Speaker 1:
From the library of the New York Stock Exchange at the corner of Wall and Broad Streets in New York City, you're Inside the ICE House, our podcast from Intercontinental Exchange on markets, leadership and vision and global business. The dream drivers that have made the NYSE an indispensable institution of global growth for over 225 years. Each week we feature stories of those who hatch plans, create jobs and harness the engine of capitalism right here, right now at the NYSE and at ICE's 12 exchanges and six clearing houses around the world. And now welcome Inside the ICE House.
Brooklyn McLaughlin:
Welcome, inside the ICE House. I'm your host, Brooklyn McLaughlin, Head of Corporate Affairs and Sustainability at Intercontinental Exchange. We've talked on this podcast in the past about the evolving role of corporations as it relates to corporate responsibility or what is often referred to as ESG, environmental, social and governance matters. Earlier this year, our guest was President of Fortune, Alan Murray, among other subjects he shared his views on changes to how CEOs view their responsibilities and how companies, employees, and customers were increasingly drivers of that. In August, the business round table came out with a significant statement on how companies need to prioritize all of their stakeholders, not just investors. There's really no question that companies are thinking about ESG issues broadly and across many constituencies, employers, consumers, their communities, as well as investors. Today in this podcast we're really going to focus on the investor aspect and talk in detail about how companies are interacting with investors and how investors are thinking about ESG.
Brooklyn McLaughlin:
On that front investor interest in ESG factors has seen a significant increase in recent years. Globally there's estimated to be 31 trillion in assets under management in some form of an ESG strategy today, roughly 12 trillion of that is here in the US. That's up 38% from two years ago. Another way to think about that is it's about one out of every four professionally managed dollars. Asset owners are increasingly demanding more than just financial returns for their investing dollars. Asset managers are increasingly using ESG driven data points as part of their risk management analysis and companies are evolving, how they approach sustainability and how they tell their story around what they're doing. Our guest today, Brian Matt of IHS Markit, is here to help me parse through these issues, including how corporate responsibility has evolved and the role of investor relations in ESG. Our conversation right after this break.
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Brooklyn McLaughlin:
Our guest today, Brian Matt, is Director of Research Analysis at IHS Markit. He came to IHS Markit through their recent acquisition of IPREO, where he served as Global Head of Strategy and Innovation in the corporate services business. Previously, he oversaw the corporate analytics team focusing on institutional investor targeting programs globally, as well as situational analytics and transactional analysis for companies considering or undergoing strategic changes. Welcome, Inside the ICE House into the New York Stock Exchange.
Brian Matt:
Thanks Brooklyn.
Brooklyn McLaughlin:
Can you take a minute and talk about where IHS Markit, which trades under the NYSE ticker Info, I-N-F-O, fits into the larger world of capital markets and investing?
Brian Matt:
Sure. So IHS Markit, we would call ourselves an information company. We give our customers the key information that they need to make decisions of all kinds. The range of those customers though, is very broad. It's not just a capital markets focus for us. There's energy companies, transportation, maritime and trade, the defense industry, governments. It's a very wide range of different customers, different companies, different personas that we face. My history, and specifically within IPREO, is much more focused into the public company realm and specifically in investor relations that you and I have spent the most time discussing. Our job of course, is to then help companies know who are your investors, who are the decision makers with those investors, how do you communicate with them to then help them make investment decisions and make voting decisions.
Brooklyn McLaughlin:
You joined IHS Markit through last year's acquisition of IPREO where you had worked for the past dozen years heading up innovation and client services. What does innovation look like in the world of IR?
Brian Matt:
Few ways to take that? I'd say first off, think of the external factors that are acting on the IR community, obviously digital communications of all kinds, video, audio. The fact that digital communications can spread across the globe in an instant certainly changes things, since when I started in this industry. Regulatory changes happen at uneven speeds in different regulatory markets across the globe. So certainly the impact of MiFID, for example, on US companies not just European companies, has been felt. And also the investor audience has globalized. We've seen a lot more impact from non-US investors on US companies and vice versa. So I'd say innovation for IR really just means addressing each of those changes, external changes to the market and helping companies understand how each of those processes within communication, within regulation, within globalization, help them really change the way that they need to tell their story and change the demands on them from the investor community. I'd say everything really falls into those categories. That's how I'd put it.
Brooklyn McLaughlin:
When did ESG become a large part of your focus?
