Total time: 13:08

00:07

Andrew Poreda: 2020 certainly was a banner year for ESG funds. According to Morningstar, we actually saw over $51 billion flow into ESG funds. We also saw that ESG funds outperformed their traditional counterparts. That being said, as this ESG market has grown quite a bit there's a need for looking a little bit under the hood as two asset managers that may have a similarly labeled fund may be doing some things differently from a stewardship perspective. Hi, I'm Andy Poreda, ESG Research Analyst at Sage Advisory and I'm joined by my colleagues, Emma Harper, and Sara Rodriguez, both ESG Analysts, to talk about an important aspect that you need to look at when looking at your ETF and mutual fund providers. Emma, you recently just released our annual stewardship survey. Can you talk a little bit about kind of what is what we're looking at from a stewardship perspective?

01:00

Emma Harper: Sure. So, as you mentioned, the flows toward ETFs this last year and in the last several years has been extraordinary. There are a number of providers, or sponsors, that look the same but have very different operations in how they actually utilize their ownership rights which we'll talk about. So, as an ETF holder, or an investor in ETF, basically, what you're giving up in holding the ETF and not holding the individual name or stock or bond, is that ownership right that comes with the owning of the actual stock or bond and with that ownership right comes the right to vote on issues facing companies that are within the ETF. So, if you hold the ETF, you're actually giving those rights, or ownership rights, over to the ETF sponsor themselves. Therefore, the ETF sponsor has a great amount of power in terms of voting on these companies and their strategies going forward, major decisions, talking about their boards and strategy of things like climate, etc. So, it's really important to understand what these ETF providers are doing with their ownership rights that we have given over as ETF holders. So, that's why stewardship is really important to take a look at if you're an ETF holder, because you have to understand what these providers are doing with their ownership rights. Are they voting in line with what you would expect? Do you care about potential environmental, social and governance issues? If so, are the ETF providers voting in line with how you'd want them to vote on those issues? Similarly, it's not just voting that we're looking at, we're looking at engagement. Are they talking with these companies about strategy? Are they talking with these companies about some things they want to see changed for the better? We want to know, as ETF holders, what they're doing when they're talking with these companies. We want to know, are they just talking with them, and not really having any sort of significant change after the talks? Or do they have metrics to determine success, after they've talked with them about something that they are concerned about and have some sort of metric for success for the company to actually have made a change. So, it's really important to understand how these ETF providers are thinking about these rights that they have and utilizing what power they have in order to drive positive change and positive outcome in portfolio companies.

04:01

Andrew Poreda: Based on our results that we've seen from the last few years; we've seen a lot of claims to be made of future results and getting better on all these issues you mentioned. But in the end, we haven't really seen the results in past years, it's kind of a lot of hot air more or less. Is this year different? Did we see anything that stood out to you, with actual results that have showcased that companies are actually following through with some of these big issues that they have said they care about?

04:29

Emma Harper: Yeah, this has been a hot button issue in the past, because there have been a lot of ETF providers that have said that they agree with certain ideas and certain ways that they want companies to act, and then if you take a look at their voting record, or their engagement record, it doesn't exactly match up with what they say they believe in and what they say they want to drive in terms of positive outcome in the portfolio companies that they hold. So, that's been something that has really driven investor focus in the last several years, and I think some of the larger ETF providers have heard what investors have to say and have somewhat felt some pressure in terms of needing to put their money where their mouth is, and really vote in line with how they say that they would vote. So, we've seen some positive changes on some ETF providers accounts in terms of aligning their voting practices or engagement practices more with what they say they believe in, but it is a little bit of a mixed pack in terms of the fact that some of the peer group is really riding the ship, really changing how they're thinking about these voting and engagement puzzle pieces fitting together, and some of them are still lagging behind and still needing to have an improvement in their practices. So, we have seen some improvement, but we're still going to be looking for more improvement, hopefully in the next years to come as we continue to do this survey.

