Today we’ll talk with Himani Phadke, Sustainable Investing Strategist at Wells Fargo Asset Management (WFAM) about how we integrate environmental, social, and governance (ESG) investing initiatives here at WFAM.
Laurie King: I’m Laurie King and you are listening to On the Trading Desk®.
Our guest today is Himani Phadke, Sustainable Investing Strategist at Wells Fargo Asset Management, and our topic is sustainable and ESG investing—which stands for environmental, social, and governance investing—here at Wells Fargo Asset Management and why it matters to our clients. Himani, welcome to On the Trading Desk.
Himani Phadke: Thanks for having me.
Laurie: Before we discuss the Principles for Responsible Investment, or PRI’s, ESG integration assessment results for our firm WFAM, it would be great if you could tell us about our focus on ESG issues here and sustainability themes. How are they implemented, and how do these efforts contribute toward positive investment outcomes for clients?
Himani: We view ESG as an important element of investment performance, and we believe that an analysis of ESG risks and awareness of wider sustainability themes, like climate change, enable us to really understand and assess the investments that we make.
So we have four main pillars or goals for ESG integration and sustainable investing.
The first is that we integrate material ESG information to better evaluate issuer risk exposure and to enhance portfolio risk management.
The second is that we understand systemic risks from climate change and we analyze the investment implications sector by sector. It involves a process with our analysts, our portfolio managers, and our ESG experts across the firm.
The third is where we develop and follow frameworks to allocate capital towards positive sustainability outcomes.
And finally, we engage with our investee companies and we vote proxies in ways that we believe will maximize these companies’ long-term value.
Laurie: And I see that PRI, the Principles for Responsible Investment, it has assessed WFAM’s environmental, social, governance efforts for four years so far. Could you provide some background on PRI? And in particular, does PRI have a global role in ESG promotion and monitoring?
Himani: Yes, the Principles for Responsible Investment, it’s an international network of investor signatories that incorporate ESG factors into their investment and ownership decisions.
So it began in 2006. It was initiated by the then United Nations Secretary-General Kofi Annan. It has over 3,000 signatories today and they represent over $100 trillion in assets.
We became a signatory of the PRI in 2015, and we committed to publicly reporting our progress towards implementing those six principles for responsible investment through the PRI’s reporting framework.
So this reporting framework assesses the responses from signatories and evaluates them against the peer benchmark. So it provides us with an indication of progress, and it supports our ongoing efforts to enhance our approach to ESG integration.
Laurie: That’s really helpful, Himani. In looking at a table that summarizes WFAM’s 2020 assessment results, WFAM received an A or A+ score in most modules. Could you briefly describe those modules and what they are and what it encompasses and the WFAM result?
Himani: So, as you mentioned, we responded to seven modules for the PRI reporting framework, and I’ll go through them briefly to mention how we did on each of them.
So the first one is around our strategy and governance, so how we implement ESG integration across WFAM, the bodies that are responsible for oversight and monitoring and implementation, and other aspects of our strategy and governance. So there we scored an A+ compared to the industry median of A, which, of course, we’re very pleased about.
The next two modules cover our ESG integration in listed equities. So when we look at listed equity investing, how do we incorporate ESG in our investment decision-making process? And second, how do we consider active ownership, our engagement in our proxy voting when we do ESG incorporation? So on both those modules, we scored a grade of A and that compares to an industry median of A when you just look at ESG incorporation and an industry median of B when you consider the active ownership component of it.
Then, the next three modules cover fixed income and ESG integration in fixed income. So the three modules cover integration for sovereign and sub-sovereign issuers, for financial issuers, and for non-financial corporate issuers. On all three modules, we scored a grade of A compared to the industry median of B.
And then finally, the last module covers our ESG incorporation in listed equity manager selection, appointment, and monitoring. So that’s when we select external managers and whether we incorporate ESG in doing that. On that, we scored a grade of E, unfortunately, compared to the industry median of A, and I’m happy to go into that in more detail later on.
Laurie: So in terms of ESG integration, what do you see as WFAM’s key strengths at this point?
Himani: We’ve really demonstrated consistent strength, I think, relative to peers in wide-ranging aspects of our ESG integration.
So we continued our strong performance on the strategy and governance module where, like I mentioned, we scored an A+, and we also scored A’s in five of the remaining six modules.
Within these modules, as well, we achieved the highest available scores for a number of indicators, and overall, we met or exceeded the median score on several of these indicators.
So for example, on our responsible investment policy, on the aspects of analysis that ESG integration is integrated into, our prioritization and monitoring process for engagement activities, to name just a few.
I’d like to point to particularly our improvement in 2020 on listed equity active ownership and the fixed-income SSA modules that covers the sovereign and sub-sovereign issuers.
So these results really reflect our significant efforts during 2019 to build and strengthen our firm-wide stewardship platform.
Laurie: You mentioned fixed-income SSA. Can you tell our listeners what that means or what that refers to?
Himani: Yes, so the fixed income SSA simply covers our ESG incorporation when we’re looking at sovereign and sub-sovereign issuers. So the SSA covers those types of issuers, and that’s what this module evaluates.
Laurie: Thanks for explaining that. So what do these assessment results do you think reveal about WFAM’s areas of opportunity for improving ESG within the firm?
Himani: Yeah, we continue to seek opportunities for further improvement and refinement of our approach, and we really want to be an investor of choice for our clients. So the PRI assessment results are a great opportunity to reflect on those areas for improvement.
One obvious area of focus based on these results, like I mentioned, is ESG integration in our external manager selection, appointment, and monitoring. So this covers our use of external managers, independent from our internal independent investment teams. And that accounts for only about 1% of WFAM’s total assets under management.
So far, our ESG integration efforts have been focused on maximizing our impact across the majority of our assets under management. And so we didn’t previously consider ESG explicitly in our external manager selection or appointment.
Having said this, the sustainable investing team is collaborating with key internal partners to really assess how we might improve our practices in this area and so improve our score on this module as a result of that. Other areas where we are continuing to enhance our ESG approach include greater transparency in client communication, our assessments of sovereign and sub-sovereign ESG risk where we continue to build our approach, and as well as our analytical capabilities on the really important topic of climate change.
Laurie: Well, thank you so much for taking the time to discuss the PRI’s 2020 assessment of our ESG efforts. Do you have any final thoughts that you’d like to share?
Himani: Yes, so just to sum it all up, through our PRI assessment of our efforts, we’ve really demonstrated improvement in our practices over time. So our sustainable investing initiatives in 2019, they laid the foundation for advancing ESG best practices further within our firm and really across the industry.
Laurie: Well, thank you, Himani, for sharing your perspective about the PRI results here at WFAM and our ESG efforts.
Himani: Thanks very much, Laurie.
Laurie: That wraps up this episode of On the Trading Desk. If you’d like to read the full report about our PRI results, investment professionals can find it by visiting wellsfargoassetmanagement.com.
To stay connected to On the Trading Desk and listen to both past and future episodes of this program, you may subscribe to the podcast on iTunes, Stitcher, or Overcast. Until next time, I’m Laurie King; take care.
Investing in environmental, social, and governance (ESG) carries the risk that, under certain market conditions, the investments may underperform products that invest in a broader array of investments. In addition, ESG investments may be dependent on government tax incentives and subsidies and on political support for certain environmental technologies and companies. The ESG sector also may have challenges such as a limited number of issuers and liquidity in the market, including a robust secondary market. Investing primarily in responsible investments carries the risk that, under certain market conditions, an investment may underperform funds that do not use a responsible investment strategy.