around topics that we would now call, you know, engagements. So working with the companies that we owned and portfolios that they were invested, to raise awareness with, with the Corporate Directors at those firms, as well as to help shift behavior over time, so that it would be more in line with the values of the investors of the funds that we were investing in, or we were managing, I should say, Also, at that time, a lot of institutions were created to offer a forum or kind of a organizing body to aggregate those voices of investors so that the individual investor would be stronger in a group versus just, you know, ringing up their investment manager and articulating their own special needs. So organizations like iccr, for example, came about at that time, our first product, so to speak, came to the market in 1990. And so you know, you might be sitting there thinking like, wow, what you do for 20 years. But the reality is, is you know, as investors were contacting their investment managers like TIAA, we were engaging with our companies to raise awareness to try to start to affect change positively from, you know, at that time, it was really the best in ESG from a social perspective, as well as raising awareness around governance and the environmental issues. But the way portfolios are often managers managed in the industry, or by taking things out as an exclusionary focus. So an investor would say, I don't want to own Pfizer, for example, because they have a large operation in South Africa. And I'm morally opposed to apartheid practices that are dominant in South Africa. So investment manager would take Pfizer out of a portfolio, but they didn't necessarily replace it with something. So what that led to in terms of performance was oftentimes underperformance versus their benchmark called the s&p 500, which did have Pfizer in it. That's just one example. But this was kind of the ongoing practice. So in 1990, we as well as a couple other firms came to market to offer a social index fund that investors could invest in to get quote, unquote, the normal benchmark results without those industries that they will oppose to. So you know, in today's day and age, that might not sound revolutionary, or more, like, you know, doesn't sound like a pioneer. But it really was, if you think about it, you know, it was finally this idea that we can be proactive, versus responsive, or just, you know, doing negative screens, to take things out of a portfolio.

Todd Zempel  5:58  Now, with socially responsible or sustainable investing, one of the reasons why it's so attractive to me is, is when you ask Joe sixpack, maybe all they have is what's in their 401k. When you ask just a person that's not in the industry, if they could take their retirement savings and invest it in a way that is positive for change. would they do that? and nine times out of 10 people say, Yeah, I would absolutely do that. And the big concern has always been, well, if you do that, what are you giving up? Right? Are you giving up performance? Well, the good news is, for the last handful of years, at least, you hadn't had to give up anything. So you could also you could invest for good, but also have good returns. Can you speak to that?

Megan Fielding  6:47  So last year 2020 really offered a lot of interesting data. You know, if you think almost a year ago, to march with last year, extreme volatility in the market, I'm sure you have a lot of stories that you could share in terms of your phone ringing off the hook in terms of people being concerned about all of the volatility that they saw in the marketplace, that they were hearing about in the newspapers and, and television reports, etc. But two things stood out. So one during the period of volatility in March, April of last year, sustainable funds outperformed their peer group, so the non ESG or the non sustainable funds, and then longer term, they they continue to do very well. And then over a 10 year average. If you're comparing, for example, sustainable equity funds to the s&p 500, or the Russell, they're really in line, both from a performance perspective and a volatility perspective. And something you know, that we talk about a lot in the investment management world is risk adjusted returns or Sharpe ratio. And there it is actually spot on with the s&p 500. And slightly, slightly better than the Russell three. So. So thinking of your your clients who say they'd even be willing to give up performance results, you know, data, both short term and long term suggest there is no reason to give up that performance. In fact, they can do equally as well as, as non ESG funds.

Todd Zempel  8:30  I love it. I mean, you are making money while you are doing some good in the world, potentially. And apparently, I'm not the only one who loves it, too. I mean, per Morningstar, roughly there were $51 billion in flows into sustainably managed investment options in 2020, which was almost double that of 2019 and roughly a tenfold increase over 20 2018. So needless to say, I'm not the only one who's interested in this topic.

Megan Fielding  9:04  Yeah, yeah. Absolutely. And again, Morningstar has a lot of data available publicly available on their website to help expand upon that.