06:09

Andrew Poreda: That's really interesting Emma. I guess this question would be for you, Sara. I know you took a deep look at some of these voting issues, did anything strike out to you of trends, whether it's ESG issues or maybe a Say on Pay, or something along those lines. I know that the voting issue has become a hot topic, especially what we just saw at Exxon Mobil with Engine No.1, those Board of Directors getting added and BlackRock was a key vote behind putting those new directors on board. Do you see any kind of trends or any sort of certain areas where there's more action being taken?

06:44

Sara Rodriguez: Yeah, absolutely Andy. Like Emma mentioned before, it's really important that we take a look under the hood with what these ETF providers are doing with their investor’s votes. So, this is a section of the survey that we find really important. Oftentimes, these ETF providers are required to fill out thousands of proxy votes, so they'll often give their proxy voting capabilities over to a third party and let them handle it. We don't necessarily love that, because that means that they're not really taking an active approach to making these voting decisions. One trend that we saw this year is that the ETF providers are using these proxy advisors as more of a research tool rather than a recommendation tool. So, they're using them to gather data on the companies that they hold in their portfolios, but in the end, they're making the decisions themselves, and we find that to be really positive. So, that was one area of improvement. But overall, we saw that the ETF providers do seem to be scoring better in the voting section. Last year, we had only 64% of them pass with a C or higher, and this year, that number bumped up to 71%. We also saw that the repeat respondents either improved their grades or stayed the same 84% of the time. So, we're pretty happy with those results and that's something that we're going to keep taking a look at.

08:10

Andrew Poreda: Very interesting. So obviously, it sounds like there's been a lot of improvement from last year. I guess the question I would have is, what about next year? Now that we've seen this great improvement is there still work to be done? And if so, do you anticipate asking more questions or focusing on different areas? What do you think will be the hope to see from the improvement on these companies for next year?

08:32

Emma Harper: So, the survey changes from year to year based on new emerging trends that we find are very impactful to the portfolio companies under ETFs, and also within the ETF providers actual own operations. We want to be incorporating these trends and making sure we're understanding and keeping on top of them, and monitoring changes in these trends. So last year, we added a climate section to really dig into ETF sponsor oversight of climate and what they were doing to understand the risks that portfolio companies had in terms of climate exposure and whether they were monitoring those risks or helping to foster better climate strategies for the portfolio companies under the ETF providers. This year, we added a Diversity, Equity and Inclusion section, which we find to be really important to companies overall to have a strong diversity, equity inclusion policy, be able to promote diversity at all levels of management, not just at lower levels management, but throughout the entire structure of the firm. So, this year, we asked about diversity, equity, and inclusion policies within the ETF providers own operations and what they were doing to foster diversity throughout the different parts of the management structure, and any plans that they have in the future to expand upon these initiatives. We found that many of our ETF providers did well in terms of the actual stated diversity policies that they had on the books. 94% of the providers indicated that they had a stated Diversity, Equity, and Inclusion policy. So, we're excited to see that. We view diversity a really important hallmark of a successful firm. There's a study from McKinsey that we included in the stewardship report, talking about gender diversity and racial and ethnic diversity leading to outperformance over peers on profitability. Those with better gender and racial and ethnic diversity outperformed peers on profitability. So, we definitely see it as an important topic, something to be driven towards. This upcoming year, we're planning on adding a section about how the ETF providers are managing the oversight of portfolio companies in terms of diversity, equity, and inclusion. Is it something they're monitoring and something they're talking to portfolio companies about helping to foster further diversity, helping to foster any initiatives that might be in a nascent stage with portfolio companies, etc? So that's something we'll be adding on and are looking forward to discovering more about in the upcoming years.

11:33

Andrew Poreda: Wow, that's really interesting, and I definitely look forward to seeing next year's results. In the meantime, I'd implore anybody that is interested in stewardship, which they should be, our report, the Sage Stewardship Survey is available on SageAdvisory.com as well as on LinkedIn. In the meantime, I really appreciate both you and Sara coming on and talking about that and I hope that we will continue to have these discussions on stewardship because it's an interesting topic and an integral part of what asset managers need to be doing. So, with that, thank you for listening in and hope everybody has a great day.

12:08

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