• Brendan Sheehan

An Introduction to Socially Responsible Investing

In this webinar, guest speaker and portfolio specialist at Clearbridge Investments Robin Freedman talks about socially responsible investing, or ESG investing (environmental, social, governance), and discusses what it is, what it isn’t, and the process in which her firm specifically vets other companies when it comes to socially responsible investing.


Watch the video below, or scroll down to read the transcript.



Topics Discussed:

  • ESG becoming a fiduciary

  • Investing trends

  • ESG integration models

  • ESG considerations vary

You can watch this video and others on the Waymark Wealth Management YouTube channel.


Video Transcript

Brendan Sheehan: All right. Well, welcome, everyone. We are here with our SRI, Socially Responsible Investing, or ESG, another way of describing this. I'm here today with Robin Freeman. Robin is a portfolio specialist at ClearBridge Investments. She joined the firm in 2010. She's almost celebrating her 10th anniversary, and has been in the investment business for over 13 years. We just caught up. She actually was within Lehman right around the crazy times back in 2008, and has since transitioned over to ClearBridge. She's part of the SRI team, socially responsible team, and she's going to help us to understand a little bit more about social responsible investing. What it is, what it isn't, and how her firm specifically actually handles the actual vetting of different companies when it comes to socially responsible investing. Welcome.

Robin Freeman: Thank you. Thank you for taking the time to watch us and listen to us today.

Brendan Sheehan: All right, sounds good. First, before we get started, we have this nice, fancy disclosure at the bottom that this is all educational in manner. I'll read it verbatim. Opinions voiced here are for general information only, not intended to provide specific advice or recommendations for any individual. There's no assurance that the techniques or strategies discussed are suitable for all investors [inaudible 00:01:33]-

Robin Freeman: I think what [inaudible 00:01:35] it started with Europe, and it's going to come here as well, where we have actually seen on the institutional side, so these are endowments and trustees, where they're looking to be investing ESG, and then retail, so individual clients is how we consider that, is something where more until recently you have it where clients are the ones that are bringing it up to advisors, and I think there's been more of an importance of more of a knowledge and education, and that's what this is today, is that ESG is something where we think that you can't say it's a barrier for asset owners. It's going to be very important over the next really 10-plus years.

Brendan Sheehan: Yeah. It's funny you say that, and some of the things that you just mentioned a moment ago really echo today because I actually have an attorney who watches this [inaudible 00:02:31] and I don't want to say anything bad about him, but he has kind of that old school mentality that handicapping of portfolios, that using ESG handicaps portfolios, and so his fiduciary responsibility is to not handicap his portfolio, and therefore he has told me very explicitly this is not a strategy I want to consider. What you're actually saying is that in some situations, the ESG part, the ESG consideration is actually a key component of their fiduciary responsibility.

Robin Freeman: Yeah, I talk a lot to advisors who are newer to talking about ESG, and how can I bring it up with clients, and I think it's something where you don't force a client to any portfolio, similar to anything else you're doing, but just starting the conversation and asking about what they're interested in or are there any values you want to put into your portfolio. If they're someone who says, "No, I don't want to talk about this," then you move along, but just entering it into the conversation, I think, is important.

Brendan Sheehan: Sure, yeah. Talk to us a little bit about the trends. So, obviously I guess, it surprises many people that millennials and younger people would very attracted to this. Talk to us about this slide and some of the people that have the most interest in [inaudible 00:03:50] they actually [inaudible 00:03:51].

Robin Freeman: We had done a survey about two years back that was looking at high net worth clients and millennials, and the interest of what does ESG appeal to you. The survey wasn't very surprising to us, but I think it was probably for a lot of people, is that it holds very high appeal for high net worth sides, but especially millennials. They're almost 90% more interested in learning about ESG and that concept of ESG, and what I thought was very interesting was is you look at towards the bottom, where believe ESG investments are likely to perform as well as better than non-ESG, you have almost 75% on the high net worth side and 84% of millennials, and informative about ESG from their advisor. It's been something where they have been bringing it up to their advisor by learning about it from self-directed research or by the press. I think there is this huge wave that hasn't come yet, but based on that education I was talking about that high net worth clients and millennials are very interested in hearing about ESG, it's really about getting that access through their advisor or through some self-directed research.

Brendan Sheehan: It sounds like the key to this slide for me is make sure I keep mentioning this to people because it doesn't look like many advisors are bringing it up with their clients.

Robin Freeman: Yeah, I think that millennials are discounted in a way, where people see millennials as younger, but millennials are starting to age. They're now becoming a bigger population than baby boomers. Especially it's important because if you think about everyone talks about that transfer of wealth that's going to be happening between the baby boomers to the millennials, and millennials are very interested to hear what they're investing in, what the company that they're investing are doing, so by involving them earlier on and getting them educated, I think that's something that we look at.

