Praemium Advice Leaders
ESG: Mythconceptions, Methods and Client Engagement
Originally delivered as a webinar in November 2021, this straightforward discussion on ESG investing with guests Steve Monnier from BlackRock and Nathan Hughes from Perpetual Ethical remains relevant. They demystify ESG investing, discuss how it is explained to clients, and its pivotal role in the shifting financial environment.
The conversation touches on climate risk costs, the uptick in socially conscious investments post-Covid-19, and stewardship activities of index investors. We also look at the shift towards sustainable investing, the effects of changing regulations, and how data availability is speeding up this transition. The speakers shed light on how 'dirty' industries might hold unseen investment potential amidst the move to sustainability.
We also address misconceptions about fees influencing investment decisions, and how ESG is integrated into Perpetual and BlackRock's portfolio management. Whether you're an investment pro or a beginner, this discussion will give you a new understanding of ESG investing and its role in progressing towards a sustainable future.
Originally delivered as a webinar in November 2021, this straightforward discussion on ESG investing with guests Steve Monnier from BlackRock and Nathan Hughes from Perpetual Ethical remains relevant. They demystify ESG investing, discuss how it is explained to clients, and its pivotal role in the shifting financial environment.
The conversation touches on climate risk costs, the uptick in socially conscious investments post-Covid-19, and stewardship activities of index investors. We also look at the shift towards sustainable investing, the effects of changing regulations, and how data availability is speeding up this transition. The speakers shed light on how 'dirty' industries might hold unseen investment potential amidst the move to sustainability.
We also address misconceptions about fees influencing investment decisions, and how ESG is integrated into Perpetual and BlackRock's portfolio management. Whether you're an investment pro or a beginner, this discussion will give you a new understanding of ESG investing and its role in progressing towards a sustainable future.
Hi everyone. A very good morning to you all and welcome to today's webinar. My name is David Shannon and I'm the coordinator of our webinar program here at premium. I'm moderating the session today, which means that I'll be pushing the go-to webinar buttons. But first up, I want to introduce our fabulous panelists for today's presentation. Matt van Dyke is our regional manager for the top end of Australia and he will be chairing today's session. Good morning to you, matt. Morning Dave. Steve Monia is a sustainability specialist with our good friends at BlackRock. I'll let Matt introduce Steve properly in a moment, but for now, good morning and thanks for joining us, steve.
Speaker 2:Morning David, and delighted to be with you all today.
Speaker 1:And Nathan Hughes is a portfolio manager for Perpetual Ethical. And again, I'll let Matt handle the formal introductions. But good morning to you as well, Nathan.
Speaker 3:Good morning, david, and thanks very much for having me on.
Speaker 1:Terrific. Just the usual couple of quick disclaimers before I hand over to Mattie. I have you all on mute. That's just to limit the amount of background noise that we experience. We've got quite a few people with us today, so it's great to see the interest in the topic. We do encourage your questions, so please feel free to use the questions function on the go-to dashboard. I'll be keeping an eye on those questions you're posting and if we can't get to them during the session, we will have time at the end, hopefully, when I can share them with you. If we don't have time for all your questions, I'm sure our panelists are more than willing to get in touch with you after the session is finished. Okay, that's enough for me. I'm going to hand directly over to Matt to get this started.
Speaker 4:Brilliant. Thanks again, buddy. So my name is Matt Van Dyke. I work for premium in the northern part of the country and my team and I really focus on trying to help advisors deliver great investment outcomes to their clients, and it's that theme or concept that really led to our panel discussion today. And before I introduce Steve and Nathan in a bit more detail, I just want to visit the two key themes for today's panel discussion to really help set the scene.
Speaker 4:One of the key points in my travels both around the country and around the state albeit around the country has been virtually for a while, so thank you to everyone who has attended for doing another Teams meeting or another virtual meeting. But I did notice that ESG is a concept. It's still poorly understood in the broader advice community and I think there are many that fall into the trap that it's focused on oil and trees without really understanding how nuanced it can be or the different approaches that can be taken to implement a sustainable investing approach or an ESG approach, and both Steve and Nathan will be discussing their take on how it can be applied, both broadly or very succinctly and covering concepts that they're supporting through their companies that can make a change to a more sustainable world and visiting specific criteria that they will factor in. Both our panelists do apply ESG in a unique way in their businesses and in sharing their knowledge and expertise. I'd like that to be able to give you again a bit of an idea about the different ways that you can think about implementing ESG and having these conversations with your clients. My personal view is, and while I accept that this is a little bit of the world according to Matt, I'll quite happily stand my ground and say I don't think there is a better way at the moment of engaging clients and assisting them to really engage with their investment and financial plan right now, then just asking the question about what matters to them when it comes to investing.
