esg investing...sustainable investing, october 2015 “high sustainability companies significantly...

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ESG Investing

Robin Freeman

Vice President, Portfolio Specialist

November 14, 2019



Agenda

1. ESG Investing has many names

2. The beginnings and where are we now? What does the industry encompass?

3. The 5 myths in public equities ESG investing

4. How to cut through the noise? True ESG integration

5. Questions



An Industry With Many Names

“clothespins” by Barbara Eckstein is licensed under CC BY 2.0.



An Industry That Continues to EvolveFrom Black & White to Shades of Grey…



But There Remains Skepticism

• A Performance Trade-off

• Breaches Fiduciary Duty

• Only Negative Screens

• Not Enough Assets

• No Real Impact

The 5 Myths of Public Markets ESG Investing



Performance Question Has Been Answered

“Sustainable strategies have performed the same or

slightly better than traditional strategies with

volatility equal or lower than traditional strategies.”

– Audrey Choi, CEO Morgan Stanley Institute for

Sustainable Investing, October 2015

“High Sustainability companies significantly

outperform their counterparts over the long term,

both in terms of stock market as well as accounting

performance.”

“We find that High Sustainability firms also perform

better when we consider accounting rates of return,

such as return-on-equity (ROE) and return-on-assets

(ROA).”

– Harvard Business School study, 2013

“We show that employee satisfaction is associated

with positive abnormal [stock] returns in countries

with high labor market flexibility, such as the U.S.

and U.K.”

– Wharton School of Business

working paper, 2014

All investing involves risk and you may incur a profit or a loss. There is no assurance that any investment strategy will be successful.

Asset allocation and diversification does not ensure a profit or protect against a loss. Past performance does not guarantee future results.

Perception

A common objection of asset owners and consultants is that “Holding companies to high ESG standards means sacrificing performance”

Reality

Third-party studies and our own experience confirm that stocks with strong ESG characteristics perform as well or better than stocks overall



Financial Analysis

.

Perception

ESG factors are superfluous or only qualitative in nature

Reality

ESG factors are critical components of financial and risk analyses

• 90% of the studies on the cost of capital show that sound

sustainability standards lower the cost of capital of companies*

• 88% of the research shows that solid ESG practices result in better

operational performance of firms*

• 80% of the studies show that stock price performance of companies

is positively influenced by good sustainability practices*

* Source: From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance, Gordon L. Clark, Andreas Feiner and Michael Viehs, March 2015.

All investing involves risk and you may incur a profit or a loss. There is no assurance that any investment strategy will be successful. Asset allocation and diversification does not ensure a profit

or protect against a loss.



ESG Becoming a Fiduciary Priority

All investing involves risk and you may incur a profit or a loss. There is no assurance that any investment strategy will be successful. Asset allocation and diversification does

not ensure a profit or protect against a loss.

Perception

Fiduciary duty is a barrier to asset owners integrating ESG issues into their investment process

Reality

Many countries have added regulations requiring institutional investors to consider ESG issues in their investment due diligence

“The literature on SRI is robust enough to say that there is a

serious question around whether or not ESG issues are

important to investment performance. This suggests that, at a

minimum, due diligence processes must include assessment

of the need to take account of these issues in investment

decision making.”

- Larry Beeferman (Director, Pensions and Capital

Stewardship Project, Labor and Worklife Program,

Harvard Law School)



Key Findings From Investors

Source: Legg Mason ESG Investment Survey.

High Net Worth Millennial

The concept of ESG investing holds similarly high appeal with both millennials and high net worth investors.

82% 88%

56%

47% 60%

74% 84%

20% 10%

High net worth awareness most often driven by press

43%

Millennials cite self-directed research most frequently

62% 51%

Would like to learn more about ESG investments

Would like to invest more in ESG

Believe ESG investments are likely to perform as well as or better than non-ESG investments

Informed about ESG investments from their advisor



Key Findings From Investors

Source: Legg Mason ESG Investment Survey.

Nearly 90% of advisors cite ESG investment discussions are most initiated by their clients

66% indicate that most clients don’t believe ESG options perform worse

90% indicate that most clients don’t believe ESG options carry more risk

69% of advisors feel the importance of ESG investing has increased over the past five years and expect this to

continue over the next five years

90%

66%

90%

69%



Investors Can Create Impact Via Public Equities

• Capital allocation can drive change (hint: impacting cost of capital)

• Investing in companies whose end-product/service benefit society

• Investing in companies whose supply-chains impact the world at scale

• Engaging with companies to drive change in environmental and social practices

* Source: From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance, Gordon L. Clark, Andreas Feiner and Michael Viehs, March 2015.



