The evolution of ESG investment strategies

Tim Cook, Head of Client Strategy at Russell Investments

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Interest in Environmental, Social and Governance investment strategies has grown significantly over the last three year as more investors look for long-term sustainable growth that is align to their personal values. However, the management of ESG strategies varies significantly from active and passive strategies to negative and positive asset screens. In this episode, we break down the global trends in ESG with Tim Cook, Head of Client Strategy at Russell Investments, and look at how investors can better define and align their ESG integration and investment process.

 

Transcript

Paul O’Connor (POC)

Welcome to the Netwealth Investment Podcast series. My name is Paul O'Connor and I'm the head of investment, management, and research. Today, we welcome Tim Cook from Russell Investments, who is the Australian Head of Client Strategy working across the Russell Investments business in Sydney.

POC

The Australian based Russell Investments Business is a wholly owned subsidiary of the Russell Investment Group Proprietary Limited, which is also a wholly owned subsidiary of the US based Russell Investment Group, having been established by Frank Russell in 1936 as a small brokerage firm in Tacoma, Washington.

POC

Over time, the business expanded into consulting and pioneered multi manager investing worldwide. The Russell Group had approximately 415 billion of funds under management and 3.6 trillion of assets under advice as at September 2020. The Russell Group has associates globally structured across regional business units covering the Americas, Europe, Middle East and Africa, and the Asia Pacific, overlaid by global service lines that include the investment division, consulting and advisory services and investment services. As a 30th of September 2020, the Russell Group employed 13 hundred and 28 people globally, with 241 investment professionals within the investment division. So, you'd certainly say Russell, a well-resourced technically.

POC

Tim works with superannuation and non-superannuation clients in Australia and New Zealand, providing advice on investment policy and strategy, asset allocation, manager selection, portfolio structuring and implementation. He's also the asset consultant to the trustee overseeing the Russell Super Solution Master Trust in Australia and sits on the Russell Global Forecasting Committee, which generates the economic scenarios underpinning Russell Investments Global Strategic Modelling.

POC

Prior to this, Tim worked in the firm's London office, is an associate director in client strategy and research. He advised institutional clients in Europe focusing on asset liability modelling, liability hedging strategies and supporting clients investment strategies. Before joining Russell in 2006, Tim was a manager in PricewaterhouseCoopers Investment Consulting Practice for seven years.

POC

Tim has a Bachelor of Science in Geography from the University of Birmingham and is a fellow of the Institute of Actuaries. There were eleven Russell investment options on the Netwealth Super and IDPS investment menus that cover a range of diversified strategies from conservative through to high growth.

POC

These include five managed funds that employed traditional strategic asset allocation with dynamic tilting to manage funds that target real returns and for managed accounts or SMAs. Interest in environmental, social and governance or ESG investment strategies has grown significantly over the last three years and is now seeming to become mainstream in investment management.

POC

Historically, investment management typically analysed a business or a security using a financial metric and a qualitative overlay of management quality focusing on maximizing the financial return. However, ESG involves incorporating non-financial metrics and blending it with traditional financial analysis.

POC

In the 1960s, in the 1970s, economist Milton Friedman, in direct response to growing interest in philanthropy, argued that social responsibility adversely affects a firm's financial performance and that regulation and interference from big government would damage the macro economy.

POC

His contention that the valuation of a company or an asset should focus almost exclusively on the bottom line with the costs incurred by social responsibility being deemed non-essential, and this under the belief really prevalent for most of the 20th century.

POC

Towards the end of the century, however, a contrary theory began to gain ground. In 1988, James s Colman wrote an article titled Social Capital in the Creation of Human Capital. And this really challenged the dominance of the concept of self interest in economics and introduced the concept of social capital into the measurement of value.

POC

At a high level, investment management ESG analysis involves incorporating environmental issues that focus on sustainability, such as the threat of climate change and depletion of resources. Social analysis that focuses on diversity, human rights, and consumer protection. And governance that focuses on diversity management, employee relations and rights and compensation. The growth of a straight product has been extraordinary in recent years, and the management of these strategies varies significantly. There were passive ESG strategies that involve, I guess, more a simple negative screen to remove companies or securities in the investment universe of the strategy that do not meet the ESG standards. And there are active ESG strategies that I guess include both a negative and a positive screen in the investment management process. The added complexities that both negative screens and positive screens use by managers differ significantly.

