Morningstar Magazine - April/May 2018 - 60

Investors

Snider: But it's better than a bunch of KPIs
that just talk about inputs, which is what we've
been dealing with heretofore.
Eccles: I would agree with that.
Lydenberg: The SDGs are very long-term goals.
But they are going to force those in the
investment community who say they want to align
themselves with those goals to figure out
what, in fact, that means. The longest-term
investors-the pension funds with a 30- to 40-year
time horizon, or even the Japanese pension
fund that describes itself as super long term with
a 100-year time horizon-can align themselves
with the SDGs. There will be a cascading effect
down from those.

They can then confront the question of how they
can, as investors with not only a portfolio but
the ability to convene for collective action, move
the financial community into a position
where it can contribute to these long-term goals
set out in the SDGs. How can they influence
public policy on system-level issues?
Eccles: But as part of that, you're going to
have to change the nature of the conversation
investors are having with companies.
Companies say investors never ask about this stuff.
They just want to know about revenue growth,
earnings, how's that acquisition going?
There needs to be a more structured conversation
from the investment community.
Lydenberg: You see that happening in
Japan, where the GPIF, the government pension
investment fund, has not only required all its
domestic Japanese managers to invest in an index
which contains those companies that are
positively screened for ESG, but to engage with all
of these companies. It's a condition of their
doing business with GPIF. That's a clear message
to the largest asset managers in Japan or anybody
who wants to manage the largest pension
fund in Japan. And the companies need to have
that engagement with an investor who says they
have a 100-year time horizon.
Eccles: But a lot of the asset managers will say,
it's all well and good for GPIF to say they've

60

Morningstar April/May 2018

got a 100-year time frame. We get a three-year
mandate, and we're evaluated on an annual basis.
Lydenberg: I was at a presentation where
the head of GPIF relayed some of the pushback
they'd gotten from managers. They said,
"Well, we don't get paid enough to do this
engagement." GPIF's response was, "Change your
business model."

What's in a Name?
I run into a lot of investors who have not embraced the
idea of investing for sustainability and impact.
How would you sell a disinterested investor on this idea
of sustainable investing? Why should they care?

Snider: At the end of the day, this is just
additional information by which to invest. What
investor doesn't like more information to
make an investment decision? Has every single
metric across the ESG set of metrics been
proven to have a direct correlation to price or risk
or return? No. But you can start from there.

The other day, I was at a conference on the
Sustainable Development Goals that PIMCO helped
to host. One of their CIOs made an interesting
observation on how many sectors, because
of transformations in business models, had gone
from investable to noninvestable sectors.
Some people are going to be more anchored on
whether it helps returns. Some people are
going to be more anchored on the risk side. Just
forget the terms ESG and sustainability and
instead ask investors to think about how the world
is transforming and what society or the
environment or their daily lives might look like
in 10 years, and whether their portfolio is
actually geared toward that and what might
be at risk in their portfolio. I think a lot of people
would want to know the answers to those
questions and be surprised when they do find
the answers.
That would take out the fear that ethical
concerns are creeping into logical investment
portfolios. Instead, this is about whether their
portfolios are actually geared toward the
transformation of society, from both the risk and
the return perspective.

Lydenberg: I would ask managers where their
returns are coming primarily from. Are they coming
from risk management at a company level
that is aimed at beating the market, or are they
coming primarily from the returns that the market
as a whole, or their benchmark as a whole, is
giving them? The answer to that is that the ability
of managers to consistently beat the market
through risk assessment is relatively limited,
whether with ESG or not with ESG. The return that
the market itself gives them is far greater. By
paying attention to system-level issues that are
ultimately responsible for the performance
of all the companies in the benchmark, issues that
affect all the companies in their portfolio rather
than a single company here and there, they have
a source of return.
Eccles: A lot of it's about language, as Anna said.
OK, you don't like sustainable investing. But
what do you think it is: negative screening or
values-based or ethics? No. It's about identifying
risk factors and opportunities. Change the
language so that it's clear about what we're
talking about.

It's hard to do, because once people have made up
their mind that they don't like something, then
they'll keep insisting on more empirical evidence.
Here are all these studies that have been done
about corporations, showing how better ESG
performance leads to better financial performance.
"Nah, that's correlation. It's not causation."
What's the data like on the investors' side?
It basically shows that, at the worst, it's a wash;
there are all kinds of methodological issues.
"Well, I'm waiting until there's clear evidence
that you can get superior returns through
sustainable investing."
OK, big guy. You think you're out there trying to
compete and do better. You're an also-ran.
By the time you get on board, a lot of that alpha's
gone away, and people will be on to something
else. If you're waiting for the herd to demonstrate
something and you don't want to be out front,
that's your choice. You're going to be a follower. K
Jon Hale, Ph.D., CFA, is director, sustainability research with
Morningstar global research.



Table of Contents for the Digital Edition of Morningstar Magazine - April/May 2018

Contents
Morningstar Magazine - April/May 2018 - Cover1
Morningstar Magazine - April/May 2018 - Cover2
Morningstar Magazine - April/May 2018 - 1
Morningstar Magazine - April/May 2018 - 2
Morningstar Magazine - April/May 2018 - Contents
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