ESG Integration Models

Model 1: Model 2: ClearBridge:

Third party

ESG research

firm

Segregated

internal ESG

research team

One team integrating

ESG and fundamental

research

Preferred approach to ESG integration:

• Same person (investment professional) doing fundamental ESG research

• ESG considerations influence fundamental view of company

• ESG issues brought up in CEO/CFO engagements vs. separate ESG engagements



ClearBridge’s Approach

A dedicated ESG program with the resources and performance of a mainstream firm

• A legacy of specialized ESG expertise starting in 1987

• The scale, access and infrastructure of a long-term investor with $146.4 billion in assets under management1

• Sustainability Leaders and eight additional style-specific ESG strategies

Combining active investment with active ownership

• Selecting investments and managing portfolios

• Advocacy via proxy voting and engagement with company management

• Client and public education about ESG best practices

True ESG integration

• Firm-wide fundamental research incorporating ESG perspectives across industry sectors

• Research analyst compensation based in part on evaluating ESG factors linked to company performance

• An ESG ratings system facilitating systematic research and engagement with companies

Strengths and Distinguishing Characteristics

1 As of June 30, 2019.



Five Main Segments of ESG Integration in Practice

Portfolio construction and ESG integration

Company and thought leader engagement

Advocacy via proxy voting

Client interactionPublic

education



Key ESG Factors by SectorFundamental Research Team

As of June 30, 2019.

Name Sector(s) Covered Key ESG Factors

Chuck Harris

Director of ResearchIndustrials

Environmental impacts of products; labor management; governance; health and safety; environmental regulation and compliance; fuel efficiency

and optimization

Neal Austria Consumer DiscretionaryLabor management; product quality and safety; health and wellness trends; governance; raw material sourcing; supply chain practices; data

privacy and security

Robert Buesing, Jr. Consumer Staples/Durables Health impacts of products; supply chain practices; environmental efficiency of operations; clean vehicle technology; product safety; governance

Dimitry Dayen, CFA EnergyOperational safety; environmental efficiency of operations; governance; community relations; environmental and climate change regulation;

alternative energy investments; geopolitical risk

Tatiana Eades UtilitiesFuel mix; renewable energy exposure; emissions and carbon intensity; operational safety and efficiency; governance; environmental regulation

and compliance

Hilary Frisch, CFA SoftwareData privacy and security; governance; labor management; products to address environmental and social issues; impacts of automation;

environmental efficiency of operations

Erica Fufaro Media & InternetData privacy and security; content responsibility; governance (especially shareholder rights and capital allocation); social impacts of services;

labor management; data center efficiency; environmental impacts of e-commerce

Miguel del Gallego, CFA Financials Corporate governance; Compensation structure; Lending practices; Regulatory compliance; Talent acquisition/retention; Corporate responsibility

Marshall Gordon Health CareAccess to medicines; addressing unmet medical needs; governance (especially capital allocation and executive compensation); drug safety and

efficacy; quality of care and patient satisfaction; privacy and security of patient data

David Hochstim, CFA FinancialsGovernance; customer privacy and data security; lending practices; transparency and fair advice to customers; financial inclusion and access;

gender diversity

Deepon Nag Technology HardwareEnergy efficiency of products and services; data privacy and security; labor management; supply chain practices; governance;

environmental efficiency of operations; product life cycle management

Humphrey Oleng Basic MaterialsHealth and safety; environmental impacts of products; business ethics; environmental efficiency of operations; governance; labor management;

supply chain practices; raw material sourcing

Hannah Whang IndustrialsEnvironmental impacts of products; labor management; governance; health and safety; environmental regulation and compliance; fuel efficiency

and optimization

Nick Wu, PhD Health CareAccess to medicines; addressing unmet medical needs; governance (especially capital allocation and executive compensation); drug safety and

efficacy; enabling research and products that improve health care outcomes



ESG Considerations Vary by Sub-SectorSample Sector Considerations

Oil and Gas Exploration Production Software and Technology Services

Environmental

Greenhouse Gas Emissions

Air Quality

Energy Management

Waste and Wastewater

Management

Social

Community Relations

Security and

Human Rights

Data Security

Governance

Accident and Safety

Management

Systemic Risk Management

Competitive Behavior



ESG Integration into Fundamental Research at ClearBridgeProprietary ESG Rating System

ABeginner

AAIntermediate

AAABest in Class

BFlagged

Company has integrated ESG strategy into its business model, usually with full CEO and/or employee support, formally measures sustainability efforts and proactively communicates to investors. Often, these are companies that are providing goods and services that have a positive effect or impact on society or industry.

Company sees value in ESG factors, has begun to incorporate sustainability into business operations and products, and has started reporting its progress.

Company recognizes potential to capitalize on ESG improvements.

Company that has not focused on ESG, has a poor ESG record or operates in an unsustainable industry.

Progression



Company Engagement

Work with

management as

long-term owners

Identify

key areas for

improvement

Establish baseline

and monitor progress

Focus on

ESG leadership and

prudent financial

management



ClearBridge Investments ESG Engagement Reports

• Long term holding periods and large asset base enable access to senior management

• Bespoke, collaborative engagement identifies areas for improvement

• Transparent client reporting demonstrates meaningful progress

Annual Portfolio-Level Statistics and Commentary



Case Study

UN PRI Report: A Practical Guide to ESG Integration for Equity Investing

Neal Austria, ClearBridge Global Consumer Analyst, authored a

case study that was selected for inclusion in the landmark report.



