Understanding ESG Impact to Energize Clients and Raise Assets

Craig Churman, Vice President - Product Development, and Elizabeth Alm, Portfolio Manager and Senior Investment Analyst, share insights from our 2020 Saturna Sustainable Funds Impact Report, including how the UN's Sustainable Development Goals factor into our analysis and research.

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Understanding ESG Impact to Energize Clients and Raise Assets

Craig Churman: Good morning everyone and good afternoon for those on the east coast. This is Craig Churman. I’ll be the moderator today. And welcome to the Saturna Sustainable Webinar series. This is our session that we’ve actually been working on for quite a while. And joining me is Elizabeth Alm who is a Senior Analyst in our Investment Group and a Portfolio Manager. And today’s topic is Understanding ESG Impact to Energize Clients and Raise Assets. And the good news is that we just released our Impact Report which Elizabeth had worked on for quite some time and it was finally released and we’re gonna share some of the anecdotes and insights from that report. Investors have a variety of reasons to invest in ESG assets and we’ve found that connecting investments to specific goals is a good way to not only identify the risk and opportunities in these assets but also to communicate the impact to clients and really provide and excellent framework for doing that. So, Elizabeth will be going through the way we’ve constructed our Impact Report and, more importantly, how we use the Sustainable Development Goals, or the UN promulgated SDG’s as a way to share that information. And we take a deep dive into each company, looking at the quantitative and the qualitative information that we can and really elevate the way the SDGs are used within certain companies and how we can share that as a way to both monitor the company as an appropriate investment but also share the impact stories. So, joining me is Elizabeth and I’ll start by asking her, you know, what are the relevant issues and what are the issues around SDGs that you might want to share with clients? And we’ll use that as a way to start the meeting.

Elizabeth Alm: Excellent, thank you very much, Craig. Really the goal here is to talk about how we conceptualize our impact: our framework, why we use the data we do, but ultimately, our incorporation of sustainability goes beyond just a quantitative process. To connect with clients, we want to communicate the whole picture including the stories and the qualitative side. So, the way we’ve been doing this, and the framework that we’re using for communication, really is based off of the Sustainable Development Goals. There are 17 goals and 169 sub-targets that were created by the UN to end poverty, promote prosperity, and promote wellbeing for the planet. And they are really helpful when evaluating our investments because we do believe that this is gonna be the new standard by which sustainability will be reported and measured and contribution to these goals allows us to identify areas of risk and potential new opportunities... but even more than that, it can define a common language for sustainability and within the ESG space. A common language is really one of the main issues that we grapple with. And especially as the world grapples with COVID, raging wildfires, the urgency to achieve these paths increased. And unemployment, supply chain disruptions, and deepening inequality are just some of the challenges that we’re facing. And when we’re tackling such complex issues, presenting data is never easy. You know, as the amount of data increases, so does the depth of our research and we’re, really, constantly evolving our analysis to take into account new research and new information as well as improving our process. Because the Sustainable Development Goals are relatively new, specific data on the companies contributions to the goals really isn’t readily available and in order to combat this, we do a deep dive, as Craig had mentioned, on every holding and went through each company to look at who is reporting the goals, how are they reporting these goals, and, really, in order to be counted on this chart, which looks at who is reporting, in our portfolios, on specific goals... it really... they don’t have to just report on climate, for example. They have to report on climate and connect it with the SDGs.  I thought some of these results were intuitive, as in the most reported goal is Climate Action and Climate Change, but there are some very important goals here that still are really underreported, such as Life Below Water and Life on Land. These are notoriously hard to measure... water usage, biodiversity... but what was really surprising to me was how few companies are still reporting on Sustainable Development Goal 16, which is Peace, Justice, and Strong Institutions, especially given the importance of corporate governance... I would have thought it would be more reported. But, even so, a significant amount of our portfolios are now reporting and these numbers are up substantially from last year because we do track this process. And one important part of our impact reporting is the fact that we want to deepen it every year and evolve it and make it more thorough and one thing that we’ve been focusing on in our analysis of impact is the importance of targets with goals and historical tracking. Acknowledging the SDGs and issues is good but describing a contribution to them, setting up a clear target and goal while tracking historical process, is idea, and really gives us as investors a clue as to the strength of the corporate governance. So, we use a company’s exposure about their contributions to the SDGs as part of our process of determining which businesses are fully incorporating environmental, social, and governance standards into their holistic company strategy and culture and who could be possibly brainwashing their business for maybe a beautiful marketing page. But, really, as investors, we’re looking for those companies who are thinking ahead and thinking about the risks related to ESG and really, that’s where we believe the value is for investors.

