Current ESG trends in wealth management

Carolyn Kim Allwin, head of ESG at Capco; Aubre Clemens, global head of sustainable research at JP Morgan; Amantia Muhedini, sustainable investing strategist at UBS; Roseliny Genao, vice president, investing with impact/D&I analyst, Global Investment Manager Analysis at Morgan Stanley.

Transcription:

Announcer: (00:10)
Hi, everyone. Welcome back. Thank you for joining our final session of the ESG breakout session hosted by Capco. We will now be moving into our current trends in ESG in wealth management panel, with Carolyn Kim Allwin, as Capco's Head of ESG, Aubre Clemens, Roseliny Genao, and Amantia Muhedini. Thank you so much.

Carolyn Kim Allwin: (00:56)
Thank you so much May we're excited to be here, since we have so many cameras in the room, but we are excited to share some insights from top leading organizations in this space, since we do have an intimate audience, I do welcome questions throughout, if you just have some questions that you'd like to interject, feel free to raise your hand and just let us know as these ladies are experts this space, and we're excited to see what UBS JP Morgan and Morgan Stanley are doing in this space as leaders in sustainable investing. So I will just, aim to keep this interactive, so do feel free to participate, why don't we start with quick introductions, so please introduce yourself and, as an ode to Lily Trager of Morgan Stanley, why don't we just say, what are you most excited about? So introduce yourselves and what you're most excited about if you wanna start out for us, Rosaliny.

Rosaliny Genao: (01:55)
Yeah, absolutely. Can everyone hear me? Everyone can hear me. Great. So hi everyone. My name is Rosaliny Genao and I am the Lead ESG Analyst within Morgan Stanley's Global Investment Manager Analysis Team, long name, but what we focus on is, manager research and due diligence specifically for strategies that are ESG and impact oriented across the public equity and fixed income markets. And in addition to that strategies from diverse owned firms, whether it's women owned, or racially and ethnically diverse owned, and in terms of what I'm excited about and just what we're excited about at, at Morgan Stanley, well, first and foremost this year is the 10th anniversary of the investing with impact platform at Morgan Stanley, which is tremendous, over the past decade, we've grown, incredibly in fact, today we have over 200 investment strategies on our platform, and from my vantage point today wearing my due diligence hat what I'm most excited about is, okay, how can we maintain the rigor and high bar of strategies that ultimately make it to the investment with impact platform? and then two, another area that we're super, excited about is diversity and inclusion specifically around expanding the product suites that we have, it's a core initiative of our group, and a personal interest of, mine as well.

Amantia Muhedini: (03:35)
Great. Hi everyone, I am Amantia Muhedini, I am a sustainable and impact investing strategist with the UBS, Chief Investment Office for Global Wealth Management. So another mouthful I don't think we can do without the long titles what my role and what we do is set the UBS global house view for sustainable and impact investing from strategic asset allocations to what does this actually mean? How do you, invest and how do you position across market environments, including in the current situation? I'll say what I'm excited about is seeing how sustainable and impact investing has really grown and taken wings, how it's moved from being a niche, set of strategies for people who are really values oriented and wanted to drive change with their capital to a broader understanding in the market that sustainability matters to investments and to performance. So I am quite optimistic even seeing some of the challenges and questions posed to sustainable investing, to ESG and to impact as they, to me signify yet another step in the maturation of this way of investing.

Aubre Clemens: (04:49)
Hi, I'm Aubrey Clemens, I'm the Global Head of Sustainable Investing Due Diligence at JP Morgan and similar to what you've already heard on the due diligence front, we think about due diligence across sustainable investing through four key approaches. So focusing on value based investing, ESG integration, thematic as well as impact and finding investment solutions across those approaches to build client portfolios. And what I am most excited about is I started off in the space in 2010, and we've seen a lot of product come into the marketplace specifically around ESG integration, really giving you those core building blocks to build total portfolios. But now where we're seeing the growth is really on the sustainable themes. So we're seeing new products coming in around climate, around future of food and sustainable agriculture, biodiversity and inclusive economies. So I think that's also really great and unique because it allows clients to align to things that are more aligned with their views and have that through their investment portfolios as well.

