Name: Investor Roundtable 2021: Why investors like socially responsible companies
Uploaded: 2020-11-19
Duration: 13 min 10 s
Description: ESG stocks were extremely popular in 2020, and women gained ground in the C-suite.

 MATT HEIMER: The pandemic has drawn a lot of attention to the way companies treat their customers, the way customers treat-- rather, the way companies treat their employees. Are they keeping us safe? Are they keeping us healthy? Are they shielding us from layoffs? And what I'm wondering is whether that kind of behavior is A, getting noticed and B, attracting investors' attention. Are investors beginning to reward companies that take that stakeholder mentality and try to take care of their people, take care of their communities that way? And Savita, I know you have done a lot of research in the field And I'm wondering if during the pandemic, you noticed any shifts in that generation or in that direction, I should say. SAVITA SUBRAMANIAN: Yeah. It was interesting to see that during the bear market from February to March, the fastest bear market we've had, it was kind of fascinating to see the differentiation of stocks based on some of these social factors that are probably least understood by investors. So for example, if you look at companies that have happy employees. Like, one way to measure this is if you look at their Glassdoor ratings. And Glassdoor is a website where employees can go on and enter their views about their company anonymously. So it's as close to the truth as it gets, maybe even more negatively skewed in some cases. But what we found really interesting was that within sectors-- so this wasn't just buy tech and sell energy. But within sectors, companies with happy employees dramatically outperformed companies with unhappy employees. So it was a sign that some of these employment treatment factors were actually driving differentiation and performance, which is not necessarily what we would think of as mattering during a bear market. We also found that things like a company's policies around leave was a very important differentiator of returns during the COVID crisis. So what I think is so fascinating about this bear market that we experienced is that well, we're all very used to thinking about governance risk, and financial risks, and liquidity as the big drivers during market downturns. We actually saw these more employee geared or community geared factors as driving a lot of the alpha during that quick, but very severe bear market. And then, I think what was also interesting to see is that fund flows-- we basically saw investors selling in almost every risk to assets. So investors were in this mad dash to raise cash during the bear market, but the one area where we continue to see very strong inflows was in ESG funds. So I think that that was, again, a testament to the idea that this might not just be some bad or a bull market luxury, but it's really a sticky trend that that is likely to continue. JOSH BROWN: To Savita's point, through October, sustainable funds or ESG funds took in $30.5 billion in new flows. So by the summer, we had already taken in more in that category than the industry took in all of 2019. And that 2019 number was forex the previous year. So this is one of those trends where-- SAVITA SUBRAMANIAN: Totally. JOSH BROWN: --like a lot of old school quants and portfolio managers they scoff at it because it doesn't make sense in their worldview. Like, their libertarian worldview or whatever. They look at this like who cares how a company treats its employees. SAVITA SUBRAMANIAN: It's like this-- yeah. JOSH BROWN: But when you talk to investors, they care so much in their 20s and 30s now that you have to have an answer for that question. If you don't, then don't even bother talking to this generation of investors because they really care. SAVITA SUBRAMANIAN: You know, and I think it goes even beyond just what millennials want. I think it goes to the point that if you have an innovative sector that is labor intensive and your employees are unhappy, they're going to go to a competitor. You're going to lose your advantage. So even going back over time, we've tested some of these social factors within tech, and health care, and industries where human capital is very important. And we found that employee satisfaction actually has been a good differentiator. So it's not just what millennials-- where millennials want to work, but I think it's also just the economic value of a stable, happy workforce. It's easy to link to operating results. MALLUN YEN: So I love that, Savita, that you shared-- that you shared that across sectors, across those industries. It's sector agnostic. And is-- so the Coinbase CEO wrote that blog post a couple of months ago-- I don't know if you guys saw that-- which was saying that Coinbase is a mission focused company and the mission is the success of our business because we are a for profit company. And there was a lot of discussion about that because it says that we're not going to talk about broader societal issues. We're not going to talk about things that we may have differing opinions on outside. We're not going to take a stand on political causes. And without sharing my own view of this, it would be interesting if you tied-- But then, you have companies like Salesforce and others who are taking very-- who take very active stands, pulling out of Indiana, et cetera. Has there been any studies along the lines of tying the engagement of corporate leaders and the companies in these issues back to the employee satisfaction and, hence, performance? SAVITA SUBRAMANIAN: That's an interesting one. You know, I haven't explicitly looked at that. But I think what you end up seeing is that companies that are good at the G are generally good at the E and the S. I mean, they're all-- so it's hard to say whether it's just that this company is focused on environmental, social, and governance issues. Maybe it's just a really good company that's well-run and they also have a strong handle on other aspects, which tends to be-- good companies tend to perform better than bad companies. So I don't know if this is all some moral agenda. I think what's so interesting about this is that ESG is considered to be some liberal, feel good, kind of ethical agenda, but we've actually found that it's-- There are opportunities right now to buy so-called bad stocks that actually seem to