Speaker 4:What's prevented a number of firms from implementing ESG approaches, though, has been the focus on detailed investment management. Discussions doesn't really translate to the advisor, to client meetings, and in a lot of the sessions that are attended both personally and virtually, a lot of the conversation did have a tendency to become very detailed very quickly and focus more on the often the financial theory behind a lot of what was going on, so we're going to talk a little bit about that today through the course of the conversation, but a large part and one of my roles as the host I'm going to take on is to really sort of push Nathan and Steven around the concept of how to make these conversations more client friendly, so that you can take what we're doing today for you and actually implement that in your firm with your client conversations. So my hope today is that, through a bit more of a relaxed fireside type of chat that we're about to embark on, that, our attendees today, you are able to take the next step, or even the next two, in using concepts like ESG and sustainable investing to create a better and more engaged client with your firm and with your advice. So, my little preamble aside, to introduce you to the people that you're arguably really here to listen to, today, steve Monier joins us from BlackRock Australasia and, in his role as sustainability specialist, steve partners with clients to help them navigate and achieve their sustainable investing objectives through client engagement, developing sustainable solutions, policy and advocacy. Prior to joining BlackRock in 2020, steve was the director for BlackRock's investment stewardship team in London and covered that from five years, january 2015 to January 2020. He was responsible for engaging and voting with portfolios and the companies across Europe, middle East and Africa.
Speaker 4:Prior to joining BlackRock in February 2012 and initially serving as director in the corporate and operational risk and the risk and quantitative analytics team, steve's held a number of risk management roles at both Bank of New York, mellon and before moving to the UK, spending three years at Unisys as an operational risk manager in Sydney, after working in project and structured finance at Macquarie Bank as a deal manager for three years. Steve started his career in 1994 as an analyst for Bankers Trust. Steve holds both a Bachelor of Business degree from Griffith University in Australia and is a qualified certified practicing accountant. He was advanced to fellow status in 2016 and also earned a Masters of Science in Business Strategy and Environment in 2011 from Birkbeck College at the University of London. On the perpetual side of our screen today, portfolio manager Nathan Hughes manages the ethical SRI fund, which has over $950 million invested and has been running since April 2002. Nathan completed his Bachelor of Commerce degree at the University of Woollengaw and initially worked as a chartered accountancy business for six years. Provided joining perpetual in September 2010 as a research analyst, nathan moved into his role as equities dealer for almost two years on the Dealing Desk Perpetual, where he then worked on the All Australian Equity strategies. Nathan was appointed to the role of equities analyst covering small cap stocks in 2013 and provided to deputy portfolio manager in May 2016, where he took on responsibility for managing 50% of the small co-fund in 2017. He was appointed as portfolio manager for the Ethical SRI fund in April 2019 and also holds the Chartered Financial Analyst designation.
Speaker 4:Introductions aside and again thank you on my behalf to both Stephen and Nathan for joining me today and taking part in our fireside chat To move into our questions which I've put together for today's presentation ESG, as I mentioned earlier, and sustainable investing because the two again slightly nuanced concepts has really moved into that mainstay of conversations for both advisors and investors around the country remarkably fast we were talking just as a group before the webinar kicked off that it's gone from really being almost sort of so hot right now to people feeling almost inundated with information and detail on these concepts. So I might ask Nathan first and then Steve to respond as well. I'm curious what does sustainability mean to perpetual? If you could start off by answering that question for us.
Speaker 3:Sure. Thanks everyone for having me and thanks, martin, for your introductory comments. Look, I 'll actually take a step back, if I may, from the subject that we're going to be discussing today, and I think sustainability is really crucial to an investment decision. When you're buying inequity, you're buying the future value of cash flows, and so you need to, by definition, buy something that you think will be sustainable and durable for a long period of time. And when I think about it, I think about you know.
Speaker 3:Returns to an equity holder are a function of a company doing well with a whole heap of stakeholders. So it's providing great value to your customers, sourcing well and looking after your supply chain, providing resiliency to your supply chain, treating employees fairly, encouraging diversity, inclusion these sorts of things which we expect of business in 2021. It's about the communities you operate in, the regulatory backdrop, the environment and doing as best you can to minimise the impact or even make things better if you can. So it's really. I think it's really broad, and I think when people think it is due to sustainability, they tend to have quite a narrow focus, but I think sustainability is all encompassing. It's really key to successful investing. It's not just the environment, it's so much more than that.
Speaker 4:That's great. Thanks, nathan Steven. What about to you? And what about to BlackRock? What does sustainability mean to you?
Speaker 2:Yeah, I mean, I think there's probably a few different ways that you could approach that, and I think I'd like to perhaps take a slightly different angle and think about definitions, because we know that there are a lot of acronyms used in this space. They're used into change and they can mean different things to different people. I'd also, then, kind of like to tie it back to purpose, blackrock's purpose and it's certainly something that, when we think about our stewardship activities and talking with companies across a variety of environment, social and governance factors, we're talking about strategy and purpose as well, and that's really important part of that conversation. Then bring that to light through some of our sustainability commitments over the past couple of years. Let's start with definitions.
Speaker 2:Sustainability is a broad concept and, simply put, it means meeting the needs of the present without compromising the needs of future generations. Certainly, within finance, sustainability is commonly referred to as sustainable investing. For BlackRock, what that means is the combination of traditional financial analysis with those insights from ES or G environmental, social and governance to mitigate risk and enhance returns. I think that that's kind of just an important place to start. But, all these acronyms aside, when we're thinking about ES and G, what we're really talking about is operational excellence. Companies that are managing all of their risks and opportunity, including these ESG issues risks and opportunities we think are going to do better in the long run because they're taking into account the fuller set of information. If we kind of then pivot to purpose and strategy and, as I said, this is something that we talk to companies about through our stewardship activities, so it's important that we walk the talk with this. Blackrock's purpose is to help more and more people experience well-being through wealth. A focus on long-term sustainability is really embedded in everything that we do to deliver on that purpose. That's kind of important context as well. Then, finally, I think, just in terms of our own commitments and holding us to account for what we're delivering on, sustainability is at the heart of everything that we do at BlackRock. It's been a journey and, I would say many respects it's an evolution, not a revolution, although I think what we have seen to your point in the intro comments, Matt we've really seen an acceleration of that in recent years.
