Episode Transcript
Speaker 0 00:00:00 Welcome to the Definitive Sustainability Perspectives Podcast, where our goal is to engage and inform our audience from investors to asset managers and portfolio managers, to sustainability leaders and those involved in E S G and sustainable finance. This is Kesa Shrine. Today we're going to talk about four trends that were accelerated by the Covid 19 crisis. And our guest, again is Guam Moscato, vice President, head of E s G, and invest stewardship at American Century Investments. Guam, thank you for joining us again today.
Speaker 1 00:00:39 Thank you so much for having me again.
Speaker 0 00:00:42 So, according to a recent survey conducted by American Century Investments, healthcare continues to be a key impact investing area. And with news about new coronavirus vaccines, other factors such as supply chain in accessibility are at play when discussing healthcare investing. So, Guam, let's start with the state of healthcare today. What, if any, elements would you add to make this thought leadership more relevant for right now in the final weeks of 2020?
Speaker 1 00:01:12 Sure. Well, uh, <laugh> indeed, uh, what a year so far, right, <laugh>, and, and I think it's gonna continue to be what, a year, even next year? Um, so the fact that, uh, the pandemic has had material, social, economic, and also financial costs, um, you know, definitely is putting this at the forefront of everyone's mind. So when we interviewed some of our participants and, and realized that, um, you know, perhaps the pandemic played, um, you know, in their perception of what they feel would be most pressing in terms of investments, we actually think that this is fairly well in line with the broader trends that we're seeing in the market as it relates to impact investing. What do I mean by that is if you look at all of the, um, United Nations sustainable development goals, one of them, which is goal number three, it stands for, uh, good health and wellbeing is one of the most popular.
Speaker 1 00:02:04 We're seeing this across a lot of different strategies, and investors are very much interested in, uh, in healthcare. So even if the results show a slight dip, if you will, in the appeal for impact investing, the fact that it sees a, a, a, a, a big focus on healthcare for us, actually doesn't make it at odds with the broader trends that impact investing is actually gonna be, if you will, a new standard in the institutional and also retail, um, markets for, for investment management. And so, I, I would say that that's definitely a first observation. And then the last observation is, if you look at the breakdown of the, um, generations that were participating to this survey, the millennials across the board still found, um, impact investing very appealing. So net net, this study is, is still positive for us. It shows a continuity of the, uh, overall trend towards shifting away from your kind of traditional investments to something more impact focused, right, to help in the environment in society, but also the fact that it's healthcare is, is indeed linked to that, right? So at the end of the run, we're very, um, in, uh, you know, positive about the results.
Speaker 0 00:03:15 So that is trend one, trend one. Healthcare is on top of the list when it comes to impact investing. Now, trend two, let's talk about regulation specifically Guam, what's your take on the regulatory environment around the green economy? So as the landscape across different regions and, and outside the US is changing, what do investors need to do to understand these changes? And I'm thinking about the green recovery as one specific item.
Speaker 1 00:03:43 Well, I mean it, so one, one thing that we believe strongly in is the interest for E S G investing in general will continue, uh, irrespective of regulatory changes, right? So what we mean by that is definitely under Biden who's been dubbed as the green president, we, we will see a, uh, resurgence, if you will, of, um, the role of the federal government in environmental, uh, policy setting. And, and that's definitely gonna be a positive right for, um, climate change related, um, initiatives. Um, such as, for example, joining the, uh, Paris Agreement, again, um, restoring some environmental legislations that were, um, world back under, under President Trump. That being said, um, you know, if you look across the board, whether it's the United States, Europe, whether it's Asia, um, the topic of, um, climate change is a universal topic. Everyone agrees that this is gonna be very important not just for, um, you know, the economy, but also for us as a society and our relationship with, um, the planet <laugh>.
Speaker 1 00:04:52 So given that, and if you bring in the economic realities attached to technological innovations and renewable energy, for example, which is competing heavily with conventional energy, a lot of people are saying, look, it just makes sense now. It makes good business sense to invest in the transition towards a lower carbon economy. So I would say that it's, it's great to see that there's more momentum on the part of our decision makers across the board, and in particular the momentum that we're seeing in the United States. But globally speaking, investors will continue to focus on these longer term green trends, if you will, uh, because they make economic sense. And we've been saying this for quite some time, that, um, E S G should not be measured, um, in terms of what's happening in, uh, in a parliamentary debate. It should be looked at it from an economic lens. And when it comes to transitioning towards a lower carbon economy, it does make economic sense.