Carolyn Kim Allwin: (05:50)
Thank you ladies, so we have so many topics that we could cover. Why don't we start with the one that we see in headlines all over today about this now that we've officially entered a bear market. And so how do we think about impact investing in sustainable investing during these times? I guess I'll just give you another moment to think, as we look to Ron, Cordez who's one of the leading impact investors at the Cortis foundation, right? So we're talking about sustainable investing, but there's also this impact investing notion, which it's great to hear you at UBS sort of mention in this space and as a different Noer, which is we'll go into that too. But as talking about during a recession, he sort of saw his microfinance and emerging market investment opportunities really be uncorrelated to the rest of his portfolio. And I wonder if that's a theme that's going on now, or how you think about, what we're going to do as we enter a bear market and your clients and their priorities in sustainable investing impact investing. We can go down the line or start anywhere. Amantia you wanna go first?

Amantia Muhedini: (06:53)
Sure. I'll go first, so I'll say as we think more broadly about this question of the bear market, our advice to our clients from CIO agnostic of sustainable or not is to focus on their investment priorities. So focus on managing their liquidity strategy, have those things and plans set in order. And then from there on, then look at where we are and whether, if they're positioned well for the next three to five years then look at the longer term opportunities. Maybe as we're seeing this market continue to sell off, maybe there are areas of longer term growth. Now that look more attractive as even compared to the beginning of this year, just six months ago. So as we take this lens and then we apply to sustainable investing, really the question that we ask back to our clients, when they say is ESG is sustainable is this still applicable? How do I position? Well, we say, what do you want to achieve from a sustainability perspective and with your investments from a financial perspective from then point on then we continue to hold our view that sustainable investing strategies should keep their longer term investment opportunities and benefits in portfolios. And here's another way in which it's been helpful for us to think about this question of ESG and sustainability in the current market. As we look at, as we take a step back and we look at what are the underlying I guess issues that are causing the current volatility that are pushing, inflation to continue go up and so forth. One of those is tied to increased energy volatility is tied to the war that is still happening in Ukraine. Now for us being based in Switzerland and as UBS, it's been interesting to observe how in Switzerland inflation rates have also been going above their general targets, but sit it around 2.5 and 2.9% really does not compare to the rest of the Eurozone does not compare to where we sit here in the U.S In terms of inflation rates. This is interesting to observe. So part one of the drivers here is the fact that the Swiss market, 97% of energy solar sources in Switzerland come from hydro and other forms of renewables. Only 3% comes from fossil fuels. And this is just one of those indicators that shows to us just taking that climate and fossil fuels, as one example, to understand why governments, investors, consumers, everyone is trying to is now seeing in the current market, how investing for sustainability for the longer term comes back in benefits to economies and to portfolios. And it also more practically means that other governments are taking this message noting here that energy independence and kind of moving away from fossil fuels will be important. And so those longer term opportunities there in that specific verticals apply, we think we can apply this logic to other areas that have to do with sustainability and investments.

Carolyn Kim Allwin: (09:48)
Thank you. Long-term value Creation in ESG.

Rosaliny Genao: (09:50)
Yeah, I can certainly build on that quite similar to what Amantia just said, investment advice always matters in particular in a downturn. And so what we do at Morgan Stanley is yes our clients have their financial goals, but in periods of downturn, we emphasize the other dimension of their holistic goals, which are the environmental and social impact goals that they express to us. So quite similar to from that vantage point, and then from a due diligence perspective, I would add that we are really focusing on, at least within our coverage universe, the ESG factors and data points that are being used by our asset managers and how those are driving investment returns as well as mitigation of risk on the downside there was a report that was published by the Morgan Stanley Institute for sustainable investing that looked at performance for the first half of 2020, right at the beginning of the pandemic. And what it found is that sustainable funds performed better than their traditional counterparts. So we're taking that report and building on that to see what kind of patterns we are starting to see within sustainable funds today, and which are those factors that are really driving performance, so dual response from that regard.

Carolyn Kim Allwin: (11:30)
Thank you. And what do you see from your diligence perspective of them?

