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Michael Jantzi: Making 'Informed Choices' in Sustainable Investing

The CEO of Sustainalytics discusses the evolution of the ESG movement, the regulations and rule-making behind it, and the future of sustainable investing.

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Our guest on the podcast is Michael Jantzi. Michael is the chief executive officer of Sustainalytics, a Morningstar affiliate that specializes in ESG and corporate governance research and ratings. Prior to forming Sustainalytics in 2009, Michael was the founder of Jantzi Research and has been active in the responsible investment field since 1990. Michael has been recognized with numerous awards for his leadership and work on sustainable investing, including the Responsible Investment Association's Lifetime Achievement Award, which he received in 2010. Michael is a director of the Tides Canada Foundation and sits on the Advisory Council of Ivy Business School's Institute for Long-Term Prosperity Through Business. He also serves as a director of the Principles for Responsible Investment, or PRI. Michael holds degrees from Western University and Dalhousie University.

Background

Bio

Sustainalytics

MakeWay (formerly Tides Canada Foundation)

Principles for Responsible Investment (PRI)

ESG Evolution

What is ESG?

ESG Investing Comes of Age,” by Jon Hale and Bridget Ginty, Morningstar.com, June 2020.

Sustainalytics’ ESG Risk Ratings

Environmental, Social, and Governance Investing, Morningstar.com

The Value and Efficacy of ESG

The True Value of ESG Data,” by Leon Saunders Calvert, refinitiv.com, Sept. 3, 2020.

Who Cares About ESG Investing?” by Steve Wendel and Samantha Lamas, Morningstar.com, May 3, 2019.

Why ESG Matters in a Crisis,” institutionalinvestor.com, June 9, 2020.

Breaking the Tragedy of the Horizon--Climate Change and Financial Stability,” speech by Mark Carney, bankofengland.co.uk., Sept. 29, 2015.

How to Align Your Investments With the U.N. Sustainable Development Goals,” by Dan Lefkovitz, Morningstar.com, Oct. 28, 2019.

"Why Become an ESG Investor?" by John Rekenthaler, Morningstar.com, Nov. 23, 2020.

ESG Ratings/Subjectivity

’This Is the Shareholders’ Money’: Billionaire Warren Buffett Argues That Companies Should Stop Making Decisions Based on Their Social Beliefs,” by Ben Winck, businessinsider.com, Jan. 2, 2020.

The Department of Labor Attempts to Throttle ESG Investing,” by John Rekenthaler, Morningstar.com, July 2, 2020.

ESG Best Practices

U.S. Lags Europe on Regulation of ESG Investing,” by Joe McGrath, expertinvestoreurope.com, June 3, 2019.

Sustainable Finance Disclosure Regulation: An Industry Game-Changer,” by Anne Schoemaker, sustainalytics.com, Nov. 4, 2020.

Risk/Return

ESG Investing Is About Long-Term Risk Management,” by Alex Bryan, morningstar.com, July 14, 2020.

Sustainable Funds Weather Downturns Better Than Peers,” by Tom Lauricella and Jess Liu, Morningstar.com, June 15, 2020.

COVID-19 and Beyond: Using Sustainable Finance to Build Social Resilience,” by Jonathan Laski, sustainalytics.com, April 7, 2020.

Transcript

Christine Benz: Hi, and welcome to The Long View. I'm Christine Benz, director of personal finance for Morningstar.

Jeff Ptak: And I'm Jeff Ptak, global director of manager research for Morningstar Research Services.

Benz: Our guest today is Michael Jantzi. Michael is the chief executive officer of Sustainalytics, a Morningstar affiliate that specializes in ESG and corporate governance research and ratings. Prior to forming Sustainalytics in 2009, Michael was the founder of Jantzi Research and has been active in the responsible investment field since 1990. Michael has been recognized with numerous awards for his leadership and work on sustainable investing, including the Responsible Investment Association's Lifetime Achievement Award, which he received in 2010. Michael is a director of the Tides Canada Foundation and sits on the Advisory Council of Ivy Business School's Institute for Long-Term Prosperity Through Business. He also serves as a director of the Principles for Responsible Investment, or PRI. Michael holds degrees from Western University and Dalhousie University.

Michael, welcome to The Long View.

Michael Jantzi: Well, thank you very much. It's a pleasure to be here with you.

Benz: To start, can you give a quick thumbnail sketch of Sustainalytics? How many people are on the Sustainalytics team? And what are your main outputs from a commercial standpoint?

