Shining a spotlight on the stakeholder

Zaneta Koplewicz: Hello, everyone, and welcome to the breakout session, Shining a Spotlight on a Stakeholder.  My name is Zaneta Koplewicz and I'm a member of the Strategic Client Coverage team within our Institutional Client business.  It’s a pleasure to be your host today.  This is a topic that has really come into focus over the past several years and even more so over the past several months.  So, we’re looking forward to discussing it with you today.

Over the past several years, we believe a tectonic shift has been underway in sustainability and impact investing more broadly.  This shift has come even more to the forefront as the COVID-19 pandemic and the recent resurgence of social unrest has really been accelerating the pace of change and accelerating the dialogue.  As asset owners many institutions, including BlackRock, have responded to the calls from constituents, clients, and employees to reexamine the role the asset management industry can play in helping to address systemic inequality, as well as the environmental and governance-related issues confronting our planet and society.

We know many of our clients are grappling with these same questions and really thinking through the best approach to sustainability for their organizations, while also balancing acting as a fiduciary and working to improve investment returns.  So today, we’ll hear from our panelists how the recent pandemic and social unrest is changing the dialogue, is shifting client views around sustainability, and how this shift is really starting to play out in portfolios. 

And with that, I'm honored to be joined today by Tom Lee, Chief Investment Officer and Executive Director for New York State Teachers Retirement System; Brian Deese, Global Head of Sustainable Investing at BlackRock; and Debbie McCoy, head of Sustainable Investing within our Systematic Active Equities group here at BlackRock.  So, thank you all so much for joining us today.

Tom, maybe we’ll kick it off with you.  How have these past months shifted your views on sustainable investing and on building sustainability within your organization?

Tom Lee: Thank you, Zaneta.  It’s a pleasure to be here joining the panel.  Well, I would say that the past several months we’ve all experienced a dramatic shift, not only in terms of our lifestyle at work, but also our lifestyle at home.  But in terms of New York State Teachers, long before the COVID-19 crisis, you know, our investment strategy has always been to align our investment program with our fiduciary duties.  And in this regard, you know, our responsibility to provide a secure retirement for over 430,000 members is top-of-mind and our investment program is so vital to ensuring that these members receive their retirement benefits after a long career in public service.

So, within that context, in terms of our investment program our portfolio is broadly diversified globally, and we are primarily invested on the public equities side in passive investments.  As we look at passive investments, we currently as investors are exposed to companies or have exposure to companies that have ESG as part of their business model, as well as their strategic direction.  As the index changes our policy benchmarks, we’ve seen over time that the composition and weighting of the indices change as the economy changes and new technology and new innovation occur and that’s a process that occurs constantly.

So, one of the things that we’ve done is given the fact that we currently have exposure to many of these companies, for example Barron’s puts out a list every year of the 100 most sustainable companies.  NYSTRS is an investor in 99 of those companies in terms of our public holdings.  But, to further look at these issues, these issues are quite important to a fund that’s a long-term investor.  We’ve set up a framework for governance in terms of hiring a consultant to assist staffing the board, to refine our investment beliefs regarding ESG, and we’ve also reached out to many members of the community in terms of organizations, such as BlackRock, to help us as we move along this path.

Zaneta Koplewicz: Yeah.  That's really interesting.  You know, Brian and Debbie, maybe turning to you.  You know, you’re having conversations with clients on this very topic on a daily basis.  How have your conversations on sustainable investing really evolved since the start of the pandemic?  And have you seen new considerations emerge in terms of how clients are approaching this space?  Maybe Brian, we’ll start with you.

Brian Deese: Yeah, look.  Thank you for that and thank you to all of you for joining.  I hope you’re staying safe.  This has been an extraordinary period in the world, in the macroeconomy, in our health systems globally, and also in sustainable investing.  And I think coming into this there were really two big questions and we have seen overwhelmingly and, in some cases, surprisingly client responses to both of them in the context of the COVID crisis.

The first was this question fiduciary in nature connected to what Tom said about can we really invest sustainably and do so while getting the same or better long-term financial returns.  And this has been a question, a perennial question for years, if not decades.  We’ve seen lots of and a growing body of research to show that that actually is possible and, indeed, integrating sustainability does lead to stronger long-term outcomes.

But we have not tested that in the type of crisis that we’ve seen in this period.  So, one of the things that has come out of this period has been a really interesting body of evidence, short-term in nature, so take it with what it is, but a body of evidence that has shown that sustainable strategies have shown resilient financial properties, a resilience in terms of helping to profit in extreme downturn scenarios and strong performance in this environment.