Brian Matt:
Mm-hmm (affirmative). There's a good question. ESG has always had sort of a niche focus within the investment community. I was leading our investor relations, our investor targeting and situational analytics business back through around 2014. We started at the time to see a lot more companies interested in, I guess I'd say the G-side of ESG, right around the time of Say-on-Pay. You did see a lot more companies starting to at least want to know who their investors were from a voting decision perspective, not just an investment decision perspective. And I'd say some of that really evolved into how we see companies engage throughout the year with investors from a voting perspective.
Brian Matt:
Around that time, maybe a little bit after that is when we start to see a much sharper increase in the size of assets under management, both active and passive into the ESG space. And really if you were to pick an inflection point, it might be around 12 months ago, it might be last fall is really when we started to see the largest increases. Everyone's always talking about hockey stick growth. It's right around that point that I think the rest of the investment community started to realize the benefits to themselves internally of involving themselves with ESG integration and dedicated ESG strategies to help them compete. Which then of course, the demands from them pushed on into the corporate community as well.
Brooklyn McLaughlin:
Before we dive in much further let's take a minute and just talk about some of the terminology we're going to use today. I tend to use ESG, sustainability, corporate responsibility, pretty interchangeably. There are no set definitions for any of these terms but there are nuances and I think they sometimes mean different things to different people. For the purposes of our conversation I think what we're really talking about is the non-financial risks and opportunities that impacts stockholder value over the long term. Would you say that's fair?
Brian Matt:
Yeah, that sounds fine. There is no matter what, for any company, there's a risk exercise that takes place around non-financial characteristics. And for any investment, that risk exercise has to take place as well within the investor that evaluating the company, for that decision really across any asset class. You're right, there's a wide range of different definitions. Some of that is for branding purposes. Different investors are trying to brand the type of research that they're doing in the ESG realm as different, or hopefully more effective than others. But in reality, we would boil all of this down to non-financial information that's used to make either an investment or possibly an investor voting decision as well.
Brooklyn McLaughlin:
After this break, we'll get into more detail about how investors are factoring ESG into their investment decisions. We'll be right back after this.
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Brooklyn McLaughlin:
Welcome back. Before the break, Brian Matt, Director of Research and Analysis at IHS Markit, and I were discussing the evolution of ESG, in particular as it relates to investors. Let's take a minute and talk about what's driving this. We hear a lot about women and millennials prioritizing environmental and social factors in their investment decisions, which and in turn, of course drives asset managers. They're also an increasing number of investors and asset managers that are looking at ESG factors as a standard part of their risk management or even a way to drive alpha. Brian, how do you think about what's driving this growing investor interest in ESG?
Brian Matt:
If you look at each of the components of that, I think you got to the right audiences there. I mean, first off the asset owner community, the classic public or municipal pension fund tends to be in an environment where there may be political pressures to push companies towards some type of environmental, social, or potentially governance goals as well. The public asset owners have always been the leaders in this space. We've always expected state and municipal, and also all the European, both company and national pension plans to be involved. You see a lot more from individual investors as well, as you mentioned the retail investor community, wanting to look for options to see their values reflected in their investments. There's more and more of those available to them today. And hopefully they're finding the opportunity to bring their values into their investment portfolio overall at more and more attractive cost too.
Brian Matt:
Really beyond that when you speak to the asset management community and really a lot of our job within IHS Markit is to understand what's driving investment decisions. When you speak to the asset management community, they're fairly open. They're trying to differentiate themselves. They're trying to produce new products that are more effective, fit a better audience, the pension fund audience, or the individual investor audience that we spoke of before. And they're looking to put the right resources against those, potentially to generate alpha, but also to produce a wider line of products overall. The active asset managers of course have lost capital to the passive asset managers over time. One of the best ways to differentiate is to find a new strategy that's not easy to replicate in passive form. And in some cases, a thematic ESG strategy is something that a passive investor cannot produce. So you do see asset managers thinking in those terms and hopefully using it to either fill out a product portfolio or to differentiate themselves.
Brooklyn McLaughlin:
There seems to be a dichotomy out there, when you talk to investor relations officers, we all hear a lot about this tremendous investor interest in ESG. Yet it doesn't come up on earnings calls. It doesn't come up in a lot of investor conversations. Why do you think that is?
Brian Matt:
I can answer the earnings call question. The earnings call is a bit of a time horizon mismatch. ESG tends to be a longer risk based analysis, and it's going to have a lot longer time horizon than just one quarter. As to just ongoing calls with the investment community, it's possible that the IR community just simply speaking to the wrong individuals. There's individuals inside the company that tend to reach out the most often, that are doing a fundamental model, are really doing much of the financial analysis, but it's possible they only receive the end results of an ESG analysis that's been done elsewhere in the company by different personas. So that may just break down to how each asset manager structures its team and the way it takes ESG information and makes decisions as well.
