Investors are looking to evaluate environmental, social, and governance approaches with metrics beyond risk and return. ESG industry expert Chris McKnett joins us to explain.

 

 

Chris McKnett: I always welcome conceptual and theoretical discussions about sustainability and ESG, but frankly, I think more conversations about taking action would be fantastic.

 

Laurie King: That’s Chris McKnett. I’m Laurie King, and you are listening to On the Trading Desk®.

 

This conversation highlights key aspects of a featured insights paper called Seeing the whole picture that’s centered on the idea that investors are looking to evaluate environmental, social, and governance approaches with metrics that go beyond risk and return. We’re talking with its author, Christopher McKnett, Senior ESG Investment Strategist at Wells Fargo Asset Management. Welcome to the program, Chris.

 

Chris: Thanks a lot. It’s a pleasure to be here.

 

Laurie: The paper, Seeing the whole picture, includes steps to put ESG into action. For investment professionals listening, we encourage you to contact your relationship manager at WFAM and ask for Chris’s full insights. If you’re an individual investor listening, contact your investment professional and ask them to get a copy so you guys can sit down together and discuss the insights you’ll hear here today.

 

But for now, Chris, ESG investors are looking to evaluate approaches beyond risk and return—why is that?

 

Chris: Well we believe that in our industry, the investment management industry that is, we adapt as market conditions change and as customer needs shift. And many investors are recognizing that their investments are actually financial stakes in enterprises that operate in the real world, in the real economy if you will, and that the actions of those enterprises have real consequences on communities, on people’s lives, and in the actual world. And this awareness is one of the shifts we’re seeing among our clients. So looking at their investments through an ESG lens lets investors evaluate their portfolios on a much broader range of criteria than they could in the past.

 

Laurie: How about a few examples of what, beyond just risk and return, investors are looking for.

 

Chris: What we’re really talking about today, what we’re seeing more and more, that is really exciting is interest in more positive measures and also in new ways to evaluate risk. One good example is the environment, and climate change in particular.

 

There’s something called a carbon footprint, and a carbon footprint is essentially a statistical measurement of how much carbon dioxide emissions a company is responsible for. Investors can use that as a starting point to evaluate how climate friendly an investment is and also as a window into how a specific company might be expected to perform as we move towards a low-carbon economy.

 

In the social arena, diversity is a focus of a lot of investors, not just at the board level of companies in terms of looking at gender representation, but also among management and increasingly throughout the whole workforce.

 

And what’s interesting about this is that there’s an equity or fairness dimension to this—there’s also a lot of interests in research that more diverse companies perform well. And there are a lot more, Laurie, but those are a few specific examples.

 

Laurie: And, interestingly, investors want these values to be measurable, an actual metric to evaluate achievement. Which it sounds like, I mean, that’s what the examples you just shared do.

 

Chris: Yeah. Measurability, and that’s really key. Because, look, I mean, our clients want to know whether their portfolio is working for them or whether it’s working against them. In a word, it’s really about transparency. And you can think about it almost like food labels to consumers. That information is simple, but it’s really powerful. It actually influences behavior, and likewise, we think investors kind of want to know the calories and nutrients within their portfolios, right?

 

Chris: So we see a future where this kind of information becomes more common and is ultimately more of a standard, you know, sitting alongside all the usual financial measures in a fund fact sheet or a client report. But it is important, I think, to point out that the indicators and the measurements are improving all the time due to more disclosure and information from companies. Advancements in technology and data analysis that investment managers like us can use, but it is a mix of kind of an art and science right now. And you have to remember, I mean, we’re talking about values and preferences of clients which are qualitative in nature, right? So it will likely never be pure science, but what’s really fascinating is that the area of measurement and metrics is an area where a lot of exciting innovation is happening right now in the industry.

 

Laurie: That’s interesting, thanks. Now going back to the paper, Seeing the whole picture, that was written, and it was important to provide for actionable steps in it. Can you tell us more about why that was the case?

 

Chris: I think the key here is that as an industry, as practitioners like myself, if we’ve done a decent job on the why of ESG—why it’s important either in terms of its connection to risk in return or in terms of being a tool to align an investor’s portfolio with their broader objectives—but the how to do it, you know, practically speaking hasn’t gotten enough attention. I’d say we may be giving ourselves a B+ on the why, but we’ve really fallen short on the how. And this how is important because the world of ESG investing can be broad. It can be complex. It can be saturated with information. And at the same time, no two ESG investors, just like no two investment professionals, are cut from the exact same cloth. Right? So fortunately, the good news is that the breadth of the ESG universe lets investors express their unique points of view in their portfolios, and choice and customization is generally a really good thing for clients, right? But the paradox here is that ESG investing or sustainable investing is by definition not as standardized as other types of investing. So that’s why we really felt like it was important to have a framework with a process to enable investors to really manage that complexity of ESG while working towards their goals.

 

Laurie: How are we challenged to do better?

 

Chris: You know, we exist solely because of our clients. And they definitely challenge us. And I would say that the volume and complexity of client question on this topic are increasing at what seems like an exponential rate. And I think that’s great. And the client dialogue, you know, used to be more of, “Tell me about ESG,” and now it’s evolved to become, “Show me.”

 

And sometimes it’s even a little bit of, “Teach me.” And then I would say that investment and wealth managers, now they challenge us to improve their toolkits for servicing their own clients.

 

Laurie: Having written Seeing the whole picture, what would make this a successful effort in your view?

 

Chris: You know, I always welcome conceptual and theoretical discussions about sustainability and ESG, but frankly, I think more conversations about taking action would be fantastic. I think it’s a famous Elvis Presley lyric, maybe, that goes, “A little less conversation a little more action.”

 

I think that sums it up pretty well.

 

Laurie: Okay, well that’s all the time we have for this episode. Be sure to get Chris’s full insight paper. For now, Christopher McKnett, thank you so much.

 

Chris: Very welcome. My pleasure.

 

Laurie: Until next time, I’m Laurie King; take care.

 

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