The second question was would clients be comfortable sticking with and actually allocating to sustainable strategies in a market drawdown scenario, in an extreme period of crisis.  And in some ways, that’s been more, even more astounding.  During this period where we’ve seen massive periods of risk often in the market, we’ve seen historic inflows into sustainable strategies broadly globally and in the US we saw record-breaking inflows into sustainable strategies, into passive sustainable strategies as we were seeing drawdowns in other parts of the market.

And so, both of these things has helped to reinforce our view that there is a structural shift in investor preferences toward more sustainable strategies and more sustainable outcomes.  And with that, I think the COVID crisis and its focus on stakeholders, on how companies are managing employees, how companies are managing their health and safety and wellness, how companies are interacting with the local communities in which they operate is taking on an increased salience in this environment and is likely to actually increase this trend that we’ve seen over the last six months.

Zaneta Koplewicz: Sure.  Debbie, anything you would add to that?

Debbie McCoy: Sure.  Zaneta, thanks for the question and, yeah, thanks for everyone participating for joining us.  I would add there has been a noticeable expansion in the kinds of questions that I'm receiving in client conversations.  And actually, first in the narrow, you asked about the pandemic.  One of the things we’re being asked to talk about quite a bit is the disease itself.  And so, the team that I'm a part of, we have a significant emphasis on using technology and data in our research and analysis and we invested a lot of time starting in the middle of January really thinking about the health and human implications of the virus itself, moving on to companies and markets.  And so, a lot of our conversations involve the views that we’ve developed from that start.

Now certainly, the sustainable investing lens overlays with what is going on in the pandemic and I think the standout for me is I am receiving more queries to understand how we’ve been thinking about sustainable investing over a long period of time.  And so, what I take that to mean is when I'm in conversations, people are really asking me what has been animating the team, what has been animating our research agenda for a long time, and were we in a position to be able to comment on some of these very complex interactions between companies and society. 

Now certainly, having made an investment in sustainable investing research now for many years, we’re able to talk about what we were thinking about and I think that’s been for me one of the unique features of conversations I’ve been having is really a much broader commentary on how society interacts, different elements one to the other. 

Zaneta Koplewicz: Yeah.  That's great.  And I love your comment about sort of thinking about this evolution over a longer timeframe, Debbie, and not just the recent period of the pandemic.  And I think taking a step back, you know, many of our listeners are really at various points of their journey in terms of exploring this space, everything from, you know, really early stage diligence and education on the space to actually making active investments across both public and private markets. 

So, maybe kind of building on that, Brian, I think you have such a unique seat as the Global Head of Sustainability here at BlackRock.  I'd love to hear how you’ve seen kind of client approaches evolve over your broader time at BlackRock and maybe highlight a few of the more innovative approaches you're seeing today.

 Brian Deese: Yeah, absolutely.  This is a journey in almost all cases and Tom referenced it earlier in terms of thinking about actually –

Zaneta Koplewicz: I think, Brian, we might need you to unmute.

Brian Deese: Classic problem.  I was saying this is a journey for sure and Tom referenced some of that earlier as well.  One of the sort of core elements of the journey that I have seen and I think we’ve seen in this space of sustainable investing has been to move, for clients to move the conversation from something that is about a niche, either a niche exposure, a satellite allocation, or a niche output to address a particular element of their overall investment process to sustainable investing as part of the core strategic asset allocation and portfolio construction approach of a – of an individual investor or a fund or a plan.  And that evolution is really important, because it, you know, it aligns with what we know more broadly in terms of investment, the academic investment research, the decisions you make about portfolio construction, those decisions you make about the actual allocation in your portfolio become really load-bearing in terms of the overall outcomes that you get.

So, the ability to evolve and move that sustainable investing conversation into the core of how do I build an entire portfolio approach and embed sustainability across the entire portfolio is really I think one of the things we’re seeing in the evolution.  And that’s very innovative in and of itself.  There are certainly, you know, really innovative strategies that we’re seeing using new and unstructured techniques to try to apply data that has previously not been, you know, used in the sustainable investing space and doing that.  Debbie’s at the forefront of that type of work.  We’re seeing very innovative approaches to try to invest against the low carbon transition climate-related approaches.

But, I think overall one of the most innovative things is actually taking this conversation that has for years been about how do you allocate 5% of your portfolio into something that is largely about aligning with your values and instead bringing this conversation to the core of how do I construct a portfolio where sustainability is actually at the core of driving long-term value?