POC

So, to start with Tim, can you explain how you came to be working in Sydney with Russell as an investment consultant and it appears you've made your way from the UK to Sydney is your home?

Tim Cook (TC)

Yep. I certainly can't thank very much. Yeah. So, as you said, I started my actuarial investment consulting training back at Peter, you say. But I moved to the London or the Russell London office back in 2006. Before I moved there, I was doing a lot of manager research and consulting and really felt that I wanted to move to somewhere where I could really focus on the consulting aspect. And Russell obviously had is well known for its manager research. And so that's what attracted me to moving in in London.

TC

And then. I then I did meet an Australian, and, as often the way one follows the female to their place of residence and ended up moving here in in 2013. Nicely time for the Lions visit, which I'm a big fan of watching.

TC

So, I came over here in 2013 with Russell, and that was that was great to sort of move internally. And got a lot of time for, you know, working with Russell and thankful for the move. In fact, I've actually been employed twice by Russell, went traveling at one point, took a year out and came back and slotted straight back into my old role, which is which was nice. But like I said, what I'm here doing is providing it advice to clients and that's my Head of client strategy role, it really sort of transcends the retail and institutional and the Master Trust business it at Russell Investments, and that's really what I'm passionate about is helping clients find solutions or solve problems. And you know, that's why I came to Russell Way so I could focus on that side of the equation rather than sort of doing what you before, which was managing research and client consultancy. But I really find that breadth I've got across those different areas of the Russell businesses is part of what sort of excites me and gives you that sort of challenge.

POC

And I also guess your interaction with the client base as well that give you a really good feel for the feedback in the interest, particularly in ESG, so probably makes you very well placed for the podcast with us this morning. Tim, you work across, both retail and institutional clients, so what do you see as the main difference in the needs of these clients?

TC

Yeah, well, I mean, when we're looking at all clients, we try to understand this of goals, and all the preferences of our clients and then then, you know, as you well know, we put together well researched, best in breed managers together, put together a portfolio using all of our portfolio construction tools and give the best possible solution or portfolio to a client which maximizes the chance of them achieving their own objectives. But the objectives and how they define those objectives does change across different across the institutional and advisor market.

TC

So, within an institutional, its very goal orientated. I would say, they may have a complex set of liabilities or specific funding program that they may need to solve for. So, you can often be quite mathematical. I mean, that's certainly my background from defined benefit in the UK, and I still have my fingers in defined benefit calculations out of out of New Zealand as well. But you need a sort of a carefully design portfolio that delivers that return pattern. And that achieves the goals that they need or have set out to achieve. You often find in the space that they will have and not for profits or charities will have missions or beliefs that are important to them, and that influences that portfolio construction that influences that funding program that they may have.

TC

But when you move across to the sort of advisor client side of the equation, it's much more effective, much more on key preferences. So, you're not only trying to design a portfolio that meets a long-term return objective, but you need to have things like greater tax efficiencies, the clients. You need to take that into account, more so than necessarily on the institutional side, and you need portfolio transparency to the end advisor and client.

TC

And the advisor needs to sort of see and be able to show their inclined or those underlying stocks. And that's key, especially in the managed account world. But they still want that best of investment ideas that we can bring from global research. So, you mentioned the managed accounts, they're a good example of it's not necessarily just an investment problem that we went about when we were trying to design those. You're trying to provide those in an efficient tax vehicle.

TC

Trying to give that transparency through the direct Australian equity holdings. And you're trying to have that dynamic core that are in the managed accounts because that gives the people, the advisors, and their clients the actual ability to and dynamically adjust the portfolio, but without contributing to trading and turnover. And that's very important when you're on that sort of platform side of it.

TC

So, it's really that sort of differences. There are the overall objectives, which you can probably draw some alignment between, but it's the implementation and the preferences that you get on different sides of the ledger that make it make it interesting to solve those two quite distinct solutions or problems which provide you with different answers in the end.