Aubre Clemens: (11:32)
Yeah, I think we saw a lot of negative news around flows and performance year to date, but what I would say is, I don't think it gives you the whole story. we have continued to see strong flows into sustainable investments, even though that has started to flatten out a little bit, but it's not just ESG strategies, they're still having more flows, seeing more flows coming in than your traditional funds. So it isn't just because they're ESG strategies, it's more a function of the volatility in the marketplace. And I think the underperformance that we have seeing has been a function of the fact that most ESG strategies do have limited traditional energy in their portfolios, but they do have more exposure to things like renewable and clean energy, which just hasn't held up as well as we seem a traditional energy, as well as having more exposure to technology, which again just speaks to the fact that that's where they're finding good opportunities in the space today. So it's, not just ESG strategies. It is more growth oriented managers where managers have more exposure to technology where they're seeing more growth opportunity that just sold off due to a D rating in markets.

Carolyn Kim Allwin: (12:38)
Okay. So I'm just gonna throw a little kicker in here, just to expand upon the interesting answers that you all are coming back with. It's, not planned, but I'll give you time to think after I throw it out. But I think it's interesting to see that there may be more flows into this space in the ESG fund space, Rosaline and you, alluded to the fact that there was this perhaps higher, return potential with ESG funds as evidenced by the study that you mentioned in the publication that you had, back when I was at Wharton, we had a great expectation study, and that was maybe like a precursor to some of that, right. They had studied not a significant sample size of about 35 ESG funds, but they really outperformed, so perhaps we can think about that for what ESG really does when you integrate it into a portfolio. But really like that's sort of leveraging, like what are the good opportunities you're seeing in these markets, right? Like thematically, you mentioned biodiversity Aubrey. It's something that I'm trying to wrap my heads around and what does that mean? Or, DEI do you see anything increasing in these bear markets? It's like, you're highlighting this for your client. Are you just suggesting that we divert from the 60 40 portfolio on start to go more towards fixed income? Or like, what kind of thoughts do you have on this space? And maybe that was enough time to give you guys lots.

Aubre Clemens: (13:55)
I think we're still trying to be balanced in the asset allocation, but we are looking to compliment the core portfolio with areas that are gonna have this long term growth potential, which is gonna be your clean energy. It's gonna be your sustainable agriculture. It is gonna be biodiversity because they do have those, the structural growth and tailwind behind it and we're also given everything that we see with the food and supply chain, it's, you're gonna require some of these products and you think about the supply chain. And so I think it's gonna provide that nice tailwind for long term outperformance.

Amantia Muhedini: (14:27)
Yeah. I mean in some ways there's consensus on this focus on energy security, which means investments in renewable, that's kind of what you're saying, food security, again that's the other part of the thesis, I think in terms of asset allocation, however for those investors for whom this makes sense who are able to, to include this in their plans, diversifying to alternatives is part of the advice that we are giving, again all of our clients agnostic of their focus on sustainable and impact but that means looking for those opportunities to drive more measurable, actual kind of verifiable positive change that often tend to overlap or more likely be present in those venture capital or private equity kind of, growth equity type strategies. So again, that's how the other way of thinking about the longer term asset allocations and finding the opportunities for diversification there with this added benefit of impact potentially.

Rosaliny Genao: (15:21)
Yeah. And the only thing that I would add to that definitely echo the sentiments from Aubrey and Amantia, but at the same time, we're also responding to client demand and where we see significant client demand continues to be in strategies focused on climate change specifically climate solutions oriented, strategies. So part of our focus is really seeking out some of those innovative products there as well as sort of those sub industries or sub themes that are related to to climate, right? So, they mentioned biodiversity that's one of them, sustainable agriculture is another one water and resource management. We're actually seeing an uptick in interest in those subthemes. And then in parallel diversity and inclusion, I would say over the past two years is one of the, top three areas where we get questions from our clients in particular institutional client, that really want to be catalytic with their capital and not only seek to advance positive outcomes for, underrepresented communities and marginalized communities, but also level the playing field in the asset management industry, by investing in women in diverse owned firms. So part of our response is yes, currently weathering the existing, market conditions, but also looking forward towards those impact areas that matter to our clients in the long term.

