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The Source Podcast: Impact investing and active ownership with Regnan

9 December 2020

(28 min podcast) In this episode of The Source, eVestment’s podcast covering trends and insights in institutional investing, we are joined by Susheela Peres Da Costa, Head of Advisory, and Tim Crockford, Senior Fund Manager, at Regnan. Susheela has been instrumental in the development of Regnan’s research, stewardship and advisory programs and recently co-authored a paper with the UN PRI, Active Ownership 2.0, while Tim leads the Regnan Global Equity Impact Solutions team.

If you’ve listened to some of our past podcast episodes, you know ESG has been a big focus of these conversations. eVestment recently released a new questionnaire to make sure consultants and investors have all the data that they need when evaluating a manager’s ESG approach. The eVestment database now has more than 790 ESG-focused strategies, reporting data and AUM in the universe across $400 billion for the first time ever last quarter. For information on how to research these strategies or to make sure your fund is included and available to over a thousand consultants and investors across the globe, contact us at solutions@evestment.com.


Highlights from the conversation

Rich: Thank you both for joining us today. I’m excited to hear your perspectives on impact investing and about the strategy you’ve recently launched. Susheela, if we can start with you. You co-authored a paper with UN PRI titled “Active Ownership 2.0” which centers around three pillars: outcomes, common goals and collaborative actions. Can you talk a little bit more about what Active Ownership 2.0 is?

Susheela: It’s probably important to start with what Active Ownership 2.0 is not. And so as an organization that was founded on this idea that pension funds are really long-term and very widely diversified, they essentially have this stake in the whole economy. And that was the original insight into the founding of the Principles for Responsible Investment.

Yet when we actually look at what goes on under the rubric of active ownership, a majority of what takes place is actually not capable of addressing many of the challenges that universal ownership needs to be addressed. For instance, it’s very easy for investors to think primarily when they undertake engagement (meeting with companies, writing letters and voting), it’s very easy for them to think primarily about the individual company and what creates performance in that individual company.

So if you take an example like climate change, that’s often focused on how climate change will affect the company. What gets missed in all of that, when you add it all up, hundreds of investors, having hundreds of conversations with companies about how the company will be affected, is that outward-looking perspective that would actually protect the whole system against the worst excesses of climate change.

The insight that drove Active Ownership 2.0 was actually that investors needed to reorient active ownership to focus on things that weren’t specific to the individual companies, that they were focused on that addressed those common goals, that focused on outcomes rather than what we would call governance measures. Very often it’s easier to talk about disclosure rather than talk about what a company is really doing.

And ultimately, recognizing that collaboration was a necessary feature of that bigger picture perspective. You can’t really achieve the things that need to be achieved without working with other investors towards that. So they were the three pillars that came through: outcomes, common goals, and collaboration. And they are really addressed to that system protection that is so necessary for the markets to operate effectively.

Rich: You also serve as the chair of the Responsible Investment Association Australasia. We talk a lot with our European clients about the differences between the US and Europe, as it relates to ESG, and how far along that maturity curve we are here in the US. We don’t talk a lot about that in Australia. What are some of the themes top of mind with Australian investors, as it relates to ESG, SRI and impact investing?

Susheela: One of the really unique things about the Australian market was that it was driven by this economic understanding of what the largest and longest term pension funds needed. And that meant that quite unlike Europe and quite unlike some of those much more faith-based, ethically-driven investment organizations in the United States, it had a very strong focus on ESG integration.

So that analytical application to environmental, social, and governance issues and understanding the extent and the means by which they would impact and usually impair corporate performance long-term, that was a really strong focus. And so what that means when it comes to impact investing is, it’s more of a blank canvas. There’s not a muddying in Australia to the same degree that we see elsewhere of what will create returns and what will have an impact in the world. And so we get a much more distinct and, in my view, a much more disciplined approach to impact as a result.


Rich: Tim, jumping over to you. You and your team recently launched your new global impact strategy. Can you tell us about that investment approach and how that’s going so far?

Tim: The plan was really to try and build a public equity strategy that was built on the core tenants of what impact investing in the private investment world is, and the private asset world is. We took this view of investing with the intention to create an additional measurable impact, and try to understand how we could apply that in a public equity context.