Jantzi: Well, I'll be happy to. Sustainalytics, as you know, is a shop that does research on environmental, social, governance performance of companies around the world. And we provide that information to investors globally. We're about 800 people around the world. We operate from 16 offices, and of course, now very pleased to be part of the Morningstar family. Some of our flagship product is an ESG Ratings. So, our clients really look to us to help them understand at an issuer or company level, how well the company's management is managing the ESG risks and opportunities that they have. And so, that is the flagship product. And of course, there's different components of ESG research that we provide. We also have a part of the business that works with investors as owners of companies and helps our clients engage with companies on issues environmental, social, governance risk. So, that's another part of our business. And I think a third pillar of what we do is working with financial institutions to help them create and innovate sustainable finance-related products and support both of those financial institutions and issuers in their desire to raise capital through sustainable means.

Ptak: What steps do you take to safeguard the integrity of the ratings your analysts assign? If you sell your data to an issuer, let's say, but also are assigning an ESG rating to that firm, how do you ensure the analysts can call it like she sees it?

Jantzi: It's a great question because analyst independence, I think, for any research shop has to be at the very center of the culture and certainly, for Sustainalytics, that's always been the way that we've operated. So, the first thing is, you need to make sure that you have a research methodology that is consistent and as sound and a research process that you follow consistently. And that's certainly something that we've had at Sustainalytics since the beginning. But I think the other part of that is to make sure, and we certainly do our best to do this, that there are research analysts are isolated from the commercial aspects of the business, if you will. So, through various mechanisms we try to protect our analysts from knowing who our clients are or certainly, the extent to what those client relationships might look like, certainly you don't want an analyst being biased because they know it's a client of some strategic importance or that sort of thing. So, we have mechanisms in place to guard against that. And then certainly, in no way whatsoever is an analyst remuneration based on commercial success. That remuneration is in no way tied to commercial outcomes one way or the other. So, analyst independence is core to Sustainalytics. And we've got a variety of mechanisms in place to ensure that that independence is assured.

Benz: For someone who is trying to trace the arc of ESG's popularity, what have been some of the key milestones or events along the way?

Jantzi: Oh, Christine, I've been doing this for 30 years. I don't want to bore people going back for three decades. But when I think back on this, and it's a good question, I go back to the early 2000s. And I don't know if your listeners can remember companies like Enron and WorldCom and Tyco, but those were companies in the United States that had some challenges on the governance side or that, shall we say, some ethical lapses. So, I think, Enron was the first of those in about 2001 and Tyco and WorldCom following on their heels.

We had similar types of situations on the corporate governance side and problems, I mean, in Europe with Parmalat, in Canada with a company called Northern Telecom, or Nortel. So, that was a significant milestone, because of course, when we talk about sustainable investing, it is about environmental, social, and governance issues. And it really was the first time from my experience where an ESG issue, as we call them, had a dramatic effect on the share value of companies. And it really did change the conversation that I was having at the time with chief investment officers. And the paraphrase that was sort of well, I never would have believed as a CIO that a governance issue could have such an adverse impact on company valuation. And so, maybe I need to pay a little bit more attention to the environmental and social side as well. So, for me, it was those governance issues that we saw in the early 2000s, which were a starting point for this conversation.

I think 2006, we saw the establishment of the principles for responsible investment, which was, I guess, in a nutshell, the easiest way to explain it is it's the Industry Association for asset owners and asset managers and investment managers that serve owners of capital. With the launch of that, I think, responsible investment and sustainable investing got on the global agenda in a new way and that's continued to grow. And I do think that subsequent to the founding of the PRI, the Principles for Responsible Investments, in 2006, you had the global financial crisis hit, 2007-2008, and the market volatility that continued. And while that wasn't a milestone to celebrate in any way, I think for sustainable investing, it was sort of the first test with respect to the resiliency of this concept. And the answer is, in retrospect, you saw sustainable investing and the growth of sustainable investing not just survive the global financial crisis but accelerate out of it. So, I do look at the global financial crisis at that point as a milestone.

More related to an environmental or social issue, I think another milestone for our movement was in 2010. If you recall, that was with BP, and the Deepwater Horizon accident in the Gulf of Mexico. Again, obviously, a prominent example of where environment can affect valuation of a company. And, in fact, it wasn't just about BP. It turned the spotlight on energy companies more broadly. I also think it was a milestone for our industry, because it really was a meaningful point where companies like Sustainalytics, we needed to reexamine the way we were evaluating the performance of companies, because at that point, I will say with Sustainalytics, we had certainly seen some issues with BP in regards to its environmental record over time, its health and safety record over time, but we certainly didn't connect those dots meaningfully enough. And I think really, at that time, we didn't have the confidence in our calls to really be bold in regards to what we were telling our clients in regards to the risks that were associated with a company like BP. So, that was a milestone for our industry, because we had to turn the mirror on ourselves, or at least we did it at Sustainalytics, and I think it made us a much better company. It made us reexamine our research methodology, our processes, and how we communicate our calls to clients. So, that was a very powerful, maybe more inward-looking milestone.