Zaneta Koplewicz: Yeah.  Brian, I think that’s spot-on.  And it’s interesting.  In our first polling, actually, it looks like a little over 50% of the respondents are integrating sustainable investing as a driver of risk and return across strategies.  So, to your point, taking a much more holistic approach. 

You know, Tom, I think maybe taking NYSTRS as just, you know, kind of one case study here, I'd be interested sort of what your journey has looked like.  You touched on it a bit earlier.  And also, maybe give us a flavor for, you know, what the process has been like, both for your investment staff as well as working with your board and thinking through, you know, sustainability at the NYSTRS level.

Tom Lee: Certainly.  And, you know, as I mentioned in my opening, you know, NYSTRS is a long-term investor.  We’ll turn 100 next year.  You know, the sustainability of our fund really depends on us making really intelligent and thoughtful decisions on our investment program.  And those decisions should occur within a framework that aligns our investment beliefs with our fiduciary duties. 

The journey for us has been, you know, we’ve relied on firms such as yours and others to really stay abreast of the current research in this area.  We’ve – we are currently running a model portfolio in terms of a carbon-free index.  We’ve reached out to index providers to see the various types of indices that could be incorporated in terms of a policy benchmark.  We’ve also reached out to many members of our plan sponsor community to see what they’re doing in this regard. 

So, I would say, you know, it’s a journey.  It’s a journey where every day we’re learning new things.  And, you know, fortunately for us being a large plan with a good brand, we have access to the best thinking out there and our job is to incorporate that thinking in a program that will ensure that, you know, our past performance has been for the past 30 years over 85% of our income has come from investment returns.  So, we really want to make sure that that income stream continues in the future and I think we need to adapt, incorporate new information, and be really thoughtful in terms of how we implement.

Zaneta Koplewicz: Thanks, Tom.  You know, maybe let’s shift gears for a second and drill down a bit more to the asset class level, you know, thinking about sustainability from an asset class perspective.  Debbie, I'd love your thoughts on some of the more compelling ways you’re seeing clients access it through public markets and through public equities specifically.  And I think you come at it from such a unique and interesting angle with that more quantitative lens, as you referenced earlier.  So, maybe we can also touch on how research and really the signals, you know, your team uses can help in assessing the impact of opportunities along the spectrum within public markets.

Debbie McCoy: Sure.  Well, one of the things that is exciting for me in the type of approach that my team has is that we can identify characteristics of companies and in doing so uncover some common ground in even large universes of public securities.  And so, we have our research agenda divided into four key areas when it relates to sustainable investing.

The first is thinking about superior growth – these are just, again, characteristics of firms – risk mitigation, social issues, and then transition and transition could be economic transition and environmental.  And so, just a couple of highlights, Zaneta, to answer your question about accessing the market. 

Brian referenced earlier questions that have come up really prominently recently about how companies interact with their employees and we have been intrigued by this question over the last five years.  What’s the quality of the management team of a company and really what’s the texture of the relationship between the employee and the employer?  And that includes a number of pieces of research within it, everything from how an employee experiences the company to the kinds of support that they’re offered.  And we can really see in moments like the ones we’ve had recently how that plays a role.

Risk mitigation has come out to us in research and in thinking about markets through managing around controversies.  We know that controversies can be extremely negative for companies and their performance, but negative for companies in terms of what’s happening to the communities around them.  And so, we have a deep research agenda in thinking about controversies and when are there some marker characteristics in companies, kind of early warning flags that we might be able to see or perceive that tell us a company might be positioned to have controversies exposed.

On the social side, I mentioned some of the modeling we’ve done about COVID, but I think we’ve never been more excited than to have developed research around pharmaceutical research and development in 2014 and 2015.  And so interestingly, we have taken a view from the sustainable investing side of things to just better understand for pharmaceutical companies to the extent that the main value they deliver into society and we all need it right now is great research and things that can help humans.  We've been classifying that actually in a fair bit of detail for a number of years. 

And so, you know, across the board I think we’re finding there are a lot of points to understand more deeply how companies in the listed space are playing out in sustainable investing through this really granular research and, of course, including environment, where we’ve done an awful lot of research on, again, research and development.  We think it’s a great indicator of what companies really care about, what do they spend their money on, and then some of the bigger, more commonly discussed issues like carbon emissions and mitigation.

Zaneta Koplewicz: That's great.  And maybe just to contrast that, Brian, you know, how are you seeing this play out across private markets or outside of the public markets, if you will?