POC

Interesting, your comments there about the retail market and retail clients having a um, an interest in transparency in the portfolio, and I guess that's what an experience that netwealth has been in terms of the growth of interest in the managed account service. And I find that the whole managed account trend. A lot of that is driven by that actual transparency where the investor can actually see the underlying allocations. They can see the, I guess, changes to the asset allocation and the management over time. So, it's really bringing a product, making it a lot more tangible, I think, to the retail market.

TC

The tangibility brings in any negative to see it, feel it. And each advisor, group or advisor has a has a different sort of maybe they have a different cost point. But what they also have is their own philosophy and it's very important to try and it's we view it is very important to try and build that into any solution or advice that we're providing.

TC

So, what is that advisor's desire around or views around the risk-controlled nature of their portfolio? Is it about active management? Is it about downside protection? Are they looking for a set of guide equity exposures? What is their philosophy or what is their combined inclined philosophy in terms of how to build that up?

TC

And that's where it comes in. And, what makes it then interesting is how the ESG component comes into thinking about the solutions that being clients want and try not to necessarily sort of break those return objectives. And that that is that is one bit that is consistent across the institution in the retail world. It's how do I how do I step into the landscape? But notwithstanding, my goals and objectives or preferences that have already set up.

 

POC

 So responsible investing is a growing global trend, and as a global manager, how are you seeing these trends play out in different markets and different clients? And I guess it is the Australian experience being replicated across Europe and the US of the board or Asia?

TC

Yeah, it's a good question. And you said we are a global firm, and we have global committees. Thank you very actively working in this area to provide and to react, to provide solutions, to research and understand the impacts across the globe. And we know that different regions are doing things at different speeds.

TC

I was speaking to local representative on our global responsible investing committee just this morning, and he was referring to things in Europe. So obviously we know that the Paris Agreement article 8 and all those sorts of impacts that are hitting Europe mean that there is a big increase in the adoption of responsive investing in Europe funds. I think that's one of the stats I've seen is that over a third of the assets now are classified as having ESG characteristics over there because they now must declare if they have them. So that's a that's a huge number.

TC

And so, lots of funds, lots of funds are now having to sort of back that off as well in terms of making sure that they are meeting those ESG characteristics or promises. And you're also seeing mainstream funds needing to start dropping their carbon footprint. And so, it's not just ESG specific, but it's now just coming into the mainstream more. And the US, I would say, is probably a little bit further behind both Australia and Europe. The drive over there is far more comes far more from specific client mandates or specific requirements that are put or that brought to bear by the end client or end user, as opposed to a sort of more top-down shift.

TC

And I certainly I think Australia. It's at it's at the forefront as well. And we within Russell are. And, you know, nip and tuck with that of Europe in terms of innovation, in terms of the products and solutions that the research to clients and the interest level.

TC

And then, you know, they go hand in hand. And you know, one of one of the stats regarding of the funds in retail is to sort of 33 billion as of June this year, which is, you know, a material increases in just twelve months.

TC

I think it's like a 66% increase. Obviously, the markets have jumped in that time as well. So that's not all-time flows, but it's still material flows into ESG funds. And certainly, when I look at the managed account space and I look at the platform availability of ESG orientated solutions, it's quite exciting to see the amount of options that are coming onto the platform.

 

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TC

Sort of the depth that we're now seeing there. If I were to look at it twelve months ago, I would have said these solutions in in Australia on platforms that there wasn't a lot of depth. But now we're seeing sort of those products and those solutions and that thinking become more mainstream, become more available and match up with the sort of research that we're doing globally in terms of seeing, this is great, twelve months ago, they weren't available in Australia. Now they're now available in Australia. So that's exciting to see and really helps us for myself when I'm thinking about trying to build something that's as good as it can get.

POC

Yeah, I would hazard a guess, but I would feel we'd get two or three approaches a week from manages, about adding ESG strategies onto the investment menu for us for our clients. And that would be far greater than any other type of strategy there that we offer on the extensive investment menu there.

POC

But is there any sort of bent towards environmental, social and governance trends that you're seeing in different markets? So, I guess what I'm getting at there is that my observation in Australia is that, you know, you study most of the retail focus is on environment.

POC

There is some on social governance. Not so much governance appears to be more at the regulatory level or an ASX listing rule. Yeah. But if you've got any insights there as to the different in the E the S and the G, what the blend is across different markets?