Brendan Sheehan: Yeah, and again, anecdotally, I see that all the time. The younger they are, the more ... When I have that conversation with people, they actually do say, "Yes, I'm very interested in making sure," as the title of our presentation is, "[inaudible 00:05:53]."

Okay. Any other things that you found from that survey?

Robin Freeman: So, the prior slide was about looking from the client experience. This slide is more from the advisor experience. The top one is that nearly 90% of advisors cite that the ESG investment discussions are initiated by their clients, which of course is not the case today since we're doing a webinar on ESG. Then 90% of advisors' clients indicate that they don't believe that ESG actually carries more risk, so that fiduciary duty, advisors are really debunking it on this slide.

Brendan Sheehan: Got it. Okay. This slide doesn't really surprise me that much in what parts of the country are actually embracing this, but do you want to [inaudible 00:06:45]?

Robin Freeman: Callan, they had done a survey. Callan is a big institutional presence. They're based on the West Coast. They've done a survey that looks at all the different regions of the country, looking from 2013 to 2019, and looking at ESG adoption rate, and excluding the middle of the country, all areas of the country have increased in ESG adoption.

I was actually, an anecdote, I was in Houston, Texas in the fall. I was told, "You don't really need to bring up ESG, they're really not interested in it in the oil center of the company." I actually just asked, "Do you ever get clients that are interested in ESG?" It was actually a yes, so you have areas like Texas can grow in ESG. I think that there's hope for the rest of the country.

Brendan Sheehan: Got it. Okay. Makes sense. All right, so this is one of my favorite parts of the whole ESG story, is the impact. I actually wrote a blog article a couple of months ago about my daughter, who has been, I think it was September, in the Boston climate strike [inaudible 00:07:51]. She wasn't there, but she was [inaudible 00:07:54] spearheaded that climate strike. As much as I was proud of her for participating in it, I also gave her a little dose of reality from her dad, just simply saying, "It's great that you participate, it's great that you helped, you make pretty signs, and everything, but I'll be honest with you. I don't think much is going to happen from that."

This is where I love the ESG story because it's really using capital. Ultimately, these companies will start changing when it hits them in the pockets. That's what I love about this, is that you have two stories, where if you give money and give most of your money in investing dollars towards these companies, it allows them to [inaudible 00:08:41]. They can do work with that money. On the flip side, if you're just blindly giving money to, let's say again, the [inaudible 00:08:52] 500, not only are you helping the companies that are not ESG, interested in ESG metrics, you're also somewhat endorsing them by just blindly saying, "Hey, you know what? I'm just going to give my money and just let it do what it needs to do." I love the concept of actually creating change with how you're investing your dollars. Why don't you talk about that?

Robin Freeman: I think that with clients or just individuals, it's how do I get started? If I invest in a stock, I don't have any impact, and that's really what we try to talk about, is that you can make an impact by investing in stock. Part of being with a manager who's done this, we pool clients' assets together, and that's how we're able to make an impact, by putting those sellers to work. If you think about the types of companies you're investing in, my favorite is talking about investing in companies that their end product can benefit society. If you can invest in a biotech company that's working on a cure for Alzheimer's or they're coming out with treatments or cures for unmet medical needs, then I think that's something that people don't think about in their day-to-day, but what an impact that is, is that by you investing your money there, that you can potentially come out with a life-changing cure for something.

Brendan Sheehan: Mm-hmm (affirmative), yeah. It's huge. I absolutely agree with everything that you just said, that this is how you really make change happen. [inaudible 00:10:29], and I think you're starting to see that a little bit, especially with oil companies. I think you do, whether it's a Superbowl ad or just a recent ad by one of the oil companies that we're talking about, how they were changing the world for the better and looking at alternative ways to use oil for, again, good. That seems a little bit of an oxymoron, but they're branching into other industries, so that they can diversify because let's face it, oil is probably going away. It might not be in our lifetime, but we'll see, and these oil companies, if that's their only product, then they could be going the way of the dinosaurs. They have to diversify.

Talk to us a little bit about ClearBridge specifically. So, boots on the ground, a manager like ClearBridge, what do they actually bring to the table that the actual [inaudible 00:11:23] the individual investor can't do?

Robin Freeman: So, ClearBridge has the experience where we've been doing this since 1987, when we started our first ESG portfolios. I think there's a few different ways that different firms will do it. So, there is one model where a firm will use a third-party researcher to do ... It will take their portfolio, and screen out names. There's maybe a model where there's a segregated ESG team that deals with company meetings, and there's also going to be another person who will talk to CEOs, and for ClearBridge's approach, how we've always done it and we think is really the most prudent is we believe in full integration throughout the firm.