Brooklyn McLaughlin:
Why don't we talk a little bit more about that? Can you talk about the investment, how investment managers are making decisions when it comes to... In regards to ESG?
Brian Matt:
This is where we get into... we've spoken to a lot of the asset management community, large asset managers down to even the small hedge fund community. So there's a rapidly changing environment out there, first. Asset managers as mentioned, are looking to differentiate themselves. They're producing new products, almost week to week they're producing new products. We would suggest if you break down the way the asset managers see this into a primary screener function and sort of a secondary screener or ESG integration function, that's probably the clearest line. There are asset managers that are building up a primary screener portfolio or a dedicated ESG portfolio. Those tend to be fairly new in the grand scheme of things. These aren't portfolios that have been around for 20 years and have had that time to build up assets, but they are of course differentiated. Some of them are performing very well.
Brian Matt:
That group, just the primary screeners, the size of that within the active universe is growing at double digits annually on the active side. Also, if you consider the passive side to be sort of the primary screeners as well, a dedicated ESG characteristics screen, that group's growing over 20% per year on the passive side. So in addition to primary screener portfolios, most investors will conduct an integration exercise across many other portfolio. For some asset managers this is even the vast majority of their equity investments. May take in and use ESG information to perform maybe what they would call ESG integration, essentially a secondary screen using ESG as one piece of the puzzle, not a primary piece, but a secondary tertiary piece is much more common. And this has really advanced over the last couple years, to the point where some asset managers are even putting a majority of their overall assets into that ESG integration bucket. So that's really where we've seen the broadest change within the asset management community. It's also where we've started to see a lot more ESG information flow into the rank and file analysts and portfolio managers that are responsible for the fundamental models on the company, not just the ESG analysts inside the firm.
Brooklyn McLaughlin:
Obviously data, ESG data, is a critical part of that process. What data are investors using and how are they using it? Can you talk a bit about that?
Brian Matt:
A lot of different sources out there these days. So there's a number of different rating agencies or research providers that are collecting information from companies producing their own ratings. There's a number of different questionnaire or survey organizations that often have focus on just one topic within E or S or G. Those organizations sometimes collect very effective information as well. Some of that information is then being used. There's also primary research as well. And that primary research can be done by dedicated ESG analysts inside the firm, can sometimes be done by the fundamental analysts inside the firm. And in some cases is really done by a more data centric role as well. Someone who's pulling data in from a lot of different sources and looking for signals in that data from a number of different ESG providers. So I'd say for companies, it's very important to know that whether or not you're putting information out there about a particular ESG topic, it's likely some piece of that information is being generated on you anyways. And it's worth knowing what that information is and how it's being used to make decisions.
Brooklyn McLaughlin:
So as companies are on the receiving end of money and a growing number of these surveys, how should they think about their resources and how much should they put toward managing the rankings and the scores versus telling your own story?
Brian Matt:
It's a good question. So first off, I'd say some of this is industry dependent. There are certain industries... my easiest example for this is the utility space that spends a lot more time given that sometimes green power production is a part of their business model. Maybe they spend a bit more time putting information out about something that's much closer to their source of revenue, for example. Financials tax might be a little less focused on the environmental side, but might also still have a social or governance focus. At the minimum, there's certain providers out there that are very widely used by investors.
Brian Matt:
And really the best part here is your investors will tell you, as you speak to them, the sources that they're using, just have an ongoing conversation, and you'll start to pick up what some of the most common are. Just about every research provider that's gathering that information about a company wants to also make sure that their research is seen as accurate and effective by their buy-side customers. Therefore, most of them are fairly open with sharing the factual information that they use to make those recommendations back with the issuer, back with the company. So it does give companies some ability to see the factual data that goes into those research reports and potentially make sure that that information is accurate, up to date and reflects the company effectively. That's a good exercise for any company to do dealing purely with data. It's something most companies should be doing right now.
Brian Matt:
Beyond that though, there's also a narrative function as well. Most companies do have a story to be able to tell about what they're doing in the environmental or social or governance realms that might help drive what the business looks like down the road, both from a risk perspective, but an opportunity perspective as well. That narrative is also important for those providers.
Brian Matt:
If you're conducting ESG research, you're often presented with a mass of information from a lot of different frameworks and a lot of different sources. Sometimes as a research analyst, your job is to be able to identify what should I look at first. The narrative that a company provides tells that an analyst, that researcher, or really anyone else across the investment community, this is what you should look at first. It's also the driver for a lot of those primary screeners as we spoke about earlier, that universe that's really looking for identifying the best companies or the most progressive companies in any of those spaces. That narrative really does help. And we've done events with investors where that's really the lead thing that they bring up within their ESG groups is, "Please don't just give us the data, we also want that narrative as well. It really does help us do our job."