TC

Now I think I think I think the growth in E is in line with what's going on, certainly in Europe, as I just mentioned, and that's where all the focus is growing. I would sort of flip it in in my mind in terms of the mid-year, the G has always been there from an active management stance, and we are about to release our ESG survey in the coming months, maybe next week or so, but we rank on a ranked or survey managers to understand what their focus is and how those changes through time.

TC

Having done it over a period and it used to be just governance, I mean, it kind of stands to reason that an active manager, certainly a quantitative active manager will go in and speak with a corporate and understand their processes and think about the governance that they are operating under as to whether that's a good investment opportunity. And that certainly used to dominate it.

TC

So, the stats of something like the key decision was governance, and I was 91% back in 2018. And as you say, the E side of it has grown dramatically. So, we're now seeing that, you know, 15% of what they think most impacts the stock is coming from the environmental side of the equation, but that that core of governance is still there. So, I think that that to us as an active manager or selector of active managers has always been something that should have been and was embedded within how you assess a stock and whether you think that stock has potential to out or underperform.

TC

And we, you know, every time there is a governance blow up or hiccup in any firm, you see that, and you see that in quite a stock impact on the on the share price quite often. And whereas the environmental side of it, we know that it's going to be a longer-term trend and it may not be an overnight trend. Something is not going to break or it's unlikely to break overnight and hit the share price the next day.

TC

A governance hiccup, folks not wanting to downplay it. But where those sorts of things go wrong, you see the share price impact almost immediately. And that's why active managers are always looking for those and seeing certain stocks as riskier than others.

POC

Hmm. Yeah, it's interesting. I guess the comment you've made that governance, I guess, really has always been part of the investment management, I guess particularly active investment management team looking at the quality of a corporate or even from my perspective, looking at the quality of a fund manager.

POC

Um, so whereas the E and the S are a little bit more, I guess, to do with the trends and challenging views of society and how we treat the environment and how we respect others, except for these. So, Russell's known as a global leader in multi-asset portfolios, and as I mentioned earlier, you really were one of the pioneers or the pioneer in multi manager investing and but also in manager research. So how does an ESG play a role in your investment process?

TC

Well, we've got a sort of fundamental belief that investing responsibly will deliver attractive investment returns over time and meet clients’ objectives. And it's kind of a I don't want to be too clear on it, but it's almost a no brainer that we recognize that these factors, whether they are ESG. And we've just gone through G bit of detail, and we understand E in terms of the green transition and the carbon footprint reduction over time.

TC

But there will be or is highly likely to be an impact on share price and the impact on returns and whether that is a trend through time or a hiccup or sudden impact. We believe that it does impact and share prices. And therefore, if we are out there selecting an investment manager and we think they're good at their job, they too must believe that and be able to demonstrate that they do that.

TC

So, it's long been embedded in our research of fund managers as to what are you doing on ESG, what he. What are your thoughts, what is your philosophy? How much time do you spend on it? Can you illustrate how you've incorporated that into stock selection or portfolio construction in the funds that we're considering?

TC

And so that's, that's one of the ways in which it pays. It plays a key role in in our whole process because he's embedded within our manager research. But then it goes much further than that now into the realms of, well, that's sort of integration and then you've got sort of designing solutions that meet specific goals or needs. And we understand that I know one size fits all. So, we've already discussed three different regions around the world and each the demand and the shift in the regulatory environment is different in each one of those areas. So, you can't just have a single solution that meets everyone's need. You don't even get that when you're in one particular region, and especially when you start moving into the sort of missions and the beliefs of certain investors, whether that's a charity or an individual. If someone is bringing strong beliefs to the table, then there's a different solution that's arguably needed there.

TC

And so ESG factors, it's a core belief of ours that they impact security prices, so we're not creating a sort of niche area that we're not suddenly staffing up an ESG team and saying, oh, this is a cool growth area, we'll just staff that up now. We actually believe it impacts all of our business as it stands. And so, it is it has been important, is important and we'll continue to be important. And it's a critical area in which we actually sort of rank our investment managers.

POC

Given the I guess, you know, the earlier comments I'd made about the growth of ESG ecosystems among the retail market and I guess ESG criteria becoming commonly accepted now, such as climate change and social responsibility that we've already mentioned.

