How One Asset Manager Tackles ESG

Jon Hale: Hi, I'm Jon Hale, head of sustainable investing research at Morningstar. As part of our sustainable investing initiative here at Morningstar, we've begun a focus on fund engagement and proxy voting. Through these means, investors as shareholders are increasingly influencing corporate behavior around ESG issues. I'm speaking today with Tim Smith, director of ESG shareholder engagement at asset manager Boston Trust Walden.

Tim, thank you for joining me.

Tim Smith: Glad to be here.

Hale: Tim, I thought we'd start off with an example of a successful engagement. I know you were heavily involved in an effort at Emerson Electric to get them to publish greenhouse-gas emission targets and sustainability reporting in general. Can you kind of take us through that effort?

Smith: I can. And I'll say a sentence about our firm, too, Boston Trust Walden, which has been doing work in terms of environmental, social, and governance investing for over 40 years. And we've been actively involved as owners in companies in raising issues about the environment, about social issues, about governance concerns. And Emerson Electric, a company based in St. Louis, is one of the companies we've been a long-term owner of, and for about 10 years have been engaging them, urging them to expand their disclosure on sustainability and more recently to set greenhouse-gas goals for reduction to try to bring, of course, not just them, but many, many companies, to reduce their emissions so that we can lessen our negative effect on climate change.

Emerson initially had been rather reluctant to--they were always polite and open to talking about the issue but were not as interested in doing such disclosure. I think we are an exercise in persistence because not just Walden but numerous other investors including the Methodist Pension Board called Wespath and Mercy Investment Services, a Roman Catholic investment group, were knocking on their door, filing resolutions, asking for change. We were pleased to see several years ago that they decided to step up and do a sustainability report. And in the last two years, as we've talked to them, they did agree to hire a consultant and work on a plan and to set a goal on greenhouse-gas reduction.

Now, I think that there's a lot of factors that stimulate a change like that. One of them, of course, is all sorts of companies are looking to see what their competitors are doing and what just companies are doing in general. But they're also listening to their investors. They're listening to the companies that they sell to, to their clients. And I think that on many sustainability issues, climate being prime among them, we see tremendous interest in society, among investors, for companies to be leaders on climate. So, I think that came to play in Emerson in a successful way.

Hale: Yeah, it seems to me that the companies are becoming more open to engaging with shareholders, particularly when it comes to an issue like climate risk. And of course, we have the Business Roundtable statement on corporate purpose that just came out in August that seems relevant as well.

Smith: I think you're absolutely right. More companies are comfortable with engaging with their shareowners, having discussions, meeting with them. And don't forget, it's not just firms like ourselves. We manage about $9.5 billion for our clients. But it's the mega firms like BlackRock and Vanguard and State Street, who are also asking for meetings with companies on issues like climate change or board diversity. So, it changes the acoustics when you got some of the biggest investors in the world asking for companies to sit down and dig into these issues. It also helps when you have firms like our own, along with hundreds of other investors, including pension funds, like New York State or CalSTRS, joining in filing resolutions with companies to officially petition them to ask for change.

You still get a number of companies who are very reluctant to talk. They're very reluctant to deal with the issue at all and just give you the stiff arm. But I think particularly on climate, which was a point you made, they watch as we do as investors globally, who created an initiative called the Climate 100+ program, have $33 trillion of assets under management. Investors who created that are that large, and they are talking to 165 major companies about how to reduce greenhouse gas emissions and be a more proactive force on climate. That helps a great deal when you've got that critical mass of investors who are raising that issue.

Hale: So, investor coalition is really important in this area. I'd like to ask you, just to conclude here, Tim, what does the 2020 proxy season hold for us? We've just finished this one, and we're on to the next. What are some of the issues that are going to come up in the coming year?

Smith: Well, it's as big as all outdoors. It's going to be everything from human rights to board diversity, from governance change to the issue of plastic pollution. Prime among the issues will be climate change once again. Again, as I said, investors around the world knocking on company doors to talk about what companies need to do to be a proactive force on climate. This last week, we were particularly pleased to see a group of investors send a letter to close to 50 companies in the United States, urging them to do something very specific. And that is to look at their lobbying, their public policy advocacy, and the lobbying of their trade associations on climate change. So, the concern is that, of course, the trade associations have tremendous power in the United States on public policy. The U.S. Chamber of Commerce has spent, well, I think it's about $200 billion in the last 20-plus years on lobbying. And we are quite concerned that companies that may have a forward-looking on climate may find that their trade associations are actually trying to turn the clock back.

So, this letter sent to these close to 50 companies, asks companies to assess their own lobbying, their trade associations, and to have them consistent with the goals of the Paris Accord. And investors--there were 200 investors who supported this letter with $6.5 trillion of assets under management. So, that sends a pretty strong message to a company that this is not a fringe issue or something that's a special interest of one or two investors. It's a mainstream issue by major investors from Legal & General to CalPERS and New York City to Boston Trust Walden Asset Management.

Hale: Tim Smith, Boston Trust Walden, thank you very much for joining us today. We'll look forward to maybe hearing from you with an update on this as it proceeds.

Smith: I'd like to do that. Thank you.

Hale: For Morningstar, I'm Jon Hale. Thanks for watching.