Unpacking the complex world of ESG

Caroline Grossman: Hello, and welcome to today's event, Unpacking ESG, hosted by Chicago Booth's Rustandy Center for Social Sector Innovation and the George H. Stigler Center for the study of the Economy and the State. I'm Caroline Grossman, Executive Director of the Rustandy Center. For those of you who are interacting with the Rustandy Center for the first time, we're the social impact hub at the University of Chicago Booth School of Business, for people committed to tackling complex, social and environmental problems. We're an important part of the university's social impact ecosystem. We promote innovation, advance research, and develop the people and practices that can accelerate social change.

Caroline Grossman: For those of you who aren't familiar with the Stigler Center, the Stigler Center is dedicated to understanding issues at the intersection of politics and the economy. Through research support, analysis of data and economic trends and a range of courses, events, initiatives, and resources the Stigler Center has become an intellectual destination for research on regulatory capture, crony capitalism, and various forms of subversion of competition by special interest groups. We're thankful to the Stigler Center for being such a strong partner and for helping to bring this event to life.
 
Caroline Grossman: This is the first event in our new Unpacking ESG event series, which will seek to investigate the ways in which ESG is and is not, and could be a force for social and environmental impact. I'm thrilled to be bringing this conversation to life. I so often talk to students on campus and alumni for whom, five years ago or when I was a Booth student, which is 20 years ago, ESG didn't exist. We didn't talk about it. And we didn't know about it. There wasn't a word. I'm so, so thrilled to be here today, to go deeper into something that is, in the newspaper, on Twitter every day, day in and day out.
     
Caroline Grossman: So today we will explore questions like, what is ESG investing and how is it different from good corporate social responsibility? How do investors determine, what a legitimate ESG effort is and what are the most important ESG metrics and how are they moving the needle, on environmental and social progress.

Caroline Grossman: Our panelists tonight are well positioned to dig into these topics. Our moderator tonight is Chris Wheat, my friend and colleague, executive director of the Stigler Center. Chris will facilitate our conversation with industry and thought leaders in the ESG space, including Rob Gertner, Joel F. Gemunder Professor of Strategy and Finance at the University of Chicago Booth School of Business and John Edwardson Faculty Director of the Rustandy Center for Social Sector Innovation. Liz Michaels, a Booth alum, and co-head of Aperio, which is part of BlackRock, and Blake Pontius, director of sustainable investing at William Blair Investment Management.

Caroline Grossman: We're also excited to hear from all of you about questions you may have. Just a reminder this is the first event in a series. So if we can't get to it all today, we will use your questions to help influence the series through its duration. And so after our panelists discuss a series of questions, we'll leave some time to take questions from all of you. If you have a question, submit it by the Q and A chat function within Zoom. And with that, let's dive in over to you, Chris.

Chris Wheat: Great thank you very much Caroline and good evening to all of you from a snowy and icy Hyde Park. Thank you for joining us for a really interesting conversation, what we hope to be an interesting conversation and hopefully the first of several. And so I want to kick it off with maybe a very basic and maybe the hardest question at the same time. I think that as Caroline indicated, as I talked to students, fellow alums and others around the country and around the world, there's always this question about what does ESG investing actually entail? And so maybe starting with you Liz, and then going around, how do you and your colleagues define ESG investing and how has that thinking evolved from what this conversation may have been when I was a student, which was around socially responsible investing?

Liz Michaels: Sure, thanks, Chris. So let me, I'm going to wear two hats here. So at Aperio Group, we view this environmental, social and governance as a values and mission alignment statement by our clients. So it is how they view it and then we implement accordingly. We were acquired by BlackRock about a year ago. And as I'm sure you all know, BlackRock has taken a different view on that and views it as a materiality piece. So with the kind of work that we do, we are looking to our clients to be able to define what they believe is environmental, social, and governance. And that can be different views at different points in time and different investment theses. But most often the folks that we are working with are coming to us saying, our worldview is about climate change or about social issues, or racial equity, or environmental racism. And that's how we go about applying it.