And then, the last one I'll just share was in the fall of 2015. And that was when Mark Carney, who at the time was a Governor of the Bank of England, made us a very powerful speech. I can't remember the exact title, but it was basically the tragedy of the commons. But it was focusing on the strong link from his perspective between climate change and the risk that climate change presented in regards to financial and fiscal stability. And it was the first time that somebody like Mr. Carney--again, who was not just the Governor of the Bank of England but chaired the Financial Stability Board--directly and very powerfully linked climate change to financial resiliency and the resiliency of the financial system. And that was the starting point then where climate change risk really got on the global agenda, and that, of course, has been a very powerful driver of the continuing mainstreaming of sustainable investment over the last four or five years.

Ptak: That leads to my next question, which ties in well to your previous answer. If we had a more concerted globally coordinated response to risks like climate change, do you think that would take some of the steam out of the ESG investing movement?

Jantzi: I don't think so, Jeff, because I do think that part of that coordinated response and part of what the capital markets understand now is that there's capital required to fund that transition to a lower-carbon economy. And I think that that has at least two facets to it. First of all, I think investors will tell you, or chief investment officers will increasingly say there's opportunity in regards to investing in that transition. And that would only strengthen if there was a more robust global framework around limiting emissions. So, I think that would only strengthen the ability of investors to engage. But I also believe that as we sit now, increasingly investors are concerned with the negative impact, again, climate change may have on the system resiliency, overall, going back to my comments that Mark Carney speech highlighted. And so, I think that if there was a more robust global effort, or a more aligned and concerted global effort to address climate change, it would fuel more activity in the space rather than the contrary.

Benz: If you are an advisor trying to help a client or a prospect understand what an ESG strategy could bring to the table, what are the most important concepts or lessons to impart to those clients to help them make informed choices?

Jantzi: Christine, I think the words there that really resonate most strongly and are really important are “informed choices.” So, if you'll allow me to deviate slightly from the question to begin with, I think one of the things that is evident to those of us who work in this space is that whether you're listening here in the United States or around the world, what the research is pointing to, and including our own research at Morningstar, as you well know, is that individual investors or the retail investor is becoming a lot more interested in sustainable investing. And you're seeing that consistently now over time across jurisdictions. So, we do know that investors are very interested in this space.

We also know from Morningstar's own research and findings is that those investors are looking to their financial advisors, their professionals, for support in helping them reach their investment objectives. And again, those objectives increasingly include support around the sustainable investment concept. So, we know that advisors are an important part of that conversation. But we also know that what we need to do to help advisors is inform and guide that conversation with the investor. And I think the beginning of that conversation needs to be an understanding of why that individual is interested in sustainable investing. And so, I think the initial questions need to be very focused on what it is that the investor intends to achieve through investing through a sustainable investment; what is their desired outcome?

What we know is that there are some investors that are interested in sustainable investing simply because they believe as institutional investors have practiced ESG over the last decade or so that environmental and social issues are not just about values, they're not just about impact, they represent real risks that investment professionals should take account of, alongside that traditional financial analysis. And only by integrating environmental and social issues into an investment process and into an investment fund in a systemic way or systematic way can they be best positioned to drive long-term performance and competitive long-term performance. So, we need to determine whether that's one of the things that the client is interested in or the individual is interested in.

We also recognize that there are a growing body of investors that believe that they can have a very positive environmental or social impact with their money and through their investments. So, we need to determine whether part of the desire on the part of the investor is to make sure that they are part of a solution, whether it's to a positive societal outcome or on the environmental side. So, again, going back to the climate change example, we know that increasingly individuals understand that there's an issue with a warming climate. And they don't want to just avoid companies that are doing damage in that regard; they want to be involved and capture the opportunities with those companies that are trying to provide solutions to the issue. So, that impact is a powerful part of the story.

And then last, and certainly not least, we need to understand to what extent an individual is interested in aligning their own personal beliefs and values with their investment decisions. That's a very powerful motivator as well, not just in investing, but more broadly how people choose to live their lives, where they donate money from the philanthropic side, goods and services they choose to purchase. So, that investment decision and it's alignment with their own personal belief system is also important. So, those are three main areas where I think investment advisors can very quickly and very easily enter into a conversation with a client, which gives us an immediate sense of where we can powerfully connect sustainable investing and the tools and the products that are out there in the market in the best way for our clients.