Speaker 0 00:05:47 And so, if we were to look at this beyond 2020 to 2021, we all know that E S G is financially material. Not many people on the investing side are disputing that. Now, are there specific areas that you see outperforming in the long term? We can look at fixed income and green bonds as well as the equity side of the house. So in terms of where we expect some outperformance going on in the longer term, um, what, what do we see there and what can we say to back that up?
Speaker 1 00:06:14 Yes. Um, so to, to go back to what I've mentioned earlier when we talked about healthcare, um, the fact that we're still tackling the pandemic, that it's, there's some obstacles right around costs, storage of the vaccine, distribution of the vaccine, and the fact that the results are still preliminary. Um, this will continue to position healthcare equities, um, as, as, as, as one of the favorite themes, if you will, uh, for, for investors in 2021. So we think definitely there, there'll continue to be some, some attractiveness in some of those more innovative healthcare companies, especially the ones that are, um, um, emphasizing, uh, medical innovation. Um, and also the ones that are emphasizing access to medicine, uh, globally, right? So not just, uh, creating the innovation, but also rendering it accessible, um, to, uh, to less fortunate nations. That's gonna be a very important, uh, topic.
Speaker 1 00:07:04 Um, in terms of, if you move out of the healthcare theme, we think that going forward, the pandemic has highlighted this notion that, um, it's not just about public health, it's also about the environment. Because when we did, um, implement those drastic measures to, uh, to bring the lockdowns everywhere, <laugh>, um, it for some reason, as you may have observed it, um, it also cleared out the air. So a lot of people are saying, look, it's, it's not that bad, right? We, we we're, we're realizing that by doing less travel, that by doing less, um, industrial activity, we can have a positive Im impact on the environment. So we think that as a result of this, you'll have more and more investors who are gonna perceive this notion that public health is really important, but once we tackle the pandemic, we should not just go back to what we had before, which is a lot of travel, a lot of, uh, industrial activity, which is negative in the environment.
Speaker 1 00:07:55 So you might have this, this component of let's have our investments address both public health, but also safeguard the environment. And we think the circular economy theme will be very important in 2021 and beyond, which means that companies that are investing in these, uh, um, you know, solutions to facilitate the transition towards a closed looped economy, which basically means fully renewable, fully recyclable, are gonna be the winners, right? And then to your point about fixed income, um, right now we're seeing an explosion in sustainability, sustainability, linked bonds and green bonds in general. Um, we, we still think that there's room for improvement there. So we're not seeing this necessarily as an outperforming, uh, you know, asset classroom and E S G standpoint, because investors are still interested in finding out where exactly is the proceeds going. If I'm, if I'm lending you money and you're saying it's E S G, can you really demonstrate to me where the, where the money has gone? How did you finance the project? You said you would, and at the end of report to me back, right? How, how, what kind of progress you've been making on this, if it's a five year bond, for example. So it's a promising area, but we think we, we, we think investors are gonna wanna have more information, and then the e s G space in this area will need to have a bit more i in improvement for us to consider this as, um, sort of an outperforming asset class, if you will, from an ESG perspective.
Speaker 0 00:09:14 And that brings us squarely into trend three. Excellent job there. Um, trend three, the relationship between focusing on E S G and financial performance. It's changing. Want to know your thoughts about why do you think e s g focus companies outperformed during this crisis and make a prediction about future crises as we know that, um, you know, according to scientists, this won't be the last time that we experienced this.
Speaker 1 00:09:40 Yes. Well, we've always been focused on the long term and, and looking for companies that have both solid margins of safety in order to weather short time shocks, such as we've seen right now with covid, it is still a short time, short, short term, um, you know, systemic effect, right? That's negatively impacting companies. So companies that have solid margins of safety for these issues are, tend, tend to outperform those who don't. Right? Um, we also look for companies with high bears to entry and a clear focus on the long term. So if you have a, a company that has a, a sustainable franchise, um, that can navigate cycles, right? Correctly, sure there'll be some outperformance sometimes, but over the long run, right? The, the, these businesses will prove to be resilient. There's also an important consideration. And then last but not least, if, if you are, uh, confident that the company, um, is taking e s G risk management seriously, and it has, uh, implemented things like business continuity measures, supply chain auditing and traceability, as well as solid human capital programs to ensure that there are people under a pandemic are well taken care of, and, and, and their, their operations are not compromised as a result of this.
