Total time: 10:47
Jessica McHugh: Hi there, and welcome back to The Hitchhiker's Guide to ESG Investing. Today we're going to talk about the language of ESG, what environmental, social, and governance investing is, how we think about each of those letters – the E, S, and G – and the importance of financial materiality when incorporating ESG factors into an investing strategy. I am Jessica McHugh, Marketing and Communications Director here at Sage., and today I have with me Emma Harper and Andy Poreda, two of our ESG Research Analysts. Welcome, guys.
0:30
Emma Smith: Thanks, good to be here.
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Andy Poreda: Yes, thanks for having us.
00:33
Jessica McHugh: So, I'd like to start off this discussion talking about what ESG is, and what it isn't. I personally sometimes use the term “sustainable investing” in hopes that it will resonate with people more easily. Sometimes, we also hear the term “socially responsible investing,” but at Sage, we operate clearly in the realm of ESG investing. So, if you guys can talk a little bit about what ESG investing is, and compare it to some of these other terms, such as sustainable investing, and socially responsible investing.
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Andy Poreda: Yeah, so thank you, Jessica. That's a really good discussion, and sustainable investing is kind of the idea that these companies that operate or governments that, you know, issue bonds, they have an overall arching sort of mission to have the idea that, you know, our world needs to kind of operate in perpetuity. And to do that, companies and governments have to be more sustainable in the overall process—doing things that are good for the environment, good for their constituents and their stakeholders. That’s kind of an overall umbrella of what sustainable investing is, but then once we start boiling it down, there are some other types of investing that kind of fall in this umbrella like impact investing, where you're trying to, you know, have a particular outcome, whether it's like a desired social goal of say, “I want to reduce poverty.” That's kind of impact investing. And then there's also the socially responsible investing (SRI) that covers an area like “I think investing in tobacco is bad, so I'm going to eliminate that from my portfolio.”
02:10
Emma Smith: Yeah, avoiding your sin stocks—that's SRI. So, there's a lot of acronyms and different names that fall under this umbrella, so distinguishing between them is important. And it’s important for everybody to understand that there are differences underneath this umbrella and you need to understand what you're investing in if you're investing in this. Like Andy said, impact investing versus SRI, which is socially responsible investing, versus ESG investing.
02:35
Andy Poreda: Yeah, absolutely Emma. I think once we kind of define that, that's kind of a good starting point. Now ESG investing, we threw those around—ESG investing is environmental (E), social (S), and governance (G). And what that means is these are factors that we are looking at, that are going to then be analyzed to potentially have something that we are going to talk about later, called financially material impact. So, in ESG investing, the goal is to look at these factors to have a decision-useful financially material outcome, and it sometimes correlates with a desired social or environmental impact. But the main goal is to look at these factors and then have a positive investment return from it.
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Emma Smith: Right. So, you have these environmental, social, and governance factors that you analyze and look at, that are not traditionally analyzed in traditional financial analysis, but really provide color and understanding – past traditional financial analysis – about these companies.
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Jessica McHugh: Can you share with us what some of these ESG factors are?
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Andy Poreda: Sure, I will lay out few examples for each category. In the environmental category, things that are financial material to a company are greenhouse gas emissions, water management, impacts of climate change, and pollution. The social category includes issues like human rights, labor standards, supply chain management, diversity, policies, customer privacy, and data security. And finally, in the governance category, ESG investing would deal with matters like board structure and diversity associated with that, business ethics, management of the legal and regulatory environment, and political contributions.
04:16
Jessica McHugh: Got it. You brought up a good point, a lot of times the factors that we're looking at are not things that are reported on traditional financial statements or in traditional financial analysis. There's a big component here that maybe makes Sage a little different, a little bit unique, and you guys just alluded to it a little bit—and that’s how Sage incorporates ESG factors into portfolios. But how does Sage determine which ESG factors are relevant to a particular company or a particular sector? So you guys brought up this idea of financial materiality? Can you talk about that a little bit more and why that's an important crux of this whole ESG investing analysis?
05:00
Emma Smith: Yeah, you have to look at each industry from a different kind of lens, and each industry has their own financially material information. I think a lot of companies out there have understood that investors are taking a greater look at this ESG information, so in an effort to kind of satiate that hunger for more information, they're putting out a lot of nice to know information, a lot of fluff, a lot of extra information. I like to say banking companies are putting out a lot about their recycling programs, which is all great, but it is really not going to impact the bottom line. And so for us, as a pragmatic investor, I think we've really focused on separating out the ‘nice to know’ from the ‘need to know,’ and understanding that extra information really helps us to understand what's going to impact the bottom line of the company and what's going to determine what is going to create a profitable company in the future, and what's going to create a risk to profitability in the future. So, that’s something that we want to separate out and understand—that a recycling program is nice to know, but governance is going to be much more important in terms of thinking. So that's kind of where we focus—understanding what is material for each industry to analyze these companies.
06:15
Andy Poreda: And Emma, if I might add, I think one of the things that really makes Sage different is, a lot of people are looking at these things from a kind of risk exposure factor, like Emma alluded to, but I think one of the things that Sage really feels important is to look at what we call the intentionality of a company. So, I think that is one of the things that Sage spends a lot of time looking at and that sets us apart from a lot of our competitors.
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Emma Smith: Yeah, that's a great point, Andy, I think that's something that we really do focus on, intentionality going forward as well.
06:44
Jessica McHugh: So for individual companies, Sage can break down how they rank on an individual environmental, social, and governance basis, and we do this regularly with our Highlights and Holdings reports, which are one-page case studies of individual companies. So, a really well-known company that started out as a single Seattle coffee shop in 1971 and has since expanded into 78 countries and has around a $90 billion market cap and may provide many listeners their daily caffeine fix is Starbucks. So, Andy, I know that this was one that you worked on. Tell me about this case study on Starbucks, you know, which are the most important components from an ESG perspective and why is Starbucks considered an ESG leader?
07:34
Andy Poreda: Great question, Jessica. So, Starbucks was a very interesting case study, we felt. It is one of our portfolio holdings, and it's one that is well recognized by everybody. And I think Starbucks actually has some ESG risk across all three of those metrics. I think though, sometimes with ESG things, we can see that sometimes controversies are actually a great way of exposing different risks. So I think with Starbucks, you know in the news, we saw the issue that Starbucks dealt with, from a social perspective, they had individuals that were staying in the stores but not purchasing coffee. Were they considered customers or not? We saw a huge backlash from society, in different media sources that, you know, that was an issue that they [Starbucks] had not fully rectified. So, I think that was a kind of an interesting one. One of the things that Starbucks did to kind of move forward, which we thought was great, was they basically defined a customer as anybody that is actually just sitting in the store and not necessarily always purchasing coffee on that day to day basis. So they help manage their social risk by responding to that. But there also are some other environmental factors that they have to deal with as a coffee company—they obviously have to deal with their supply chain. So sometimes it's also not just the company that they operate from, but the suppliers that they utilize. That whole kind of ecosystem has an environmental impact as well. So there's a lot of great things to look at with Starbucks. But ultimately with any of these companies, kind of the heart of it is looking at governance, and how a company manages. I think governance really is something that we will talk about a little later, but they work both to the E and the S in that governance is how you manage both those, and there's a lot of things overall with a company that we have to start looking at governance first and seeing how they manage their company across the board that I think is really interesting. It was for Starbucks, and it is for applicable to any company really.
09:33
Jessica McHugh: Thank you everyone for listening to this episode of The Hitchhiker's Guide to ESG investing. You can find us at sageadvisory.com, @sageadvisory on Instagram, and on our Sage Advisory LinkedIn page. See you next time!
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