We have 14 different analysts that work at our firm. That's going to be sector-based, so healthcare, technology, et cetera. We're going to have one person, along with our portfolio managers, meet with company management teams and talk to them about how is your balance sheet? What do you think the next quarter is going to look like? We're also looking at ESG issues that are important within different industries, and we think that by having that done in one conversation, it's really how you get the best picture of a company, rather than it being these different conversations with different people within public companies.

Brendan Sheehan: So, bottom line then, do you actually have representatives at ClearBridge who will go to one of these companies, whether it's a Tesla, whether it's an Apple, whether it's a Microsoft, and actually sit down with board members and actually talk to them, and say, "What are your plans? What's your business model? How are we incorporating ESG into the mix?" Is that pretty much what you're saying?

Robin Freeman: Yeah, so ClearBridge is ... We tend to be very long-term oriented in nature, where on average we've held a company at the firm for seven years. We have $150 billion in assets, which we really do think that that provides us access to companies where we have about 1000 management teams that will come into see us every year. Of course, we'll go to conferences, but getting that access where we believe that a company wants to hear from us. They want to hear what we think because they know we're not just looking to own a company for three months and then get out of it. We're really alongside the table. What we think the company can be doing for us to own them for five-plus years.

Brendan Sheehan: That's interesting. This goes back to the prior slide, is that this is where the individual investor can actually influence change because I would imagine there are probably companies that you're [inaudible 00:13:54] right now, that you go out and visit them, and you say to them, "Listen, we love everything about you. You've got a great balance sheet, you're profitable, you're this, you're that, but from an environmental standpoint, this is where you fall short. If you were to fix that, then it would definitely be something that would be on our list, and we can actually dedicate tens of thousands of millions of dollars towards you." Is that pretty much what you're saying?

Robin Freeman: Yeah, so we're going to give a grade to every single company at the firm. Every company that's covered by one of our analysts is going to get a rating anywhere from AAA, being best in class where it's really coming down to how is the company-

Brendan Sheehan: [crosstalk 00:14:33] slide here.

Robin Freeman: Yep.

Brendan Sheehan: Yep.

Robin Freeman: So, how is the company, really from its core, putting ESG at the forefront, where they're also creating a good investment beneficial to society, like we were talking about earlier? But then there might be companies that fall really to the left of that spectrum, where we're going to give it what we call a B rating, where it's flagged. So, it's either in an industry that's unsustainable, like a tobacco, but it could be a company that really is just not just detrimental from an environmental standpoint, but not really thinking about good corporate governance. This is still going to be a company that we'll meet with because we're hoping, by engaging them, that they are able to improve on some of these metrics. Just because we gave it a B, it doesn't mean we never talk to them again.

I think as ClearBridge, we pride ourselves on being active managers. Not to be confused with activists, where it means we're putting shareholder proposals forward, but active in that we are constantly engaging with companies on best practices and looking to help them improve on different ESG frameworks.

Brendan Sheehan: Got it. I know this was a slide that you were particularly excited about. Talk us through this slide.

Robin Freeman: Sure. So, when we talk about ESG, it's not going to be the same for all sectors. An energy analyst is going to look at the world differently than a technology analyst, and here we have looking at two different sub-sectors, so a retailer on the left and then a software and technology services analyst on the right, and really just what they're looking for from a company, from an environmental, social, and governance standpoint. That's going to be different.

On the environmental for a retailer, they're going to be looking at the efficiency of buildings, they're going to be looking at transportation. That's a lot with talking about Amazon, talking about Costco, and really that last mile, how are you going to get something from a delivery unit to a consumer? Whereas a software analyst is really going to look at the efficiency of a plant, what type of waste are they using when they come up with product. Then on the social side, a retailer, we're going to be looking at the hourly wages, supply chains, versus a software analyst. I think something that's been really a new round has been social media and software about how are they going to keep data security. That's something that we're engaging on with all of our technology analysts, whether it be within software, and also the new internet and media space.

Then lastly corporate governance. This is something that's obviously important for all sectors. When looking at the retailer, gender diversity, board independence, and then on the software side, looking at that competitive behavior.

Brendan Sheehan: So, needless to say, you're doing a pretty exhaustive review of all these companies.

Robin Freeman: Yep.

Brendan Sheehan: Got it. I like this slide too. I know I'm bouncing around a little bit, but this one here. This is pretty much putting into a [inaudible 00:17:30] of figure here of how ClearBridge, or any of these managers who manage from an ESG standpoint, work with companies. Can we talk a little bit about this?

