(This transcript has been edited for clarity)

13:30

Roman Samuels: Sage is a fixed income and ETF strategy manager. And as part of our engagement efforts, our ESG team conducted a survey of ETF providers to gauge to what extent they are dedicated to encouraging higher standards of ESG performance among the companies in which they are invested. My name is Roman Samuels. I am one of the regional consultants here at Sage, and I am joined by Emma Smith, who is one of our ESG research analysts. Emma designed the survey and reviewed the ETF providers’ responses. So Emma, can I just quickly ask you in the survey, what were the parameters of the survey and who did Sage send the survey out to?

Emma Smith: Yeah, sure, Roman. We sent the 26-question survey to 20 U.S. domiciled ETFs sponsors, and 14 of them completed the survey.

0:55

Roman: Can I just back up a quick step here and just ask you, why did we send this survey in in the first place? What was the rationale for us sending that?

Emma: So we sent it because we believe that we need to be good fiduciary responsible managers. And so we were looking at what these ETFs providers were doing in terms of stewardship. And in terms of being good fiduciaries for their ETF clients, which in turn are us, and then our clients are then investing with us and trusting us with them, with that fiduciary responsibility as well. So it's really just a kind of the waterfall of fiduciary responsibility starting with the ETF providers themselves and how they look at their stewardship responsibilities with these ETF portfolio companies that they have.

Roman: Okay, it's almost like congruency between what the end investor wants the ESG parameters to be and what the ETF providers are actually doing inside of the portfolio. We're basically trying to get more insight into what those ETF providers are actually doing.

1:57

Emma: That's correct. We're looking under the hood to make sure that they are doing in fact what they say they are doing in terms of their stewardship responsibilities.

Roman: Okay, so I keep hearing this word stewardship. Could you tell me a little bit more about what we mean by stewardship?

Emma: Yeah. So the term stewardship means careful and responsible management. And one of the implications of stewardship is fiduciary duty, where people who manage other people's money should act in the best interest of the beneficiary rather than in their own interest.

Roman: Okay, so we're basically talking about from an environmental, social, and governance standpoint, we're trying to figure out not only what is going into the ETF in terms of the actual securities, but we're also trying to figure out how are those ETF providers managing those securities from a voting and a proxy standpoint, and things like that.

2:54

Emma: Yeah. So when we're talking about environmental, social and governance investing, or sustainable investing, it's incumbent upon the fiduciary, in this case, the ETF providers, to ensure that the companies in which they are invested, who they've deemed to have certain qualities we look for in sustainable investments, are actually acting in the ways that are sustainable. We want to gauge if the ETF providers are also engaging with the companies not only by proxy voting, but also by direct communication to encourage higher standards of ESG performance.

Roman: Okay, got it. So tell me about this survey. When you sent this out, how did you come up with the questions and the themes for the survey?

3:30

Emma: Yeah, so there's been a lot of research on what's important for ETFs providers in terms of stewardship. Based on that data, Sage’s survey was designed to evaluate the relative stewardship policies and practices for each respondent across five core areas. Now, these core areas are ranging from 1) general policies regarding corporate governance and ESG issues; 2) firmwide proxy voting practices and history; 3) corporate engagement policies, practices, and communication efforts; 4) depth and breadth of human and research resources, dedicated stewardship and engagement. And then the last is level of disclosure regarding ETFs sponsors, voting practices, and company engagements.

Roman: Okay. So it's not just looking at the at the way they vote on the proxies. This is a pretty deep dive into what are they actually doing on the ESG front? We sent out the survey to these ETFs providers, they went through it and we got some responses. What were some of the unifying factors that you found when analyzing the respondent data?

4:34

Emma: Yeah, I would say that most providers have policies in place, whether it be for corporate governance, proxy voting, ESG considerations, etc. There are policies in place and pretty much across the board in all these ETFs providers.

Roman: Okay, so they do have some level of structure that is showing that they are following through on their ESG message and their ESG mandate.

Emma: In terms of the policies, yes, they have a stated policy in place.

Roman: So what divided the groups? What were some of the lines between certain demographics and the survey responses?

