ESG: Is Values-Aligned Investing Attracting Younger Savers?

Kevin Sullivan, CFA, CAIA and Andrew Parry, Newton Investment Management

We first met Kevin Sullivan and Andrew Parry in connection with California – a ways from home for both of them, and yet very close to home. Kevin is a New Englander with – dare we say it – a charming Boston-area accent. Andrew currently hails from near London, attended University in one of our favorite seaside towns – St. Andrews, and is also a pleasure to talk with. In California Kevin was part of the team sharing insights into Newton’s Environmental, Social and Governance strategies for the program that is likely to become the country’s largest Auto IRA, CalSavers (Andrew joined shortly after this). Here we go a little deeper into the thinking around ESG and why you may care about it going forward.

Kevin Sullivan and Andrew Parry, tell us about your roles and teams at Newton Investment Management. Kevin let’s start with you.

KS: Great. Thank you! I work with institutional investors and their consultants developing solutions to their investment needs, much as we did in the case of CalSavers when they were seeking an ESG option for their program.

KS: Newton was founded in 1978 and Responsible Investment has been part of the work that we do going back to our inception. While the approach has evolved, and will continue to develop with new learning, it's very much part of the fabric of who we are.

Awesome. How about you, Andrew?

AP: Righty-o. I'm a member of the Newton executive team and I'm responsible for the sustainable strategies at Newton, as well as the overall approach to responsible investing, which is a significant and long standing area at Newton. I work internally and externally on advocating with our clients and prospects for a more sustainable investment approach.

Newton’s is the first ESG investment offering in a state facilitated retirement savings program. Why do you think ESG is important to the savers in these programs?

AP: Let's remind people what ESG is. It's not a label. It's the environmental, social and governance influences that affect all businesses to a greater or lesser extent. It is simply good investing practice. It's about getting that complete insight into the nuanced, complex, and ever changing influences on a company's long-term profitability and success.

We like to think of it as helping us to navigate our clients through a world in flux. Helping to understand better those big thematic forces reshaping future business and economic opportunities, as well as revealing emerging risks that they might have to face. For us, it's just naturally Finance 101. It's what we should be doing to understand where the world is going in order to take our clients successfully on that journey.

We can think of two current influences -- COVID and how hot it's been in the west this summer.

AP: When you think about COVID crisis, it is essentially a human crisis -- with human cost, and social consequences. We also think of COVID from an economic perspective. This includes the response to COVID through slashing of interest rates, and all the liquidity pumped into the system.

It's also associated with macroeconomic forces such as rising inflation, and potentially with increasing budget deficits. So it just shows how complex and interconnected the world is. It also shows how the social and the environmental dimension are ultimately economic dimensions, because they will influence the quality and longevity of economic outcomes. This is particularly true if they're not managed well. Badly governed company – and this applies to economies too – have a tendency to destroy investment returns.

Makes sense. Kevin, tell us more about your involvement in the state programs.

KS: We saw a need and we knew we could create a solution that made a lot of sense for CalSavers and for other savings programs. We were highly motivated, knowing that CalSavers and other state programs including Illinois Secure Choice and OregonSaves, -- were taking bold steps to address the retirement savings shortfall, and we wanted to contribute to those efforts.

Many workers don't have access to an employer sponsored retirement plan. By providing a solution to CalSavers, we felt we could play a small role in helping to address the significant retirement savings gap in the US.

Our purpose at Newton is to improve people's lives through active thematic and engaged investment to deliver attractive returns and to foster a healthy and vibrant world for all. CalSavers provided a great opportunity for Newton to step-forward and take action consistent with our purpose.

Andrew, as a Brit you've had some firsthand experience with what it looks like when retirement savings coverage at work gets expanded. What have you seen in the UK?

AP: What we've been seeing is a greater engagement in the financial sector. I think this is one reason why sustainable investment issues are gathering momentum.

We're beginning to get the younger cadre of people coming into the pension savings arena. They have an acute awareness of social and environmental issues that they want reflected in their savings plans. And I think that's been an important and often underplayed element in this.

Now, the most important element is getting access, and fair access to all for long term provision for retirement. It is going to be potentially one of the biggest investment decisions in their life, beyond maybe their home. But so little attention had been placed on it. So we've seen this is just a great opportunity to raise awareness and to bring a whole new body of people in who also want to actually invest in the way aligned with their values.

Bringing more people in and getting more engagement, that sounds very productive. You started to tell us how you define ESG: how does that definition influence your investment selection process?

AP: Yes, so very much we see ESG as an input, and not a label. It's about, as I mentioned earlier, a complex series of nuanced inputs. It’s about the environmental efficiency of an organization, about its social responsibilities to its employees and its customers and its communities that helps support brand value. It’s about how it manages itself for innovation and effectiveness.

So, when you think of it in that way, that is not why you should do it, it's just why the heck you wouldn't consider ESG issues. Because if you're not thinking about the environmental efficiency, the social outcomes, and the governance or the management of company, you're missing out on potentially very important information that's going to shape the long-term financial returns from that business. It's about getting the full range of insights to actually make you a good investor, I think. And that's where we have to see it as not as a convenient label to sell products, but something that you innately do as part of your investment approach.

You’re making your case here, Andrew.