Leadership Positions in ESG Organizations

Sources: www.riacanada.ca, ussif.org, ceres.org, cdp.net.

The Responsible Investment Association (RIA) is Canada’s leader on responsible investment (RI). RIA is a national, membership-based organization composed of

financial institutions, mutual fund companies, investment firms, financial advisors, and various organizations and individuals who practice and support responsible

investing.

ClearBridge is a Member.

The Forum for Sustainable and Responsible Investment is the U.S. national nonprofit membership association for professionals, firms and organizations

dedicated to advancing the practice and growth of socially responsible investing (SRI). Forum members support SRI by integrating environmental, social and

governance issues into portfolio selection analysis, shareholder advocacy, and community investing.

ClearBridge is an Active Member.

Ceres is a nonprofit organization with a mission to integrate sustainability into business practices for the health of the planet and its people. The organization leads

a coalition of investors, environmental organizations and other public interest groups working with companies to address sustainability challenges such as global

climate change, deforestation, and water scarcity and support a sustainable economy.


As a project of Ceres, INCR (Investor Network on Climate Risk) is a network of investors from across the globe dedicated to advancing the investment

opportunities and reducing the material risks posed by sustainability challenges such as climate change. It consists of nearly 100 members managing more than $11

trillion in assets.


CDP is a nonprofit organization that collects climate change, carbon emissions and water data from more than 2,000 companies worldwide. As an investor signatory

since CDP’s inception in 2003, ClearBridge Investments has joined hundreds of other institutional investors in supporting disclosure on GHG emissions data and

transparency on climate change policies and strategies. As a company member, our parent company, Legg Mason, has also committed to collecting and disclosing

critical climate change data as well as the risks and opportunities presented by climate change to our organization since 2008.

ClearBridge is an Investor Signatory.



Leadership Positions in ESG Organizations

Sources: thegiin.org, iccr.org, unepfi.org, accesstomedicineindex.org, fsb-tcfd.org.

The Global Impact Investing Network (GIIN) is a not-for-profit organization dedicated to increasing the scale and effectiveness of impact investing. Impact

investments are investments made into companies, organizations, and funds with the intention to generate measurable social and environmental impact alongside a

financial return.

ClearBridge is a Network Member.

Through the lens of faith, the Interfaith Center on Corporate Responsibility (ICCR) builds a more just and sustainable world by integrating social values into

investor actions. Harnessing their power as shareholders in the world's largest and most influential corporations, ICCR members work in coalition to promote

corporate practices that ensure long-term business growth while measurably improving environmental and social impacts.

ClearBridge is an Affiliate Member.

The Access to Medicine Index analyses and independently ranks the top 20 research-based pharmaceutical companies on how they make medicines, vaccines and

diagnostics more accessible in low- and middle-income countries. Two billion people in the world have no access to medicine, and the index gives insight into what

the pharmaceutical industry is doing to improve this situation. Funded by the Bill & Melinda Gates Foundation and the UK and Dutch governments, the Index has

been published every two years since 2008.

ClearBridge is a signatory to the investor statement as of 2016.

Climate Action 100+ is an investor-led initiative to engage systemically important greenhouse gas emitters in curbing emissions and improving climate-related

disclosures.

ClearBridge is a signatory as of March 2018.

The Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) seeks to promote the voluntary company disclosure of decision-useful

climate-related information. Such disclosures are intended for use by investors, lenders and insurers, and take into account several risks associated with climate

change across industries. The TCFD aims to help companies understand what financial markets want from disclosure in order to measure and respond to climate

change risks and to encourage firms to align their disclosures with investors’ needs.

ClearBridge is a supporter as of Sept. 2018.

https://climateaction100.wordpress.com/



Sample Publications

Used with permission. The information in these publications is based on sources believed to be reliable, but no representation is made by ClearBridge Investments as to their

completeness or accuracy.

Integrated Analysis (2013)

Produced with the UN PRI Public Equities

Working Group

The Impact of Sustainable and

Responsible Investment (2013)

Produced by the US SIF Foundation

Fiduciary Duty & Responsible

Investment (2009)

Produced with UNEP FI Asset

Management Working Group

The Materiality of Climate Change (2009)

Produced with UNEP FI Asset Management

Working Group

Responsible Investment Performance (2007)


Working Group

Pension Funds (2007)


Working Group

Report on US Sustainable, Responsible

and Impact Investing Trends (2016)

Produced by US SIF Foundation

Driving Revenue Growth (2015)

Produced with IRRC Institute

A Practical Guide to ESG Integration for

Equity Investing (2016)

Produced by Principles for Responsible

Investment

Integrated Governance (2014)


Working Group

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