Sustainable Team Survives Thanks to Performance

Stockholm (NordSIP) – On her last visit to Stockholm, Mary Jane McQuillen, Portfolio Manager and Head of ESG Investment at Legg Mason affiliate Clearbridge, met with Nordsip to share her exciting career story. She explained how her team has endured through several M&A rounds by staying true to its ESG strategy and demonstrating that it is possible to have it all: perform while upholding sustainable investment principles.

“I grew up in New York City,” McQuillen starts. “In 1996, I applied on Wall Street as an analyst. I was invited to interview and the only info I had was that the team managed public equities – little did I know that I would be starting an exciting journey into sustainable investing. The COO was a woman, which was not very common back then. An Asian woman like me, she noticed me walking on the floor. She came to me, said ‘hi’, and we introduced each other, then I went for the interview. ‘Theresa said we should hire you,’ they said. It was the most comfortable interview I have ever had, a nice gesture from a gender diversity perspective. This kindness is something I have always tried to pay forward ever since.”

“Today I work at the same firm as I have for the last 22 years, even if the name changed a few times,” McQuillen continues. “I joined what was then Smith Barney Asset Management, and after several combinations, we are now called ClearBridge.  What’s remarkable thing is that during this entire period, the firm has remained committed to sustainable investing and the team I joined from the start has been growing and thriving. Throughout the consolidations of different funds and fund management teams, sustainable investing was always left intact, and never cut. Instead it has continued to expand throughout the years. We have experienced some turnover, but a on a percentage basis, it is very low. Our average tenure is 22 years.”

The fact that McQuillen’s firm shows such a low turnover is quite extraordinary indeed, especially in today’s market for sustainability jobs. “A lot of the small firms have been growing,” explains McQuillen. “Here we have a strategy within a mainstream firm. We were together during the recession as well as the bull markets. We had to show that we could perform, that’s how we survived. Initially, everyone said we could look at ESG as long as we didn’t hurt performance. No one thought that you could generate outperformance. We demonstrated that it was possible.”

The goals for outperformance relies on a strict investment process. “Performance and investment process have to be at the core of any ESG strategy. Do you think that advocacy and impact should be paramount? Not if you can’t perform.” At ClearBridge, everyone has to take ESG into account, from the fundamental analysts and portfolio managers, to compliance. “To date, 92% of our assets under management are integrated into our ESG process.”

McQuillen currently wears two hats: as Head of ESG Investments, she oversees that all the parts of the process are working smoothly together, and as a portfolio manager, she co-manages ESG separate accounts, including one mutual fund and two active ESG ETFs. ClearBridge operates according to a model where ESG is integrated across the entire team of investments professionals. Both fundamental and ESG inputs are considered by fundamental analysts that also lead company engagements.

To allow us to understand better, McQuillen explains how the two worlds meet in the context of an investment case: “The firm has a team of 29 fundamental analysts that perform an in-depth report for each position looking at every aspect of the business model, the valuation, as well as all the ESG dimensions. In the end, they produce both a price target and an internal ESG score. The companies can be rated anywhere between B to AAA, where B is a red flag. That means that there is a concern and that we want to make all investment team members aware of that. For example, tobacco is rated B across the sector. This gives us a language to discuss their ESG goals with clients. Some mandates will only allow investments in A-rated or above. Other clients may be ok with B if the business case is interesting.”

“The ESG score also allow us to track the progression that we want to drive by engaging with companies, which the analyst is also responsible for. For example, we have owned large shares in a technology company that was recycling 50% of its water use, but we then encouraged the company to set higher water recycling targets as there was high competition for water access in the area, and the company came back to us after a few years and reached its new target of 100% water recycling. This gave us confidence that the company was trying to optimize its resource utilization and as a result, saved millions in water costs. The portfolio is highly concentrated, which allows the team to engage at this level with all the holdings on a continuous basis.”

Finally, to ensure accountability, the notion of ESG is fully integrated into the analysts’ performance review. “We rate everything from how often analysts bring new ideas, how well they integrate ESG, how often they alert the portfolio managers to sell something. Once a year, we go through the entire universe to ensure that no stone is unturned.”