Liz Michaels: Now the question is around how this, this has changed over the years and I think the biggest change is sitting here, the intersection of the folks in this room, right? So we have somebody coming at it from policy in the Stigler Center, we have Rustandy and that group didn't exist 10 years ago. And certainly a place like BlackRock wasn't asking those questions 10 years ago. So I think there's been a lot of shift in that in the ways that people view it, there is a room for all of them we believe and a very large tent that helps move it all forward.

Chris Wheat: Thanks. Blake, same question to you.

Blake Pontius: Great, thanks Chris, and thanks everyone for having me. I would take a slightly different approach than what Liz described in terms of William Blair being a 100% active oriented investment manager, where our clients have hired us to generate long term investment returns. So very much with the financial materiality orientation, when they're looking to, to integrate ESG and thinking about ESG it's through that kind of risk/return lens, as opposed to having more of an impact focus. So our clients are predominantly, very long term oriented investors, pension funds, endowments, foundations. And so for us as a 100% active, manager focusing on fundamental research ESG integration, is really investing with that broader research lens to help us better identify risks and opportunities. It's about assessing non-traditional factors that can impact risk and return across different asset classes.

Blake Pontius: And I would say, you also need to distinguish between ESG integration and then specific sustainability-oriented strategies where you do have, you are prioritizing some of those objectives such as decarbonization or energy efficiency or diversity or financial inclusion. But I would say relative to kind of yesterday's CSR, you're seeing a greater emphasis on financial materiality by investors and companies. Whereas traditionally CSR initiatives were, I think trying to address a broader group of stakeholders, beyond just the shareholders, which is where a lot of the ESG integration focuses is focused today.

Chris Wheat: Rob, let me put the question to you, not only how you define it, but how the growing research portfolio of the academy defines it.

Robert Gertner: I think that, it's a bit of a challenge there. There's lots of attention in this space and there's lots of different terminology that's been used. So I like to think of the origins of ESG very much being on the investor side. So I tend to think of corporate social responsibility, corporate citizenship, really being sort of the focus on the strategies that a firm adopts with respect to the impact it's having on the environment and on social issues. And I think of both ESG and impact investing as terms that come from the investing side, if we're focused on sort of investors engagement, vis-à-vis the social impact of what companies are doing.

Robert Gertner: And I think the ESG term is a little bit elusive. I think it's origins start largely in the public markets and a bit of a response to what you call socially responsible investment, which I think largely was a term that focused mostly on negative screens. So just sort of in public equity markets, not investing in certain companies that, or doing something bad from the perspective, at least of some subset of investors. And I think ESG has come to be sort of a much broader term and much more focused, not just on negative screens but a lot more attention paid to investing in and even having an impact on what companies do from a more positive perspective of trying to have a positive environmental or social impact.

Robert Gertner: I do agree with Liz that, there's a very complicated issue as to the extent to which this is designed to try to either deal with just materiality. So the notion of how do these factors affect the actual financial returns of companies. It's also used as a way for investors to merely express their values, to invest in companies where, which, whose activities are aligned with their values. And thirdly, they're designed to actually shift what companies do. So to sort of affect the behavior of companies with their investment. I think all of those are actually quite distinct but they all, I think fall under the broad umbrella of ESG. And I also think, even though it's had a public market focus, I think certainly the term gets used sometimes to describe corporate activity. So social corporate social responsibility, and certainly it's being used more in private markets as well. So outside of public equities and in bond markets.

Liz Michaels: And if I may, we've talked about the investor side, but I think it's important to we, as you think about the stakeholders that ESG is also being used as an employee recruitment and employee retention. It's a signal to internal stakeholders of where you sit. So it's playing a much broader role than certainly it did 10 years ago, as something that's driving retention and recruitment as well. And I think that plays a role in how companies are thinking about it and how they want us to talk about it externally.

