How ESG Metrics Work And Why All Investors Should Care
How ESG Metrics Work And Why All Investors Should Care
This is the conscious investor presented by nuyeen.
這裡是the conscious investor由nuyeen播出
I'm here with Martin kremen Stein, the head of retirement and ETF solutions at Nuveen.
Can you talk to me about the ESG metrics and what do they measure and how good are they of measures of social responsibility and where do they fall short?
Sure, sir. ESG stands for environmental social and governance, and what that really is is a framework for analyzing companies and really assessing how are they compared to their peers in terms of performance against these metrics.
Under E for environmental, you have a water usage waste, production, and general kind of environmental behavior about how efficient they are and managing their resources, and also looking after the environment around them,
Under social, it's around how well they treat their clients, how well do they treat their workers, and then there also some diversity aspects around the the management and workforce.
And then under governance, I mean that's around share class structure and governance structure within the company, how well-run is the company?
When you take it all together, what you're really looking at is another way of assessing a company without looking at its balance sheet, and looking at how it impacts the broader society at large.
And where do these do a really good job and where do you think that they fall a little short? What can't they measure sure?
So, I think when they do it, they do a good job in terms of how well is Company A doing compared to Company B.
But it's less good, I think, you're looking at what is the overall mission of a company, in terms of, is it out there to do good. and if so, how do you manage that?
I think the other way, where it kind of falls a little bit short is that it's it's a little bit of a framework.
So, lots of people have different views around what is more important.
For some people, it's around environmental that's more important, for others it's social, for others it's governance.
You know, as many people as there are in a room, there are going to be different opinions as to what actually is important.
And so, unless you are gonna go and build a bespoke portfolio for someone in a separately managed account, there's gonna be have some to, have to be some degree of compromise around how that ESG framework is actually going to be applied.
And are they self-reported? Our company is tell its sharing these metrics with you, I mean, with investors at large?
Yeah, so most of the data is public.
It's a combination of self-reported, and also analysis done by you know analysts who are pouring out company factsheets, their regulatory reporting, and so forth.
So, because of that, you do tend to get better reporting from larger companies.
But you can get reporting for companies all the way down the cap structure, cap size, and also internationally as well.
You know, we're able to produce an ESG framework that enables you to look at large cap value, as well as small cap but also emerging markets, in developed markets as well.
And do you have advice for people who want to invest along their values, and who, maybe haven't spent a lot of time looking at the ESG metrics? What is some way to get them over the hurdle, where it feels like there's just too many options, and they want to put their money where their values are?
Sure, so, I think there are a couple of things.
First of all, they are gonna have to define for themselves, what what's important to them?
And you know, there are certain ESG providers that have a very specific slant to how they're doing it, and they have to decide whether that's what they're looking for, whether it's based on religious or certain other social aspects.
If they're looking for just general, you know ESG, and in terms of framework, for companies that are better stewards of their you know the environment and social, then you really they should either look for ESG providers.
There are certain companies that have been in this space for a long, long time.
And all ESG funds will be labeled ESG, or responsible investing, or impact, because, you know, if you have any SG fund, you are gonna put that in the name somewhere.
所有ESG基金都將被標記為ESG，或responsible investing或 impact，因為如果您有任何ESG基金，他一定會有這種名字的標記。
And then you need to look at how the products work.
You know, look at the the criteria by which companies are being scored.
That should be very, very clear, and apparent within the funds literature.
If it isn’t, and maybe then move on to another provider.
If you're looking at your retirement plan, maybe talk to whoever runs your company's retirement plan, are some about responsible investing options for that plan.
Is there a trade-off? Do you feel like that you can still make money, and invest it responsibly?
So, historically the Nok has been that to actually have responsible investing, you had to give up some performance.
I think we're seeing now that that isn't the case, and we're actually seeing lots of times we're using an ESG framework, can actually help you avoid companies with bad practices.
And for example, we had the Equifax scandal sometime last year, right?