Speaker 2:If I look back at our own routes to sustainable investing that go back to 2005,. And then look at Larry Fink's letter since 2011, when he's writing to the companies that we invest in on behalf of our clients. I think that there's a really important part of that as well, because his letters are always couching the fiduciary responsibility that we have to clients. First and foremost, we are entrusted to manage our clients' assets, and that comes with huge responsibility. He also talks about a long-term perspective, which is, I think, really important when we think that many of our clients are saving for long-term goals such as retirement. Then he also talks about the importance of stewardship. Whilst the themes might change year on year, those are really the bedrocks of what we commit to in terms of sustainability.
Speaker 2:Last year, we announced that sustainability was a new standard for investing, and that was a recognition around sustainability and climate risks being investment risks.
Speaker 2:Again, thinking about these risks alongside risks that we would typically look at in terms of market risk or liquidity risk or credit risk, we want to bring these right next door to those other risks in terms of how we're evaluating it. Then we recognized that this conviction that we had was really based on that tectonic shift to sustainable which you mentioned, matt. We've seen great interest around sustainable in recent years and we can talk about that in a moment in more details. That was a really big part of our commitments and then building on that this year, recognizing that we're at the beginning of a very long transition to a low-carbon economy, that there will be winners and losers along that way, but that our clients are going to be best served by being on the forefront of this, we announced steps that we were taking to support our clients and support the Gold of Net Zero greenhouse gas emissions by 2050 or sooner. Hopefully, those three things bring to life what sustainability means to us at BlackRock.
Speaker 4:That's great. I think one of the common themes I hear from both of you which is really important to call out because, again, when I reflect on conversations that I've had with a number of our clients and other advisors that have had the pleasure of talking with, is that there was a period, or perhaps still an element, of advisors feeling that performance and sustainable investing there was a question mark over it, without understanding that, looking at some of the fundamental ways of valuing businesses and looking at the financial theory behind it and how well sustainable investing can support and indeed actually make companies look more attractive and more valuable from an investment perspective.
Speaker 4:Steve, you've actually triggered an extra question for me that I wouldn't mind just getting a brief answer off both of you around. That was when you were, and I'll paraphrase slightly and say you were really looking at sustainable investing almost as a fiduciary responsibility within the business. Is that something that both of you are either the business are talking or considering and that sort of level of fiduciary responsibility to be considering sustainability?
Speaker 3:Yeah, look, absolutely, and I think Steve actually touched on it around the ESG, non-financial factors and how getting an understanding of how a business performs in those areas and the opportunities and threats that they have can actually be really fundamental to an investment decision. I have interesting discussions with clients saying, well, how do you integrate ESG into the investment process? And I say, well, how do you do the investment process without ESG? You know, and it might sound silly, but these things are crucial. So, for example, it's trying to understand where a company sits in terms of, say, climate risk, and what does that mean? Is it an energy transition risk, depending on what business they're in? Are they a financial institution looking at insurance risks in a changing weather environment? Are they a bank with a large mortgage book that may be susceptible to property damage in a changing climate? They're things that you just have to understand to make informed investment decisions. So, look, really it really goes hand in hand. I don't think you can have one without the other.
Speaker 4:Yeah, cool. Thanks, Nathan. Stephen, did you want to expand on it? I'll talk about what you said previously there.
Speaker 2:Yeah, I mean, I'll just probably make one comment.
Speaker 2:You know, again, just kind of reminding everyone that this is not BlackRock assets, this is our clients' assets and so you know we really feel our fiduciary responsibility to.
Speaker 2:You know, manage our clients' assets on their behalf. You know they've entrusted us to manage those assets and we want to protect and enhance the value of those assets so that, you know we can help them achieve the outcomes you know typically long-term outcomes that they're looking for. So you know, to Nathan's point, you kind of raise the question if you don't think about these environmental, social and governance factors, which traditionally have been seen, as you know, non-financial, but we certainly know can very quickly become financial, and you know we only need to think about, you know, some of the costs related to climate risk in the past year. Munich Re, a global insurer, estimates that natural disasters in 2020 led to $200 billion US dollars in damages, the highest ever recorded. So you know these issues can certainly become material financial issues very quickly. So, yes, you to be a fiduciary, you really do need to consider all of the environmental, social and governance factors along the side traditional stuff.
Speaker 4:That little factoid as well from Munich Re. You know. That itself, I think, is so interesting because if you take a data point like that, it's not only going to challenge you around what companies you're thinking about investing in, but it's going to be that level of payout and damage. If that's what you're expecting to be, it's actually going to make decisions. It's going to impact the decision on what companies are going to be impacted, either negatively or positively, through that level of natural disaster taking place and, potentially, whether it's a safe bet or a safer bet as possible to consider.
Speaker 2:Yeah, and I would actually say it even goes beyond that company as well. I mean, you think about the impacts that that will have on its supply chain, upstream and downstream as well. So then you start appreciating the complexity of the analysis that goes into this area.