Speaker 1 00:10:50 Um, all of these factors make it that these companies did well, right? They did better than others, if you will, um, during the, the, the, the, the, the heart of the, um, of the shock that happened, um, over eight months ago. And then I'll say one last thing too is a lot of those outperforming, uh, companies, if you will, were exposed to the, they were already exposed to the stay at home slash digital economy, right? Healthcare and technology companies. So this, this, uh, configuration of, of, you know, company fundamentals, company specific indicators, as well as their industry involvement, makes us believe that we should not necessarily associate this too quickly to E S G, right? There's a lot of other factors, right? Industry specific market-based risk measures, as well as a company's own fundamental. So it, it confirms our point of view that e ESG must be accounted for in a holistic way when doing due diligence on a company, right? Because it, it might not be very wise from our perspective to just tell clients to buy just highly rated e s G stocks, because if they're heavily, let's say, concentrated in technology or healthcare, what if all of a sudden we find a cure and then cyclicals start to do better, then, you know, you might have a big selloff or rotation out of these high growth, digital, digital, uh, stay-at-home type companies, and then they might, they might suffer some losses. So again, you know, it's important to look at the full picture
Speaker 0 00:12:15 And that's great that we see both sides there. Those, um, those high tech digital companies that, as you say have been really focused on, um, the staying at home model versus the companies that have, um, a really firm grip on supply chain, um, for instance, as you mentioned, as well as a really firm grip on resilience, wanting to know specifically if a firm is not there, if they are not in either one of those situations, what would be your recommendation in terms of building a successful strategy, even post this pandemic that could help them fare better, better? If you had a top three list to deliver to those companies and to those leaders, what would you say they need to prioritize in order to build back better in terms of their response?
Speaker 1 00:12:59 Interesting. Um, yes, I, I would say the first is human capital. They need to really invest in their people. Um, a lot of, uh, a lot of what's on the balance sheet tends to be measurable in terms of like hard assets, but people is, is an intangible asset. And numerous academic studies are starting to show the value of intangible assets, right? Um, it's hard to value, but nonetheless, they, they do play out when you have situations like this. So if you, if you implement measures such as, um, you know, short time work, which proven to be quite effective in Germany, um, also the protection of your employees through health and safety measures, the ability for them to practice distributed management, right? Where everyone can manage, um, you know, on the web and making sure that the businesses are not the, the business operations are not, uh, disrupted, that's gonna be very, very important.
Speaker 1 00:13:49 The other thing I would say is, um, to stay the course on, on, on what they believe is the true value add right of their businesses. If a company decides to abruptly change and go towards something else, and then they, they indent themselves, they, uh, they make the wrong move cuz they do it from a tactical perspective, then that might not prove to be a longer term, um, sort of strong return on capital in our perspective. So having the right long-term strategic direction is also very important, um, in order to make sure that, um, these companies continue to innovate, but at the same time, they don't lose sight of their core assets, which is, which is what is generating a lot of the cashflow usually. And it's what a, a lot of, uh, companies, um, tend to rely on in order to transform themselves towards maybe another company going forward. So I would say these two big things, right? So human capital and also long-term strategic vision, but without abruptly changing away from their core assets.
Speaker 0 00:14:43 Okay, great. And in terms of sustain sustainable strategies that really create the most financial outperformance, would you be able to rank those in a similar sort of way, or just give the top three, if we were looking at the most, the best, the most effective strategies, um, that could really create financial outperformance?
Speaker 1 00:15:01 Yeah. For us, you know, core E S G integration is really the strategy we would recommend because it allows for more flexibility in terms of finding companies within an investible universe, right? It, it broadens your univer, your investible universe, right? And also it allows you to integrate alpha inputs at the same time as e S G inputs. What do we mean by that? Is if I'm excluding parts of my sector right outright, I might be missing out on some opportunities as I discussed earlier, who might be investing in the future, who might be poised for reinvention. We call this E S G inflection, right? So that, that, that's one. And then, because E S G, um, is an input into the investment process integration allows you to create some hybrid thinking where you can take some e s G metrics, combine them with financial metrics, and come up with actually an integrated thinking when doing due diligence on the company.