Todd Zempel  9:14  Now, Megan, one of the areas that I have particular concern about is that when we look at the list of companies that have very high quote unquote, sustainability rankings and things like this, a lot of the times all they're doing is outsourcing the nasty jobs to the third world country. I'm talking about oftentimes, it's to the worst of the worst, you know, communist countries, running factories that people are working for, essentially slave labor type wages, forced abortions, suicide nets around the factories just pumping out the nastiest, nasty junk into the atmosphere. How do investment managers reconcile this?

Megan Fielding  9:57  I mean, certainly, I can't speak for all investment management firms. But I'm happy to share our approach here been, you know, there, there are lots of different avenues to to create a fund. And so there's active management, where you're literally looking at every single security that goes into a portfolio and you're actively managing those positions. And then another area might be more quant based or more index oriented ETFs. exchange traded funds, for example, are a big area that a lot of investors look at, to invest their their money. In both cases, however, you know, you're establishing criteria that starts that process. So I would call that the initial universe creation. So when it comes to our ESG funds, regardless of if it's an active strategy, or quant based, index oriented strategy, it starts with that universe creation. And that is really around ESG criteria. So what we're looking for our ESG leaders in their respective sectors, across all industries, and across, you know, the entire region of what that fund is designed to do. So in the case that you've outlined, you know, emerging markets, for example, you know, that that holds true in emerging markets. So who are the ESG leaders? And when you peel that back to look at the analysis around ESG, leaders, again, it's specific to the sector. So for example, I think you described really kind of a manufacturing company with a supply chain. And so so the analysis that takes place is looking at that supply chain, you know, what are their labor practices? What are their, you know, how are they treating their vendors? What is their use of water? Where are they sourcing water? How are they treating, you know, water once it's already contaminated? For example, through the manufacturing process? Are they dumping it out into public system? Or are they recycling it, cleaning, etc. So all of those things are looked at, these are material ESG factors, and come in combination, they help to assess that corporation or that company around their practices, which establishes what we would call an ESG rating. So what does that look like? How are they How are they performing from an ESG leadership perspective? And as I mentioned earlier, you know, when we design our strategies focused on ESG offerings, it starts with that ESG universe creation where we're looking at ESG leaders by sector.

Todd Zempel  12:46  One term that's starting to come up more and more is greenwashing. Can you explain to our listeners what exactly that is?

Megan Fielding  12:58  Yeah, green washing. So greenwashing is, I think, a fancy term to say like marketing spin, right? So several years ago, particularly, you know, I would say 2018 2017, little by little more and more investors, and asset managers started to recognize the value of ESG, that it had shifted really, from this values driven investment orientation to having attributes in terms of accomplishing alpha for a portfolio, so better so out performance. And or, it was extremely useful tool in the risk management of that portfolio. And simplistically put, you know, if you have more information than less information, will you hopefully do a better job managing your assets? And I think it's, you know, we'd all say yes, so, so as the industry was really recognizing this, you know, a number of firms kind of came to market, put put their funds together, but also what started happening, or at least started to get exposed, was that some funds were added editing their perspectives, and adding in the term ESG into their perspective to, to to notify investors that they now had an ESG fund. And so, again, you know, you can you can have the best language ever to describe your work, whether it's in your brochure or your perspectives, but it really comes to peeling that back and doing the due diligence, which is why the work of you and your your team at Gordon. You know, it's so important because you do spend time with asset managers and really understanding what they do, and that's invaluable. But so greenwashing is really the term that you know, it looks like a green or sustainable fund. But it's just sort of splashed with the right, you know, look and feel to help you think that way. It doesn't necessarily mean it's true. So it's well, as I said, it's kind of marketing spin, you kind of the typical would be the the glossy brochure, and it's got windmills on it and, you know, clean beaches, and it paints this beautiful picture of phenomenal funds that most people, you know, they'd be looking to sign up as soon as they saw those images. But it's peeling it back, as I say, and really doing the due diligence and understanding, is that a verified and authentic process that is taking place with that investment manager for that strategy. Are they really, you know, implementing an ESG strategy? What is their risk management process? You know, I would also throw an engagement process, you know, what are they doing once they own these companies to continue to forward best practices around ESG, at those companies in which they're invested, you know, just last year, Morningstar, on average, their average category three out of four sustainable equity funds beat that average, are 25 of 26, ESG, equity index funds, that they kind of follow. So So, you know, there's performance of sustainable equity fund beating quote, unquote, the average Fund, which is, again, the non sustainable fund. And that sounds exciting. But again, from a diligence perspective, it's important to, to dive in and look at what those funds are and how they're actually investing not to assume because the brochure says that, or even if they're part of a ranking that says they did this, well, you really doing that diligence is so critical.