Speaker 3:Yeah, and I'd say sorry I should say incredible complexity, but also uncertainty. There's definitely volatility in the climate is changing and there are paths that we may have beyond, but it's difficult to say with any certainty what may occur. Look, I really just wanted to hammer home, I guess, this notion of non-financial versus financial. Steve's given some tremendous examples, but even examples you may not think of, around labour relations and I touched on diverse inclusion, staff engagement, safety, Like these can become very real costs and that's marred and that's earnings for these businesses. So you want to attract talent, so you need to offer compelling opportunities for people. You need to be doing the right thing because it can very quickly get into your cost base if you're losing people and you're going out and having to hire people again. So I think it's really critical to understand that the thorough understanding of the E, the S and the G can actually have real impacts on cash flows and therefore valuation.
Speaker 2:Yeah, and if I could just pick up on that as well, sorry, because I think it's a really important point that you raise. Given the experience that the whole world has been through in the last two years in relation to the COVID pandemic and so we often talk about, is G more important than E or S? And certainly what we've noticed is what I call the rise of the S. We've always had the G as being important, and improved data has really helped us understand the E a lot more. The last two years have really, to Nathan's point, really shown a spotlight on employee relations, employee well-being, supply chain resilience, for example. All of these issues that diversity, equity, inclusion have really risen up so much so that, you know, whilst when we've surveyed clients in the last year around the importance of ES and G and our clients overwhelmingly voting in around the E, we are certainly seeing the focus on the S or the social aspects certainly come up the curve in the past couple of years.
Speaker 4:Great. I think, at the risk of this horse already having bolted a little bit, there's a lot of jargon around the subject, where we hear words like ethical, sustainable and then and I always hear some variations on the theme of what ES and G is. But I'll draw a line to the sand and say that we're going to be classifying ESG around environmental, social and corporate governance issues. Is there a key distinguishing difference between ethical sustainable and ESG and if there is, in your view, what do you think that is?
Speaker 3:Looking in my view, I think ethical probably refers a little bit toward like negative exclusions and I was probably born out of the SRI movement when this whole I guess ethical SRI investing was in its infancy some time ago, and so that might be screening out things like alcohol or gambling. Obviously fossil fuels is a very common screen for obvious reasons. So, like, I think ethical is perhaps more driven by people's moral compass and I think the challenge to jump perhaps a few questions ahead or just go off-piste everyone's moral compass is different and so that can be challenging with clients because people have different views on different matters. So, look at, as an investment manager, all I try to do is be really transparent about our process and I can't tell people how to live their lives or what to think, but I can be really transparent about how our particular process works, what's in and what's out.
Speaker 3:Look, I think there is some interchangeability between sustainable and ESG. We've kind of covered off on some of the ESG metrics, if you like, and there's a whole raft of categories under each subheading and we've touched on a few of those. But I think they're probably more linked in my view, as ethical is probably a little bit different, a little bit more values based. I don't know if Steve has a different view.
Speaker 2:I would completely pick up on where you left in, nathan, and agree. I think we're really talking about values based investing versus value based investing was how I would draw the distinction, and Matt's absolutely right the history of whether you call it perhaps ethical investing is really where this movement started, and it was very much based around faith based investing, where there were certain values that clients were concerned about and wanted to express in their portfolios, and they did that by excluding particular stocks, and so that might have been everything from adult entertainment to backer is a widely accepted screen, and weapons and munition clusters as being another one, but there are a range of different options. So that's very much what I would say the values based investing, whereas the value based investing is really kind of leaning more, in my view, around the sustainable investing. So it's about using those insights ESG insights to provide sustainable long term risk adjusted returns that we think are going to help our clients.
Speaker 2:But I think it's important and where we spent a lot of time is again this we are fiduciary to our clients, this is our clients assets, and so we want to provide them with choice when it comes to sustainable. We want to help them find solutions and provide solutions where they may have certain ethical views or values that they want to reflect in their portfolios, and so we want to find solutions that help them achieve that. But other clients, their objectives might be, might be different, and so we also want to provide choice for them and perhaps different solutions. So I think, certainly as a global asset manager our clients are many and varied it's really about providing a range of solutions, but really understanding what are your clients needs in terms of their investment needs and what are the values that are important to them to reflect in the portfolio, then looking for the building blocks to sit beside that.
Speaker 4:Fantastic, I think, and that's the. There's two key points, I think, out of what you've both said there that I'd really want to call out for the audience. The first is that I think some, sometimes some advisors will get worried about having an ESG conversation because they're not sure what their clients are going to say. Or they might say, look, not important to me at all.
Speaker 4:And they're like oh, I go from there. I challenge that and just say the important thing here is to actually just ask the client in the first instance and then you can work with them on whatever their answer happens to be. But myself personally I use and I know Steve, actually you're going to talk about some of the different options and ways that you can look at implementing ESG and responsible investing a little bit through the presentation but I was a negative screen on my own portfolio. My family's always been a fan of keeping dogs. I have a faithful hound he's a beagle and it's absolutely critical to me and I speak with my advisor about this that we use our negative screen for non-pharmaceutical animal testing, because I frankly don't believe you should test lipstick and make up on dogs, and that's one of the key points that's important to me in my portfolio. A hand in hand goes with that to see, what you alluded to is understanding that if you're thinking about long-term investment which for most advisors on this call who are dealing with sort of the mass affluent through to emerging high net wealth and even high net wealth client bases, long-term investing is absolutely a part of that strategy, whether it's a simple retirement plan around superannuation, accumulation and pension. Whether you're dealing with not only accumulating wealth but transferring it either through to a form of charitable trust or the next generation, it's key to understand that sustainable investing from an investment perspective is crucial because it should actually deliver longer term. You've got companies that we have led to live a sustainable, longer term cash flows and therefore better value to investors by considering these types of concepts.