Ptak: Another practical question--actually it's more behavioral in nature--material ESG risks, and I think you alluded to this, they tend to be fairly long-lived by their nature, especially climate risk. Given this, is there evidence that an ESG integrated investing approach might yield other benefits that are more behavioral in nature by, for instance, keeping investors more focused on long-term measures than perhaps would otherwise be the case?

Jantzi: Well, first, I'm not an expert in behavioral finance by any stretch of the imagination. It's certainly an area of interest of mine, and I enjoy my conversations with the folks at Morningstar who are experts in this area. I firmly believe, and this is based on 30 years of experience and working alongside investors, and that I would say individual investors and institutional investors is that their investment beliefs and so on and the outcomes that investors wish to achieve, certainly go beyond those things like wanting to have a good financial return at the end of the day. So, I do think that from an individual standpoint, one of the things again that I would argue is that if we are able to engage with individuals on issues of values or social environmental impact, for example, that helps individuals connect with their investment portfolios or those investment decisions in a way they might not otherwise.

And again, I don't pretend to be a behavioral scientist or behavioral finance scientist in any way. So, this is just based on my experience is that sometimes individuals haven't been engaged in financial decision-making to the extent they should. I've heard a joke more than once that people have spent more time planning their vacations than they do their financial futures or the retirements. And I do think that possibly that's because it doesn't connect with them at a deeper level. And I think today, individuals want that deeper connection. And that is part of the attractiveness, I guess, of helping them align their decision-making in this space with a deeper desire to have a positive outcome or to align these decisions with their values. So, I do think there is a behavioral element to this, Jeff, but again, I don't pretend to be an expert in it. And I can't point to deep pool of scientific research on it. It's more just based on my experiences over the last three decades in this space.

Benz: If one reviews some of the Morningstar E, S, and G indexes, you find that sector weightings can be really different. For instance, the Morningstar Global Sustainable Environment Index recently had 20% of its weight in technology stocks, while the Morningstar Societal Development Index had just 11% in that sector. Given how wide some of these differences can be, does that suggest that the best approach to sustainable investing might be the one that's tailored to that investor's particular E, S, or G objectives? How do you approach a question like that?

Jantzi: Well, I think maybe I'll step back a little bit and make a distinction between individual investors and institutional investors, if I may. And I think that if you look over the last 10 or 15 years, it's been large institutional investors, so asset owners, so pension funds or sovereign wealth funds and the large investment managers that serve them, that have really driven the growth in the mainstreaming of this arena. And their primary focus on this has again basically been informed by the belief that environmental, social, and governance issues are risks and opportunities that need to be accounted for in that process in some way. And so, they're incorporated alongside the traditional financial analysis. And they just believe that that makes for better informed decisions, which over the long term is going to position them better to produce those long-term results that they want to produce or create for their clients. So, in that sense, again, especially on the active management side, in our experience, they're not so focused on the weightings. I mean, there's always some measure of looking at their benchmark or their weightings versus the benchmark weightings.

When you're talking about individuals, and obviously, this becomes a very personal decision. And I think that, yes, at that point, if you're talking about individuals, there's lots of funds out there that incorporate environmental, social issues into the decision-making process, there are funds out there that have very particular issues that they disclose that they look at as part of that process. You have a growing array of thematic funds, those that look specifically at social issues, or environmental issues and so on. To me, that diversity of approach is wonderful for an individual investor, because we have the ability now, whether it's through products off a particular shelf or the tools that we have to create product for individuals based more closely on their own situation or their own goals and objectives--to me, the opportunity we have to do that today is exponentially greater than it was 10 years ago. And so one of the things that from an individual perspective we have the ability to do now, which goes back to one of your earlier questions about the benefits of this, is that we have this wonderful opportunity now to meaningfully connect people with their financial decisions on the investment side, and we have the ability to tailor these things.

So, I think, Christine, the answer is yes. As an individual investor, there's trade-offs with respect to going through the work, maybe in the extra effort of finding a portfolio or creating a portfolio that matches very closely versus going with a fund that might match your desires or objectives on most, if not all, of the environmental and social issues you find important, but the ability to exercise what you want to do across that spectrum, I think today is wonderful.

Ptak: So, if you were thinking about the future of ESG investing, does that suggest that the future of ESG investing is more personalized, mass personalized formats, like direct indexing?