Craig Churman: So, Elizabeth, we’re benchmarking against the MSCI All World for both the equity strategy and the fixed income strategy and we’re looking at that as a global portfolio? So, both of those funds that we manage, and the one that you manage, SEBFX, the Sustainable Bond Fund, we’re using the same benchmark for this analysis.

Elizabeth Alm: That’s true. We think that the MSCI All World is a good benchmark to measure our funds against, because it is global, just like our Bond Fund, and it does have a lot of securities. There are about 2,300 individual securities in the MSCI All World so it gives a good picture and a good comparative benchmark for our funds. You can really see here that we are focusing on companies that set these targets, that are reporting and are going to be stronger in governance. And we as investors report on several goals in our Impact Report and I’m gonna go through three of these goals today to talk about why we chose reporting on these specific goals and why we have chosen the data we do, as well as some case studies to highlight, you know, what are some of the stories behind the holdings in the Fund. So, SDG 3 is really important, especially now. So, Good Health and Well-Being... and some of the sub-targets within these goals are along the lines of achieve universal health coverage, including financial risk protection and access to quality health care, also sub-targets include support research and development of vaccines and medicines for diseases as well as to provide affordable access to medicines in developing countries. In terms of how we’ve decided to, you know, present our data, the focus of this goal right now is to look at how companies are treating their workers and how they’re contributing in a wider sense. And the pandemic has really focused the world on the link between health and business and employee health and well-being has been shown by several peer-reviewed studies to be material to market performance. There’s one study that compared 45 companies who received really high scores in health and wellness and they significantly outperformed the S&P 500 over a 6-year period. And these considerations revolve around how corporations are addressing new challenges in front of them. So, we’re looking at paid sick leave, work and location flexibility, health coverage and workplace best practices for COVID are some indicators but we’d like to see these best practices incorporated as part of normal business rather than just being perks that will expire once the pandemic has ended. And ultimately, talent retention and attraction the best and diverse people will drive financial performance into the future. And really, when we’re looking at the data presented here, we’re looking at companies that have a strong health and safety management system and you can see that we significantly have more companies in our portfolios that have the strong health and safety performance relative to the MSCI All World. You know, poor workplace practices can lead to reputational damages in the form of outbreaks of COVID and shifting investor focuses to these companies that fit within an ESG portfolio. For example, there are some fast food chains that only have 22% of workers have access to paid leave versus 100% of Starbucks employees. Within our specific reporting on SDGs, we also look at who’s reporting by sector. So, you can see on the second graphic there, underneath the first, you know, some sectors are doing really well with reporting on this SDG, such as consumer staples, but... utilities, government bonds are really not reporting very much and they could definitely use some improvement. Our case study is Roche, which is a pioneer in health care and personalized health care. One of the targets of this goal is to strengthen the capacity of all countries, in particular developing countries, for early warning risk reduction and management of health risks and they’ve been contributing to this goal directly in the fact that they have received FDA approval for a highly accurate antibody test for COVID, which will absolutely be key in stopping the spread of this disease. But, beyond just COVID, they have the ability to make significant impact on affordability of health care. There’s definitely room for improvement but they have been acknowledged by the Dow Jones Sustainability Index as an industry leader in addressing drug costs. For example, the company provides a program in Pakistan where some of the cancer medications are split 50/50 by Roche and the Pakistani government and they’re provided free to citizens and there’s absolutely room for growth of this program but last year it benefitted around 8,600 people.

Craig Churman: And Roche is one of the stories that you have a little more information on in your Impact Report so that can be used with clients in terms of sharing a story about Roche and really how it falls into SDG 3.