Speaker 4:I think we've actually the couple of questions that I had. We've probably addressed a few of them, sort of, in the conversation that we've had there. There's one that I want to focus on particularly, though, which for Gents the two of you as portfolio managers and contributors to the construction of portfolios with your respective businesses when you're choosing companies to hold or not to hold in your funds, what does this then really mean to you? How do you think about that? I might ask Nathan to start off on this one, if you don't mind.
Speaker 3:Sure not a problem. So look, it is worth pointing out. So the fund I manage does have negative screens and they're all the sorts of things that I've touched on and you'd expect to see. So fossil fuels, tobacco, alcohol, gaming, animal testing, weapons I may have missed one, but they're the main ones and we run a 5% revenue materiality threshold, so it's really clear cut. We then have a second screen where we're scoring the companies on a whole raft of SRI issues across the ES and NG and, in essence, a company has to have a net positive score to make it through the next phase. So we've got a quality filter investment process at Perpetual. My fund has two extra filters.
Speaker 3:But over and above that, it's not just a box-ticking exercise and you go from there. There's obviously a lot more thought involved and I hope you're going to from what I was touching on earlier, like ESG is part of the process and it's integrated very much into our investment thinking and from there it's more so than science. It's the art of stock picking and it's trying to weigh up all of these factors and think about valuation and risk of reward, as Steve's touched on a number of times. People have entrusted us with their capital, so it's really a quite holistic approach. There are things that pass our quite regimented screens that I don't think are sustainable or have heightened ESG risk so, for example, unregulated consumer credit or payday lending or things of that nature so they are unlikely to make it into the portfolio. So there's a whole number of levels, but at the end of the day, I'm trying to distill all of that into evaluation and a risk reward equation so I can firstly protect and then grow the capital of the people who have entrusted me with their money.
Speaker 2:Perhaps I'll take a slightly different tack and talk about this from the perspective of an index investor and just recognizing that, as we talked about, we want to provide clients with choice. We want to reflect their values not our values their values, their investment objectives and find the right solutions for them. And certainly index tracking solutions are one way for clients to get access, broad access to the markets. And for an index investor, typically, if that is the mandate that your client has given you, then you are required to hold the stocks within that index. So that's kind of the first point to probably make.
Speaker 2:But sitting irrespective of that, sitting across all of that is ESG integration for index strategies, which is really all about our stewardship activities.
Speaker 2:So it's about engaging and voting on those holdings, because an index investor is, by its very definition, a long-term investor.
Speaker 2:We are going to hold that stock on behalf of clients for as long as it's held in the index, and often that is, we see changes in management and we see changes in boards, so we can be persistent and constructive and encouraging companies to adopt those more sustainable business practices.
Speaker 2:And I would also say that the index strategies and the ETF strategies they've really democratized access to a wide range of investors, and you'll know that we're about to launch our ESG diversified model portfolios on the platform and we're really excited about that as being a really great way to not only just democratize access but do so using some of these index strategies that we have as building blocks within the models and some of those index strategies both Aussie equity, international equity they apply screens, extensive screens, but they also tilt to the good, so it's not just about one or the other. You can invest sustainably by excluding certain stock, but you can also then say actually I also want to weigh into those companies that I think, through our analysis, the better ESG performers, the leaders in that space, and so it can be the combination of both of those. I would say.
Speaker 4:No, that's fantastic, and so I'll give Dave Shannon, our webinar farther, a little bit of notice here, because you've got a couple of pre-prepared polls that we're going to bring up now just to get everyone reaching for their mouse and clicking on this, and I'll get you to have a look at this poll while our panelists answer the next question I'll pose to them. So, dave, if you could bring up that first poll on the screen.
Speaker 4:So we're not allowed to vote on this, so this is very much going to be about the audience and I think, steve, you're jumping on a couple of your words.
Speaker 4:I think we democratizing the process here somewhat.
Speaker 4:But I'd like to ask the question, while this poll is being considered by the audience, that when we look at investing responsibly, it can certainly be about aligning values and interests, and many think of this as being philanthropic but sometimes not the best investment, which is a real shame, because I think there's a lot of you know, if I look at my studies in modern portfolio theory, what really ties in, and I think we've talked to some great examples of why investing responsibly and good performance over the long term are intrinsically linked. The sub question to this and when we look at the result from the poll, I guess we think that investors expect their savings to be responsibly invested and I think, looking at the result of the poll, it's a really interesting answer. I might ask, steve, for you to leave the question off there. So we've had almost half half, but slightly more, say that having long term sustainable investing central to the strategy, but we've got just under half of saying it's valid but it's still niche. What's your view on whether investors think their savings should be responsibly invested?