Robin Freeman: Sure. So, that top left is working with management as long-term owners, so going through the different ESG frameworks of ... A lot of times they'll ask us if they have a lot of capital, what do you think that investors would be more interested in, a buyback or dividends? Then also looking on the environmental standpoint of what could we be doing from a client perspective, and then once ... When we work with management, I think all of these go hand-in-hand, is that all [inaudible 00:18:11] the companies, these are the areas that you can improve on, and we'll assign a rating to each company. This isn't something where we say a company is a AAA, and then forget it. That's just a baseline, and we're going to be ... If there's a news event with a company, these ratings aren't stagnant, where if there's something that happens, that could warrant a model change. We're willing to do that. That's also not to say from the other spectrum, working with companies as long-term owners, and identifying those key areas, you hope that companies can move from a B to an A, to a AA, et cetera. Lastly, focusing on ESG leadership. I think that being a manager ... Prudent financial management really should be the number one, whether it's ESG or not.

Brendan Sheehan: Mm-hmm (affirmative), got it. Okay. I think we're winding down. Were there any other slides ... I know I've bounced around a little bit at the end there. Are there any other slides that you want to take a look at before we jump into questions?

Robin Freeman: I think those are probably the ones that I definitely think we should have highlighted, so I would love to see what's on your clients' minds.

Brendan Sheehan: Okay. So, let's open it up to questions. We'll spend a minute waiting for the questions to start pooling in. That could be the title slide here, but yeah, so far, so good. This is really interesting. I'm learning some stuff along the way. I think every single one of these webinars I've learned a little something about everything here.

Robin Freeman: I think especially ESG is something that's constantly evolving, so you're talking about how we started out talking about all the different names that ESG has had. I think that as more people get involved in ESG, this is something that's just going to continue to move along in importance, and not just with individuals, but I think it will continue to grow, and you have [inaudible 00:20:05] grow as well.

Brendan Sheehan: Got it. Okay. Well, it looks like we've got one question that came in. The question is do you have any examples of a company that ClearBridge has been working with that ... Kind of a case study of a company that may not have passed through your screens, but by working with ClearBridge you actually have pumped it up to AAA, to actually get that company to invest? Some case study example of some place where ClearBridge actually has effected some change?

Robin Freeman: Sure. So, there is a technology company that we've been working with in that semiconductor area, where we looked at ... [inaudible 00:20:54] use this example, but where we looked at how they ran their organization. It was incredibly inefficient. They were wasting a lot of money on servicing the plant, the water usage, and we were able to work with them on how they could redesign in order to become more profitable. They wound up saving something like $5 million a year just on that, by putting those in place.

I think a more interesting example more recently is we own a company, Discovery Communications. They did a merger with Scripps Network probably about three years ago now, and if you looked at Scripps Network ... So, if anyone watches HGTV, I'm a big fan of the channel. It makes me want to move all the time. Scripps Network is very female viewership dominated, and if you looked at the merger of the two companies, and you looked at the board and how they were divisioned, they didn't have a single woman on the board. How can you be saying what types of shows that women want to watch when you don't actually have a woman represented? We voted [crosstalk 00:22:03]-

Brendan Sheehan: That makes sense.

Robin Freeman: So, we had the opportunity to vote our proxy in. Proxy voting, I should have mentioned earlier, is something that's also very important as active managers, where we'll vote 100% of our proxies for our clients. We voted our proxy to have a woman added to the board, which was successful, and then in the next year we voted our proxy again to get another woman added because you want to have that company represented better than it was.

Brendan Sheehan: Interesting. Again, you're putting your money where your mouth is.

Robin Freeman: Exactly.

Brendan Sheehan: I don't know if you know, what ... I know I'm throwing a curve ball at you. These are off script here. I'm more curious about this. Of all the money that ClearBridge dedicates to different companies that make up the portfolio, what's the largest shareholder percentage that ClearBridge has in any one, or any one stock?

Robin Freeman: So, that really varies. I mean, if you're talking about a mega cap company-

Brendan Sheehan: Right, that's be small.

Robin Freeman: ... that's going to be much smaller, but there are companies where we could be 12% shareholders.

Brendan Sheehan: Really?

Robin Freeman: Yeah.

Brendan Sheehan: So, it is that high?

Robin Freeman: Mm-hmm (affirmative).

Brendan Sheehan: Okay. That's what I was wondering. So, just with that example of voting with proxies, 12% of the votes, if that was a company that had that issue, 12% of all the votes could have been we want more females.

Robin Freeman: Yep.

Brendan Sheehan: That's fascinating.

Robin Freeman: Yeah, there are some companies we'd probably like to be bigger shareholders of, but we're capped at a limit. To own too much of a company, but yeah, by 12% of votes, that vote tends to matter.

Brendan Sheehan: Yeah. Well, it looks like those were the only questions that we had, so I think we're going to wrap up here. Any final thoughts, Robin, before we finish up?

Robin Freeman: I just want to say thank you for taking the time to listen to us today. If you have any questions, I'd be happy to be able to filter those back to ClearBridge, and however we can best help you in your practice and your conversation ESG, we'd be happy to help.

Brendan Sheehan: Okay, sounds good. Well, thank you, everyone, for joining, and I hope you have a great day. Take care.

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