Responsible Investing in the 21st Century

Welcome to the Green Investor powered by Investopedia. I'm Caleb Silver, the editor in chief of Investopedia and your host on our journey into what it means to be a so-called green investor today and what's happening across the sustainable investing landscape. On this week's episode, we're going old school and we'll be talking to Emily Chu of Calvert Investments, one of the original sustainable and environmentally conscious money managers, about what Calvert's clients want today, what it's offering them, and where this investing firm is headed. Calvert is a pioneer in ESG and responsible investing, and Emily has great insights to share.

2021 was officially the fourth-hottest year on record, and there were 20 separate climate disasters costing more than $1 billion each. That's according to NOAA's annual recap of climate and extreme weather events across the U.S. The National Oceanic and Atmospheric Administration's report also highlights the busy Atlantic hurricane season, with 21 named storms and numerous wildfires that burned 7.1 million acres in Western states.

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Meet Emily Chew

Emily Chew is Calvert Research and Management's executive vice president and chief responsible investment officer. Prior to joining Calvert, she was Morgan Stanley Investment Management's (MSIM) global head of sustainability for investment management, and she currently co-chairs MSIM’s Sustainability Council. Ms. Chew is also a member of the CFA’s Technical Working Group, in addition to formerly serving as rotating chair of the Steering Committee of the Climate Action 100+ and chair of the Asian Investor Group on Climate Change.

What's in This Episode?

Way back in 1982, when no one was really thinking about sustainable or socially responsible investing, the Calvert Social Investment Fund was launched, becoming the first investment fund to integrate ESG factors with financial analysis. Forty years later, the firm, now owned by Morgan Stanley, has over $36 billion in assets under management and is still leading the charge for responsible investing. Emily Chew is the chief responsible investing officer for Calvert, and she is our special guest on the Green investor. Welcome, Emily. 

Emily:

"Thanks, Caleb. Nice to be here."

Caleb:

"You have such a cool job title, one we don't hear that often, but I have a feeling we're going to hear it a lot more. What does it actually mean and how does it fit into Calvert's overall leadership team?"

Emily:

"Well, I'll start with the second part of your question first. So, Calvert it in the process of rapid growth and expansion. As part of that, we're building out our leadership team and my role specifically, day to day, is to have oversight of our ESG research group and our corporate engagement group and to ensure that the work that they're doing is oriented towards our long-term investment thesis to develop out some of those views across the board and to ensure that they're consistent. And then we also have other departments of Calvert that have other senior leaders, including our Applied Solutions Group, which is responsible for our responsible indices and other systematically managed products."

Caleb:

"When you go to Calvert's site, though, there you are, right there on the site. So, right there on the top of the leadership team, you know Calvert takes this very, very seriously. As I said in the intro, Emily, Calvert's been at this a long time. The name is synonymous with responsible investing. So, what are your customers, what are Calvert's customers asking for as it relates to green- or environmental- or climate-related investing? What are the questions? What are their needs?" 

Emily:

"Well, you're right, Caleb, in that we are one of the originals in this space, and it's such an honor to be able to work for an institution that has been a real trailblazer in the field of responsible investing. I suppose I want to answer your questions in two parts. One is that, first of all, what do we mean by responsible investing? Because I think that, at Calvert, we have a very specific view on what that means. I find in these conversations, you always need to have a 'clear the throat' kind of definitional chat first because there are so many acronyms and terminologies that can mean slightly different things to different people."

Caleb:

"It's alphabet soup out there. So, please, lay it out."

Emily:

"Yes it is. It is unfortunately alphabet soup out there. At Calvert our definition of responsible investing is really that it encompasses our fiduciary duty to our clients, which first and foremost, is to invest for attractive financial returns. And we do this across a range of investment styles in the public markets. We also invest in companies that are at the forefront of managing their ESG risks, exposures, and opportunities, which means managing risks from unmitigated externalities to both the company and to a broader set of stakeholders, and to invest in companies that are profiting from the positive change, product opportunities, and business models available to them as there is a systemic and structural shift in the capital markets, which reflects the systemic and structural shift in the economy."

"So for us, the concept of 'responsible' encompasses both financial returns and responsible corporate behavior from an ESG perspective. And I want to highlight that because you introduced us as a socially responsible firm, and I think that that was very much in Calvert's DNA when we first got involved in this space 40 years ago. And I think for many people, 'socially responsible' kind of implies the ethical- or values-oriented investing, which certainly is a very valid concern and is a concern that we seek to address for our clients. But it's obviously not something that we believe means you need to make a trade-off with financial returns."