Speaker 2:Yeah, well, I think you know the points that I would make is you know investors' objectives are many and varied, but certainly what we have witnessed is what I described at the beginning of the session is tectonic shift to sustainable, and I think you know it's interesting to see those results but also perhaps reflect on. You know what we are seeing when we survey our global clients as well and I think, even though it's kind of fairly split there, I feel like you know it's that movement right. You know we're seeing this kind of transition more to sustainable and you know our view is that that's going to continue. And why is that going to continue? There's a number of reasons for that. So, firstly, we can see evolving regulation. Now you know a lot of that is actually coming out of Europe, but certainly the client conversations that we're having here are around trying to understand what that regulation is and you know, particularly around how we classify what products are sustainable or not. So the SFDR regulation, whilst it might seem like it's an EU piece of regulation, actually clients are quite interested in that because you know we're all aware of the risks of greenwashing and so having a framework and a taxonomy that tells you what it is and what it is and is actually really useful. So we can see regulation is evolving in a particular way. But you know I also mentioned investor preferences and investor preferences are also moving towards sustainable.
Speaker 2:So we kind of went into 2020 thinking that you know we were going to see this tectonic shift to sustainable and then COVID happened and you could think, oh okay, well, is there going to be a pause on sustainable investing now because everyone's going to be needing to focus on other things. But actually what we saw was that investors doubled down. We saw even greater flows to sustainable and we also saw that resilience in our performance of sustainable strategies relative to their mainstream parents. So, again, that's kind of really demystifying some of those myths that you know you need to trade off, you know risk and return to invest sustainably, which we believe is not the case. We know there's greater data available and that data gives us greater insights about you know that there isn't a trade off to invest sustainably. We're able to see that resilience, that our performance of sustainable strategies. But we do know that you know sustainability is important, is a broad issue that is important to many investors and, as Nathan talked about, Down on sustainable investing during COVID.
Speaker 4:What really sort of led that? Was it just being led more time to think about things when they weren't commuting an hour or two a day to the office? Or is there anything that you share there about what sort of made it even more prominent for investors?
Speaker 2:Well, I think it was some of the stuff that you know Nathan also touched about and we discussed earlier. On the social side of things, there was a huge focus on employee welfare. When you know, all of a sudden we're finding ourselves working, you know, from home, so you know, hundreds of offices rather than one office, and you know families are having to balance a lot of different issues. We had supply chains that are kind of having to confront challenges that they hadn't necessarily confronted before and you know we were all very much living that experience. So it certainly did, you know, shine a spotlight on those kind of issues.
Speaker 2:And you know there's research that talks about, you know, millennials focus on sustainability. You know women, again, are very focused as a group on sustainability. And if we think about, you know, the transfer of wealth that we are expecting to see in the coming decades from, you know, the boomers to millennials, that's a, you know, 30 to 40 trillion US dollar transfer of wealth to women and millennials. So I feel like we're starting to see that come through and you've got to remember that many of these people will be tomorrow's leaders and they will also, you know, be inheriting the decisions that we take today as businesses and leaders. So you know, I think that there will be continued focus and that's perhaps what we're seeing.
Speaker 4:That's great, and sorry, nathan, before I hand over to you for your view on that, last year was, I think, a really interesting year, apart from the obvious, with what happened, because for a long time, millennials were not considered ideal clients by advisors, but the oldest millennial turned 40 in 2020. You know, these are very much people, as you said, and there's that massive intergenerational wealth transfer that's already starting to take place, occurring, and for any advisors on this call you know who've been enjoying what we're talking about and are listening to us my challenge would be that if you're thinking about what your business, if you're still expecting to be in business, not only in two years or five years, but 10 years from now, if you're not thinking about this now, I think you've really got a. You know you really do have a gap in your business strategic plan, and so that's one of the reasons I'd certainly call out why you know you should be thinking about this now and not waiting for everyone else to get ahead of you there. Nathan, please jump to the area.
Speaker 3:I've got very, very little to add. Actually, you two gentlemen have covered off, I think. Look, in terms of people expect their same issue, managed response, of course, and the people are voting with their feet looking at flows and Steve stole my thunder a little there. I was going to bring up the millennials and it's a conversation I have with advisors and researchers. It's a new generation and they're very much driven. I suppose there is a huge focus on them and as they get the wealth transfer, as they get a little bit older and more involved in investing and things like that, and they come through the system, absolutely, I think you'll see that focus continue to grow.
Speaker 2:Well, one other point I would just say and it would be remiss of me to not say that we've just had climate talks in Glasgow and just remember, we've had over 127 countries, more than 1,100 companies, commit towards net zero 2050 goals. So the ambition is there and we know that we're at the beginning of a long transition. As I said, there'll be winners and losers and, with a combination of improved ESG data, that's going to be a really important part for investors to make sure that they are on the right side of the long transition to a low carbon economy, which today we acknowledge is very carbon intensive. But we know that we need to change.
Speaker 4:And I think to add to that as well, it's I know this certainly wasn't what you were saying, but it's not just about winners and losers. It's considered what opportunities present as we transition to that low carbon economy as well, and I think that's also a bit of the narrative. That gets missed potentially is thinking, well, who's going to lose out, but it's well, what's going to come in. That just didn't exist because we've now got the ability to look at it. So, webinar father Dave, if you wouldn't mind placing a second poll on the screen for our audience just while they're considering that poll. Nathan, can I start by asking you would you mind sharing maybe some of the more common myths and myth conception from investors when you're having your conversations around this?
