Thank you for listening to this podcast, that is part of a series dedicated to the 14th edition of funds event. The theme of this year's event is high reward, high risk . My name is Maria home , and in this episode emit the low carbon transition companies that prioritize environmental stewardship and establish clear climate strategies could be market leaders that deliver value for investors. Can environmental stewardship actually be a source of value for investors?
That is something I'll discuss today with Jolanda Courtine Jolanda is equity portfolio manager in the global Stuart's team of Wellington management. Global stewards is a concentrated environmental, social, and corporate governance integration strategy that seeks to invest responsibly in high return companies with leading corporates to , or chip over an extended time horizon. Jill, on that welcome. It's great to have you.
Thank you very much
Jolanda . Before we take a deep dive into today's topic, maybe you could briefly introduce yourself to our listeners.
Absolutely. So I'm delighted to be here today. On behalf of Wellington management, we are really excited to talk about the philosophy and process behind stewards . Uh, it's a portfolio that I managed together with my colleague mark Mendell. I'm based here in London, he's in Boston. Uh , I've been , uh, with Wellington for 14, nearly 15 years.
And , uh, um, I started out , uh, with, as a financial manager during the global financial crisis, which taught me a lot about the importance of risk and oversight , uh, and culture. And from there I've been really excited to work on this project for, for nearly four years.
Thanks so much for that introduction and we cannot wait to hear more. Um, Jill on the, you, you wrote in a recent blog post and let me quote here , uh, we have observed that many funds that focus on ESG tend to look like growth funds, masquerading as sustainability funds. And I wonder what exactly do you mean by that?
My comment was , was meant to be provocative. I'm trying to really differentiate between funds that have a high bar on an inclusive approach to ESG investing from those that use ESG screens. So , uh, when you use , uh , an ESG screen, you can end up with a bias towards tech names and consumer names. And these , uh , can result in an unbalanced portfolio.
You end up with exposures and ultimately returns that are much more geared by whether it grows out performs , then the sustainable characteristics that you're looking to to screen for. So , uh , with more exclusionary strategies, you do, you do get a environmental footprint, but you can end up with poor governance metrics with poor social metrics. And often you end up holding companies that actually don't care that much about the planet.
And so they may have a low direct carbon footprint, but their broader carbon footprint in terms of the supply chain and the end use could actually be quite large and, and ignoring that could be a financial risk going forward. So stewards is built from the bottom up. Uh , it's got a very high bar for financial and nonfinancial inputs and that inclusive approach we believe is more authentic , uh , and more balanced in terms of identifying sustainable investments
Clear. And , and what then dilemma is the relationship between that long-term mindset that you mentioned and ESG, and then also stewardship. So , so how do they relate to each other?
Yeah, so the benefits of ESG and stewardship compound over time. So there's value when you focus on all stakeholders and that grows in importance as your time horizon is extended. So think about investing in talent and innovation, or , uh, setting up a strategy for the energy transition. We're not going to see that next quarter. We're probably not going to see that in the next year, but those can be really important value drivers over the longterm .
So strong corporate stewards focus on generating value for future generations and all of these build this, this flywheel effect of stewardship reinvesting in stewardship enhancing returns and taking those returns and putting them back into stewardship that builds a company's moat . So you might have lower employee turnover, you might have better innovation or you avoid environmental fines and , and have less supply chain disruption, and all of that , uh, builds value , uh , over time.
And so we are not going to agree on when these factors might matter, but in a concentrated portfolio with high conviction stewards, that combination of companies together will generate value cumulatively over time.
If you were then to define what environmental stewardship actually means, what would you say? And also why should it matter to investors?
It's a great question and an environmental stewardship. If I were to summarize it into sort of three key things, it's, it's being planet positive , uh, it's, it's earning that social license to operate and it's protecting and enhancing financial returns. That's what good environmental stewardship means to us.
And it's protecting that value for future generations through the limited use of finite resources , uh, and from lowering the footprint , um, on , on the planet, the companies that we invest in are large multinationals. And so they need a social license to operate. You need to use less energy and less water. You need to use less waste or produce less waste, and you need to respect the local communities. And , and that's critical to securing that, right?