"You asked, 'What are our clients looking for?' Our clients are looking for conviction. They're looking for long-term oriented investing, not kind of opportunistic trading around ESG themes or short-term trends but really looking for strong conviction over the long term about the materiality of ESG factors to companies. And they're looking for authenticity. I think they're looking for a group of people that they can trust to steward their capital to deliver financial returns but also to be looking really long term and selecting companies that they want to be involved with and companies that perhaps have some room for improvement, or significant room for improvement in some cases. But our role as asset managers, as stewards of that capital, is to be actively engaged with those companies. So, our clients are looking for the full package in that regard."

Caleb:

"It's important to note that Calvert doesn't just help steer investors to the right funds or companies. You actively work with the companies to improve their ESG, their sustainability efforts, as shareholders. How does that work? How do you get in there with the board or into the executive suite and try to help make change and facilitate that?"

Emily:

"We look across our funds and we identify names where we think there's an opportunity to really add to the bottom line and to add to our returns as an investor through engagement. And so, we identify those ESG issues or trends that could be the most value-adding for a company. And I think if you start from that perspective, it's much easier to have a conversation with the company because you're essentially coming in and saying, 'Look, we're a stakeholder here, we're part owner in the company. We're concerned about your business. We see this particular human capital issue or this particular energy transition issue. And we're not clear, based on your current disclosures, what you're doing about that and that concerns us. So let's have a conversation.'"

"So really, our engagement process, we're boiling it down to a science. It's obviously a process of iteration and learning over several years. But what we do is we identify the issue. We develop an engagement thesis based on our investment research and based on the experience of our engagement team. We then initiate contact with the company. We invite them to a conversation. Many companies are very open to those conversations, many of them we have established relationships with. So, it's not that we're contacting them for the first time. And then where the company is perhaps not responsive to our requests, we keep trying, and then we'll look for other ways to access the company if we're not getting any traction and that might be through an approach to a board member or leveraging the relationship that we may have. And then we have a discussion and we essentially seek to escalate that discussion over time if we're not seeing responsiveness to our requests."

"And our requests could be anything from 'be clear about your energy transition plan.' If you're an electric utility, what is your CapEx tends to transition your energy assets? Or it could be around plastic waste reduction; what are you doing as a supermarket or as a consumer products manufacturer around plastic waste reduction? All with the understanding that there is a tie back to an investment thesis. So, it could be reputational risk oriented, regulatory risk oriented, could be ensuring the ongoing competitiveness of the company as the economy shifts. And then ultimately, if we're not getting any traction, we will use shareholder resolutions as the final way of getting the companies attention or of trying to force the issue with the companies that illustrate that there is consensus around a point. And we had some success with that tactic with Tesla last year. We had the shareholder resolution that we sponsored around their diversity disclosures that passed at the AGM in Q3 last year. So, we were very pleased with that result."

Caleb:

"And you have this criteria, folks. I'll put this in the show notes for selecting the companies to engage with. That's materiality, opportunity, position, size, financial performance, and experience. This is what you look at when you say, 'Should we engage with this company? We're a shareholder. We're a stakeholder.' I want to bring up comments recently made by Larry Fink, the chairman of BlackRock, in his letter to shareholders. Everybody listen to that letter to shareholders. BlackRock's made a big deal about being ESG oriented as a stakeholder. But he said recently that it's not 'woke' to be a stakeholder capitalist or to be involved in ESG. It is capitalism. I'm not going to ask you to respond to Larry, but what's your position on that at Calvert?"

Emily:

"I think we need to avoid getting caught up in false dichotomies that can be imposed on us by a particular political environment, which is so divided and divisive. We are investing, as I mentioned, for financial return. We have really high conviction that these ESG factors matter, and you will find across the capital markets that different investors take a different position about their level of conviction, essentially."

"So, for example, in 2015, we essentially exited the majority of the energy sector. We did it at a time when that wasn't as popular and we didn't do it based on a top down binary screening process, which you'll see with some ESG funds or just with some investors where they say, 'Oh, no, no exposure to this or that.' Ot was really based on a bottom up, fundamental analysis that these companies had high exposures to a rapid energy transition, potential disruption from that transition, and they didn't have a strategy in place. They didn't even have targets at that time. And so that is not really about, I think, taking a political position. That's about looking at it from the perspective of investors. But investors who have high conviction that stakeholder management and a company seeing itself as part of a system, part of the system of wealth stewardship and generation that defines prosperity for a whole community—that these things matter to us as investors."