Jantzi: Well, it could be. I think, again, if you look back 10 or 15 years ago, there was simply no opportunity, or very little opportunity, for an individual to engage in that way. You had certain funds that were available to them, or other types of products that were available to individual investors. Again, if you had a certain level of wealth, you could certainly work with advisors to create your own portfolios. And so, today, with the tools that we have at our at our disposal and advisors can now use, I think the ability to do, build your own model portfolios, build portfolios whether they're actively managed or passively managed, again, just repeating myself, are exponentially greater than they used to be. So, whatever style of investing your like, whatever style of investing you're comfortable with, I think the world is limitless today in regards to what advisors are really able to do for their clients in regards to meeting their financial objectives and their social and environmental objectives at the same time.

Ptak: I think that one could concur that some of these other more encompassing priorities that investors have hold meaning to them and they should be pursued. But there are also skeptics, I think of someone no less than Warren Buffett, who would say that, while it might be laudable to commit to those types of causes--environmental, social, and governance--you shouldn’t use your investments to advance them. And so, I'm curious, what would you say to that?

Jantzi: Well, my first comment to that or response to that is--and I can't say if that was driving Warren Buffett's view on this or not--but oftentimes, I'll say through my experience, oftentimes those comments are underpinned by a belief that if you look at environmental and social issues as a part of an investment decision that necessarily leads to an adverse impact on return. So, again, although that may not have been explicitly mentioned in a lot of these critiques, my first response is, underperformance is a myth and so that I think history has shown and performance has shown in that the history of why mainstream investors have been embracing this highlight that the reason you look at these issues is to better position yourself and certainly, not because you think environmental and social issues integrated into decision is going to lead to poor performance. So, that's always the starting point.

The second way I answer this, and I've never understood why we wouldn't use all the tools in the toolbox to address the challenges that we have. And so, this goes back many, many years. I was working with a foundation. And, I know, not exactly the same as an individual. But this foundation was focused on environmental issues. And one of the areas that they were working on was pollution that was caused by mining companies through acid mine drainage, which is well-known or used to be a well-known issue, environmental issue in the industry. And they were very proud of the work that they did on the program side in helping communities not just mitigate those impacts but work with the companies in those communities that were causing the problem in the first place--very proud of that work. But when we looked at the investment portfolio of that foundation, we found that the foundation was invested in those very companies that were causing the problems in the first place. And of course, the investment in those companies was multiple times greater than the grants that these community groups were receiving to fight the problem. And so, you had this issue where they were very happy to be funding David against Goliath, they weren't as happy to be finding out that they were funding Goliath tenfold.

So, I don't understand this philosophy that says just invest without any regard to the challenges you may be trying to address in other mechanisms. Why don't we find alignment between those things? And then, from my standpoint, and I think increasingly now people understand that if you can bring alignment to these decisions, use as many tools in your toolbox to find solutions for the problem that you may be trying to address, that's a much more powerful response than certainly working across purposes to one another. So, I think that this zero-sum game has never worked particularly well from my perspective. And so, with all due respect to Mr. Buffett, I would say that we can leverage our spending decisions, our philanthropic decisions, and our investment decisions to address situations or challenges in an aligned way. And I think that's a much more holistic and powerful response.

Benz: If you are hypothetically put in charge of an investment committee and responsible for implementing an ESG-integrated approach to investing those assets, how would you suggest the rest of the committee measure your progress in three or five years? What are the metrics you'd suggest that they be looking at?

Jantzi: Oh, it's a good question, Christine. And it's more than hypothetical for me because I do happen to sit on the investment committee and actually a board of a foundation. So, we deal with those questions in very real ways. So, the first thing I will say is, the way that our foundation has approached this area, again, going back to themes that I've talked about is that first of all, we believe that the investment managers that we use, we want to ensure that as part of their investment process that they are integrating environmental, social, and governance issues into that process in a way that's appropriate to the way that they approach investing, because we do believe as a foundation that will better position us to drive competitive returns that we need to fund our granting program. So, that's number one.

And number two, we do have a pretty traditional mix of investments, but also a portion of our assets that are focused on very high-impact thematic areas that align with our programmatic interest as a foundation. So, we have that mix there. So, how do we measure success in those areas? Well, first of all, financial success is very important to us. And so, we have like any, I wouldn't suggest owner of capital, we have particular objectives in place in regards to what we would expect on a financial-return basis, and we monitor those on a quarterly basis, and we do, obviously, hold our investment managers accountable. We do tend to take a longer focus. So, we're less concerned with those quarterly results. But certainly, as you suggest, the one-, three-, and five-year timeframes are something we look very closely at from the financial side. So, that remains important.