Speaker 3:Yeah, sure, look, I think the first one and we already kind of touched on it is that by imposing whether it's greens or a sustainable approach or do things in a particular way that you have to compromise on performance. Look, I don't think that's the case. I wouldn't get out of bed every day to do what I do if I thought that was the case. So, look, I think that's a common one and they're probably the most stark. I guess there's some other things that I touch on. I think some investors view a lot of ESG as black and white, whereas I think in the real world there's a lot of nuance and a lot of gray. You see, touched on it, there's a transition that has to happen, but it is just that it's a transition and there are trade-offs and there are compromises and you can't flick a switch. So, whether it's around electricity, base load power and generation stability, it's just one example. Look, I'm no expert on what's happening in European energy markets and I know there's some political machinations as well, but I think that highlights it. A lot of these things. There's no easy answer.
Speaker 3:Some of the industries and stocks that will benefit from this big decarbonisation are, admittedly, dirty.
Speaker 3:They're extractive, they're copper companies, they're nickel companies, but the reality is these are the things that are needed to help us along that path and get to the end goal.
Speaker 3:What matters is how companies go about it and how they can do it, respond to themselves and less harm and things like that. So I think a lot of people think perhaps too black and white, where there needs to be some balance. And the last thing I guess not so much a myth or misconception around ESG, but I always say to people there's no such thing as a perfect company and you've got to be mindful of that. No company is going to tick every single box, but we can work with companies and we can engage and advocate with companies and they can improve. And I find that there's great opportunity in trying to find companies that can improve their ESG performance, as opposed to, say, a company that's already there which is likely highly rated, has good miscuse sustainability ratings, big multiple in a lot of sustainable funds. I think there's opportunities to take something that may not be seen as an outstanding ESG performer but can improve. I think that's where you can add a lot of ideas active investors as well.
Speaker 4:Excellent, thank you. So just before we get your reflection on the myths and myth conceptions you here, this is a really telling result here, I think, on the poll so moderately important. There's still a driver here around for overwhelmingly over four-fifths of respondents saying that fees are a consideration, at least moderately or very much so, when choosing an investment. I think that's a really interesting, which I'll probably give you both the answer to talk about now, because if I was given a choice myself and I've expressed my rather strong view about testing mascara on dogs if I had a choice between investing in a fund or a product of some sort that couldn't enable me to avoid that versus one that could, to me it's not a question about the fee.
Speaker 4:I believe very much market forces will strain and keep fees around a reasonable playing ground for everyone, but I would absolutely have no problem paying more to ensure that I wasn't investing companies that don't satisfy that particular need for me. So I think that's actually a really, really interesting response to see that fees are still driving that, I guess one of the myths that, or potentially, isn't a misconception, that is it more in the advisors mind rather than the clients mind, where people are expecting a canny outcome and, being a type Dutchman, I can appreciate that, but how much is being driven by the advisor? Is their concern around compliance for the retail level? On being told that fees matter most over everything else? And I think that's really disappointing, because fees absolutely don't matter more than anything else, particularly when it comes to concepts like ESG. My view Sorry, I'll put my soap box aside because I'm hosting this and I'm not one of our panelists- I'm leaving.
Speaker 2:Yeah, I mean just a brief comment. I think there has been huge amount of work in the industry and certainly a black rock around providing clients with choice when it comes to sustainable but doing that at the same cost as traditional building blocks has been a really key part of the work that we have been doing. So absolutely, I think today we can see that sustainable options can be accessed at the same cost as traditional building blocks, and I can imagine that it would be a consideration for clients and perhaps there is an expectation that they should be able to invest sustainably and do that at a comparable cost as well.
Speaker 4:Great. We've actually had a few more questions that I think I've allowed time for today. Almost wonder if we need to organise a part two of this session and perhaps if our audience, if you have enjoyed today in your feedback and notes, if you would like a second part to this webinar, let us know and we can look about if we've got the ability to organise that. And I think, nathan and Steve, I've certainly enjoyed hearing your views and takes and what you've been able to share from your experience for us, I think it's starting to move toward the closing stages. That for perpetual I guess I'll ask a very pointed question for perpetual side of things, nathan, how do you incorporate ESG into active portfolio management? And then, on the flip side of that, steve, and I'd ask you sort of subsequently with black crop, how do you incorporate ESG into the index strategies? If we can get down into a bit more of the brass tacks to help the audience understand your unique implementation of this.
Speaker 3:Sure, look, I'll try and be really brief, conscious of time. So, as a study, esg is integrated across our whole investment process, not just for my fund but all the portfolios here. The responsibility sits with an analyst, so an analyst will cover a list of stocks and the ESG analysis, if you'd like to call that sits with them. So the buck stops with them. And so we're always monitoring on a regular basis things that are going on whenever a stock comes into our investable universe as a potential investment opportunity and ESG assessment has to be made day one Well, the analyst what I would say is it doesn't necessarily preclude us from owning something if the valuation is compelling enough and we feel like we've made a strong assessment of risk and reward, but it does give us the ability to go and engage with a company on what we might see as a particular issue moving forward. So we might get on the register and then agitate the change in any number of areas, not just in a governance level, and that's kind of an ongoing process.
Speaker 3:So, look, it's part of the process. Each analyst is responsible. We score things individually. We also get some external data in as well as a tool, and from there it's really about being active owners. So we talked about responsibility and stewardship. We are active owners, as I said, not just on governance. Obviously, voting is incredibly important and taken very seriously by us, and we exercise that on behalf of unit holders, but it's really an ongoing thing. There's no set and forget. I've ticked a few boxes, it's all over.
Speaker 3:It's a really ongoing process, but I'd just like to emphasise an ESG problem doesn't necessarily prevent us from owning something. We need to make an assessment of how does the risk and reward stack up for our unit holders.