Caleb:

"Well, absolutely. And it's about risk. Folks that listen to this podcast know from episode one, we were talking to Spencer Glenn about risk. If these companies are not paying attention to risk that could erode their bottom lines. Forget about protecting the environment and reducing climate warming if they are not paying attention to the things that could affect their bottom line, it really could hurt them and their shareholders in the long run. So that's your position. But you do it with a responsible angle, which is so interesting. "

Emily:

"I think just to add to that, Caleb, I think the risk element is one of the reasons why ESG investing, however it's defined for you as an individual investor, has really taken hold, particularly in the last two or three years, I would say it's really mainstream because I think there is enough data at this point, and there's consensus, that at a minimum consideration of these factors is good risk management. It just makes sense. And there's enough data available now, obviously of questionable veracity or consistency, but there is enough data that you want to go into the markets looking at that data. You don't want to go into the markets just not looking at it—because everyone else is looking at it! So, there's been a self-reinforcing cycle, I think, at the bare minimum of risk management. At Calvert we're doing more than just risk management. We're actually investing for positive change, and our shareholder activities, shareholder resolutions that we bring, our engagements with companies, the way in which we select certain companies, we are looking for companies that are proactively trying to generate positive change for the community and for the environment."

Caleb:

"And helping them along the way as well if you're a stakeholder, which makes a ton of sense these days. Let's talk about some of your funds at Calvert, especially the ones that are more climate or environmentally oriented. Let's talk about a couple of the big ones and sort of your criteria for that company's selection and how you approach it. So, take us through a couple, if you don't mind." 

Emily:

"Thanks, Caleb. Thanks to the opportunity. And when you asked earlier, 'What are your clients looking for when it comes to the environment?' I think that they are looking, again, for companies or for funds that are invested in solutions, invested in that positive change, and managed in a way where they are stewarding their assets as a company in a way that's environmentally responsible."

"And so, I think the starting point for our investment process really is the Calvert Principles for Responsible Investments. These are available on our website. It's a principles-based framework that expresses our belief that corporations deliver benefits to society. They do that through their products and services. They do that through employment, payment of taxes, and some of their behaviors. And that we seek to invest in companies that provide positive leadership in the areas of their business operations where these ESG factors are material for themselves and material for society. So, if you're looking at airlines, you're looking at their carbon emissions, you're looking at their labor management. And that's very different if you're looking at a luxury goods manufacturer where you're looking at water usage, supply chain, plastic use, etc."

"So in the Calvert Principles for Responsible Investment, they are organized under the pillars of E, S, and G because it's a clear way of communicating, again, for conceptual simplicity's sake. And under the E pillar, we're looking at reducing the negative impact of operations on the environment, managing water scarcity, ensuring efficient and equitable access to clean water sources, diminishing climate-related risks, and reducing carbon emissions. Driving sustainability innovation through resource efficiency, both through business operations and through products and services and provision of solutions. So these kinds of factors are broad; it's a principles-based framework, and the beauty of a principles-based framework is that, on the one hand, we're clearly stating we believe in the importance of water, natural capital, the atmosphere via a focus on carbon emissions. It's very clear what we stand for, but on the other hand, it's flexible enough to be applied in an industry-relative manner."

"So our research is supported by a team of research analysts who are sector specialists and have several years of experience, in many cases, of watching the markets following the companies that they're responsible for. And our research process takes the initial step of identifying the ESG issues that are most material to that industry or sector, based on research, based on various frameworks out there in the industry, based on our own experience. We develop an ESG investment thesis so that identifies how those ESG factors might be material to the industry as a whole and companies operating in that industry. We build structural scoring models using ESG data to essentially rank companies in a given sector based on the material ESG factors. And those structural models are essentially guides for our analysts to help make investment decisions about what's investable or not investable under the principles-based framework. So, it's not implemented in a rigid or, I would say, quantitative manner that we are using the ESG data as a way of coming up with a relative peer comparison. And then from there, we have a governance committee that oversees the recommendations from the analysts about what's investable and what's not investable under the principles."