have the right-- the most material aspects of their business model aligned with ethical considerations, or with economic considerations. So for example, energy. I think energy is an interesting sector because it's been essentially purged from portfolios because of its dirtiness or because of its environmental impact and its carbon emissions, its direct emissions. But the truth is if you look at some of these electric vehicle companies, or EV, or themes that use batteries, mining for the metals that go into batteries is actually a very dirty business. So where do you draw the line between clean and green and ethical versus the less ESG focused companies? I think it's an interesting and nuanced landscape today where I think that some energy stocks could actually do really well from here because they've established carbon neutrality rules. They've established a path towards getting better and are probably not discounting that, whereas some clean ESG players might actually be overpriced because investors are ignoring a lot of their scope two or three emissions. JOSH BROWN: We're going to get a live test of that, Savita, because ExxonMobil basically said, we don't care. And Royal Dutch Shell said by 2050, we won't have any oil for sale and we're going to completely remake our company. So Exon's like no, we're just going to do what we do. So you're going to get a live test between how those two companies fare in the next 10 years. One of them completely just doesn't care about ESG at all and the other one really wants to become a solar and wind energy provider. SARAH KETTERER: The difference is Europe got there first. And it's interesting to see the stakeholder orientation now is in Vogue. And guess who was there long before US companies thought of it where labor has its own say into how the companies managed. But we've been doing a lot of ESG testing at Causeway in our quantitative group and found there are ways to identify factors within ES and G that do lead to alpha. And that is what it's all about. If you can emphasize that and deliver performance at an excessive benchmark, that's exactly what we all want. So it's really way beyond a theme that it's put into practice. DAVID EISWERT: Yeah. I Think Australia and the Nordic countries really have to be given credit for how they have shifted their assets. The AustralianSupers I mean, look. They're not interested in any products that have any ESG violations. So I think they've-- I think those two groups, probably especially the AustralianSupers have just really changed the market. The other point to Josh's contrast of Total and Exxon-- the other thing about this is that if you find yourself in quicksand, don't swing your arms because you sink faster. And so, the question is for some of these companies, what kind of value or free cash flow do they destroy trying to transform themselves into something else? Just a comment on the surge in ESG flows this year. I mean, I do think there's a sense of awareness of social justice around the world that whether it's the election, whether it's George Floyd. I mean, I think people are more aware today than they were three years ago about social injustice. And I know at T. Rowe, I mean, we really think about ourselves as being a leader here. We're trying to do things that unlock talent. So the thing we think about in an industry that's been dominated by white men, right? That's really been our industry. And the question is how much talent are we leaving on the table by not looking for talented, non-dominant group people. And I think for us, it's really come down to holy cow. We talk about we want to do things in the interest of our clients. Put our clients first. I think we've come around to the view that putting our clients first means unlocking talent from diverse areas and that that's actually, to Sarah's point, that's an alpha generating issue. I mean, we're doing it because it's good. We're doing it also because these are talented people that we need to access. MATT HEIMER: I'd be remiss if I didn't point out that Mallun Yen's company essentially her fund operates very strictly on that principle by bringing [INTERPOSING VOICES] MALLUN YEN: So you guys operate on-- you guys operate in the public markets. What we're trying to do is get the companies early on from a startup perspective so that we have our natural networks that are broader than the dominant homogeneous group, because it's very easy to hire people who are just like you. And once you get to 20, 100, 500 people, it's very, very hard. So we're trying to get to those companies early. We invest in founders from all backgrounds, all genders. But because our investor base is 90% women, 40% people of color, when we naturally are mentoring and helping in bringing board members and executives into that, that's what we're trying to do. And back to what you said, Savita, is that we want to fund those companies we're trying to build that culture from day one because we know that makes for a stronger company. And I love the fact that you've got this research and the data on the other end that says absolutely that's happening. So we're trying on the very, very early end. DAVID EISWERT: And just one of the greatest examples of that this year, Lisa Su at AMD. Amazing. She is an amazing leader and she basically is the Intel slayer. And it is incredible what she did over a long period of time building that company. Kristin Peck at Zoetis is another great female leader. And I think they're showing by example that they can deliver value and I think-- JOSH BROWN: The new CEO at Gap. DAVID EISWERT: --wonderful too. JOSH BROWN: Yeah. The new CEO at Gap, Sonia Syngal-- DAVID EISWERT: Or UPS. JOSH BROWN: --she was handed the reins the day of the pandemic started, like in March. She was the leader of Old Navy. They were going to spin Old Navy off and have her be the CEO. They said, forget it. No spin off. We're in trouble. You're the CEO of Gap now, literally like March 23 or something. And look at that chart. Look what-- she is going to take on Lululemon, and I don't think a white male-- elderly, white male CEO could do what she now has to do, which is slight Lululemon. So to your point, I think it's a really unsung story at a lot of these companies. 

Investor Roundtable 2021: Why investors like socially responsible companies

ESG stocks were extremely popular in 2020, and women gained ground in the C-suite.