POC

But how does Russell consider ethics to be part of the analysis? And I guess ethics in my mind is something that are a lot more complex because I find the ESG, most people can agree to varying degrees on climate change and what action we need to take as a planet, etc. Whereas ethics can be very different pending the background of the individual, their ethnicity, their religious beliefs. So, do you consider ethics as part of a history?

TC

I mean, you can probably come into fits into all three of them all. You know, you could argue in terms of the backdrop to where you come up with your beliefs and the ethics around that. It certainly comes into the governance side of it. And a lot of the blitz that I mentioned earlier are sort of ethical. What's the right phrase? Ethics may be wound front and centre during certain decisions. So that's that makes that very important with across the governance side of the equation.

TC

And also, in the ethical side of it. It's certainly part of that. You know, modern slavery is one of the things that was a lot of focus on now, and that certainly plays into to that arena. So, we are out there, and researching are the market in general. But, you know, certainly with investor manages to understand how they are thinking about these things, how they are incorporating that into their own process and how they are actually then implementing it into their stock picks and portfolios that they put together, because if there is a material breach of ethics by a particular firm, then that's going to impact the share price of that firm. So, when we're just generally being asked to manage money on behalf of clients we need to protect against that impact, whether it's an ethical stance or not. And so, it's definitely in how we pick portfolio managers and how we hope those portfolio managers are managing, managing the stocks and being aware of. And maybe the culture of a firm and whether that's going to be positive or negative. And certainly, we would expect our managers to all things being equal, but which it obviously it never is. But if all things are equal, then you err on the side of the firm with the better cultural standpoint and can evidence that as opposed to someone, a firm is known for having less than perfect ethics, so to speak.

POC

It's sort of interesting, I guess, a common theme in talking through the way you're incorporating a history. And these and even ethics as part of the Australian analysis is that it is having a material impact on the pricing or valuation of an asset now.

POC

So it would be, I guess, be a miss of a manager in this day and age not to be incorporating or thinking about how to further incorporate and develop this to their investment process because it will go hand in hand with generating the return that the clients need.

POC

So interesting. Interesting comments you make there, Tim. So, Russell has both ESG integrated and ESG managed solutions. What's the difference?

TC

This sort of really sort of tries to draw out what we're what we're just talking about here in terms of one is it should be incorporated across the board and integrated everywhere. It should be at the core of how we do business. The second sort of moves into paper with people, clients or sectors or regulators with specific needs and solutions that are required for that, that arena. So given that we believe the responsible investing is, is it effectively intelligent investing for not don't want to sound like it's a strap line and it we need to integrate all ESG considerations into it, into our research, into a portfolio management and also into active ownership, which also a very key area and where we think that that adds that adds value. But if I spend a bit of time on the integration and a bit more on how we research on managers, what we are looking to do in terms of that integration into our process is to assess those portfolio managers on our ESG criteria.

TC

So, we expect them to have an ESG commitment. We expect them to incorporate and undertake ESG considerations. So, thinking about commitment, they're showing value in money and staffing, and resource put paid to it. And they are considering the impacts on stocks and portfolios, regions and markets and sectors, et cetera. But then they're also implementing it. So, it's all well and good to sort of have nice, shiny presentations. But if you're not, if you can't demonstrate that in your portfolio and stock selection, then performing a construction stock selection, then it's all just sort of window dressing and so we that's why we have it all spit out across three different areas. And then the fourth area is the active ownership area, which is key. We think that you can actually sort of achieve a lot of good in in terms of good for the environment, but also good for the share price.

TC

And then the fourth area is the active ownership area, which is key. We think that you can actually sort of achieve a lot of good in in terms of good for the environment, but also good for the share price and through sort of active ownership and having a good approach that that ESG rank that we provide built into our overall rank and then builds into the portfolio. So, you know, all things being equal, a manager that has a better ESG aggregated rank has a better chance of outperforming and therefore will undertake a larger role within our portfolios or better ESG managers will be across more of the portfolios to actually provide that level of protection, you could say, or alpha generation, because it's the same. The same sides, two sides of the same coin, sorry. And so that's how we do in integration. And you know, we've got our own sustainable risk policies and practices that mean that we need to think about things from a portfolio construction point of view and say risk analysis on that.