"So, that is the baseline for all of the companies that go into Calvert funds, whether they're systematic funds or active funds. And then when you think about, well, 'What do we offer in the environmental space specifically?' Our clients are really interested, as I mentioned, not only in the broad sense of responsible environmental stewardship, which just feeds through in our process—as you can see from the bottom up and everything that we do—they're also interested in the solutions."

"So, a couple of the funds I would point to is our Global Energy Solutions Fund. This is a fund that invests in companies that are involved in business activities in the sustainable energy solutions sector. So, that could be renewable energy companies, but it could also be companies that are suppliers to that renewable energy system. So, it could be battery manufacturers, chip manufacturers, et cetera. Now this fund is interesting because essentially we're out of fossil fuels, for the most part, based on our fundamental view. You won't find oil and gas companies that are trying to say that they're becoming green or they've got some target that they haven't provided evidence of how they're achieving it in these funds. You'll find companies that are really oriented towards that solutions provision and based on our website, the fact sheet there, at the top holding right now is EcoPro BM, Voltronic Power, LG Chem, just really interesting. On semiconductor, you'll see Tesla in the top 10 as well for this fund. Now, this fund has actually outperformed the MSCI ACWI on a three-year and five-year basis. And so, we think that it does demonstrate you're not sacrificing returns to have high conviction solutions providers."

Caleb:

"Yeah, I want to get into that real quick. A lot of the backlash against ESG or climate-based investing or whatever we're calling it today has been this you might have to sacrifice performance if you want to invest along with your conscience. Not the case anymore, Emily. Not the case for the last few years, right?"

Emily:

"Not the case for the last few years. And I think that's partly because the data has improved. Now that's enabled us as investors to do better analysis, analysis that is very fundamental, very oriented towards value creation for investors, but able to also monitor companies impact on stakeholders. And I think also we're seeing a structural shift in the economy. It's time. We're up against some really very real planetary boundaries here. There's no justification for continuing to support systems and structures that don't benefit all of humanity, and that includes the environment as our ultimate system in which we live."

"And I think that's recognized by policymakers. Policymakers are moving as quickly as they can, obviously subject to election cycles, in some cases. Policymakers are moving, regulators are moving in terms of disclosures that we need to make as fund managers around climate metrics and other environmental metrics. And I think that there's a shift with the end investor, with retail investors who want to understand, 'Well, my money's invested not for the next one or two years, but for the next 30 to 50 years. And where is the planet going to be after 2050?' At the moment, we're not on a great trajectory. So I think all these factors are really coming into play to make these business models much more profitable than perhaps they've been in the past, obviously aided by the incredible reduced cost of the technology, the underlying technologies that are driving the fundamentals as well."

Caleb:

"And not for nothing, there are some big-cap companies in here that have done very well over the years. You put a Google or Alphabet or a Tesla or an Apple into any of these funds because they qualify based on your measurements for some part of this. You're going to get performance. But that's not just because they are the biggest companies that are also doing the best. They're also making change because of stakeholders and because of demands of shareholders and their customers as well. So, that's why you're seeing a lot of performance. But you're also seeing, as you've noted, a new industry really growing up in the past decade or so—but really in the past couple of years as so much venture money, private equity investment money in general, has gone into the sector."

Emily:

"Absolutely. And I think that those large-cap companies, they're interesting because they come with some of the biggest problems. Walmart has just had some issues in the last few days around toxic emissions and negative impact. And we are always going to have some negative impacts from these very large companies. Very large companies have complex supply chains, hundreds, if not thousands, of operational sites. They do rub up against various community concerns, but they also tend to have strong governance, more resources to address those risks, and frankly, a lot more attention from shareholders because they are the biggest holdings. You mentioned earlier our engagement process, looking at the size of the holding is a really important decision for us to decide well, 'Are going to spend our limited resources that we have on engaging with this company and what's the potential for them to actually move?'"

Caleb:

"Great point."

Emily:

"I mean, with that said, we do see a lot of potential for engagement and for investment beyond large cap: emerging markets, small cap. We think that these are a couple of asset classes that are going to be very big in the ESG space over the next couple of years. A lot of ESG in the last few years, a lot of the funds that you've seen launched, have been large-cap global equities or there's been thematic green bond funds. I mean, we ourselves, we have a very successful green bond fund that was one of the first in the industry out there. We've seen activity in that space, and we think that emerging markets and small cap are areas of growth in the next couple of years."