Equifax had actually been downgraded by major ESG data providers over data privacy and security issues about 18 months to two years beforehand
Within our large-cap growth ETF, Facebook hadn't been included because it's called relatively poorly compared to other tech companies over data privacy concerns.
That was not something that I ever considered as part of the ESG framework, is data privacy, but it's very important to a lot of people, a lot of people are divesting for Facebook now.
How does that metric work in ESG?
So, when you're looking at a common data provider score in the company, so we use MSCI as your data provider.
When they score the company, they score it based on all the different you know criteria, and under social data privacy is in there.
But also, if you’re looking at controversial business practices, which is another another way of scoring companies, you look at things that could be controversial.
And so the data privacy thing had come up from, I think that 2014 kind of conversation Facebook had with the government.
So, that was something was always on the radar, and so Facebook doesn't have a particularly bad ESG score on absolute terms, but compared to the rest of the tech sector, which tends to do better, it's called relatively poorly.
So within our large cap growth ETF, right it's called poorly in tech, it didn't make the cutoff for text we didn't have it in there.
So, last year, as Facebook did quite well, our performance suffered.
This year, without Facebook in there, our performance has done quite well.
And divesting seems to be one way in which a lot of people want to express their values.
Is that something that you're seeing? And how effective is divesting, as a method of making a difference?
So, divestment is one tactic you can use, I think we have certain industries where we do diverse from, so weapons manufacturers, alcohol, gambling, tobacco, and then nuclear power.
However, you know those are industries that we feel that like they're essentially－ they're putting that sin stock basket, and so we divest.
然而，你知道那些行業我們覺得他們本質上就是 - 他們屬於罪惡股的範疇內，所以我們撤資了。
Beyond that, I think if you are just doing straight divesting, what you are doing is taking yourself out of the conversation with the company, with the issue of the stock.
For example, if you were to divest from energy companies, you couldn't actually be in a conversation with them as a major shareholder, encouraging them to look at say, renewables.
Right, so you need to kind of weigh up divesting, which is alright, I feel good, cuz I'm not invested in what I think is a sin stock, versus, well I have no say in trying to influence that company's behavior.
So, it can be a little bit self-defeating, because you've now moved yourself from that conversation with the company.
And how much does it cost to be a good, to be a socially responsible investor?
Are fees higher on socially responsible investment products?
Not particularly, I mean we price our ETFs, somewhere between the straight kind of market cap way too benchmarked, and smart beta.
And when you look at how we're scoring the companies, someone said to me, “Well, it’s very much like non-financial quality factors.”
You can look at ESG is almost like a smart beta overlay, particularly when you consider the risk management aspects of it.
We actually put together a series of portfolios using all the building blocks within our ESG ETF suite, and it came in most of the time under 30 basis points.
So, you think investors can actually you know invest according to their beliefs, without paying over the odds to do so.
And can you talk about that a little bit, like the smart beta, and the benefit from investing from not investing in things like Facebook?
Well so, if you think about the factors themselves, they are effectively how well-run is the company?
So, you're looking at quality factors, right?
And quality is one of the more nebulous of the smart beta major factors.
And so you could say, “well, actually this is just another way of defining quality in the company, right?”
Does it waste resources? does it look after its customers, and get it stay out of trouble with the regulators? And does it have a decent management structure that encourages accountability?
它會浪費資源嗎？ 它是否照顧客戶，讓它與監管機構保持一致？ 它是否有一個良好的管理結構，並且鼓勵問責制度？
And so, by having that framework in place, you're able to avoid companies like Volkswagen.
BP, before the Deepwater Horizon incident, had actually been downgraded and removed from major ESG indices, over concerns about its outsourcing of maintenance of offshore oil wells, right which is precisely what happened there.
So it's really a very, very good risk management tool, and you know MSC a do research, and I think they found that companies in the bottom 10% for ESG score had a much, much higher likelihood of what they deemed to be a catastrophic or a material drop in share price from an incident.
And by material, they were talking ninety percent.
And so, by actually having this framework in place you are really putting in place a method for trying to avoid tail risk from companies that are badly run, and may end up having serious, serious scandals in the press.
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