AP: So very much ESG is an input. Now on when you go to sustainable investing, you’re going further. You’re beginning to think about the future, beginning to think about outcomes that you want to see.

And there, it’s about emphasizing the companies with the most sustainable business models. We think these models come from, and are supported by, companies thinking about their social consequences of their environmental impact and managing those well. Because in the long term we need, as Kevin said earlier, a healthy and vibrant environment and a well-functioning society to actually support long-term economic returns that will finance the long term savings needs of our clients.

Seeing it as “we're all in it together” and taking that truly long-term perspective to investment just seems to be a natural way of investing. It just seems to be about good investment, about long-term perspectives, and about recognizing our place and influence on the world.

What should we know about ESG investing going forward?

AP: There are a couple of big changes that are going on in the way that people think about ESG. One is that people are moving away from thinking of it as just a risk assessment tool and beginning to think of it now as a way of looking at where the world's going.

ESG focus is about some of these big forces that are reshaping the way that we live our lives, the way that we run our businesses, and how social norms are shifting. So think about climate change and the transition that we're seeing towards renewable energies or electric vehicles. That's literally going to involve trillions of dollars of capital being reallocated across the economy globally over the next 10, 20, 30 years, it's going to reshape business opportunities and it's going to lead to some fantastic investment opportunities. It is also going to strand certain business models that aren't adapting quickly enough.

What else?

AP: So, it's not just the climate, it's about food. You know, with an estimated 2 billion more people coming on the planet by 2050, we’ve got to think how we are going to feed everybody -- particularly when we have soaring temperatures and potential water shortages.

We’re also thinking about the future needs of transportation, cities and also really importantly, a changing demographic. You know, the younger generations, the fabled millennials and younger, are actually the future of work. They are going to be reshaping the attitudes to work, which are very different from my generation who's coming towards the end, not the beginning, of their careers. So that's one way of thinking about the big forces reshaping the world around us: disruption and opportunity.

You mentioned there were two changes under way in ESG.

AP: Yes. The other big change in ESG is that we're all finding our voice. I like to say that we're all activists now. That's not just us as investment managers, but our clients too.

Increasingly in the retirement savings market our clients want us to raise the issues that they think are important. They see these as the issues that will help reshape society, and help ensure that we have a vibrant environment in the future that will support those long-term savings objectives.

So I think that concept of voice, and of industry recognizing the importance of governance as a route to innovation and a route to good, sustainable and resilient financial returns is something that's really deeply embedded into ESG. It's no longer just a matter of thinking about it as a risk. It's thinking about that full panoply of opportunities that this approach represents.

Well said, thank you. What haven't we asked?

AP: We often talk about what's the future of ESG. And I often jokingly say that it disappears not because it's not important, but because it is so important that we don't feel the need to talk about it as a label or convenient marketing exercise any longer.

Like it. We have to say, we test drove a Tesla last week and we are now rabid believers in electric vehicles.

AP: Doesn't fossil fuel feel so 19th century after you do?

All of a sudden, we thought “okay, we see what this is all about.” Fast acceleration and such a quiet vehicle. But the rest of it is how modern and clean the vehicle feels on the interior. There's a lot of gauges you don't have to have.

AP: Yes and very few moving parts. So electric vehicles should break down less often. They should ultimately be cheaper to manufacture. That means costs for consumers should come down very rapidly. And the choice is expanding. Material science is going to rapidly change battery technology. So “range anxiety” is rapidly disappearing.

I do have a Tesla. Other brands are available and importantly, increasingly available. So, you now get the iconic Ford F-150 pickup truck is going to be offered as an EV.

Yes, that thing looks amazing. We linked a video up above.

AP: I might have to get one. And even though it's far too teak for the roads in England, it does look pretty cool. And as you say, once you're drive an EV, it's pretty hard to go back to a gasoline car.

It definitely feels more modern. We get to ask our light light question now: what are the fun things you guys are up to this summer? Kevin, you first.

KS: Our dogs have become spoiled with many walks in the woods and my mountain biking skills have improved immensely as we take advantage of a great state park nearby.    Keeping with the outdoors theme, my wife and I have done a lot of hiking throughout New England this summer and we’ve really enjoyed our adventures.

Lovely. How about you, Andrew?

AP: Well, I've been doing a lot of nurturing of nature: growing my own vegetables, which have actually grown like Triffids. I've got a surplus of beans and broad beans and certainly courgettes. So, if you need courgettes, I’m your man. I’ve also been nurturing little trees that are appearing in the field because we had what they call a “mast” last year, which is where the oak trees produce a super abundance of acorns. Now I’ve got oak trees popping up all over the place, which I'm going to try and stake and preserve so I can turn one of the small fields into an emergent woodland.

That sounds beautiful. We’re sure that will help replace some of the rainforest that we're chopping down on the other side of the planet. Whoops, can we say that?

Thank you Kevin and Andrew! We feel enlightened and we appreciate the insights you’ve shared here. Want to engage? You can connect directly by email with both Andrew and Kevin. You can follow their work at Newton Investment Management here and on Twitter.. You can also connect on social: Andrew and Kevin.

This piece was featured in the September 9, 2021 edition of Retirement Security Matters. For more fresh thinking on retirement savings innovation, check out the newsletter here.