Misconceptions of ESG Investing

– [Victoria Cunningham] Hello, everyone, my name is Victoria Cunningham, and I’m a Senior Portfolio Manager in the Wealth Management Group at Segall Bryant & Hamill. I’m here today with our CEO, Phil Hildebrandt. And we want to take a few minutes today to share our thoughts, and perhaps some misconceptions, regarding a topic on the minds of many investors: sustainable, or what we’re now referring to as ESG Investing. So Phil, first order of importance, can you define what ESG investing is for us?

– [Phil Hildebrandt] Yeah, thanks Victoria. Now, ESG stands for environmental, social, and governance. And it refers to a type of investing that considers these factors when evaluating an investment financial return and overall impact. Environmental factors look at the conservation of the natural world. Social factors evaluate the treatment of people both inside and outside the organization. And governance factors consider how a company is run. ESG investing is alternately or sometimes referred to as impact, socially conscious, or sustainable investing.

– [Cunningham] So, this is a new product at SBH.

– [Hildebrandt] No, it’s really not a product at all and nor is ESG new to us. Environmental, social and governance factors are incorporated into the analysis we conduct on investments. It’s part of our research process. We are bottom-up investors, which means we focus on the fundamentals of specific companies rather than the industry or macro environment. By focusing on all the relevant factors that may impact an investment, we can better assess not only the future potential of a company but also any risks associated with it. For instance, in the process of evaluating a company’s revenue production, products, services, expenses, debt, overall management, we also incorporate the relevant ESG factors into our analysis of whether to invest in a company’s stock or not.

– [Cunningham] Which I think is one of the first major misconceptions about ESG investing. The acronym may be new but it’s a concept that we as a firm have been moving toward and fine tuning for years. In its essence, ESG is a way of evaluating the sustainability of an investment, and what is that other than long-term investing, which we’ve been emphasizing in firms since our inception?

– [Hildebrandt] Yeah, that’s really true, but I guess also what you’re saying is I don’t have to be a member of the Sierra Club to embrace ESG.

– [Cunningham] Exactly. At SBH, ESG considerations are one important aspect of identifying good quality investments, pure and simple, which leads us to our second major misconception about ESG. That is that it’s an all or nothing proposition, you’re either a good or a bad operator. But that’s not always the case.

– [Hildebrandt] No, that’s right, consider Tesla. Many consider Tesla as one of the best examples of a good operator especially in environmental space. It single-handedly brought the world into the era of electric vehicles, which could meaningfully reduce the developed world’s carbon footprint. But what many people don’t know or consider is how do they produce their products? What are their operational emissions during production? How do they deal with their waste that they generate during production? What about the materials that they source to create their products? Are those sustainable? Suddenly what was very black and white has become decidedly gray. But serious investors such as ourselves, we don’t shy away from the gray, we actually shine in it. That’s where our deep research process pays dividends by knowing how to evaluate and prioritize the strength and weakness of companies with the objective unveiling the real long-term investment opportunity.

– [Cunningham] Exactly, consider Quanta Power, a stock from our all cap team, on the surface, the company could be viewed as a bad ESG player, because they operate in the oil pipeline construction, even though their MSEI scores are pretty good. But what we recognized early on was the importance of their evolution into building and designing renewable electric transmission projects. It started as a small part of their business, but it grew quickly. Quanta’s utility work has positioned them to be at the forefront of the world’s electric transmission modernization, a process that’s critical to making the operation of all of those electric vehicles that Tesla is producing sustainable. Quanta since then has been worried by the markets with higher stock prices as investors just like us, start to acknowledge that transformation.

– [Hildebrandt] So, what’s interesting about that is this is the kind of company that would be easy for us to miss if we had a policy of negatively screening companies based on assumptions, but we don’t. We evaluate on a variety of metrics, including a company’s ability and willingness to evolve and pivot towards more sustainable strategies. That is real impact investing. Providing capital to not just the companies already squarely in this new economy, but finding the companies that are agents for change or what we’re trying to do.

– [Cunningham] Which brings us to our last ESG misconception, factoring in ESG considerations does not necessarily mean that an investor has to forfeit good investment performance.

– [Hildebrandt] No, that’s right. I mean, we believe strongly that ESG factors, as well as the more traditional research factors, all lead us to solid long-term investments. Not only do we think about potential return when we select a potential investment, but just as much as the embedded risk in the company, ESG factors are a material part of that risk analysis. Think of it this way Victoria. Our fundamental research looks for companies not just with high return on invested capital, ROIC which is what it’s called, but for companies that are showing real improvement in ROIC. These make great investments. It’s the same with ESG. Some companies we will identify are already leaders in ESG factors, but if we find those companies making real strides toward improved ESG metrics, these will likely prove to be great long-term investments to spot.

– [Cunningham] But what about our clients, with more narrowly defined investing restrictions?

– [Hildebrandt] One thing about ESG is that clients have very specific issues that are important to them, and we have the ability to address those specific concerns as part of our standard analysis, but also as part of a more specific restrictions. For those investors, we can place restrictions on their personal portfolio to eliminate those companies that they might wish to avoid. And that might possibly make it through because of our more traditional investment analysis.

– [Cunningham] Yeah, that type of highly customized ESG investment strategy is a very personal decision, and really does require careful implementation by a wealth management portfolio manager, such as myself. We need to really ensure that these portfolios maintain a reasonable risk return profile, and ultimately serve not just the client’s ethical objectives, but also their financial goals.

– [Hildebrandt] Yeah, look, I think that the key for us, the way we invest, is we try to provide very customized tailored solutions for our, each of our clients. ESG factors are simply one aspect of that. We’ve considered these factors for many years and they go into helping us identify great investments for our clients, but our ability to tailor it to our clients’ specific needs, I think, is something that people really appreciate.

– [Cunningham] Thanks Phil.

– [Hildebrandt] All right, thanks, Victoria.