Man painting pollution green

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For today’s soundbites, we talk about environmental, social, and governance investing with Tim Woodhouse, portfolio manager with J.P. Morgan Asset Management’s Global Sustainable Equities Fund. We asked him about standardizing ESG reporting, what makes for a good ESG player… and we started by asking if it has gotten easier to find companies dedicated to ESG principles.

Tim Woodhouse (TW): Yes. It is certainly easy to find companies. I think the past two years have really seen an inflection point when it comes to the publishing of relevant data, communicating more on the topic, and most importantly, actually thinking more about sustainability in the way they operate. With the increased focus from investors, the flood of money into sustainable funds, more companies are now considering these issues in their decision making. There’s still a huge gap, however, between those companies that do it well and those that don’t. As a result, our approach is research driven. We don’t believe that sustainable investing means simply believing external data sources for the companies best in class. We dig into that data, we look to test it, and we ultimately have to reach our own conclusion on whether a company is a sustainable leader.

What he looks for in sustainable equities.

TW: There are a few categories of companies that we would view as sustainable leaders. There are those companies who are becoming operational leaders, increasing their own efficiency level, decreasing their own emissions, and working to create an inclusive and motivated workforce. Then there are also companies who have more of a positive contribution externally, and who are actively helping to meet some of the global sustainability challenges. We look for companies that align with one of four pillars: climate-change mitigation; resource efficiency; social cohesion; and diverse and motivated workforce. And finally, with every company that we own, we expect that company to have good governance. This means diverse boards, appropriate incentive structures, and ultimately the allocation of their cash flow in a way that considers a wide variety of stakeholders. We believe the combination of a durable business and a strong, sustainable leader creates a truly sustainable business model for the long run. And it’s only when were confident that we can underwrite a company as having both of those qualities, that we own the stock.

Where he stands on standardizing ESG reporting.

TW: We wholeheartedly support the movement to standardize the reporting landscape. We believe initiatives like TCFD [the Task Force on Climate-related Financial Disclosures] are a vital step, really to not only give investors more information but a significant part of it would be helping companies understand what’s expected of them. In some ways, if we had every company setting their own accounting standards, for example, it would make it very hard to properly hold companies accountable and to compare them. And what companies tell us is that when every investor is asking something slightly different or is recommending a slightly different course of action, it makes it very difficult for that business to know what to disclose, or even what to focus on internally. So, setting consistent standards would be huge step to helping with that.

How he spots greenwashing among companies.

TW: One very important area to focus on when we’re looking to weed out greenwashing is to what extent companies have a path to achieving targets. If companies can’t give us tangible plans as to how they’re going to reach those targets, we’re not going to give them credit for it. Often companies say, ‘Well, one of the ways we’ll reduce emissions is by using these unspecified future technological developments.’ Well, for us, that’s a big red flag. And that’s one example of where we are making the judgment about whether targets are credible or not. But also, what we can do is we can engage regularly with those companies, and we can discuss these topics with the CEOs and CFOs. And when you do that, it becomes actually quite apparent, very quickly, where sustainability is truly important to a business, where it’s changing their behavior, where they’re thinking about it in every decision they make, and then where it’s just greenwashing and they’re doing it for the sake of it, to try and convince us as sustainable investors that we should own the stock.

And finally, what’s the takeaway on sustainability investing?

TW: For us, the key message would absolutely be that sustainable investing is about more than simply looking at an MSCI ESG score and then picking those that look best. It’s about doing the due diligence. It’s about really understanding what a company is doing under the surface, and about helping this company to understand best practice. It’s about holding companies that engage in greenwashing or unsustainable practices accountable. And the word ‘investing’ is key too. As sustainable managers, we’re here to make money for our investors. But we’re here to do so in a way that promotes sustainability.

Well, those are today’s Soundbites, brought to you by Investment Executive, and powered by Canada Life. Our thanks again to Tim Woodhouse of J.P. Morgan Asset Management.

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