Elizabeth Alm: Absolutely, and that’s our goal in presenting impact... is to give data, give the quantitative side, but also provide stories so that when you go to clients and we can give them a more human and more tangible picture of why sustainability matters and why they should care. The other focus goal that I’m gonna talk about today is Reducing Inequalities. And this has been incredibly important and absolutely something that’s been focused in the headlines recently but one of the sub-targets within this goal is to adapt policies, especially fiscal, wage, and social protection policies that achieve greater equality. And achieving SDG 10 isn’t just about improving the quality of life for people. It can also be important for investors to understand that diversity and inclusion policies of companies in which we invest is really correlated with profitability as well. So, companies with the most ethnically diverse executive teams... and we’re talking about not only with respect to absolute representation but also a variety and mix of ethnicities were 33% more likely to outperform their peers on profitability. So, fostering a corporate culture of diversity and inclusion is key to not only reducing inequalities but it’s also key to retaining diverse talent and potentially to long-term value creation as investors. And here we’ve tried to present information that drives to how companies promoting diversity, preventing discrimination, and shifting the culture of their firm to be more inclusive. For example, here pictured, in order to have a strong diversity policy and to be counted in these statistics, they need monitoring and audits, not just actually having a policy. And they need managerial and board responsibility for diversity initiatives. And we, in our Sustainable Funds, have 2-3 times better reporting on diversity and discrimination policies versus the MSCI All World and we really are choosing companies that are fostering this culture of inclusion, really, because ultimately, it shows better governance. It shows a better company. Our focus firm within this goal is Microsoft. Really, transparency is key to change and companies that have strong policies on diversity and inclusion—as well as disclose relevant information to track their progress—are viewed favorably in our eyes. 86% of Russel 1000 companies disclose they have the diversity and inclusion policy yet only 11% actually disclose their targets. And Microsoft has always ranked really highly in terms of workforce transparency. They’re one of only 4% of companies that actually disclose a detailed demographic report. But we don’t include them just because they’re good with transparency. They also have other programs which make them strong. They offer 20 weeks paid maternity leave and require suppliers to offer paid paternal leave as well. And they collaborate with historically black colleges and universities to encourage students to pursue computer science and STEM-related fields.

Craig Churman: Yeah, interesting within our portfolios, we tend to be overweight health care, so Roche shows up as a case study and technology and Microsoft... and being long-term investors, we look deeply into the data that you say, within the qualitative space, to make sure that it meets our risk parameters. And we see opportunities there.