TC

And that's really where we were indicating again, is that are we taking the right risks? Are we having do we have too much risk? How are we putting these portfolios together? So that's all of the integration and that's how we would do. It across the board, anyway, before we then move into what is there issue management solution, so these are solutions that have specific targets or specific objectives that are tough to undertake something like driven, client control, market driven.

POC

Yeah, yeah. Yeah.

TC

So, I mean it, it's things like a certain percentage reduction in the carbon footprint. So, it is it is not just picking the right managers, it's then also target something that is demonstrable, and you can then say, yes, this portfolio has a carbon footprint. And we have one of these 50% of the market. So, by investing in that product, you can achieve its tracking aerospace to be very tight to the benchmark, but you can achieve a lower carbon footprint. So that's one of them.

TC

Or we, you know, we can have strategies that need to have an ESG score that is X percent above the market or other solutions whereby they exclude certain things so they may exclude alcohol and gambling. And again, that's again, a target market or a key core sort of desire from individuals or institutions alike.

TC

And one of the things that you need to do with those sort of solutions is to ensure that that they are in line with market expectations for those solutions. So we are an active member of the Responsible Investment Association in Australia, and it's important for us to be recognized.

TC

As a responsible investing leader and to have that on the funds that do set out there as having a as having a managed solution. And so, you're just there's important in both sides get one integration across the whole piece. And then there's ESG. Many solutions are specific answers to specific problems if you like.

POC

Was interesting, just reflecting earlier on your comments around ESG integrated and active ownership, and I guess my thought is that active ownership is really, I guess, the outcome of the investment strategy and the impact that it can then have on capital and influencing companies to change behaviours, etc. So, it is very much a key area there, I think, and it's certainly an area of discussion that I have with many fund managers that are offering ESHG strategies of particularly obviously the equity strategies of the credit managers, et cetera, about how they actually interact and try and change, you know, make behavioural change among the corporate players.

POC

So, the really key, really key points, who might their team? There's an increasing focus, I guess, on greenwashing. And you hear this term bandied around like regularly now. And I mean, ultimately, I guess it's referring to the fact that, you know, people trying to dress up strategies or companies trying to show that they adhere to certain principles and standards. But what's your take on this?

TC

With greater demand for a solution or a product comes greater, sort of know. So, in this instance, concerns about greenwashing, so people coming to market or firms coming to market themselves and not necessarily being 100% clear on what they're saying. And it is generally used in this instance is overstating a product's credentials or misleading investors on how environmentally sound or ethical a fund really is. So, to use it’s important to if you're moving from the integrated side to the managed ESG managed solution sort of side. You need to be very, very clear on exactly what. Oh, sorry. I mean, let me step back. Clients need to be very clear on what they're seeking and, in a product, does it have positive tilts? Does it have negative screens? And it's through understanding what the portfolio is doing, and obviously it needs to be clearly defined what it's doing. You understand whether you are holding something that you actually want to hold, and it meets or matches your own objectives or preferences or mission statement or beliefs.

TC

And we believe it's important to make clear objectives clear sort of statements around what's going on in our funds so that it is it is completely evident that this is what we are seeking to achieve and this is how we're achieving it, as opposed to saying, Oh, it's a green fund, but we're not really going to tell you what it's all about, because that's not where you get that greenwashing issue. We're very clear and what we're trying to achieve. If there are exclusions, these are the stocks that are excluded. If there is a target and reduction in carbon, then this is the target reduction in carbon, what we are doing that by picking stocks with a lower carbon footprint. That's not excluding particular stocks because you may not want to exclude particular stocks. So that's one of the things we're very clear on in the lower carbon solutions.

TC

But equally, if you have an x something solution, you need to be very clear on how you're defining that X. So, is it X any interaction or is it x 10% of its revenue from a certain source? And that's where you often get that problem in terms of, you know, you x alcohol or x gambling is like, what about this? Where is the line drawn in the sand? And it's really important just to be very clear on that line in the sand and for investors then to consider that where that line is and make sure it aligns again with their own desires for what they're looking to achieve.