Carolyn Kim Allwin: (17:04)
So, thank you for that so much to touch upon there, so I guess to move into some of the things that we're touching upon, and maybe I should have done this in the beginning is really frame the definitions that we're working with, right? Because there's lots of ways to talk about this, right, ESG, sustainable investing, responsible investing, impact investing. And so it's really great to see impact investing, which is implies truer impact have a place in this conversation where we have three of the top financial institutions that, could otherwise be argued as like, not really the impact organizations that you would think to have, right? So Rosaline, you have it in your title, right? It's your organization investing with impact. And, you also Amantia have it, a sustainable investing strategist, right. And we've alluded to it. So impact investing typically applies more to the private markets concepts and typically financial institutions have been more public market solution oriented and sustainable investing. So if we're thinking about impact investing in sustainable investing, and you mentioned Rosaline, catalytic capital, are your clients coming to you for these types of conversations, perhaps it's more private market space and we don't all have to answer this, but to the point that you have some relevant points, please.

Rosaliny Genao: (18:15)
Yeah, absolutely. They, are coming to us with very specific requests around, issue areas that they want to be able to address in the private markets. And so our team spends so I'm like I mentioned earlier, I'm focused heavily on the public side of the markets. But as part of my role, I get to collaborate with those on the alts team to source and diligence strategies on the private side. And that takes a lot of time, but what we want to, especially as the space continues to evolve, we look for those managers and strategies that are being thoughtful about the data, right? How are they using data to understand their respective impact markets today and what their theory of change is and how are they measuring the outcomes that they seek to have through their through their private funds. So there's a big focus on data, not just in the alt space, but I would say in the industry in general, and that's like the critical eye that we're trying to apply when looking for some alternative investments for our clients.

Amantia Muhedini: (19:30)
Yeah. I mean, I would just add that this is probably one of the things that is most exciting in terms of the evolution of this market. We've seen ESG and this distinction of ESG integration kind of clearly pan out more and more traditional managers are looking at ESG and considering it whether or not focusing on it or not. And so, as that evolves in its own path and track, we likely are going to see even more focus on impact and a crisping sense of what does impact mean, where is that bar? And I think we're all sitting here and trying to push the industry to keep that bar high, to make sure that there's no, sometimes we have a conceptual kind of nomenclature tyranny in this space, but it's also kind of keeping those, those distinctions clear is important in order to make sure that what we're saying there's impact and there's an evolution and we're showing our clients positive change that is attributable to their investment dollars. we mean it, which also means that's a smaller part of the investible universe, and that's okay.

Carolyn Kim Allwin: (20:32)
So, just a following question for you, Aubrey, how do you think about diligence for ESG and sustainable investing versus just traditional diligence? Like what additional factors are you thinking to integrate for your purposes of sustainable investing?

Aubre Clemens: (20:45)
Yeah, so we've actually the way that we've constructed our team is that all sustainable strategies are reviewed and assessed by the broader due diligence team. We really wanted to focus in that everyone has this understanding to use the same exact process around how we do due diligence on all strategies, regardless of whether or not they are considered sustainable. But what we do add on top of that is this degree of intentionality. So we really hone in on being able to, identify those managers that are truly investing this way, because they're intentional about it. And the fact that they're looking at ESG factors to drive decisions on what stocks actually get into the portfolio, and then being able to measure and report on those exact factors. So it's raising the bar to ensure that if it is gonna be in a strategy that's sustainable on our platform, that it does meet those standards.

Carolyn Kim Allwin: (21:35)
Thank you, so obviously none of us are asset managers specifically, and we're not. And so we're not subject to some of the SEC scrutiny currently on greenwashing, but we all have client pressures that we think about like, ESG, right? Typically, since the evolution of ESG and sustainable investing, we've really been focused on ESG is sort of a marketing concept and really sharing with our clients like this is something that we're integrating and working actively on. Now it's coming under scrutiny with the SEC as we've all seen the headlines and actually nobody on this panel. Right. So we can say it's GM and BNY advisors and DWS had a rate in Germany, not to mention the climate disclosures that are coming down the pipeline and the human capital disclosures. Right. So I guess but it gives us pause when we think about calling something ESG funds or sustainable investing funds. So, the question really is like, how do we think about being transparent with our products, for our investors, making sure that what we're promising in the investment prospects are actually what we are doing in our investment diligence and our investment sourcing, and actually what we're investing in. Right. So how can we continue to ensure with the robust way that you have methods you've been deploying and further to, to make them even more robust going forward?