Brian Deese: Yeah.  Well, the first thing I would say is still within the public markets, but on the fixed income side is that a lot of the approaches that Debbie was just talking about are actually opening up new space and new ground to bring sustainable investing into the fixed income space in a way that is new and reflects an expansion from what has traditionally been, you know, the sort of longer standing traditional SRI space has been particularly equity-oriented.  And so, the ability in particular to look at risk mitigation and downside protection on things like controversies, as Debbie was talking about, is really allowing for more high-fidelity fixed income approaches in the first instance.

But then, outside of the public markets, you obviously have on the one hand a significant challenge in the sense that sustainable investing is about bringing non-traditionally financial information into the investing process and in the private market you have an information asymmetry where you don’t have the – as much broadly available information about companies.  But, on the flip side you have real upside opportunity, because a number of these sustainability themes, if we think about it from a macro perspective, if you take something like the low carbon transition or more broadly this move toward more resource-efficient business models, whether that’s across food, consumer goods, ag, other … a lot of these business models that are actually going to succeed are younger, earlier stage, more disruptive.  And so, the private markets presents a real opportunity to harvest the alpha opportunities associated with more sustainable business models and more sustainable outcomes.

So, if you can overcome those information challenges, there’s actually potentially even more opportunity to really invest successfully and sustainably in the private markets.  The good news is that, you know, the – we often think about them as asset classes as being, you know, sharply delineated public markets and private markets.  But, of course, a lot of the information revolution and the fast increases in the amount of data available and the techniques to use that data can be applied in private markets, number one.  And number two, we and others who’ve been in this space for some time have developed tools to actually extract the right type of information from companies so you can understand both the sustainability-related risks and opportunities in private market business models.

So, I think this is a space that will only grow across time.  It will – it is less structured because of those information challenges, but really presents significant opportunity as we think about where sustainable investing can go over the next five or ten years.

Zaneta Koplewicz: Yeah, absolutely.  You know, Tom, I think you obviously invest across public markets, private markets, kind of really think about this holistically.  And you and the team at NYSTRS, you know, work with some of the most respected investment managers in the world.  So, I'd be curious how you and your team think about engaging with your partners on sustainability and, in particular, what you’ve found effective in translating sustainability-related goals into actual, you know, into actual portfolio changes.

Tom Lee: Sure.  Well, we do have the benefit of working with really prominent firms globally.  And one of the things that we’ve asked is in terms of NYSTRS term holdings, in terms of a portfolio score, sort of a sustainability score, what does that look like for NYSTRS and any deviation from that score to improve that score, what sorts of strategies and products are available for us to consider. 

Another important part is the research and I believe the resources and the research that’s available from firms such as yours is really helpful to us as we look to realign and reassess our investment portfolio holdings.  Again, on the private side, we also have access to companies that may be in the early stage of developing new technologies, etcetera.  And the things that we’re asking for these companies is what is your ESG footprint in terms of not only your strategic views, but also your diversity and corporate responsibility views. 

 Zaneta Koplewicz: Yeah, absolutely.  If we can shift gears for a moment, and we briefly touched on this earlier, but you know, we’ve really seen the pandemic and the resurgence of social justice movements shift or even perhaps broaden many investors’, you know, sustainability objectives.  And, you know, Brian, I'd be curious how you feel the industry has been responding to the growing call for more focus on the stakeholder, you know, getting back to sort of the title of this panel, you know, focus on employees, on communities, and on customers and how does racial inequality and the investment solutions that are designed to address it really fit into the broader scope of sustainability?

Brian Deese: So, I think that one of the things that will come out of the COVID-19 crisis is the definitive end to shareholder economics as a viable way of actually describing and operating how economies can sustainably operate and the ascendance of shareholder economics.  This is not new.  There’s been academic work on this for decades and certainly lots of voices, including our CEO, Larry Fink, have been talking about the importance of looking at how companies engage shareholder – stakeholders broadly in service of trying to understand those companies that will have sustainable long-term profitability.

But, this is not about trying to draw a distinction between long-term profitability and a company’s focus, but instead a recognition that companies that are effectively able to engage their employees will keep their employees happy and safe, will have lower recruitment costs, lower turnover costs.  Companies that actually engage with their communities are going to have greater resilience, particularly in moments like the crisis moments like we find ourselves in today. 

And I think that the broader challenges of navigating deep and systemic racism and the systemic challenges that racial – that the push for racial equity entails will only drive greater focus on this, that we’re seeing across the board that there is more that is being asked and expected of companies.  Companies are being expected to step in and actually show, not just in rhetoric, not just in policy, but in their actions how they intend to provide a positive social purpose that connects directly to those stakeholders.