What we’ve built is a framework whereby we look first and foremost for solutions for products and services which are capable of driving a positive impact. So we start off thinking about the system before we start thinking about the companies. We start off thinking about, if we have a problem to solve, and the problem is climate change, if we need to reduce emissions, for example, what are the best ways of doing that as they relate to the application of public transport? What are the best ways of doing that as they relate to agriculture? And then we start comparing, and I’m trying to understand which of these solutions relate better, and which has the best chance of driving a positive outcome. And therefore by definition, which of the solutions has the best chance of being a financial success.

And that is what the strategy revolves on. It revolves around companies that have at the center of their business a mission because they sell a product or a service to solve either an environmental challenge or a social challenge and as a result of this increasing need for these solutions, that drives the revenue or the market size first and foremost, for this solution that drives the revenue for the company. And therefore, that drives the profit and earnings growth for these businesses.

So what we try to do by finding companies who have a unique, innovative solution or technology for a particular environmental or social challenge, we’ve tried to align this concept of creating the largest positive impact and creating the largest financial return, such that if you had to plop the two on an X and Y axis, you could ideally be able to draw a 45 degree line between the two.

And so that’s basically how the strategy works. And I won’t go into the details of the process and all of the fun stuff, but it really is based around building a framework to really identify, before we even look at the companies, which solutions are best placed to solve these challenges, hence the name of the strategy.

Rich: So through that process, you created a universe of 2,200 companies and growing, and you talk about corporate engagement. What does that actually look like in practice with these companies, beforehand or once an investment is made, and how willing and able are the management teams of these companies able to get on board with that level of engagement that you’re expecting?

Tim: First of all, we don’t engage with all 2,200 of those companies, as that just would not be feasible. We have a very quick filter that we apply called our impact assessment to understand which of these companies are truly impact leaders and which of these companies really has an innovative solution at the center of their business.

You know, this isn’t about global conglomerates. This isn’t about mega cap companies who have their business in many different areas. This is about focused, smaller businesses. So it’s relatively easier to figure out which one of those companies might make a decent investment idea to take through our investment process. Of course, because they are smaller companies and because their business is centered around a product or service which plays into this mission of solving an environmental or social challenge, these companies are naturally more receptive towards engaging with investors who are keen to invest in them. They want to hear what people like us want to see. They want us to go and tell the story. We had a meeting with a US company today and at the end of the meeting, they said to us, “What can we do? What are you doing? What are you talking to your investors about when you talk about us?” And I think they’re keen for more and more people to know that these businesses are focused on solving the sustainability challenges that we face.

I think ultimately the sorts of companies that we’re focused on taking down the investment process and ultimately making their way into the portfolio, are going to be companies with management teams and with cultures who want to engage with investors, want to build a shareholder base of long-term investors and they want to listen to what they have to say.

It’s not really been a challenge at all so far. And in fact, we’ve often found that it’s a two way thing. And as I said, we often get companies once they know us, once they understand what we’re looking at, coming to us to ask sometimes where I help in terms of, for example, talking about what disclosures they we would want to see in their sustainability report, for example.

Rich: How have your interactions with investors changed over time as impact investing has become more mainstream? Is there less upfront education? How has that changed as you’ve been working with investors over the past few years?

Tim: It’s interesting because in different markets around the world, there’s different levels of knowledge, different levels of understanding, and of course, different levels of desire and demand to actually invest money in these areas.

Having spent the last decade of my career in this space first within ESG integration and then more recently with impact investing, it’s been fascinating watching the development of different markets. And typically what you find is at the early stages of their understanding of the broader, responsible investment spectrum, you’ll find that people just conflate everything into one group of products. And I think that is where most people who might’ve had a skeptical or even cynical bias towards this area will just walk away without learning any more.

But what you find is when markets have started to gain critical mass, and the end investor has started to really demand this product, of course, those same funds selectors had to go back to the drawing board and get deep into the workings of this responsible investment spectrum and understand what differentiates ESG from SRI and what differentiates impact investing from ESG integration.

It’s been fascinating because you see this very steep ramp in the learning curve as that process starts. And we’ve seen it in countries like Switzerland, for example, which in a very short space of time went from not caring that much, to this being mainstream and everyone knowing their ESGs from their SRIs, if you’ll excuse the alphabet soup.

