SPEAKER Q&A: SHAHEEN CONTRACTOR, ESG RESEARCH ANALYST, BLOOMBERG INTELLIGENCE

COVID and recent events have brought a focus on the “S” in ESG.

Many corporations have pledged to improve racial and gender diversity in recent months, and investor and other market pressures could ultimately ensure words turn into action.

1. What are some of the major drivers for ESG and why has it become such an important “buzzword” now?  How much growth have we seen?

ESG continues to be driven by pension funds and increased millennial interest. For example, the U.S. Trust Insights on Wealth and Worth indicates that of groups surveyed, millennials lead in terms of social-impact investing interest and ownership at 77%. In addition, regulations particularly in Europe are on the rise and will continue to drive integration. The European Union’s sustainable finance taxonomy is an example of this.
A testament to the growth we have seen is the surge in assets under management. For example, our data shows that ESG and values-based ETF assets surged to $116 billion as of June, almost double that of the previous year. Despite the drawdown in markets due to COVID, flows to such strategies reached $30 billion through the first half of this year. 

2. What role has COVID-19 played in the heightened state of ESG discussions?

COVID and recent events have brought a focus on the “S” in ESG. Many corporations have pledged to improve racial and gender diversity in recent months, and investor and other market pressures could ultimately ensure words turn into action. Another signal comes from the credit markets where social and sustainability bond issuance is on track to almost double and we expect borrowers to raise additional debt to address social issues emerging from the virus. From a performance standpoint, we think that COVID was the first real test for ESG and will only continue the discussion. One interesting point is that most ESG Indexes outperformed during covid, providing a buffer during the downturn. In addition, during the week ending Feb. 28, amid one of the worst drawdowns, only 8% of U.S. ESG ETFs saw outflows vs. 22% of all U.S. ETFs, suggesting that ESG is seen as a long-term investment more than a trading strategy. 

3. What does best practice look like and how can we get there?

Materiality, which helps understand the financial relevance of ESG factors across sectors, is becoming an increasingly important lens to understand performance. A common standard to access materiality and ESG performance would go a long way, throwing a light on organizations like SASB that aim to do this. 

4. Does diversity play a role in ESG? If so, how? 

Diversity is playing an increasingly important role in ESG and an analysis of 2020 proxy proposals indicates a growing call for greater transparency on racial and gender data. When we look at diversity and performance, we find that integrating gender diversity at the board level can aid returns in both the U.S. and Europe. In Europe, portfolio performance can be strengthened by focusing on companies that lead on gender diversity metrics such as women on boards, while in the U.S. screening out the laggards can add value. In addition, companies with a high share of women on their boards in the U.S. started commanding higher relative valuations this year, indicating the market may be repricing issuers that pay attention to this concern. 

5. What is the best way to understand and better a company’s ESG performance?

One can understand company performance is by looking at material ESG metrics compared to peers and also incorporating a forward-looking view of the company. For example, our industry research at BI ESG covers topics including;

– Performance on material ESG metrics
– Targets and goals the company is setting
– Oversight over ESG at the board level. This is where understanding things like ESG linked pay plays an important role 

6. Based on the research and what you have analyzed with market trends – What do you think is the future of the ESG discussions?

As I mentioned before, a focus on material ESG metrics is gaining ground and I think this will be the next avenue of understanding performance. Another aspect is using quantitative analysis and tools to better link ESG back to company performance and valuations. 

You can hear more from Shaheen at the Women Asset Management Virtual Summit on September 10th 2020. You can view the full agenda and register for your free place here.