2021 Morningstar Investment Conference

2021 Morningstar Investment Conference

2021 Morningstar Investment Conference moved deeply into ESG impact investing but remained relatively light on voting advice and education. At least one panel and one speaker did focus somewhat on voting. Below are a few brief notes. Unusually, the 2021 Morningstar Investment Conference was held on the same days as the Fall CII Conference.

2021 Morningstar Investment Conference: Backdrop

There were lots of experts online and in-person this year at the 2021 Morningstar Investment Conference to provide financial advisors with help on how they can personalize advice to their client’s needs and desires. Many want to help clients get the best financial outcome but increasingly advisors find themselves advising on impact investing. That seems relatively new to many of the advisors. Clients not only want positive financial returns but positive environmental and social impact. Morningstar’s recent purchase of Michael Jantzi’s Sustainalytics and Jackie Cook’s FundVotes should be central to moving in that direction. (Interesting to me; they are both Canadians.)

2021 Morningstar Investment Conference: Is ESG a Trend or Material to Investing Process?

Kristina Vanliew, of Gaysone Consulting, told of a Millenial client who inherited a sizable portfolio and demanded to be directed to impact investments, without sacrificing return. She wanted good financial returns but also wanted measures and reporting of her progress to impact goals. In fact, her younger clients and her surviving women spouse clients are far more interested in what their wealth can do, and its impact on their children, than on what that wealth can buy.

Morningstar now has the data that allows advisors to report in a deep way to clients what impact they are having through their investments, votes, and engagements. They now have access to the ESG and voting data. Yet at this session and several others, I found there was more emphasis on marketing ESG products than helping clients have an impact and measure that impact. Maybe having the Chief Marketing Officer facilitate the discussion naturally moved it in that direction?

Certainly, Cheryl Gustitus (EVP of Sustainalytics) and Van Liew appeared more focused on authenticity and how ESG factors converge. Maybe their experience with institutional investors put them a little ahead of most of the financial advisors serving individual clients in the room?

Chat That Didn’t Rise to the Stage

Looking at some of the chat during the 2021 Morningstar Investment Conference, I found increasing distrust of institutional investors. Yes, ESG funds have outperformed with lower risk. The vast majority of institutional investors are incorporating ESG factors into their investment strategies but I saw concern they are not having the impact many are now looking for.

  • Where is the track on ESG engagement? Are there no sessions on how to help clients file shareholder proposals or at least vote proxies?
  • Do we think the rise of direct indexing will be bolstered by ESG factors and the client’s desire for personalization?
  • As an institutional investor, I need to see that the advisor is passionate about ESG as a concept rather than just as a good way to make money.
  • Where does the U.S. fit in the world of ESG and sustainability since we have fewer reporting requirements than Europe does, less disclosure? How important is it to have those requirements to grow the market? to have more impact? and do you see that coming here in the U.S. via laws, regulations?
  • With the broad growth of ESG labels on offer. How should a retail investor go about verifying ESG?
  • Did Engine #1 make any difference for the future? Do your clients now value voice more?
  • Will screens for ESG debt securities be more punitive relative to ESG equity? “Don’t want to lend money to a sinner, but don’t mind buying a sinner’s operation and reforming it.”

Finding an ESG Advisor

WSJ recently published a good article on How to Find a Socially Responsible Financial Adviser. Several free, searchable online databases list financial advisers who self-identify as having an ESG focus. It also discusses using Finra’s BrokerCheck, the Securities and Exchange Commission’s investment adviser public disclosure website and the CFP Board’s site.

After finding an adviser with a clean disciplinary history, you might ask the adviser directly about his or her experience with sustainable or impact investing and how long it has been part of their practice, says Josh Charlson, a director of manager selection for Morningstar Research Services LLC, a subsidiary of Morningstar Inc.

