Independent Research and ESG: a new Take on Tradition

    Stockholm (NordSIP) – Being at the helm of SRI in a traditional asset management firm like T. Rowe Price can seem challenging, especially given the independence that each manager has in making investment decisions. How can the firm permeate ESG throughout the organisation without disturbing an eco-system that has been so successful across the years? Maria Elena Drew (pictured), Director of Research, Responsible Investing tells us what happened since she came on board in August 2017.

    Drew’s journey in responsible investing started with a robust analytical backdrop. “My background is as an investor on the equity side. Oil and gas, metals and mining, utilities, and industrials were the sectors I was closest to, early in my career. As a result, I spent a lot of time on ESG issues, not that I was looking at them as ‘ESG’, but because they represent essential considerations in these industries. When ESG integration started to become a topic for clients, I spent time trying to understand the concept in detail to be able to connect with these clients. I discovered a wealth of information that I could use in my analysis, which I didn’t even know existed.”

    Tweaking her analytical lens to include more than just financial information proved particularly useful. “Sometimes, data would confirm my investment thesis, but in some cases, it would raise questions. In any case, it was additive to the investment process. I then developed a framework for my team, at Goldman Sachs, where I worked before my current position. I spent time working with other PMs there on integrating ESG in different sectors, and that’s what I do now at T. Rowe Price.”

    As Director of Research, Responsible Investing, it is the first time in her career Drew focuses only on ESG. “When I first started, I thought my biggest challenge would be coming in as an outsider because for ESG integration to work, as it has to be part of the natural investment process. Also, with so many portfolio managers, I thought it would be quite difficult to come up with a solution that would fit all of them. But what I learned was that T. Rowe is an extremely collaborative company. It has an open door policy for any research meeting that takes place. So, I was immediately involved in the research process. I sit in the investment division, and I was thrown into the process well and very quickly. I also got to understand the investment ethos early on.”

    One of the surprises that awaited Drew, who is based in London, is that US-based portfolio managers hadn’t received many questions about ESG from any of their clients. “It wasn’t that they were ignoring ESG issues. They just didn’t understand what clients were looking for. Often, they thought that it was more about ethical investing, so there was a hurdle to get around in terms of education and trying to explain to them how this would help their investment process.”

    While US regulation is not likely to push ESG integration further into asset management any time soon, Drew sees pressure coming from the private wealth segment. “Clients tell us that the biggest shift comes when money moves from Baby Boomers towards the younger generations, who care more about what they’re investing in. For the most part, I believe that the institutional market is still keeping fiduciary responsibility number one. But I think that fiduciary responsibility is probably going to entail more ESG integration and tilt towards companies that are helping to alleviate some of the environmental and societal pressures illustrated by the SDGs.”

    For the clients that are already interested in SRI, Drew finds that the most critical challenge for a global firm like T. Rowe Price is catering for the vast disparity between exclusion lists in different geographies. “What is considered the absolute worst of the worst in one region might not be the same in another one. We run portfolio strategies that are sold across multiple different jurisdictions, so that can add complexity to the portfolio construction process. Tobacco is not acceptable in the Australian market. And we exclude it from our portfolios there, even our commingled funds because there’s overwhelming client demand for that. In Europe, we are starting to see increasing concern over nuclear weapons, whereas, in other regions, we don’t see that heightened level of scrutiny in that category.”

    Carbon, on the other hand, is an issue universally, regardless of exclusions. “It is getting harder and harder not to believe in climate change. I don’t even think it is a question about believing in it or not believing in it. And carbon is obviously a very key factor in that. We expect that industries that are emitting carbon are going to be much more heavily regulated in the future. So, it is an important factor to be considering, whether you are running a climate-oriented fund or not. We focus on companies that are emitting carbon while generating other kinds of pollution as well because we find that carbon is a very global issue and it can be difficult to see regulation come into play as quickly on an issue that isn’t impacting the local community. Hence a company that is also contributing to pollution, like coal fire generators, we see as carrying extremely high risk because regulation is coming much quicker.”

    Further down the line, T. Rowe Price is considering some products that will have a stronger “impact” character in the listed equity and fixed income space. “At T. Rowe, we are very methodical about new product launches. We like to promote our portfolio managers from within because we want our investment ethos to be passed on. Because of that, we map our portfolio managers’ development and also our product roadmap. Once they are aligned, we will launch a product. We are not going to rush to launch a product.”

    Picture © NordSIP

    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.

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