Aubre Clemens: (22:50)
Yeah, I can take that. I think it to add on to my previous comments, it is about the assessment from the due diligence team, having a team that's going out, kicking the tires, meeting with the management team, sitting across from the portfolio manager, sitting across from the investment team to really dig in and ask the tough questions around stocks that get into portfolios and why, and what are they doing? Are they engaging for change? So really understanding exactly why they are allocating to specific stocks. Maybe they're reducing exposure because of certain ESG risks, maybe they're finding additional opportunities, but having that dialogue and then monitoring it on an ongoing basis to see, we know you have these exposures, why are you investing here? And then seeing how that changes over time at being able to ask the questions. So it's really all about having that dialogue and keeping track of what managers are doing and then holding them accountable. So I think that's the intentionality that we're looking for and then being able to tie that back to some level of reporting.

Rosaliny Genao: (23:48)
Yeah, one thing that I would add to that, I really like that Aubrey has mentioned intentionality, right? Because that's the first requirement to get on the investing with impact platform. If you want to have that as a designation next to your investment product intentionality is essential. And to Aubrey's point like really understanding where the investment manager draws the line in terms of where they do and do not invest in and in what data points they use to really make that decision. So, in addition to that, what our team has done is, well, back in 2021, we launched two manager, scoring tools. One is called DEI signal, and the other is called impact signal. And essentially well DEI signal measures, the strength, or I should say improvement of asset managers, DEI efforts over time. But more importantly for the diligence process, we look at what a specific strategies impact signal score is and what impact signal what the score basically tells you is the strength or the extent to which the manager's investment process is intentional and how that actually aligns to environmental and social impact objectives. So on top of the diligencing efforts, the conversations, the analytics, we also pair our own proprietary, manager scoring tool to see, Hey, Is the manager actually investing in line with what they say they are? And if not, then we're, we're gonna keep digging in on that to get a straight answer. So that's sort of how we're approaching it at Morgan Stanley.

Amantia Muhedini: (25:36)
I'll just add my colleagues in diligence kind of covered how this actually happens. I'd say from the perspective of the client, we often start with this why question and the intentionality question, but asked to the to the client, if you're looking for a product that is sustainable or impact, what are you looking for? What is your investment objective? Because then this meets what the different asset managers objectives are in designing specific products. And that should then tell you whether the actual names that you're holding are aligned with your expectations. And the cleanest example of this is to say that a strategy that is a best in class strategy that is looking to invest in those names that are relatively compared to their peers on managing their operational sustainability risks will look different than a strategy that is more of that thematic or solutions. You both use those words that starting helping our clients understand their why, and then matching it to the why of the manager, and then fitting all of those things in an asset allocation, where we distinguish, a sleeve for an ESG leader strategy versus a sleeve for themes versus a sleeve for active engagement and passive strategies and so forth allows for this diversification on sustainability objectives, which hopefully should also help bridge over time. This, this gap in what the expectation is on what sustainable quote, unquote means and what actually, it shows up in client portfolios. It's the understanding is as key there as the actual robust job in due diligence.

Carolyn Kim Allwin: (27:14)
I apologize the audience, I had promised questions, but I've just been so focused on learning so much here. I hope you all have too, but feel free to interject at any point. I just have two more questions cause we only have five minutes, Simon.

Audience Member 1: (27:29)
Yeah. I'll ask a question. I think this fits into what you just said. How are you guys analyzing companies that so example would be like apple also may use slave labor or a company like bay that owns Montesanto, or a gun company selling guns to Ukraine. How are you looking at companies like that.

Amantia Muhedini: (27:49)
Yep. I mean, great questions. I'd say firstly it's a question that we would pose to our managers that are on the platform, that would be too easy of an answer for me to give what I'll say is that really the why is important there. So why are you investing in sort of in apple or in bear if you are and what your level of tolerance is on what you can think of as ESG or sustainability risks, right? There's nothing that we can do that is completely clean or pure from a sustainability perspective, even if you think of electric vehicles, and all of those components, all of the value chain that, that result in electric vehicles or in solar panels or all of these kind of end outputs that we may think of as socially or environmentally desirable, there are sustainability risks down that whole kind of chain. So the question that we would ask is really of our managers and here I leave due diligence to speak, but also as we are doing internally, the research is how are these names positioned for these sustainability risks? are there mitigants in place? And, essentially it's like, what's the level of tolerance and how does it match to the purpose, the objective of the strategy.