2021 Morningstar Investment Conference: Notes from Engine #1 Discussion

It was an interesting discussion with Jennifer Grancio, CEO of Engine No. 1. Engine #1 is focused on understanding the materiality of ESG-data. Data has gotten better for the total value framework. Social – Workers wages, give back to the community.  Environment – Looking for positive externalities over time. They will be using their vote. She made a point of suggesting that attendees do the same. Their voting policy will be more assertive than most.

Is Engine #1 an activist fund? Most of what we do is working with companies, not dissimilar to how private equity firms interact with their companies. We are bringing them a rich dataset. That yields constructive engagement. We take a long-term approach. Ratings are often simplistic. Engine #1 uses the raw data. Scope 1 data covers direct emissions from owned or controlled sources. Data on scope 2 covers indirect emissions from the generation of purchased electricity, steam, heating, and cooling consumed by the reporting company. Scope 3 includes all other indirect emissions that occur in a company’s value chain. There is lots of work to do on scope 3. See A New Way of Seeing Value, which discusses Engine No. 1’s Total Value Framework.

They built an economic case at Exxon. Spent a long time trying to find the best potential directors. Energy experience, transition, emerging technologies, transformation. ID best people for the board. Made it focused on economics. Forecast out possible changes. Big index funds hold a lot of the shares. Went to both indexed and active funds. Transition to net-zero will be on the agenda for years. CEO/Board/Investors all responsible.

Engagement & voting. Use your voice. Follow @GrancioJ of @EngineNo 1. Significantly, she said they will be public before they vote, not after the fact, so I assume their VOTE fund will join funds already announcing their votes ahead of the shareholder meeting.

With VOTE you don’t have to estimate the tracking risk. If you want to have an impact, you have to hold and constructively engage. When do you plan to exit? We are invested in the long-term. In the VOTE ETF forever. 

Impacts are material. Look beyond the quarterly impact statement. ESG is not a fairy-tale. It becomes math and science. Over-promising? Investors have a role to play. We take a multi-stakeholder approach. Partnering with Morningstar on the index. Pay a fee to Morningstar as an index provider. Licensed. ETF so you can come in as a large or small investor in 500 companies. The sooner these big companies develop renewable energy, the sooner they will be more profitable. We need to get to net-zero.

Engine #1 is scaling clean projects. Passive investing (diversification): the work is now around voting. Engine #1 is the firehouse in the center of the community.

2021 Morningstar Investment Conference: My Conclusion

My focus, since starting Corporate Governance (CorpGov.net) in 1995 has been on the importance of proxy voting. I went to my first Morningstar conference in 2019. It was a huge event, with lots of interesting exhibits, speakers, and attendees. It seemed like they were just beginning to focus on ESG and impact investing. Those issues were in the solid center this year.

My hope is that voting will take center stage in years to come. One driving force will increasing demand from retail investors as a result of fund voting comparisons that may become ubiquitous once new N-PX filing requirements have been in place for a year or two. See SEC Wants to Shed Light on Funds’ ESG Claims With New Disclosure and Proxy Scorecard and Fund Competition.

From Global Proxy Watch:

AGM voting. Expect changes proposed by the SEC Wednesday that would require a wide swath of funds to disclose how they cast ballots on their website using a standardized format to heighten competition to prove ESG bona fides with robust voting. The changes, which would apply to most larger pension, mutual, hedge and endowment funds and cover say-on-pay and securities lending, came in a 4-1 vote with surprise support from GOP commissioner Elad Roisman. His dissenting GOP colleague Hester Peirce suggested abolishing vote disclosure altogether. Big funds already must report votes on public N-PX files, but they are not “readily usable,” said chair Gary Gensler. Institutional investors and other clients have access to voting analyses from proxy advisors and others. The new rules would widen transparency to NGOs and retail investors.

2021 Morningstar Investment Conference: Related Posts

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Mutual Fund Wars Over Fees AND Proxy Votes

MICUS 2019: #Susty #VR

#MICUS 2020 Comparing Sustainable Funds

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