Todd Zempel  16:52  Yeah, if I had $1, for every time I heard a wholesaler come into our office and tell us that, Oh, well, we've been ESG friendly. from the get go. We just there wasn't a term for it previously. You know, it seems like a lot of folks are just like you said, using the marketing now to to hop on the train, maybe, maybe they'll add a sustainability page to their website, maybe they, you know, tweak their logo, so there's some green in it now, but it's it's definitely become a big marketing push for many companies and asset managers.

Megan Fielding  17:27  it doesn't mean that it's not authentic. At some, it again, just comes back to doing that additional due diligence, which is required, really of any investments that anyone would be going into.

Todd Zempel  17:39  Now, let's talk regulatory. When it's a personal account, a brokerage account, not a retirement account. People can invest however they want, right? But where the government and Department of Labor specifically have a little bit more oversight is within retirement plans, 401k plans. Now, late last year, the Trump administration, the Department of Labor under the Trump administration, really shocked everybody and said, they put out a piece of guidance that said you can't use socially responsible metrics for determining whether or not a fund is suitable for a retirement plan. Now, under the new administration, that rule has been scaled back and potentially is up for debate at this point. Can you tell me where we are from a regulatory standpoint?

Megan Fielding  18:30  Yeah, I mean, I think you summarized it well. So yeah, I mean, the Biden administration is looking at the rule that was passed in early November by the Trump administration, or by the DOL, which, you know, over the period of, you know, from, like, a four month period from when the DOL did, except letters, you know, from from, from the industry, asset owners, asset manager service providers, in response to their proposed rule that came out in June. You know, with a very quick turnaround, but one of the notable changes from the proposed rule to the past rule was that they did remove terminology ESG, from the from from the ruling, they still, you know, are focused on pecuniary or material items to ensure that retirement plans are only selecting those, those fun choices that have the that are driven by investment purpose, versus anything else. And so, what I would say over the review period, what transpired was a lot of concern around you know, does the DOL understand that ESG is is a Reason for investment, you know, that is an investment motive, that ESG can contribute to alpha can drive alpha can manage risks can create opportunity, it can create risk management opportunities, I should say. And and so, by removing ESG, you know, perhaps that was the DLLs recognition that when they formulated the proposal, that their understanding of ESG was rather outdated to say it mildly. But I think the Biden's administration is really taking a close look at is the rule even written as it is today. Still confusing? Does it still, you know, you know, if you go through a checklist, does it really change anything year over year over year from what the prior rule was? And most people would say, the only big change that it's, that it's made was with the QDIA a section? Right. So which for the average retirement plan, has been less of a concern? So and I think, you know, based on early days now, but their focus, you know, immediately day one, getting back into the Paris accord, you know, recognizing climate change, and, and the severity that it presents to not only us as a country, but us as a global society. I think it, it bodes well, for an environment that began from an investment driven land that bodes well for ESG in this environment.

Todd Zempel  21:39  Yeah, totally agree. You, you go out and look at the World Economic Forum, the fourth industrial revolution, 'build back better', potentially opportunity for green infrastructure building. I think that ESG absolutely presents a very interesting and plausible investment thesis. And we saw that so far this year, where it seems that ESG is continuing to perform very well.