And that social license and customers, employees, investors are all holding a higher and higher bar for what they expect from companies. And, and so being planet positive and reducing a footprint over time, I think is a critical element of good stewardship. Those companies that don't make these efforts , uh, may pay the price down the road.
They could have supply chain disruptions, they could see fines , uh, central from regulators , uh, and , uh, you might see their brands and their brands negatively impacted. And you could see , uh, the loyalty of both their employees and their customers fade with time. So it's really important to preserve, to preserve these important intangibles, right.
And now in the view of your team, the global stewards team, good environmental stewardship signals, a company's potential to outperform peers over time. Um, I wonder, w what's your proof for this? Do you have any examples?
I mean, the energy transition is underway, right? And , and I think it's, it's all about whether companies can be adaptable and resilient. And if you think about the pace of change, whether that we're seeing in regulation, we're seeing it in customer demands, we're seeing it in the newspaper headlines around climate change and companies that are failing to address this shift are going to be left behind.
I think proof is, is challenging at this stage, but I think the messages are very clear about at least what companies are going to be better positioned to be able to succeed. And those who are going to struggle , uh, I think if you think about , um, the buckets of environmental stewardship, there's those that really lean into the opportunity. So that might be companies that we own that , uh, focus on solutions for smart buildings.
And they've been building that strategy for decades already, and they had to be really early on that , uh, think about companies that are really using that climate angle to be creative and innovative, think about , uh , ways to help reduce the methane emissions from cows. Uh, as another example , um, other companies might have a product that they want to build and make it more durable so that you don't have to buy it as often. And so that durability has its own positive impact on pricing.
They have more pricing power , uh , they build brand loyalty and they can take market share. So it can be a win win for both the planet and for the returns for the company. And I think these are, these are when you lean in, but there's also the risk side, right? I think there are companies as well that we own think about banks that really need to say, look, we're mapping our climate exposure.
We're thinking about , uh , risk and, and, and the financial risk of, of funding these assets, if they are , uh, over time , uh, under pressure and being able to map it, they're going to be early. If, if, if the tides shift, if perhaps capital requirements for banks mean that , uh, they need to hold more capital. If they're carrying more carbon risk , uh, early movers are going to win.
So I think, you know, the proof is in just this, this analytical framework that we come at, the , the problem with.
Yep . Let's talk a bit more about your, your strategy to global stewards , a strategy, perhaps we can start by , um, with a short overview of what the strategy means in terms of what you're trying to achieve for investors.
I mean, we're trying to deliver responsible alpha ultimately. Um , this is a core portfolio. Uh , it invests responsibly in strong businesses with high returns, but we're very concentrated. So we own , uh, on average 35 to 45 names, and we're focused on those companies that reinvest in all stakeholders , uh, and that builds in our view a competitive advantage for the company. So that should be an important long-term driver of alpha. Uh, we want to hold these companies for the long-term .
So we invest with a 10 year plus horizon , uh , and we engage to hold managements and boards to account , uh, on their stewardship and in order to enhance the value of these companies for future generations.
So , um, we're talking about a very climate driven capital cycle. Climate is a hot topic , uh, companies that prioritize the environment and formulate clear climate strategies can become market leaders. Um, what characterizes these leaders in your view? Jelena ?
I think true climate leadership is holistic it's strategic and it's accountable. So I say that because leading it leaning in on climate should be a competitive edge. And it's not just about saying I have a net zero ambition , um , and I'm going to put a few data points out into the market. It has to be much more robust than that.
And so we're looking for evidence that that climate strategy is driving capital allocation decisions that it's board led and it's driving innovation or divestment decisions. These are really important for how a company is setting up for future future decades. Uh, we want to know that there's a scientific approach to being a good environmental steward.
Does the company have science-based targets , uh , and are there milestones along the way to get to net zero that makes it so much more authentic and credible , uh, and, and not just scope one and scope two, we're leaning into large cap companies that really have to demonstrate that they are accountable not only for their own emissions, but for the supply chain for the consumer use stage and for the end of life. Uh, and that , um, is, is where we see truly credible climate leadership.
And you refer to it already earlier in our, in our chat that , uh , your investment horizon is quite long. Uh , you evaluate companies using, I think at least a 10 year investment horizon is that long forward thinking still the way to go in an era where companies have increasingly shorter lifespans.