Speaker 1 00:15:55 If I'm just deferring to a third party data provider and I'm using that as my sole input into my investment process, you know, I'm not really doing integration, I'm doing more of an insert, if you will, uh, or, you know, I'm an overlay and I'm limiting my ability to integrate. So we would say definitely, you know, um, core integration is, is our, uh, more optimal strategy here for outperformance, followed by engagement. But we think that they go hand in hand in most cases. Cuz if you're trying to fly in a company that's poised for improvement, um, u using engagement is a way to follow how the company's progressing, measuring their progress data is and reporting it to their clients, and also encourage them right to, uh, to make improvements. Um, negative screening, unfortunately here, as I discussed, is, um, is something that we, we would recommend only if there are strong investment values that that clients have, such as investment beliefs or faith-based beliefs.
Speaker 1 00:16:50 Definitely makes sense to implement negative screening. But taking too much outta the investible universe could also position clients, um, in a maybe risky area because there could be some interesting companies in a sector that they don't like who might be poised for reinvention. There's a lot of examples that I can name <laugh> on the healthcare and also, um, in the, um, energy sector where companies might not look good, uh, from the third party perspective. But when you open the, the, the, the hood, if you look under the hood, that is, you can find some interesting stories here. We call this E s G rising stars.
Speaker 0 00:17:22 Well, you know what, that's a great segue into the last trend, trend four, renewable energy, and just wanting to get your thoughts. Has Covid served as a push toward energy transition? Do you see there being short-term gains versus long-term gains and losses? What are your thoughts about that?
Speaker 1 00:17:41 Wow, that's, uh, yeah, that's an interesting question. So, um, well I think the long-term gains is companies now, um, are gonna be more prepared. They, they know that these things can happen. It's not just, uh, you know, in the movies that, that pandemics can occur, can happen in, in 2021 and beyond. Um, so, so they're gonna be more prepared to, uh, to ensure that their operations are not disrupted and that they can continue to do business as usual. Another thing that I think will come out at the pandemic is this, uh, notion of, um, global supply chain risk management. Um, you've alluded to that earlier as well. Um, companies that have global dependencies, you know, when there is a international shock, they could, there can be vulnerable. So there's now a, a trend whereby, uh, customer preferences are shifting towards more locally sourced products. Um, and, and so that I think will be interesting from a, from a sort of national industrial policy standpoint, right?
Speaker 1 00:18:35 How can companies, um, in reinvest back home and making sure that they, they have, uh, less dependency on global supply chains. Um, you know, and then, and then the question of the environment, as you said, um, you know, we're, we're cleaning the air by doing a bit less and, and we're able to kind of digitalize and, and start, uh, reducing our footprint in general. So how can we, how can we leverage off the progress we've made in the past couple of months, uh, for, for it to be a truly longer term sort of international commitment so that we can, we can all say, look, it is possible to, to reduce our carbon footprint. We just have to, we just have to have the the will to do it. Not not being constrained to do it because of pandemic, but there is a, an opportunity for us to actually bring about positive change. So I think that's, that's gonna be something interesting to watch for, which goes back to what I said earlier, that this, this pandemic really highlighted the notion that the environment must interact with public health. And at the end of the run when it comes to investments, investors are gonna wanna look into how they can place their money in the way to safeguard both their planet, but also their health.
Speaker 0 00:19:43 Ah, great information. Giam, thank you so much. Starting off with the good health and wellbeing, s d G being one of the most popular goals and really focus that in on our trend one around healthcare, we also see a resurgence in the federal government playing a role in policy setting, um, and climate change initiatives. A great example of that is joining the, the US joining the Paris Agreement, rejoining the Paris Agreement rather. And also just looking at some examples of companies that are doing well in this environment. Companies with clear barriers to entry that are resilient that take e s g risk seriously. And also a theme that kept coming up between us today, supply chain auditing and traceability. So we can see our performance during crises, especially with these companies. Um, and then also companies that are digital in nature and that have already, are already have a culture of working from home.
Speaker 0 00:20:37 Those companies are boating well right now mm-hmm. <affirmative> for companies that need to improve in this area, starting always with human capital, starting with your people inside the firm. That means protection around health and safety. I know we've seen a lot of stories about that, particularly over the last eight months, distributed management to reduce business disruption and really having the right long-term strategic focus. One of the things that we brought up in terms of what can be done better is core E S G integration. This broadens your investible universe and also allows you to integrate alpha inputs at the same time as e S G inputs. So really focused on hybrid thinking around the company there. And then clearly firms that are really focused on supply chain management are really turning a corner. Global dependencies can make a firm more vulnerable. Companies who are reinvesting at home may be turning a corner and doing more of that. Guam, thank you so much for such great insights on all four of our trends today.
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