Lunch-conference: ESG and the Future of Responsible Investing with State Street Global Advisors

On April 25th, in collaboration with CFA Montreal, PRI Québec and Finance Montréal, FSI welcomed Chris McKnett, Managing Director and Head of ESG Strategy at State Street Global Advisors (State Street), to speak about “ESG and the Future of Investing.” Chris shared his views and expertise on the current state of ESG, the barriers to ESG integration and the future of ESG. His presentation was followed by a Q&A period led by Odrey Robillard, Senior Responsible Investment Advisor at Caisse de depot et placement du Québec. Below are are some highlights of Chris’ speech and the conversation.

Current State

Chris informed the audience of the results of State Street’s recent Institutional Investor Survey that confirm that ESG is becoming mainstream, with close to 80% of investors using ESG components within their investment strategy and an overwhelming majority believing that ESG drives long-term returns. However, although the conviction for ESG integration remains strong, Chris noted that the depth of integration practice remains shallow for all but small group of investors. In fact, more than three quarters of investors indicate that less than half of their assets have exposure to ESG strategies.

The global risk landscape, as illustrated by the evolution of the World Economic Forum’s Global Risks Report, is a key driver of ESG integration. Chris noted that, over the past 10 years, there has been an increasing number of environmental, geopolitical and social risks listed within the top 5 global risks in terms of likelihood and impact. Another driver is ESG related regulation that has increased substantially in the past 10 years. Finally, Chris stressed that economics will continue to drive ESG integration. This is illustrated best by the staggering figures related to board diversity that suggest that equal representation within companies would add 28 trillion to global GDP by 2025.

Chris described State Street’s support of female leadership, discussing the fearless girl statue and the firm’s corporate engagement initiatives with the over 700 public companies who did not have a woman on the board: as a result of State Street’s and similar efforts, over 150 companies recruited a woman director and an additional 34 companies are committed to enhancing board quality.

Barriers to ESG

Although various drivers will encourage investors to increasingly integrate ESG, Chris described some of the barriers he saw as currently impeding adoption across all assets:

  • Deep-rooted biases: There is still a belief amongst non-adopters that consideration of ESG factors results in a sacrifice of returns. This belief is predicated on one particular type of responsible investing that focuses on screening out certain businesses or sectors. The sacrifice of returns assertion has been challenged by numerous studies that say otherwise for the wider range of responsible investing practices.
  • Defining ESG: There is a lack of clarity around how to define ESG. To ensure organizational alignment, terminology clarity is required.
  • Data: Although the quantity of ESG data has increased, the quality hasn’t. Data providers have different methodologies and there is a lack of transparency.
  • Benchmarking & measuring: There is no consensus about how to benchmark ESG strategies and many investors require proof of outperformance before adopting ESG practices. However, seeing that ESG is fundamentally about risk mitigation, Chris stressed that we cannot wait for backtesting.

Looking forward

Looking to the future of ESG, Chris described trends and developments within the industry. He spoke about the SDGs, describing them as a “gift to investors” because they have created a common purpose, global agenda and alignment on sustainability priorities. He predicted that the SDGs will show up increasingly in portfolio reviews and in investment decisions. Chris predicted that the debate about whether ESG should be considered a “factor” in so-called factor investing will continue and further research will focus on the topic. He also mentioned that asset owners will increasingly adopt ESG benchmarks.

Chris again stressed the need for convergence and alignment on a common standard for ESG disclosure and eloquently closed his presentation by reminding the audience that ESG means getting active to mitigate risks and realize opportunities, and that in order to do so, we must push for the science but also be mindful of the art.

Q&A session

In the ensuing conversation with Odrey, Chris shared his perspective on how, as a passive manager, State Street approaches ESG. Chris acknowledged the limitations to integrating ESG pre-investment for passive managers, but highlighted the importance of stewardship in passive strategies. He shared that State Street’s ESG approach is centered on utilizing the power of active ownership to engage with companies on material ESG topics. Odrey and Chris also discussed the merits of ESG data quantification and standardization. Chris recognized that not all ESG factors can, or should be quantified and suggested that the industry adopt an approach that mixes both art and science with regards to utilizing ESG information. However, seeing that ESG data quality and comparability remains low, he stressed the need for further work to quantify and standardize data.

When asked what advice to give to the 2/10 investors who do not make ESG a part of their investment strategy, Chris suggested that asset owners start discussing ESG with investment managers and consultants. For investment managers, Chris encouraged them to be open to the possibility that ESG could add value. He also suggested that they continue to pay attention to what their clients are asking, noting that questions will increasingly focus on ESG topics. As a starting point, he encouraged investment managers to look at their processes to see if they are currently integrating ESG in an informal manner and how this process can be formalized over time.