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On February 1, 2022, the CFA Women’s Network hosted ESG event, moderated by Swasti Gupta-Mukherjee, Associate Professor of Finance at Loyola University Chicago’s Quinlan School of Business. The esteemed panel included: Emily Lawrence, North American Director of Sustainable Investing Client Engagement at Northern Trust Asset Management; Kelly Weber, Senior Vice President and Senior Research Analyst on the investment grade fixed income team at Neuberger Berman; and Sarah Wilson, Head of ESG Integration on the Responsible Investing (RI) team at Nuveen.

“ESG is no longer niche; it is mainstream.”  – Sarah Wilson

Summary Points

  • The three firms represented have developed proprietary ESG or Sustainability scoring systems for the companies they analyze. Nearly all large investment managers will soon adopt proprietary scoring systems, according to one panelist. The panelists seemed to agree that much of the widely available ESG data is exclusively backward looking. Proprietary scores assist the panelists in looking forward at ESG trends.
  • The panelists believe that their firms do not sacrifice returns when integrating ESG into their investment process.
  • Clients are demanding more of investment managers related to ESG. Integrating ESG into the investment process is foremost. One panelist commented that their clients want to see evidence that the entire investment management firm is integrating ESG and Sustainability into the organization.
  • Climate concerns were the most discussed ESG topics, with one panelist mentioning that climate is the salient issue for her firm’s clients.

Northern Trust measures ESG risk using its ESG Vector scores. Lawrence explained that the Vector score allows her company to be more forward-thinking about ESG risk. The Vector score helps Lawrence and her colleagues prioritize with which companies they need to engage. Weber’s Fixed Income team at Neuberger Berman formally integrated ESG into their process five years ago, starting with the development of proprietary ESG scores.

Widely available third-party ESG and Sustainability data was maligned as “backward looking” and “inconsistent.”  The deficiencies of third-party data spurred the development of proprietary scores. Yet, third-party data serves an important function for clients of the panelists’ firms, as they provide a consistent framework in which to compare various investment managers.  Lawrence told the audience that the SEC signaled that it may coalesce around certain data sets, which would move the industry toward standardization.

Adopting ESG into an investment process does not result in lower returns, the panelists explained. Lawrence asserted that utilizing ESG allows Northern Trust to identify and measure risk more effectively, so they will get paid for the risks that they choose to take. Neuberger Berman’s “Climate Transition” bond fund has similar yields to comparable traditional credit strategies, Weber told the group. Wilson added that ESG is not a silver bullet for asset managers; fundamental analysis skills remain vital to deliver superior outcomes for clients.

Climate was the most discussed ESG topic, and is the most resonant issue for Nuveen’s clients, Wilson said. She helped design a net-zero investment plan for the general account of TIAA, Nuveen’s parent. Such a commitment gives evidence of Nuveen’s leadership in this area. Weber said that Neuberger Berman’s Fixed Income Climate Transition strategy (a portfolio of companies improving in their efforts to achieve net-zero carbon emissions) has gained steam over the past 12 – 18 months.

Gupta-Mukherjee, on behalf of a webcast participant, asked the panel whether they expect the imminent use of an ESG factor for attribution purposes. The panel seemed to agree that ESG cannot be boiled down to one factor and/or the industry would not agree on one factor.

Professor Gupta-Mukherjee asked the panelists to comment on the nuances of applying ESG across asset classes.

Weber began by citing the different objectives of Fixed Income investors, such as herself, and her equity colleagues. Weber is happy if she gets her principal back, so downside analysis dominates.  Her equity colleagues are more interested in the upside potential of their investments. Weber also pointed out that Fixed Income funds can invest directly into ESG bonds to fund ESG-oriented capital projects. Lawrence cited the different time horizons for Fixed Income, public equity and private equity investors as an important distinction. Wilson offered Municipal Bonds as an asset class that has its unique challenges.  There are over 100,000 issuers. There is less data for Munis compared to equities or broader fixed income, and, maybe because of this, they receive far less scrutiny from investors compared to other asset classes.

So, for the asset managers among us, if you don’t have a proprietary ESG or Sustainability scoring system in place, it may be time to think about developing one. And our panelists would probably advise you to be able to explain to your clients how your organization, not just your investment processes, embodies ESG principals.