As demand increases for ESG investing, several key trends are emerging—from climate change to human rights. The global pandemic, in particular, has turned the spotlight on the interconnectedness of sustainability issues and financial market performance. In this Q&A, we ask Thornburg’s Director of ESG Investing & Global Investment Stewardship, Jake Walko, for his insights on ESG trends that will emerge or continue in 2022.
As sustainable investing has become relatively entrenched in Europe and is becoming more mainstream in the U.S., many asset managers have been actively integrating ESG considerations into their investment processes. There are many ways to do this. What is Thornburg’s approach?
Our philosophy centers first and foremost around appreciating the complexity of the world and the ESG issues that exist. As investors with the goal of supporting the transition to a more sustainable world, the most important thing is the ability to determine the materiality of ESG factors—in other words, teasing out material ESG factors that stand to significantly impact a company’s long-term performance. In contrast to this, there are salient ESG issues that may be anecdotally and morally important, such as human rights issues, but do not currently impact the financial performance of a company in a consistent or well understood way. So, the question then becomes: How does one determine materiality?
At Thornburg, we think the best approach is to first leverage the expertise of the Sustainability Accounting Standards Board (SASB) as a starting point to guide us toward the most material and actionable ESG factors. From there, we overlay our own internal analysis and research to develop a holistic ESG viewpoint on individual companies we’re interested in. Due to our commitment to the ESG space, we have a team of ESG specialists that work collaboratively and organically with our investment team. As partners, our portfolio managers, analysts, and ESG specialists discuss how we can invest in a more responsible manner while simultaneously delivering excess returns for our clients.
How big of a role do you think ESG factors, such as climate risk, generally play in determining a company’s financial performance?
Carbon emissions are likely one of the most universally material current ESG factors that can alter a company’s ESG profile. In an effort to rapidly cut emissions, many countries are turning toward policy tools, such as levying a carbon tax, in order to encourage companies to adapt and make meaningful changes to reduce their carbon footprint. While the U.S. may not be close to imposing a carbon tax, American companies from all sectors are facing pressures to reduce emissions. In this instance, the combination of tighter government regulations and increased penalties has transformed climate risk into a source of business risk for companies, which then translates into a level of investment risk for investors as well.
From a financial-performance perspective, we do not expect ESG factors to have an immediate influence on a company’s stock—any related drag on a company’s earnings or share price will be fairly incremental, occurring over an extended period of time. The exception may be such unpredictable idiosyncratic risks as petrochemical disasters, like a major oil spill, which can result in short-term abnormal losses for a company.
How useful are third-party ESG data and ratings, and do you use them as part of your process?
As interest grows in ESG criteria, investors increasingly need a way to access an objective assessment of a company’s ESG performance. While we believe ESG data can be useful in helping investors identify financially material ESG risks to a business, there’s no single data point that can inform us whether a company is a good or bad ESG citizen. Accordingly, a comprehensive ESG assessment needs to incorporate both quantitative and qualitative information about a company’s current and forward-looking ESG strategy and goals. Managers with strong commitment towards ESG investing excellence, like the one we have at Thornburg, will be better positioned to do this and can provide a richer picture of a company’s current and future ESG impact. While we leverage third-party ESG data as a starting point, we rely on our own internal research to determine our forward-looking ESG viewpoints on companies.
For example, some companies that we see as opportunities may not be obvious “good” ESG companies today, but they have the potential to be tremendously impactful in the future when it comes to moving along such ESG goals as mitigating climate risk. We believe that understanding how a company helps the transition to a more sustainable future is more important than its ESG score or label at a particular point in time.
Do you see any transformative technological innovations on the horizon? What are the key opportunities and risks to keep an eye on?
Financial markets have witnessed a general mindset shift from concern around managing ESG risks to a more opportunistic and return-driven approach: finding companies that will take on the role of creating value in this sustainability era. We think there are many potentially transformative innovations scattered across a variety of industries that have the potential to solve huge sustainability issues.
As an example, there is strong demand for a wide variety of clean-energy technologies, and these will be needed to decarbonize many parts of the economy. The electrification of cars is a popular technology that has gained a lot of traction over the years, although other promising developments include the use of hydrogen as a renewable energy source. Hydrogen, when produced sustainably, can be used as a high-efficiency fuel that has little to no environmental impact. And wind, solar, and even nuclear energy are all opportunities on the table that deserve close attention.
Thornburg is a global investment firm delivering on strategy for institutions, financial professionals and investors worldwide. The privately held firm, founded in 1982, is an active, high-conviction manager of fixed income, equities, multi-asset solutions and sustainable investments. With $49 billion in client assets ($47 billion AUM and $1.9 billion AUA as of December 31, 2021) the firm offers mutual funds, closed-end funds, institutional accounts, separate accounts for high-net-worth investors and UCITS funds for non-U.S. investors. Thornburg’s U.S. headquarters is in Santa Fe, New Mexico with offices in London, Hong Kong and Shanghai. For more information, please visit www.thornburg.com.
For more information, please visit www.thornburg.com