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Emma: Yeah, so we were just talking about how most of them, almost all had policies in place, but the way in which they handled these policies varied. So when looking at voting, the way in which they handle their proxy voting policies was different. So they may have the policy in place, but what they actually did in terms of their voting activities differed. So this was specifically with the use of third-party research and voting advisors. So most providers except for a small few use third-party research for their proxy voting decisions in some sort of way. The difference between the providers is that the way that they use the research -- so some of them use it for research only and they make their own decisions in terms of how they're going to vote on these issues. Some of them use a combo of in-house decision-making on these issues, and also recommendations from these voting advisors. So it's not only research that they're getting from these third-party providers, they're also getting recommendations. But they're kind of using it in tandem with their own policies and their own feelings on these issues, and voting with a combination of recommendation and their own in-house policies and recommendations. And then there are some that relied solely on the recommendations of third-party research and voting advisors. So they didn't really have strong conviction in terms of the proxy voting that they were doing, and they followed entirely along with the voting advisor recommendations that they received. So it really was a variation between using research only, research and recommendations, and then fully use of just complete recommendations from the voting advice.

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Roman: From these third-party research teams who may not have the same industry mandates that the actual provider does, correct?

Emma: Yeah, so they may or may not have the same ESG mandates. Most of the time, they do have the same ESG mandates, but it's just kind of, do they look at it on their own? Are they making their own decisions? Or are they blindly following the recommendations of an advisor.

Roman: And would Sage tend to prefer the teams that are kind of making their own in-house judgments?

Emma: I would say it fares better to make your own decisions in terms of voting; it really shows conviction in in what your stance is.

Roman: Okay, so there it seems like there's these three methods that these ETFs providers using: sometimes they're making these decisions in-house, sometimes using a combination of in-house decision-making with some third-party research, and sometimes they're farming out the decision making entirely. So we sent it out to about 20 providers, how many fall into each category? How many do the in-house? How many do farm it out? Where does the majority sit?

8:13

Emma: So when looking at this, basically 86% of providers have a third-party research voting advisor in place. So it's the vast majority. And the minority here do their own in-house research and their own voting, but the majority do have some sort of third-party research. Now of those that do have the third-party research, of that 86%, 66% use it as a research-only, they have their own guidelines, they have their own voting policies, and they make their own recommendations in-house. They just use it as a research facility only. Of that 86%, 25% use a combination of recommendations from the third-party research provider and research. So they have their own in-house policies, but they also follow somewhat the recommendations. Only 8% use recommendations fully without question, and completely, as you were saying, farm out the decision-making process. So I would say the majority use it in a research kind of way, and just kind of generally sourcing more data from these providers than anything else.

9:33

Roman: Yeah, right. I mean, it kind of makes sense, right? Because they're an ETF provider, that's their core strength. That's what they bring to the marketplace, and research parties do what they do, right, they research, so I think some combination does kind of make sense. But it's nice to know that the majority are still making a lot of their own decisions in-house; there's only a small minority it seems like that is basically outsourcing the decision-making. What do we think ETFs sponsors could be doing better? What does Sage believe needs improvement in this in this space?

10:07

Emma: Well, I'd say disclosure. Only two of our survey providers gave reports of not only their voting record, but also a breakdown of their engagement with portfolio companies throughout the year. So transparency is key. And it's becoming increasingly key in a data- and information-driven world. And investors want to know that these providers are doing what they're doing to truly affect their companies within their portfolios. And when it comes to the issues likely to affect their shareholder value and issues pertaining to sustainability and providers that can deliver more disclosure and transparency and go beyond what is required by the SEC in terms of reporting will likely continue to grow stronger and grow stronger in the representation in AUM and an interest in the ETF space. Given the increasing focus and scrutiny investors are placing on exactly what they are investing in and how those investments are impacting the world at large.

Roman: Okay. Yeah. It seems to me that transparency is the only ticket that gets you to where you need to go in the ESG space. It seems to me that more and more investors are going to demand, hey, we need to see more in terms of what you're doing, how you're voting on it, how you're implementing it; we don't just want a kind of a branded title, so to speak. We want more transparency under the hood.

11:35

Emma: You know, I think people are becoming more and more aware of the term greenwashing and what's going on with labeling something ESG or sustainable, or not even just ESG or suitable, just generally labeling ETFs something or saying that there's engagement going on or they have policies in place, but then it's just a kind of a black box when you actually look at, okay, are they doing these things that they're saying they're doing? So having that open level of transparency and disclosure is very important. And I think it's going to become increasingly so moving forward.

12:07

Well, great, thank you so much for your time today and your insights. I know that you really took this survey and spearheaded the process. And for all our listeners, if you would be interested in seeing the survey results, they can be found on our podcast page. And you can find more information about Sage Advisory and our ESG strategies on our website, sageadvisory.com.

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Disclosures: Sage Advisory Services is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. This podcast is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.