Brooklyn McLaughlin:
How should companies think about ESG indices?
Brian Matt:
Well, First we'll say there's a lot out there. There's of course, this is again a rapidly growing universe, but I will say it's growing from a fairly small base. ESG indices are produced for one or two purposes, one to benchmark active portfolios. The second is to replicate within an ETF or within another dedicated ESG portfolio, often from the passive side. What I'll say right now, the passive side of that universe isn't very large, but it is growing fairly quickly. Last cut we did, I think was about 30 billion or so in passive ETF assets, tracked ESG indices. It was a fairly small number to start with, but it has been growing quickly. Beyond that though within those indices, most of that community of consumers of those indices is really in the benchmarking side. There is still an active decision that's being made. You may see the company as part of an overall index, but you have a choice to either invest in that company or not. There's no requirement for replication like there would be from a passive standpoint.
Brian Matt:
So I'd say again, for each of those, there's an index provider that is using ESG research to make those decisions. You should be able to find who that research provider is and find out what their coverage is. What is a set of companies that they look at? What's their client base? Find out what asset managers, both on active and passive universes are using their product. That should give you an idea as to the reach of that product and therefore, in some cases, the questionnaires that these groups have for companies, the demand for information is pretty extensive. It can help you make the appropriate decisions for where to spend your disclosure time relative to those indices versus other research providers or the buy-side community directly.
Brooklyn McLaughlin:
So just to wrap up here, what advice would you give issuers that are developing or are setting their ESG strategy today?
Brian Matt:
Step one for companies just dipping their toe in the water is really that materiality exercise when it comes to ESG information. Really starting by collecting information from all of the various stakeholder groups, from investors, from employees, from communities, find out what information they're demanding, what information would help them make their decisions about the company best. Then look at that information from a materiality perspective. First off what's material to the company's future, what is something that we really need to disclose. Then beyond that, what are pieces of those requests that are valuable to us that might create greater value for us, that might help build trust with each of those communities. After that, you then have to decide for each line that anyone's looking for, is it going to be possible for us to collect it, collect it effectively and be able to collect it in a measurable way over time and are there cost to disclosing it or collecting it that outweigh the benefits? Sometimes there's even a competitive concern, putting too much information out that your competitors could benefit from comes into play.
Brian Matt:
This really is a formal exercise, that's conducted by most larger companies. Sometimes it's done annually sometimes bi-annually. It's something that really does need a dedicated amount of focus, both from the fact that there's a legal perspective to it with materiality, but also something that sort of builds up a pipeline of different items that communities are looking for, that as companies are speaking to new stakeholders out there, that they can look for and potentially add to a new review of disclosure, the second time that or third time that topic may come up. After you've decided what you want to disclose then it's communicating that information out to those stakeholders.
Brian Matt:
As we talked about investors and the various research providers looking for data and narrative, and we talked about how companies can fit to both of those goals. That narrative though fits very well across multiple frameworks if you do it right. It is the type of thing that hopefully you're able to say the same message to the investment community, but also say it to employees or to other parts of those stakeholder groups. Stakeholders will tell you how to fit that information into what they want to see around the company. Narrative is really agnostic though. It is something that if you tell a good story to one group, you're likely to be able to tell it to the rest of those groups too.
Brooklyn McLaughlin:
Brian, thank you for joining us Inside the ICE House.
Brian Matt:
Oh, Thank you very much, Brooklyn.
Brooklyn McLaughlin:
That's our conversation for this week. Our guest was Brian Matt, Director of Research and Analysis at IHS Markit. If you like what you heard, please write us on iTunes so other folks know where to find us. If you have a comment or question, you'd like one of our experts to tackle on a future show, email us at [email protected]. Or tweet us @ICEHousePodcast. Our show was produced by PDash with production assistance from Ken Able and Ian Wolff. I'm Brooklyn McLaughlin, your host signing off from the library of the New York Stock Exchange. Thanks for listening. See you next time.
Speaker 1:
Information contained in this podcast was obtained in part from publicly available sources and not independently verified, neither ICE, nor is affiliates, make any representations or warranties, express or implied, as to the accuracy or completeness of the information and do not sponsor, approve or endorse any of the content herein, all of which is presented solely for informational and educational purposes. Nothing herein constitutes an offer to sell, a solicitation of an offer to buy any security or a recommendation of any security or trading practice. Some portions of the preceeding conversation may have been edited for the purpose of length or clarity.