 

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POC

Yeah, I think that's very important from the manager's perspective. Being able to articulate the ESG strategy, you know, I’ve found some, I guess, you know, people that have accused a manager of a security of greenwashing. It might actually come down to difference in views and opinions on ESG in the areas that make up and I think to myself as a good example there being that, you know, a client may not want any exposure to old energy. And but then where do they sit in the view of nuclear energy? And what role should nuclear energy be playing in trying to assist the whole planet to transition to clean energy? And how long that will take? So, the complexity of the issues I tend to find, the more you peel them back and get into the issues, the more complex they become. So, it gets back to that important point about the manager very being very clear in how they articulate their strategy there.

POC

So, and I guess moving on to that, how are exclusions managed across Russell Investments, various products, and funds and SMAs that you have available?

TC

Yeah. So, I mean, again, within the ESG sphere, there is effectively or how I think about it, and I'll try to explain it is that you've got exclusions and you've got active ownership. And if you're excluding, you can't be, you know, and entertaining active ownership or proxy voting.

TC

So, we actually have a have a belief that active ownership is one of the best portfolio actions that you can actually undertake to generate meaningful change. And we undertake that through proxy voting processes, and we publish reports on websites on that each year in terms of all the different votes that we undertook and all the different engagements and where we voted against, and the corporate, and why we voted against our advisors or all those sort of things in. Sense of how we're looking to make a change there. And then there's engagements with themes around environmental stewardship, and climate risk reporting there, making sure that the companies are undertaking those, and we will vote in line or vote against, setting director appointments. And that will. Bringing about people to the boards of certain companies, and there's some very recent press on the sort of Exxon mobile directors being appointed to that board where, you know, engine number one was the people who were putting up the dissident sort of board members. And these people were voted in to provide that sort of different or an incentive viewpoint. And I think that was a direct proxy voting or direct active ownership that actually provides that benefit or action. And whereas if you're excluding, then then you can't necessarily undertake that. The other thing that we seek to do by actually owning a lot of the shares is collaborate with other investors and organizations like the Climate Action 100.

TC

That's an investment investor led initiative trying to ensure that their greenhouse emissions are taking the necessary steps on climate change. So, it's using a collective investment white to enact change. But exclusions. That's not to say the exclusions don't have a role. They definitely have a role to play. And where that comes in again is on that specific needs and preferences that we just spoke about and greenwashing in terms of people have views and you know, one person's view is not the same as another person's view, and one person may want to exclude anything that's like ever, ever mined coal versus something that only makes 10% of its revenue from coal. Or the same goes for alcohol or gambling. Where do you draw the line? one person may think that yes, excluding social gambling orientated stocks is where I want to draw the line.

TC

Others may think, no, no, there are. There are corporates out there who bring in 30- 40% of their money from gambling, and they should be excluded, too. And where do you draw that line? And that's where the negative screens do come in and they come in around fossil fuels.

TC

Typically, they come in around alcohol and they're coming around gambling. And this is where we're moving through that. Yes, they're both sides of the equation, and that's where you get a lot of those exclusions coming in.

POC

You know, very interesting there. So maybe just in the interest of time the team. Where do you see ESG evolving over the last well over the next five years and longer?

TC

Yeah. I mean, that's where I just start off here saying, I'm moving into a personal opinion territory here. But my view is that, you know, it's so far, it's been the home of equities. So, the equity solutions that have been provided to the market are plentiful and we're still getting more coming to market.

TC

But I think what we're starting to see is more. No, no. I don't think I know we're getting more coming to market in terms of fixed income, in terms of real assets and alternative assets, having an ESG slant to their management or they’re their solutions coming to market.

TC

So, I'm imagining those are the people knocking on your door to get on platform and that, you know, to me, that makes it quite exciting in terms of building solutions because I can. We can bring to market an ESG orientated, managed account or managed solutions because you've got the depth of research, you've got the depth of products and you've got the depth of solution across the entire suite of assets that you need to build a portfolio. Typically, it was just someone would have an equity exclusions and they wouldn't be thinking about it in terms of fixed income, or they wouldn't be thinking about it in terms of listed infrastructure, which, you know, we're seeing those products come to market where we don't have to just select a product that has a very good ESG ranking. From our own perspective, the manager is very good at considering ESG. But now that they're bringing out specific infrastructure ESG funds and we can build those into multi-asset ESG solutions.