So, I think for all of those reasons, we’re going to see a rising link between companies’ ability to engage their stakeholders and their long-term profitability across time.  And I think that that opens up more opportunities and, in fact, more responsibility for the financial services sector and for investment managers to also step in and demonstrate how they are intending to use their business model, use their networks, use their own engagement with stakeholders to drive a positive social purpose as well.  And I think that that will be, you know, that will be something that the stakeholders of financial services companies will expect in the same way that we see that happening across other parts of the economy.

Zaneta Koplewicz: Yeah, absolutely.  I think, you know, we’re so broadly seeing this call to action and call to accountability.  You know, Tom, have you felt a similar response at NYSTRS?

Tom Lee: Diversity is one of our core values at NYSTRS and, you know, the past couple months due to these horrible incidents, you know, our team has had very thoughtful and courageous discussions internally.  And I can tell you from NYSTRS’ point of view, as Brian mentioned, we’ll use our resources and our network to really advocate for our business partners and stakeholders to be as diverse and to recognize diversity as an asset.  That's the expectation from us. 

But, you know, I sort of have this view where because we’re in the retirement business, I just put out there that one area where you’re going to see a divergence is the fact that some Americans will be unprepared to have a secure retirement.  And I think the obligation of the asset management industry, as well as public policy, really needs to focus on that, because, you know, many of us who, like NYSTRS and personally, that have access to equities, we are able to grow our wealth to contribute to our retirement.  Whereas, many folks today don’t have that access and I think that is an area where the issue of sustainability, corporate responsibility, and public policy really needs to focus.

Zaneta Koplewicz: Yeah, absolutely, Tom.  I mean, as you know, that’s something that our firm has talked about and been quite outspoken about as well.  So, you know, agree with you quite strongly there.

Debbie, I'd be interested to hear how, you know, this focus on social impact has presented or perhaps not presented challenges for measuring signals and really how your team has kind of created a framework for understanding social impact investment opportunities and their associated risks.

Debbie McCoy: Sure.  Zaneta, we have found this to be a significant area of opportunity for us.  So, as a team that has a focus on quantitative measurement of really everything that we think about, we think this is an exceptional opportunity.  I’ll draw out two points here.

On the one hand, there was a long period of time where issue areas in the sustainable category were things that people thought they couldn’t quantify.  So, it was difficult to make any kind of objective comparison around specific issue areas or types of research.  Having a quantitative approach actually removes that argument entirely.  So, we’re no longer thinking about can something qualitative become quantitative.  Once we have a framework, which actually in our case we didn’t change anything.  I – and that sounds a little bit unusual, but we’ve always been quantitative in measurement.

We’ve always had a focus on drawing into our research agenda and our work new and broader and actually pretty unique and unusual ideas.  We can continue doing that with sustainable investing.  And what I think this does for us is it really expands the horizon of what is considered meaningful in portfolios.

Our research and having measurement through quantitative tools allows us to talk with a lot more precision about what we’re doing.  So, we think that all that is happening in sustainable investing globally and actually the increase in interest is great for a lot of reasons.  We have more to talk about and think about.  There are more ideas coming to the fore, ours and really just out in broader society.  And then, we have this – these great tools developed over, you know, 3.5 decades to talk about the things that we’re researching.  So, yeah, it’s been positive for us, Zaneta.

Zaneta Koplewicz: Yeah, no, absolutely.  I mean I see we’re bumping up on time already and I could spend another 30 minutes or longer with you all.  But this has been a great discussion on a topic that is very much top-of-mind for our clients.  So, a huge thank you to our panelists, Brian, Tom, and Debbie, for sharing their thoughts and insights today.  We really appreciate it.

To all of you who listened in, thank you so much for joining us.  If you'd like to continue the discussion on sustainability, before you leave a survey question will pop up.  So, please let us know if you’d like a member of the BlackRock Relationship team to contact you with more information and we’re happy to follow-up. 

And more broadly, this is now concluding our first ever Future Forum.  So, thank you, again, for spending the time with BlackRock and for your ongoing partnership.  We really appreciate the time you’ve spent with us over the past two days at our first ever Future Forum.  And it’s been a pleasure and an honor to discuss with you all some of our industry’s and really the world’s most pertinent topics. 

So, over the course of the next few days, you’ll hear more about how to stay connected to the Future Forum content, how to continue these conversations well after you leave the Future Forum today, and how to stay connected with BlackRock more broadly.  We hope to speak with you again very soon.  Thanks so much.

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