the difference in governance versus the other two factors of
environmental and social?
Debbie McCoy: When you say that many governance factors
are universal, are you viewing their performance characteristics
as consistent across the board?
Margaret M. Towle: I'm not thinking so much about performance characteristics, but rather key performance indicators.
If a company is corrupt, that seems to be a universal negative
influence on that company, regardless of industry or sector.
Another example of a key performance indicator within the
governance factor set is the role of diversity in enhancing the
effectiveness of public company boards.
Debbie McCoy: I’ll be controversial. Our group just wrote
a paper (Garvey et al. 2017) published in the Journal of
Investment Management about controversy, and the article
provides some counterintuitive examples.
Within the G framework, there are some issues that could
have a persistent negative impact on a portfolio or could potentially pose an opportunity. However, we’d like to do even more
analysis. Board diversity is great. But a large body of academic
research indicates that managerial diversity could be an even
more important factor to consider. Managerial diversity is
related to governance but actually is operational. The insight
for this discussion is probably that the E, S, and G frame is as
much conceptual as application-related.
A great reason to be doing research and thinking about these
issues is that if we all agree to more universal terms, we actually take away the opportunity to find other information that
could inform us even more. Although on balance I would agree
that controversies and ethics problems tend to be quite bad, we
find that a number of companies experiencing controversies or
other big issues might score well on traditional G assessments.
Our article, called “A Pitfall in Ethical Investing,” is provocative. We want to invite debate about the idea that if we all get in
line and say we’re going to do ESG, we might not be doing our
portfolios a service, and we might not be doing great service to
the underlying issues. BlackRock is committed to ongoing ESG
and sustainability research.
Margaret M. Towle: Before concluding our discussion, I’d like
to give each of you an opportunity to share any final thoughts,
either about ESG issues that we did not address or to offer your
thoughts regarding the future of impact investing.
Ron Cordes: Ten years after getting involved in this type of
investing, I’m beginning to realize how much of a paradigm shift
this is, not only for investors but particularly for financial inter-
mediaries and asset managers. I’ve been spending a lot of time
children. But in the interim, a number of groups, whether fami-
lies or institutions, are asserting that they want to invest
differently and are changing their core investments first.
At the micro level, E, S, and G considerations always get bundled together when people talk about these issues, and that’s
sensible. But from a quantitative point of view, as with any kind
of research, we want to disaggregate individual issues and
conduct research on each underlying issue itself. So when I
think about E (environment) I incorporate elements of global
climate change frameworks.
For example, mitigation is really about reducing carbon emissions in company activities, and that’s one important element
in positioning a portfolio. I don’t think it’s the only environment-related element, however, because companies are organic; they
change. During this period of economic adaptation and transition with regard to how companies interact with resources,
we’re using our research to capture the ways in which companies are becoming more “green innovative.” Some companies
are literally creating new products and services. In other cases,
we can use our data analysis skills to ascertain how companies
are changing their internal processes to match their environmental awareness. So that’s an area where we think “E” portfolio
research is deeper than the headline.
In our quantitative work, we have given ourselves latitude to
take into account certain issues that are societally important,
fall outside the traditional ESG lens, but relate to sustainability
or impact issues, so we analyze data for them too. It’s the
individual-level E, S, and G analyses that makes me hesitate to
consistently consider ESG an aggregated “factor.” Our work
demonstrates that each of these issues has a different way of
playing out in companies, so we prefer analyzing data on these
discrete considerations. What we are doing in portfolio construction is optimizing on the basis of additional information
If you consider traditional risk and return as the only parameters, one view says you could model ESG only as a risk. Our
research indicates that there’s also opportunity because companies change, economies change, everything changes. We think
looking only at risk shortchanges the importance of the information derived from underlying issues. We want to optimize
portfolio construction on the basis of all the information we find
for these ESG parameters, and the quantitative tools help us
Margaret M. Towle: I agree with you about not viewing ESG
key performance indicators as one uniform collection of factors.
In my research, for example, I’ve found that a lot of “G”
(governance) factor components are universal, if you adjust
for the country effect. What is the group’s thinking regarding