Megan Fielding  22:09  I was just going to say, you mentioned the environment, and certainly the Biden administration is very focused on, you know, taking a close look at the work of the EPA. And, and as you know, you know, some of that had been sort of curtailed over the prior for years. So, so I think there's, there's promising early indications that, you know, more focus will be on legislation and, you know, support for an environment to, you know, to work for all which from an investment perspective, I think offers even more opportunity.

Todd Zempel  22:48  Now, Megan, one of the questions that I get a lot is, is there one common set of rules for what determines what is socially responsible versus what's not? I mean, what's socially responsible for one person may be completely socially irresponsible and reckless for another person who makes the rules on this?

Megan Fielding  23:07  Well, a couple things come to mind. You know, one, the United Nations principles for responsible investment, it was established in 2006. And the acronym is un pri. And they are really the leading what I would call voluntary investor initiative around responsible investing, which includes ESG. And they have six principles if you go to their website, one of which is around ESG integration. So there are asset owners, so investors, and then there's asset managers who choose to become signatories of the PRI. And so we, for example, are a signatory. And we have been since 2009. And I'm just looking Oh, yeah, so, so there's over 3000 signatories at this point, which amounts to over $100 trillion of assets collectively. And so it's, it's an opportunity, I think, for investors who truly say that they're investing with an ESG lens, or with the key criteria to demonstrate that. So on an annual basis, there's an opportunity to complete modules that offer transparency around the work that's taking place at your organization. And it's a very detailed process. It takes several months to complete all of these modules, and then you submit it and then you impure I take several months to kind of assess that and then they give you a scorecard which is publicly available. So So I would say that's probably one of the leading kind of organizations to help frame the work that's taking place from an investor's perspective. You know, not like walking into Baskin Robbins, right, there's so many different flavors of ice cream. You know, with investing there, as you know, you know, there's so many different styles and ways to implement those styles of investing. And the same holds true with ESG. And responsible investing. Again, going back to the due diligence, I found I know like a broken record, but, but it's really important to do the due diligence to ensure you understand what the manager is doing, and to ensure that that coincides with the needs of the investor. But there's a number of other organizations that are out there. There's a group called us stiff, us just org leaders, their website, where they have more information around around all of their, around the industry itself. Every two years, they publish something called the trends report, where they help to, well, they go out and they interview, they collect research on what investors are doing in their space, and what asset managers are doing. And they show, for example, the trend in aligning assets in a socially responsible way, or sustainable way. So over the years, it's gone from one out of every $5 to two years ago with every one out of every $4 And now, the results show that if that one out of every $3 here in the United States under professional advisement, so with an advisor is is aligned with some type of responsible investing approach, like ESG, or impact.

Todd Zempel  26:42  Well, Megan, thank you so much for joining us today. You provided a great baseline education on responsible investing for our listeners. And as things develop, I hope that you come back and share more of your insights on this space.

Megan Fielding  26:57  I'd be delighted to I think this year is going to be a very exciting year given the change in the White House the focus on ESG the focus on climate and the environment and and also really the focus on inclusion and diversity as an as a society. So be more than happy to come back and talk about that.

Todd Zempel  27:19  Thanks Megan. And if anybody would like more information on Megan or nuveen you can visit their website nuveen.com or you're always welcome to reach out to our firm@qb.com so thanks a lot folks, we appreciate it. Have a great one.

Disclosure

The information in this podcast is presented for educational and entertainment purposes only and is subject to change without notice. opinions expressed are those of the participants and don't necessarily reflect those of Gordon Asset Management LLC. Its producers hosts or guests information presented should not be construed as tax, legal or investment advice or a recommendation or solicitation for the sale of any product or strategy. listeners are encouraged to seek advice from qualified professionals to determine whether any information presented may be suitable for their specific situation. Investments involve risks either board and asset management LLC nor its podcast participant shall be liable for losses resulting from decisions based on information or viewpoints presented on this podcast.

Gordon Asset Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.