I think focusing longterm is our edge, right? Uh , much of the market believes that stewardship is not relevant to their time horizon. And so we spend time on that market and efficiency. Uh, our companies are not ones that are going to deliver , uh , maybe the strongest , uh , returns in the next quarter or the next year, but they're ones that consistently can outperform with high returns over time and within, during business models.
And so we're, we're looking for companies that are willing to make those difficult capital allocation decisions. Uh , one of the things we spend a lot of time thinking about is that boards will outlast CEOs . And so it's really important for us to engage with boards because that's where we can better understand and ensure that a company's strategy is long-term in nature and that those companies are making the difficult decisions to preserve the value of franchise into the future.
So how does, how them would this strategy , uh , work in an investor's portfolio? Kim , can you explain, is it a combination, do you diversify?
So, I mean, mark and I would love to see more core strategies that , that look like ours, right? Focusing on the long-term not on trading, but on investing with a really high bar for authentic ESG integration. It is a core, it's a core strategy. Um , it's diversified. These are global equity positions in large successful, mature , uh, multinational companies. And we're really proud to own them on behalf of our fund holders.
And the names in our portfolio are going to screen well on an ESG basis, but that's a result of our investment process. It's not a screen , uh , and we've constructed the portfolio with an inclusionary mindset. So , uh, I think th that we own, as I said before, 35 to 45 names, and that's against a benchmark of, of nearly 3000 , uh, and that meets a very high bar. These are companies that meet a very, very high bar for returns and stewardship. Hmm .
Final topic that I'd like to discuss with you, today's engagement. Um, how do you try to determine that a company that is in a position of strength today will equally remain successful in the future dilemma ?
We're active owners. Uh, we are engaged and , and we challenge , uh , the companies that we own , uh, both on the returns on the stewardship front. Uh, we have this , uh , ambition to meet with an executive and a board member of every company we own once a year. But the reality is that we far exceed , uh , this metric.
We meet not only with the executives, but we'll meet with supply chain specialists with , uh , climate specialists , uh, whatever topic is relevant and material from, from an engagement perspective. Uh, we had in 2020, we had over 130 engagements despite the COVID backdrop. Uh, and , and our meetings are said with management where we're looking for that long-termism and they're in their approach to executing the business strategy and , and the success on capital allocation.
On the board side, we're looking for evidence of oversight and governance. Uh, we want to see that the board is independent, that they're accountable, and that they see the importance of aligning executive compensation with the best interests of, of stakeholders.
Uh, we do engage topics like the environment where , as I said before, we're looking for not only does a company have science-based targets, but is it board led and strategic , uh, in, in their , uh, focus and, and is there a strategic buy-in and, and we'll talk about other really important ESG topics , uh, corporate culture and diversity and inclusion are really high up on our agenda as well.
Um, we do believe that these are material to financial outcomes, and they end up in , uh , almost all of our conversations with our companies. Uh, we do very deep research. Wellington is an incredibly rich place for , uh , industry expertise. And we work together with our industry experts to really understand what the material , uh , ESG topics are. Uh , and we engage with companies on those.
So if I give you some examples of , of areas where we've engaged , um, include on asking for science-based targets, as, as I've said, but it could be about executive compensation. Does the company , uh, you know, properly aligned. We actually recently engaged with a company on the separation of chair and CEO. There was a shareholder proposal on this topic. We , uh , voted in favor of that shareholder proposal.
It got majority support, and the company is now looking , uh , to , to sunset , uh , the chair, the combined chair and CEO role. That's the type of impact that, that we're looking to have.
I want to thank you Jalonda for your time. And for talking through your strategy around environmental stewardship, it was a pleasure having you.
Thank you.
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I would like to thank today's guests, Jolanda Courtine of Wellington management for her time and her insights. This podcast about unlocking investors' value with environmental stewardship is offered to you by Wellington management. It was recorded as part of a series dedicated to fonts event 2021 for more podcasts, please visit Fonz event dot Annelle .
And if you'd like to know more about taking environmental stewardship into account in investment decisions, please check out the Wellington management website, wellington.com
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