TC

So that's quite exciting to sort of see that. And the other things, areas in different markets, I think more clients are going to get involved and it's going to be more important to almost everyone in almost every all of my clients will be concerned and very much more involved as opposed to saying something we'll deal with next quarter or whatever it is, it'll be interesting. One of the things I think is going to be quite interesting is how your  future your super will impacts of ESG within Australia. Those benchmarks that the superannuation funds are having to deal with might put a pause on ESG evolution now, not evolution, but the weight of money to ESG solutions because they have to be conscious of that benchmark

TC

So you're going to see it. Yeah. So, what you're going to have to have, you're going to have to have if people invest is going to stop in superannuation and it's probably not what APRA would be hoping for. And then you're going to have products that have the how can I get an ESG tilt but without demonstrable risk to the benchmark? How do I minimize that? Because no one's going to be excluding 20% of the benchmark anymore within being super because it's too risky?

TC

And the other areas it really is how investment managers bring it, bring it in to play the pace of we're really seeing it in all our research, the pace at which managers are bringing in much more importance to ESG across their own, you know, their research and their commitment in their portfolio. Construction is growing. And it's how does that change through time? How does it move from, you know, getting into corporates and becoming more prevalent in corporates?

TC

It's like we're on a cruise liner. It's moving and the direction is picking up speed and it's not going to sudden. You can't just slow it down; it's not going to slow. And I think it's going to it's going to keep moving. And the other questions that really sort of come to mind is, how does a traditional portfolio and an ESG specific portfolio, how do they look in the years to come? So, you've got to think about what's going on in Europe, whereby the traditional portfolios have to have a 20% carbon footprint reduction. So, if they're going to have to do something akin to that, what does an ESG managed solution look like? And you're going to get these sort of different step pace of what's happening in the market generally. And then what's happening in the ESG orientated solution.

TC

So, I think that's going to be an interesting dynamic. And the final thoughts I've got on is just around the active management side of it. We know the industry is growing in pace, we know it's growing in importance, and the effort to reduce carbon footprint and reduce emissions is ongoing and that will have an impact on share prices positive or negative. Things are changing. BHP used to be one of the stocks that would get beaten up on this area, and know they are one of the largest renewable energy researcher. So, you know, once a stock that was bad is now a stock, that's I'll give you good in the area. So, you know you need an active manager to. My belief is probably you need an active manager to be taking those views on a day-on-day basis because if you excluded them back in the day, you know, or if you exclude waste, always move away from particular stock. You exclude a stock because of X, and that may or may not be beneficial to you. But if that stock turns itself around, you may be underperforming based on that exclusion. And it's how do you build that in? And that's why I think that active management in ESG still has a long way to run in this area. And at Alpha three times.

POC

I think I'd be able I fully agree with you on that commonly teamwear, where I believe that ESG investing, it can't just be about a negative screen, a passive negative screen that's got to involve positive screening and also engagement to try and change behaviour.

POC

And I think, for example, there were BHP is a great example of how active ownership can influence change. But I guess the other the other point I was thinking is you were talking. There is the increasing amount of building blocks to build a genuine, diversified portfolio with a ESG strategy, so the growth of fixed interest and bonds and all the other asset classes there. So, Tim, unfortunately, I think we need to draw this conversation to an end. It's certainly a conversation. I think we could go on for probably the next three or four hours there, but I think we've already stretched out timeliness on this podcast.

POC

But look, I seriously would like to thank you very much for joining us this morning on the Netwealth Investment Podcast series. I think it's been a really interesting discussion and the points in your observations and insights to ESG, the development of ESG and particularly the client and growing client interest at both the retail and the institutional level, I think is great to see that again, capital markets and the influence that we can have over the allocation of capital is starting to take into consideration not just a pure maximized return perspective. Back to the comment that I'd made in the introduction about traditional economics and views on and views on maximizing return. So, Tim, thank you very much for your time this morning. Very much appreciated.

POC

And to the listeners, thank you very much again for joining us on the investment podcast series. A happy family conversation. Informative and a little bit educational. There are certainly learned a lot from the discussions with Tim there from Russell Investments there.

POC

Um, have a great day. Look after yourselves and I look forward to joining the song the next instalment of the podcast series.

 

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