What we do see is that the biggest hurdle people have to get over, is this perception that there is a split and that there is a differentiation between financial motive and impact or ESG motive. When it’s done properly, the two are not just aligned, but should be thought of as one and the same thing and interdependent.

One of our big frustrations is that you get often in larger asset managers, you find an investment team, and then you find an ESG analysis team and I’m thinking, okay, great. I get it. Maybe the managers don’t yet have the knowledge to do that. But ultimately if they are the ones making the decision, and you are saying to your clients that this is something which affects the alpha generation of your fund, surely the people making the stock decisions should be doing this analysis.

I think that’s changing in the markets that are getting further down that learning curve. Here in Europe, obviously it’s been somewhat ahead of probably most. I think Australia has definitely been ahead. And that perspective is very interesting because I think that’s ultimately what you need to get to, where this perception is eradicated.

Rich: Susheela, I’m interested to get your perspective as well on how your interactions with clients have changed, and what they’re coming to you to understand what their options are.

Susheela: It’s really interesting because what Tim says is exactly right, that the newcomers to the field are the ones who tend to assume that ESG integration and impact are all one and the same things. I think that comes from a perspective of partly wishful thinking, but also partly because it’s very convenient for a lot of the providers in the space to market their products and services as that really is the same thing.

What we’re starting to see though, is some sophisticated pushback, and not just from investors, but also from some of the commentators and providers in the space. That was quite an interesting debate, last year, maybe this year, but it’s an interesting debate that centered in Europe about whether or not investing in a way that limited the carbon emissions emitted by the stocks in your portfolio helped climate change. What we saw was one of the commentators in the field, a group called the 2 Degrees Investing Initiative really pushed back on that idea, rightly, because adjusting a portfolio from what is otherwise the benchmark portfolio isn’t necessarily going to change the outcomes in the world. So the problem is often that newcomers to the field are starting from the position that they need to retrofit ESG or responsible investment into what they do anyway.

And that retrofitting does result in this really demarcated split. So either you’re managing risk through ESG integration, or you’re trying to have an impact in the world, and you might do that by selecting impact investments. What you’re not doing is finding a way to genuinely make the investment outcome a result of that impact case, which is fairly unique.


Rich: Susheela, you talked in a webinar about invisible assets, things like governments or healthcare systems or economies that we just expect to work that maybe have been stressed a little bit this year. How do you think everything we’ve seen this year will impact investor demand for making an impact going forward?

Susheela: Well, the nice thing is that we don’t actually need to speculate, we’ve seen an explosion in demand for responsible investment. And certainly in the Australian context, it predates COVID. We had a very devastating bushfire season last summer in January, and during those months we saw consumer inquiries for responsible investment at the Responsible Investment Association of Australasia doubled. And that increase has continued. COVID has resulted in that spiking.

I think what COVID does is make a lot of that invisible infrastructure visible. And you mentioned things that are community assets, things like health care, like functioning governments. All of those things apply also within companies where we’re asking about how their boards have reconsidered their role in society, given the degree to which they’ve had to come to the taxpayer for support, for instance, or given the way that they have actually extended generosity beyond what would be economically rational to employees in order to keep a community going and to keep that economy ticking. So there’s a realization there that that interdependency is absolutely economically relevant and it’s relevant to market returns. And I really hope that that realization doesn’t disappear as soon as the cycle turns.

Tim: I think now is really the time for impact investors and fund managers running ESG integrated strategies to really show their mettle though, because going into a different market, going into a more growthy economy, you know, what perhaps has worked in the past might not work in the future. It’s time now for the fund managers who are in this space to show that they can build all weather strategies, not just something which is crisis proof. It’s going to be an exciting time for the industry.

Susheela: And just to add to that, one of the things that we’ve seen is a growing recognition that it’s not just about what’s inside the portfolio. And so those fund managers that are really making a contribution in terms of their influence on the companies, they’re the ones that are really receiving attention because there’s a growing recognition that there can be quite a disconnect between what a portfolio is doing and the broader influence that a manager has, especially some of the largest fund managers. That’s a really important insight to when we’re thinking about like those invisible infrastructures and the profitability of solutions going forward.

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