Caleb:

"What's missing Emily in the marketplace for so-called green investors or those that want to invest with their environmental conscience? Is it more offerings? Is it more education? Is it both of those? What else is missing in your point of view?"

Emily:

"Well, we're really in the process of building a new infrastructure for a new way of investing. There's stuff missing all over the place. We need better data. We need more data protocols. Now there are discussions underway with the ISSB around a standardized ESG disclosure format. We've seen in Europe the introduction of minimum ESG disclosure standards, and that is helpful because everything that we've built in the ESG space and responsible investment space to date has really been off the back of, if you think of it, inconsistent data, which is almost like trying to build a house without having the proper plumbing underneath the house or a proper foundation."

"So, certainly a consistent, repeatable, accountable, transparent data would be a fantastic addition to accelerating the space. But that in and of itself won't be the silver bullet for either positive change that we want to see through the capital markets or through a perfect ESG-oriented investing. Obviously, you're still going to need the intelligence, the wisdom, of real people who are experienced to understand these companies. You speak to them every day, and there's always going to be a lag between disclosed data and what's actually happening at the company."

"I would say obviously better and more data is one factor, but not the be-all and end-all of what we need. We also need more investor education. And in that regard, we've invested quite a lot of time and resources into collaborations with various institutions, particularly with financial advisors. A large proportion of our client base are investors in mutual funds or investors through the wealth management channel. And historically, financial advisors have not been advocates for ESG. They've been the ones telling individuals, 'Are you going to lose money? It's going to introduce too much risk into your portfolio.' And that's really been an outdated message, probably for the last 10 years at this point. We identified the need to invest quite a lot of time in supporting financial advisors to have up-to-date language, up-to-date facts, as well as the fund range that we've put out there. And so if you go on to our website, we have something called an Advisor Resource Center that has videos, documents, short kind of blog-style information that's quick to absorb that can help equip advisors to have better conversations with their clients."

Caleb:

"Talk to me about Calvert's plans for 2022. What are your big goals for this year? What's on the horizon for Calvert and what are you excited about?" 

Emily:

"So many things, Caleb. I mean, we have a big product pipeline that's underway that I'm very excited about. Building off the success of our Responsible Index mutual rund range, which again had very strong performance over the last five or six years. We'll be looking to launch new products that provide both more thematic exposure to different types of ESG themes that we know are of interest to our clients as well as exposure to what we think of as, say, the best ideas or the leaders in different industries. So if you like a higher conviction or form of systematic investment style. So we're very excited about our new product range."

"I think the other area that I want to highlight for 2022 for Calvert is our engagement work that I'm super excited about. To give you a bit of background, Caleb, over the last 18 months, we've run a campaign around EEO-1 disclosures. So EEO-1 is the dataset that the Equal Opportunity and Employment Commission requires companies of a certain size to disclose to them annually about providing quite a lot of detail around the diversity profile of a company's workforce. However, this data is not required to be made public. We looked at this in 2020. We identified that of our top 100 holdings in our responsible index series, only 18 of the top 100 were voluntarily making that disclosure available, and we thought that's not right. This is a really material factor to us. Diversity is linked with improved governance, risk management, improved performance profile on the whole over the long run, better corporate culture, better retention, et cetera."

"And so we wrote to those companies, we engage with them. We ran a shareholder resolution campaign. And where we stand today is that over 80% for those companies, in a relatively short period of time, are now either committed to making that disclosure public or have made it public already. So, we think that that really highlights the power of shifting a norm around information disclosure that helps everyone in the capital markets, not just Calvert, if there's a focused and targeted campaign. So, as a follow up to that, we are looking at using the data now to do a second layer of engagement with the companies around their actual diversity strategy."

"And the other piece that we are really focused on is climate change as part of our net zero pledge as an asset manager. We're committed to engaging with the companies that we invest in around their decarbonization trajectory. What's possible for them to achieve in the next 10 and 30 years around decarbonization? We'll be focusing on the high carbon companies, banks, companies responsible for the built environment, as well as the solutions providers."

Caleb:

"We will be looking forward to that. And folks, the data's out there, the information's out there. It's just about, as you say, Emily, collecting it, looking at it, and then making those investment decisions. We're going to link to Calvert's principles on the show page for the website. And this has been so fascinating. We want to have you back and see how things are going in about a year's time. Emily Chew, the chief responsible investing officer for Calvert. Thanks so much for joining the Green Investor."

Emily:

"Thanks, Caleb. It's been a pleasure."