PLANSPONSOR - October/November 2020 - 33

DB FOCUS
complication. " MSCI uses about 37 performance
indicators across E, S and G that
roll up into an overall score on a company, "
Mitchell explains. " Sustainalytics uses
over 70. Depending on the industry you're
looking at, it's debatable whether they are
all financially material.
" And that can be a challenge to the
money managers we evaluate using those
frameworks, " Mitchell adds. " Managers
have become cautious, and sometimes
hostile, to the idea of letting a third party
determine their views on the securities
they invest in. "
ESG ratings on a given company vary
greatly from firm to firm, leading a group
of academics from the Massachusetts
Institute of Technology (MIT) to charter
the " Aggregate Confusion Project, " its
goals including to " Reduce the level of
noise in measuring specific ESG categories
such as labor treatment, carbon emissions
and product safety ... [and to] enable
ESG indices to be more customized and
attuned to investors' values, " according
to the group's website. In a related paper,
they point to inconsistency in the ratings
of six ESG data providers, resulting in
average correlations of just 0.54 and
ranging from 0.38 to 0.71.
Accordingly, many asset managers
create their own ESG factor frameworks,
a method that consultants endorse. " Our
preference has been to have managers use
their own proprietary approaches, where
they might rely on outside data firms as
inputs, but invest with their own philosophies,
and so be more relevant to their
asset class, " says Nimisha Srivastava,
global head of credit research for Willis
Towers Watson in Chicago. " Luckily, we
are able to see many managers' approaches
and determine what's best in class for a
particular area, and share that with our
sponsor clients and managers. "
Epoch Investment Partners Inc., a
$17 billion manager of global equities, in
New York City, formally adopted an ESG
approach in 2016. " Epoch may not have
been the first mover in formal ESG, but
some elements of it have always been part
of the firm's work-for instance, a focus
on the allocation of free cash-flow, which
is very tied to corporate governance, " says
Ravi Varghese, an ESG analyst and vice
president at the firm.
" We rely on outside sources-but for
raw data as inputs to our research, say on
carbon footprints, rather than a firm's
overall assessment of whether a company
investment, " says Srivastava. " Some integrate
it in their existing diligence, and
some have additional reports; it depends
on the ESG opportunity or risk. With half
of all new infrastructure being renewable-and
so many opportunities in alternative
energy-that is coming into play,
whether the managers want it or not. "
While institutional investors have
" ... this proposal reflects a greater
skepticism by the DOL over whether
ESG factors will ever be 'pecuniary.' "
is strong in ESG or not, " Varghese says.
" Overall, ESG considerations are coming
up earlier and becoming integral to our
research and investment process. "
Investing in commodities, which
many investors seek for inherent protection
from inflation shocks, might seem
antithetical to ESG principles: Fossil
fuels are some of the largest traded
markets; agricultural commodities
consume immense quantities of water;
and mining metal ores can wreak severe
environmental damage. CoreCommodity
Management, of Stamford, Connecticut,
offers ESG-friendly strategies that invest
in commodities futures and public equities
of natural resource firms.
" We've established a strategy intended
to provide inflation protection through
commodities in a sustainable natural
resources format, " says Eliot Geller, a
managing director at CoreCommodity. " It
will exclude investment in fossil fuels and
invest in renewable energy. "
Packaged ESG research based on
audited financial statements may be
fine for gauging the behaviors of public
companies, but what are sponsors to do
about their substantial investments in
the more opaque asset classes of private
equity or direct real estate? " We insist
that managers in private markets have a
policy on sustainable investing and that
they are actually applying that to each
embraced ESG principles, one U.S. regulator
has lately thrown up a barrier: In
June, the current regime at the DOL issued
a proposed regulation strongly reminding
Employee Retirement Income Security Act
(ERISA) plan fiduciaries that investment
decisions should be governed by considerations
of tangibly increasing the plan's
return or reducing risk-as the DOL puts
it, " pecuniary risk. "
" It was widely perceived as creating an
incredibly high barrier for ESG in ERISA
retirement plans, " McDonnell says.
" Reading between the lines, it's
fair to say this proposal reflects a greater
skepticism by the DOL over whether
ESG factors will ever be 'pecuniary,' "
observes Julie Stapel, an ERISA specialist
and partner in the Chicago office of legal
firm Morgan, Lewis & Bockius LLC. " I
fear that, in plan examinations, fiduciaries
may have to prove a negative in their
use of ESG factors-not just how the ESG
investments performed, but how [the
fiduciaries] decided on guidelines, what
the other choices might have been, and
that they didn't leave some performance
on the table. But sponsors we work with
firmly believe they're using ESG constructively
and are positioning themselves in
the best way to demonstrate that through
their decision processes and documentation.
Defined benefit [DB] sponsors are not
running away from ESG. " -John Keefe
PLANSPONSOR.COM October - November 2020 33
http://www.PLANSPONSOR.COM
PLANSPONSOR - October/November 2020

Table of Contents for the Digital Edition of PLANSPONSOR - October/November 2020
