Your firm is all about ESG investing. How did the decision come about to make ESG the centerpiece of your investing strategy?
Responsible investing is what we do and we take it from the perspective of our responsibilities to our clients. So in terms of fully meeting our responsibilities to our clients, we use ESG information to really work in two areas. First, we use ESG to inform our security selection. Second, we use ESG metrics to determine how to form engagement opportunities with companies.
We focus everything we do on responsible investing because we believe it is the best way to create long-term value and competitive investment results for our clients. That’s why we do it.
Tell me about how ESG integration works at Calvert. Do you have a team responsible for an overall ESG outlook that then works with the rest of the company on education, implementation and integration, or do you use a different method?
We have a dedicated ESG research team of 12 sector analysts who work across global capital markets. That team identifies key environmental risks and opportunities and social risks and opportunities that different groups of companies are exposed to and analyzes how a given company manages those risks and exposures. The team then creates the ESG information we use to inform security selection across global capital markets and to identify engagement opportunities to improve companies.
We have built [ESG] scores across issuers of securities, as well as across developed and emerging markets. It’s a research system and we give data on this, plus a sector thesis and individual company write-ups that we distribute to our quantitative team and our fundamentals team. They then integrate this information into all investment decisions.
What are the key ESG metrics on which you focus?
They are specific to the industry and sector we are analyzing. We have a number of metrics related to the environment, climate risk and natural resources. We also gather metrics on issues such as how companies treat people and how companies deal with society. These are the so-called social metrics. We then use the metrics appropriate for the specific company and/or industry we are analyzing. It’s a very specific, targeted approach.
How do you decide your key ESG metrics? Are these guiding principles ingrained in the firm’s philosophy or do you revisit these metrics on a regular basis?
Calvert has a set of principles for responsible investing, but the metrics we use are dynamic. The world and companies are changing, and our processes are designed to stay current with those changes. Our stock in trade here is innovation, so we are always looking at these metrics and working to test theories on how to change and improve those methods.
How does Calvert itself approach ESG reporting? Do you use a variety of platforms?
We are part of Eaton Vance, which is a public company, so our main reporting is [in accordance with] the UN Principles of Responsible Investing (UN PRI). It is a transparent public report that you can find on the UN PRI website, in which we report very detailed and comprehensive metrics that describe our business practices and their impact, our integration of ESG and the principles of responsible investing and how we use them throughout our investment processes. It also examines how we integrate ESG across global capital markets. There is not a section in Eaton Vance’s annual report or 10K on Calvert’s ESG disclosures, nor is there one on our website.
Are you finding that the ESG information investors are seeking has changed over time? If so, where has the focus shifted?
It has definitely changed over time. It has shifted in two major ways. First, there is a desire for more science-based or metrics-based information on companies’ management of environmental impact. So we want details, we want data on how the company understands its impact, how it is progressing toward the achievement of its mitigation goals. Second, we look for specific information on a company’s workplace, both its ability to achieve diversity and how the company engages with its workforce, as well as the specifics on how the company manages ESG exposure in its supply chain. Those are ongoing developments in the information we are seeking and getting from companies.
In the past, ESG investors used to be focused more on information involving risk. They wanted to know what kind of risky businesses companies were exposed to. Are you exposed to fossil fuel? Alcohol? Weapons? That information is still relevant, but investors are much more interested in understanding the specifics of how companies are creating positive change and managing those exposures. The focus now is on how you can make companies better, rather than being concerned about risk. That’s a big evolution.
As a shareholder, do you work more with the corporate secretary or the investor relations team when it comes to engagement?
We work with the corporate secretary and the board. That’s where our engagements happen. What is common across our engagements is that we are working to improve a company, work with it to drive positive change. We use our ESG research system to identify companies we think can improve relative to their peer group to help drive long-term value at that company.
We build a case in terms of what we want a company to do and then we write a detailed letter telling that company what we found, what we’d like it to do and what we believe the results would be in long-term value creation for the company if it were to adhere to our recommended actions.
After this, our six-person engagement team works with the company’s board or management to find out where we are in long-term implementation of those strategies. Those engagements can run for multiple months or years. They are fairly deep as we work with management to drive the kinds of changes we seek.