Another way that we measure success in regards to the alignment on social and environmental issues is, we expect that our managers will be engaging with companies in their portfolios on environmental and social issues that they believe present material risks, and they want to make sure that the companies in the portfolio are managing those risks appropriately. So, the one thing that we demand alongside financial reporting from our managers is that they provide regular reporting to us in regards to how those engagements are progressing with companies that they've highlighted within the portfolio that may be exposed. And we want to know the milestones for success from our managers' perspective in regards to those engagements and we expect that we're going to get regular reports on whether or not those milestones have been met or not. And this is very, and maybe not coincidentally so, the approach that we take at Sustainalytics with our own engagement services. So, I said earlier, we have an engagement team, a large group of people and a team within Sustainalytics that works with investment management clients to engage on their behalf. So, that type of an approach is very important to us.

But last but not least, getting back to how the expectations that we have on the investment committee is we want to know from an impact side, to the extent possible, and this is a developing thing certainly, is how well our portfolio is contributing to positive societal outcomes. And the way that we've chosen to do that at this point is to look at our portfolio at the foundation in terms of its contribution to the sustainable development goals. And again, this is very similar, and again, probably not coincidentally so to the way Sustainalytics, Morningstar is assisting our clients in measuring impact, so the sustainable development goals, again, across a range of environmental and social outcomes, highlight things that very clearly delineate social and environmental impact progress, whether it's on climate change or whether it's sustainable cities or clean water, whatever they are. We have tools that we're able to measure the positive impact of portfolios across that entire range of the sustainable development goals or SDGs. And so, that's the way we also approach it at the foundation. In very real terms, I guess the expectation is that we are able to measure success on both the financial side and the social and environmental side at the same time side by side. And I think that sort of commitment on the part of financial professionals to their clients is important and is going to become increasingly so.

Ptak: I wanted to shift gears and talk about ESG ratings and the subjectivity that attends to that is not a pejorative, that's just part of doing qualitative assessments, which your team is involved in. On a previous episode, we interviewed Burton Malkiel, the famous author of A Random Walk Down Wall Street, and he did sound a dubious note about ESG investing. It seems like one of his big hang-ups is the subjectivity involved in determining what is so-called “ESG good” versus “ESG bad.” What would you say to try to change the mind of someone like Dr. Malkiel?

Jantzi: Well, first of all, Jeff, to be honest, I'm done trying to change people's minds. The first 20 years of my career might have been more focused on that. But the last 10 years of my career, I've been focused on working with the growing number of institutional and individual clients that are just interested in getting on with it. But what I would say is that again, it really depends on your approach to this. So, if the criticism is that there are ESG issues all across the map, I would say, well, really what's driven this is a belief that, and this is how Sustainalytics ESG risk ratings are established is that we look at a particular security or a company and get a sense for that particular company based on where it does business, the type of business that it's doing, the sector that it's in. The first order of business is to understand what exposure it has to environmental, social, and governance risk. And so, those risks will be different, but we very much look at the specific instances and what we're dealing with.

And so, the first thing I'd say in response is, these things aren't all over the map. There might be a collection of these things at one level, but when you start focusing in on a particular company, from the Sustainalytics perspective anyway, we're focusing in on those E, S, and/or G issues that we think are material in that particular instance to that particular company--again, based on where it does business and its business model and so on. I think you'll find there may be more alignment or more agreements on what those material factors are than some critics might be willing to admit. And I think you're seeing that's the way the world is heading. You're starting to see mainstream organizations now, the accounting profession to the IFRS, there's been a lot of talk around the key carbon metrics that we need to look at to the task force on climate-related financial disclosure. There's been a lot of evolution in regards to what materiality means in the ESG space.

Now, that being said, for individuals, I would argue that, as I guess he put it--good or bad--can be in the eye of the beholder. And I don't think there's a problem with that. We've talked about the fact that I think one of the amazing things now with the tools and technology and research that we have at our fingertips allows individuals to engage with their particular investment objectives in a very personal way. I think that is fantastic. I think it allows, again, individuals to get excited about and engage with investment decision-making in a very powerful way. And so, I guess I don't see it as a critique of ESG as much when we say people have the ability to define things differently. I think that's a huge positive. And that diversity of approach, we now have the ability to leverage in a way which is beneficial to our clients and to individuals. And so, maybe those are the things that I would say. I'd be less interested in changing his mind at the end of the day. And I just think from my perspective, those are the simple facts.

Benz: Europe has been at the vanguard of regulation and rule-making when it comes to ESG. Some would say that it's gone too far, taking a really prescriptive approach. Here in the U.S. we're lagging behind. Do you think we should follow Europe's lead? Or would you proceed differently if you had your say into it?