Elizabeth Alm: And one of the most important SDGs for investors to report on and think about is, obviously, climate change. And the sub-target within this goal that we focus on is to strengthen resilience and adaptive capacity to climate-related hazards and natural disasters. A major new study from the world’s leading climate scientists has recently ruled out the less severe scenarios of climate change. So, they really narrowed the window of warming to 2.6 to 3.9 degrees Celsius. When, as investors, we think about degrees warming, how do we communicate this to clients? It can seem very abstract. So, a concrete way that I like to conceptualize this is risk in terms of the present value of manageable assets. So, if we’re looking at the upper end of the warming, around 4 degrees Celsius, you know there’s research that’s shown that this could a $4.2 trillion loss to manageable assets. And to give context, that’s the total value of all of the world’s listed oil and gas companies, or Japans entire GDP, and if there’s more warming, some of the tail risks can be exponentially more serious. But this isn’t just an issue we need to think about for long-term investing, these aren’t all in the distant future. Two hundred of the world’s largest companies gave estimations for the financial impacts related to climate change and just within those companies, they estimated about $1 trillion at risk in their organizations and over half of these risks were reported as likely in the next five years. So, it’s really important that we choose companies that are compensating for these risks, or less exposed to them in general. And one way that we measure this in a really important way is how a company is disclosing on their carbon. How good are they at actually giving these numbers? But also, what programs they have for reductions and very importantly, carbon intensity is one of the most important metrics in our analysis. So, our measurements of carbon intensity are the final two in this graphic and when I say carbon intensity, what I mean is the amount of emissions a company has relative to their sales. So, this enables us to compare companies to each other and also assess overall exposure to regulatory risk and also compare sectors to each other. So, we’re looking at not only absolute carbon intensity but we’re looking at it compared to an industry and also how is this trending over time. And just as some examples of regulatory trends that could impact carbon intensive industries in the near future, the EU has been considering pricing carbon intensity into their imports and this is important that we take this into consideration when making investing decisions. And just recently, in the US, the commodities future trading commission put out a report that said that climate change is a material risk to US financial stability, and they advocated pricing for carbon in our economy and this could be a future roadmap for regulation. Companies that are larger emitters will be more impacted. And here are our Funds relative to the MSCI All World in terms of carbon intensity. Both funds are 72% and 75% less carbon-intensive than the index. So, we’re really choosing the best actors in low-carbon industries. And our focus company within this goal is a little bit unique because when we’re looking for opportunities, we’re looking for good actors but not only the name brand companies that are well known for being sustainability leaders. Finding value is also looking at regions that are in the frontier of this space or companies that are shifting focus. Stora Enso is actually a Finnish company that specialized in the production of paper, packaging boards, and wood products. Their CEO is one of only 150 company CEOs to sign a statement of their intention to aggressively pursue climate action in the face of COVID-19. And to us, it signals good governance because in the face of these crises, we can’t afford to only attack one or the other. Human health really does depend on planetary health. The company’s carbon intensity is well below their industry median and we know that as a forestry company, they do face considerable challenges on the pathway towards carbon-neutral, but they also do have a chance to make a huge impact as an industry leader and they have been ranked by both the Transition Pathway and the Carbon Disclosure Project as a leader in climate action. So, they’ve reduced their emissions. They’ve reduced their carbon intensity by 25% in the past ten years, which we consider very positive. They’re shifting their focus to sustainable packaging and shifting their business strategy to adapt to the opportunities that are needed in this space. And even the suppliers of the company need to respond to questions about their emissions and contributing to emission targets.

Craig Churman: Stora Enso is one of my favorite stories because it really touches on all the bases of... this is a 200-year-old company that started as a timber company and is looking ahead now. And talk about long-term sustainability. There’s a company that you want to follow. But it’s in an area that’s in northern part of Europe, Scandinavia, where this is really front and center in terms of the thinking of the community and how they impact the clients and their marketplace. That’s an outstanding owning. Well done, Elizabeth.

Elizabeth Alm: Yeah, thank you. Patrick, who also works on the Sustainable Bond Fund, and I, really do look for some of these unique opportunities. And what I find really interesting is that despite these risks, that only a few companies actually disclose financial risks related to climate change. Only around 2% of 5,000 quantified risks from climate change within financial terms despite 75% of their having a corporate sustainability report. So, we’re really not only looking for good actors but also for those that are incorporating these risks into corporate strategy and planning.

Craig Churman: And I think you’ve done exactly what we set out to do, which is to create a dialogue with clients that can cover on topics that are most relevant today, which would include climate change, racial equality and diversity, and you know, the impact that we have with what’s going on with COVID. And, you know, I want to reach out to our clients that are listening that are in California and Oregon and even Washington, where the smoke from the wildfires is, you know... our visibility today is probably close to zero. So, you know, this is top of mind with clients and firms like Roche and Microsoft and Stora Enso are really doing terrific things in terms of running their business and following the SDGs. And like I said, we did just publish our 2020 Impact Report. I’ll give Elizabeth a lot of credit. She’s not only in the fixed income space and a manager on our fixed income strategies, but she does a lot of the work in terms of elevating our qualitative research and our quantitative research as we bring it together in our investment process and working to publish our Impact Report, so thank you for that Elizabeth. So, we’ve done a series of seminars, webinars, and our webinars are available for listening on our website. You can look at them. And like I said, our Impact Report has now been published and it will be sent to you, or you can get it off our website. So, thank you very much for joining us and we look forward to our next webinar.

Important Disclosures
Top Ten Holdings and Sectors of Sustainable Equity and Bonds Funds
A Few Words About Risk




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