Rosaliny Genao: (29:04)
Thank you. And the, just to build on that a little bit cuz I like the question and we get it from clients every day, we pose that question to our asset managers. Why do you hold apple? Why do you hold Tesla? Why do you hold X, Y, Z there's no such thing as a perfect company. So let's just put that out there and I don't think there will ever be. But when you think about how a company can have positive impact in the world, right? I like to think of two sides of a coin on one side, right? You can think about their products, their services and how those are addressing sustainability issues and themes. On the other hand, you can think about the policies that companies have in place, the practices, how they operate within their, four walls and how they are as a corporate citizen and how they advance sustainability in that way. And then for some companies you can look at both, so it's very nuanced. It's, it's gonna depend on the investment objective of a specific strategy which to amantias point, you kind of have to pair with what the client's ultimate objective is and risk tolerance and view on what kind of change they want to have within their portfolio, within the confines of the public markets at waste using that example, but that's what I would add to that.

Carolyn Kim Allwin: (30:27)
That's a great answer sort of tying it. It's a tough question, Simon. So thanks for that. But it's, Really just pairing it back, you know, thinking about what the client needs are, because I'm sure every single person in this room would have a different definition of what is impact investing to them or what is sustainable investing to them. And what are your priorities coupled with what are the risk return expectations you have? Right. And so I think it's challenging, which I have two more questions. And then, but which like no conversation here could be complete without a conversation about impact metrics. I think we helped Aubrey alluded to being accountable for the investments that are made. So I know this wasn't on script but like how do you report impact or sustainable investing metrics to your clients? Or maybe you don't and it's just really still risk return reports.

Rosaliny Genao: (31:13)
Yeah, I can certainly talk about that, so the way that we do it at Morgan Stanley is through an impact reporting application called Morgan Stanley impact quotient, or Morgan Stanley IQ, before I talk about Morgan Stanley IQ a little bit it's really been a journey to develop that application over the past 10 years as the impact platform has been built out with a focus on goals, discovery products, and portfolio construction impact reporting was that last piece. And so the impact reporting application that I just mentioned, MS IQ we launched it back in 2019 and it essentially puts the client's impact preferences at the center of the conversation. The, first thing that it does is that clients are able to select what matters most to them across the environmental and social spectrum. We take that we essentially compare it, to their existing portfolios. We put it into MS IQ and what that generates is, insights on the extent to which their, portfolios are aligned to their very specific, impact objectives. And then the third part of, Morgan Stanley IQ is that it provides our financial advisors with suggestions on investment solutions that they can recommend to their clients that can help them meet, and improve their alignment to their impact goals, over time. So it's something that we're very proud of. It drives it's really the first part of our conversation with any clients really using the Morgan Stanley IQ tool, and then using that to report back to clients on where they are today and helping them improve over time.

Aubre Clemens: (33:02)
Yeah, I think reporting has been the last kind of area of kind of growth and innovation, you can see how all managers take it a different approach. You can focus primarily on carbon footprint, you can focus on the sustainable development goals, but what we did is we actually acquired a company open invest to allow us access, to be able to report on different, impact metrics, to look at a client's focus on what their values are, what their causes are that they're very much interested in, and then being able to allocate based on that and then giving them true Quantify measurable numbers, so that they understand what's what they're actually holding. So really kind of that assessment of the underlying,

Amantia Muhedini: (33:46)
I think what I'll say is that we're taking a slightly different view on this question of reporting and impact reporting in particular and what our objective is to ultimately be able to show our clients transparency in terms of what they're holding, but we're distinguishing between sort of the transparency that is score based, and kind of saying that this is then the impact that you're having. And it's very much a journey. I think one of the many challenges that our industry collectively is still is still working on and innovating is this question of, well you can look at sustainability properties using the broadest word possible, for single strategy. How do you think of that across strategies that go across geographies and asset classes, and then across asset portfolios. And that is one that there's a lot of areas and pockets of innovation on, but very much where hopefully we will come to more kind of coalescing in a single standard as well.

Carolyn Kim Allwin: (34:42)
It's so exciting to see all the activity at the institutional banks focused on this in response to all of the opportunity that exists in this intergenerational wealth transfer to women and millennials who really care about integrating impacts. So, we could go on all day but I think we're five minutes over already. So thank you so much, ladies, for joining us for this conversation.