Jantzi: Public policy, again, I wouldn't suggest is my area of expertise to be honest. I've really gone through over my 30-year career an evolution, I guess, in how I have been thinking about this. And if I look back in time, historically, I was not a big fan of regulation in the ESG space to be honest with you. I felt that if you looked at securities regulation basically in any of the major capital markets, that really disclosure and those types of things is based on materiality. And so, I felt that the regulations were already in place to allow, or to really guide companies, for example, to disclose on what they're doing on environmental and social issues, because they were becoming material. And I guess, to be flippant about it, if we're in the United States, I would have suggested that as CalPERS for examples, or CalSTRS, the big California pension plans or the New York State Pension Plan, or what have you, if they were asking companies about environmental and social issues that they felt as risks, then these were material.

That didn't transpire. And so, I've shifted my thinking now, Christine, to believe that we do need regulations in regards to environmental, social, governance disclosure, both at the security or at company level and at the investment or fund level. And the reason is now--and I think this is generally understood, I don't think this is a controversial statement--is that investors have moved from a position where these issues are now nice to have--they're sort of “nice to have” an investment decisions to “need to have.” And so, once I think that shift that has taken place from “the nice to have” to a “need to have” situation and these are now integral parts of the investment process, the need for unified or more aligned disclosure is necessary.

Getting to your question about the U.S. versus European framework, the first thing I'll say is, I think all public policy, or an investment-related public policy, should be keeping the investor at the center of the conversation. And I fear that in the United States some of the public policy is politicized. And I would argue quite strongly along some of our esteemed colleagues at Morningstar that pay a lot of attention to the public policy side that some of the regulation we're seeing in the United States is actually running contrary to what is in the best interests of investors. So, I think that's a bad outcome.

In Europe, you've described what they're doing there in regard to some of the regulations in the EU taxonomy as being too prescriptive. I'm not certain that I would agree with that. I know what's been proposed on the regulatory side. I'm still not certain where it's going to end up. So, I would agree, I'm not a huge fan of prescriptive outcomes. I'm more of a fan of public policy that focuses on process. But this is what I also believe to be true. I do believe that what's happening in Europe is going to become the global standard. I think already the taxonomy and the regulations in Europe are being drafted in a way that other jurisdictions will be able to adopt those and adapt them to their own circumstances. And so, regardless of what I might think about those regulations, and generally I'm supportive of what's happening in Europe, I do think that over time that will become the global standard because that's clearly, I think, the underlying belief in how they're being drafted.

Ptak: One of the issues that investors, investment committees and alike are grappling with is what it means to have upheld fiduciary duty in a world in which other measures have come into play like environmental, social, governance concerns. And so, maybe we can approach this from the standpoint of a couple of funds, one that invests in stocks or firms that court a lot of unmanaged material ESG risks and another that buys equities and firms that court relatively little ESG risk, and the two funds are maybe just as studious in the way that they identify and assess the risk. But the manager of the first fund, which owns those ESG bad names, feels they're cheap enough to more than compensate for the higher ESG risks they court while the other manager is the flip side. He's willing to pay for ESG good stocks even if they're overvalued. And so, for that investor or investment committee, I guess the question for them is, has that first manager in the example, has that manager failed to fulfill his fiduciary duty to investors in the way he's approached things?

Jantzi: Well, I guess, again, the answer is, to a certain extent depends on whether or not in the perspective, for example, if it's that type of a fund, how they describe themselves in regards to their investment philosophy. But, let's assume for a moment, this is a mainstream fund, there's no particular guidelines or disclosures around how they approach environmental and social issues. So, on a purely, what I would call, integration basis, so again, this idea that environmental, social, governance issues can be risks or opportunities, it has to be accounted for in order to inform the decision that you're making fully. I would suggest that in both of those examples, those managers are fulfilling what I would call their fiduciary duty.

I think one of the things that I've long believed and maybe this isn't universally or wasn't universally believed that when we're talking about ESG integration, it is about the process. So, I will argue vehemently that these are issues that should be included in that process. Whatever the outcome of that process is, I think, can vary. And so, fiduciary duty is, from my perspective, it is about the process, not so much about the outcome. So, you can agree or disagree with the decision that investment manager has made, and whether she incorporates ESG into a decision-making process and it leads to an outcome, let's just say of being underweighted, and ESG-friendly companies are highly rated companies or underweight in those, that to me, again, is less of the issue. The issue, I may agree or disagree, but from a fiduciary standpoint, as long as those two managers are taking ESG into account in a meaningful way, in an authentic way, in a systematic way, as long as they're following the process for ESG integration consistently, then that's what fiduciary duty is about. It's not about what the decision is at the end of the day.

Benz: In a lot of ways the energy sector has been the poster child for unmanaged ESG risk, but it's performed terribly for years now. It's badly lagged broad stock market indexes and even long-term bonds. So, couldn't it be argued that the market has already priced those unmanaged ESG risks in explaining why the sector has performed as poorly as it has?