Speaker 2:So maybe if I can provide a perspective from an index investment side, but before I do that, just to echo what Nathan talked about, we're also 100% ESG integrated across our active and advisory business in a similar way to what Nathan described. I think that that is an expectation. Just being ESG integrated in and of itself doesn't necessarily mean that you're a sustainable investor, but I think that it's a key that you should be looking at to make sure that you've got all of those risks and opportunities considered alongside the traditional financial ones. Now, if we move to kind of an index investor, again, it's unlike an active portfolio manager who could look at a range of issues, including some ESG considerations, and then decide you know what? I'm going to walk with my feet because the economics may no longer make sense For an index investor. We're required to hold the companies that make up that index in the portfolio. It's just the part of index investing that we need to adhere to and follow our client's mandate. So what does that mean? If we can't work with our feet, how do we think about ESG integration? Well, for us it's about emphasizing our investment stewardship capabilities, and again, there's a lot of terminology investment stewardship. You could also substitute that as active ownership. And so to debunk another myth that an index investor doesn't necessarily vote or engage on their holdings, that's absolutely not true.
Speaker 2:At BlackRock, we vote all of our index holdings as well as our active holdings, and we engage all across the piece. The investment stewardship team has responsibility to be the voice of the index investor, so the buck stops with them when it comes to making a vote decision on a particular stock. As I mentioned before, we are, by very definition, a long-term investor, often outlasting management and board. We will be there year after year encouraging companies to adopt those sustainable business practices. So for us, esg integration for an index investor is all about that really important role of stewardship.
Speaker 2:One final comment I'd actually make is the strength of our process is that we don't just necessarily follow proxy advisor recommendations. Our starting position is our own guidelines. We supplement that with the insights from our engagement, but importantly, the insights from our active portfolio managers. So the fact that they are also invested in companies and they're going to have a view on the company, particularly even if they don't hold the company, that can be really useful insight into the analysis that the stewardship team does when reaching a vote decision. So, absolutely, I would say, stewardship is critical, critically important for an index investor, and that's how we think about ESG integration.
Speaker 4:Thanks, steve. I think for time we'll look at starting to close the presentation up for today. Certainly, it's be remiss of me not to fall out that investors do have access to both of these fantastic investment managers through premium, as well as the benefit, if you need to use it, of our screening technology, which we use, courtesy of Sustain Analytics, to apply to portfolios. In closing, there were two key items that I'd call out from the conversation that I think, one of which was probably a learning for me which was really, really cool, and that was to look at the fact that, both with perpetual and BlackRock, esg isn't something that's applied to some as a concept to a certain suite of products in their portfolios. It's a company-wide philosophy that both these businesses and, I dare say, more managers are embracing and considering as fiduciaries for their clients.
Speaker 4:And that brings me to the next point and I think credit goes, steve, particularly to you when you originally called this out was it's the knowledge that it's not your money that you're investing, it's on behalf of your clients and it advises equally fall into if the advisor is your client and they have their client, if that's where the chain is going.
Speaker 4:There's a number of layers here, but it's the end client that we need to be thinking about with all of this, which is why, in my mind, I'll come back to my very early point, that just asking the question is the best and first place to start, because then you can begin to unpack whether it's individual biases, considerations or what's important to the investor when it comes to thinking about how do you invest their wealth, not only now but for the future. So, in saying that, I'll look to close up outside of the presentation and certainly on behalf of myself, my team, the broader team at premium and, again, if you're looking to further this conversation, you've got two excellent BDMs here in Queensland with the form of Rook Lacey at BlackRock and Emily Verdoulin at Perpetual, who you can speak to if you'd like to have some further discussion around this, as well as our teams here at premium, both in Queensland and around the country. So, on behalf of myself, nathan and Steve, thank you very much for being a part of today. It's great, we appreciate it. Cheers.
Speaker 3:Thanks for having me on. Thanks everyone, thanks guys.
Speaker 1:I don't take it personally, but whenever my face appears at these webinars these days, I start to see the numbers dropping off. I think people are getting accustomed to seeing my face and recognising that it's the end of the webinar. A really interesting session, guys, and, as a parent of a couple of young adults who are just starting out on their investment journey, I found some really useful analogies between the work that you guys do as custodians of people's investments and I've started to look at my own investments as not so much as being my own but being my children's investment. So, and the conversations that I'm having with them are certainly around the direction in which the world is heading and how we can make it a better place. So a really great session. I hope everyone found it useful today and if it did trigger any questions that we haven't covered, as Matt pointed out, please send them into us. You can get in touch via your BDM or via our main support phone number, or via the follow up survey that you'll receive when I end this session. Speaking of ending the session, we will also be sending out a follow up email with a recording of the session, so feel free to share that with any of your colleagues who are unable to make it today to the session.
Speaker 1:Speaking of future sessions, we have another session coming up in a couple of weeks on a topic that was briefly touched on. We've recently conducted some research with leading investment research company investment trends on high net worth investors and various segments within that high net worth group. That promises to be a really interesting session. There's some really interesting research that came out of that, so hopefully we can catch up with you in that session in a couple of weeks time. There will be a link to register for that session in the follow up email today. Thanks everyone again for joining us. Thanks guys again for being with us and we'll say bye for now.
Speaker 4:Thanks, dave, thanks a lot, thanks Bye, thanks a lot, thanks a lot. We'll see you in the next session.