Jantzi: Well, it could be. To me then, we're starting to see where… From my perspective as a long-term proponent of sustainable investing, this is what those of us that have been working in the field would like to achieve. Now, I'm not sure what you said is true, Christine, but it could be. But really, the fact is that sustainable investing is, again, the belief that looking at these issues as part of a process is important. And if the argument is that whatever sector it might be that if these risks are being priced in, then I think that that in many ways validates what those of us who have been working in the field have argued for a long time.

Now, your question wasn't whether or not I believe those risks have been adequately incorporated across the board or systematically incorporated across the board. That's another issue. But given it's possible that what you say is true, and if it is true, I think, again, it's sort of a good news story, if you will, for sustainable investment.

Ptak: As you know, many investors are shifting from accumulation mode to spending. And as they do that, they will be risking their portfolios down, investing less in growth assets, like stocks and more in areas that can generate income without excessive volatility. Some of the investors making that transition might still desire to invest in a way that upholds a commitment to E, S, and G best practices, so to speak. If so, what should those investors do? I suppose one option is something that's known as green bonds or the emerging field of ESG bond strategies, right?

Jantzi: Yeah, I think that your question raises a really interesting trend that we've seen over the last 10 years in the sustainable-investing space, because whether this was the right or wrong thing, the whole idea of sustainable investing really was initially focused only on equities as an asset class. And what we've seen is what I call asset-class proliferation. So now we're seeing ESG issues integrated into decisions across fixed-income asset class and the subasset classes. I think the next big frontier for ESG is going to be private markets, which is again aligned with the capital flows we're seeing from public to private markets a little bit. So, I think, clearly, there's going to be both a desire to do that, and we have the tools now increasingly to allow individual investors to expand into other asset classes. So, 10 years ago, my answer would be, oh boy, individual investors aren't going to have a lot of opportunity outside of equities to look at sustainable investing options. But that's simply not the case now, at least on the fixed-income side.

I think your question also highlights something that to me is very exciting, and that is that individual investors will not only have the opportunity to make sure that those income-generated, or more on fixed-income side, those investments are managed in a way that take account of ESG risks and opportunities. But I think on that fixed-income side is really where you're starting to see just tremendous creativity and innovation. And so, you mentioned green bonds, those social bonds, and sustainability bonds. I think that there's no question that in this space there's tremendous opportunity now for individuals to seek investments that, again, are very much focused on solutions. And so, green bonds where those use of proceeds are going to high-impact positive environmental outcomes. On the social side, the opportunity to invest in social bonds, where the use of proceeds are focused on high social outcomes, or high-impact outcomes on the social side, like contributing and funding social housing, or whatever the case might be. And so, I think that the trend you say, that we may see with individuals on the investing side matches nicely with where innovation and creativity is happening right now in sustainable investing. So, I think that there's going to be a lot of alignments and a lot of opportunities there for individuals to continue to participate across that entire investment landscape when it comes to the sustainable side of the equation.

Benz: Well, Michael, this has been such an illuminating conversation. Thank you so much for taking the time to be with us today.

Jantzi: Well, thank you. I've enjoyed it and appreciate your time.

Ptak: Thanks again.

Benz: Thank you so much.

Thanks for joining us on The Long View. If you liked what you heard, please subscribe to and rate The Long View from Morningstar on iTunes, Google Play, Spotify, or wherever you get your podcasts.

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Ptak: And at @Syouth1, which is, S-Y-O-U-T-H and the number 1.

Benz: Finally, we'd love to get your feedback. If you have a comment or a guest idea, please email us at TheLongView@Morningstar.com. Until next time, thanks for joining us.

(Disclaimer: This recording is for informational purposes only and should not be considered investment advice. Opinions expressed are as of the date of recording. Such opinions are subject to change. The views and opinions of guests on this program are not necessarily those of Morningstar, Inc. and its affiliates. Morningstar and its affiliates are not affiliated with this guest or his or her business affiliates unless otherwise stated. Morningstar does not guarantee the accuracy, or the completeness of the data presented herein. Jeff Ptak is an employee of Morningstar Research Services LLC. Morningstar Research Services is a subsidiary of Morningstar, Inc. and is registered with and governed by the U.S. Securities and Exchange Commission. Morningstar Research Services shall not be responsible for any trading decisions, damages or other losses resulting from or related to the information, data analysis or opinions or their use. Past performance is not a guarantee of future results. All investments are subject to investment risk, including possible loss of principal. Individuals should seriously consider if an investment is suitable for them by referencing their own financial position, investment objectives and risk profile before making any investment decision.)