Chris Wheat: Can we talk a little bit about, let's piggybacking off of that, that the signaling effect, which I think goes to a lot of what I heard through the panel that we've got, we have a clear yet still broad definition of ESG and the catalyst for that may look and feel different. Given that the reason that a company may take on an ESG strategy or investment or an asset manager or investor might take on that lens, how do we think about the market? We've got a $400 trillion global asset market. So how do we think or size the impact that ESG is having on the market? And also is that the wrong question? Is just looking at, whether or not this says ESG, actually the right metric to think about impact. Maybe Rob I'll turn to you first. You're the professor, you should know all the answers.

Robert Gertner: Yeah, well, I wish. I'm glad you still think that. So I think that, maybe. Trying to size this is really challenging. I think that's in part because certainly environmental factors, for example, right? They impact all of society, every company, and environmental issues are therefore important to every single company in the world. And they are starting to, and investors are taking note and are thinking about, this goes to the materiality point are taking note of environmental risk and that could be viewed as purely sort of traditional investing. There's this important issue out there that affects the fundamental, it's a fundamental risk, long term risk to any company and, and any investor's going to want to care about, understanding the risks contained in any investment they make. So if you start saying, to what extent are investors considering that in their investments you get to, and you incorporate that as part of ESG, ESG becomes enormous.

Robert Gertner: And it represents sort of a large, so if you ask asset managers, are you paying attention to environmental issues in the companies you're investing in? You know, you get, at some one point, not that, several years ago you got 30 to 50% or something, my guess is that would be even higher today.

Robert Gertner: But I think that's sort of, right, that's a little different from the extent to which sort of values of investors are, investors are making decisions based on their values or companies are changing what they do as a function of investor pressure so to speak, with respect to ESG issues. And I think that's a lot more challenging to try to identify in the data and to size, but it's certainly been the case I think somewhat surprising to me, this has grown enormously rapidly. And I think companies now are pretty much across the board paying attention, not just to these issues as direct business risks, but thinking about their investors and how their investors views on these issues and thinking about then how that impacts their business, their strategy, their valuation in the market.

Chris Wheat: Blake, let me turn the question to you and then Liz.

Blake Pontius: Yeah, I would just pick up on, on that point and I guess beyond looking at sort of the AUM numbers that get thrown around, I think 35 trillion is the latest estimate from the global sustainable investment alliance, which has been tracking assets for, I think for the last six or seven years. You look at the explosion in signatories to the principles for responsible investments so. You've had, I think now we have over 4,000 asset owner and asset manager signatories who have formally committed to integrate ESG considerations in their investment process. That includes being active owners and engaging with companies. And so that's, I think a more kind of meaningful number perhaps to look at when you think about the impact from, the world, pretty much every, significant institutional investor now globally has, is committed to doing this.

Blake Pontius: But it is important to also, just as I said before, I think distinguish between ESG integration and dedicated strategies, which have, which are targeting specific factors or areas of environmental or social impact. And certainly that's accelerating as well, but it's a much smaller piece of that 35 trillion. I think the latest estimates I saw from Morningstar were closer to 4 trillion and kind of specific sustainability focused strategies.

Liz Michaels: So I'm going to take a very non U of C approach and not give a quantitative answer, but give you more of anecdotal observations from over the last---

Chris Wheat: We'll let you keep your degree.

Liz Michaels: Thank you, the last 10 or 15 years. And when I think about all of the picking up on the stakeholders, all of the different touchpoints of where this is coming up, and if you think broadly and about a supply chain, it's coming up at every point. And so when you have, when, when my parents know what ESG is, we've reached a tipping point, right? And it's because companies are marketing to it, not just in the US, but globally, they believe that it's going to drive business. You have companies that are selling, whether it's B2B or B2C, they are talking about it. They are making it part of their own supply chain because they believe it is just better business to do it. And then on the policy side, Chris, not to jump into your world a little bit, but you have New York trying to legislate the supply chain within the fashion industry to make sure they're changing behaviors. So I think there is a confluence of all of these small pieces in all of their own lanes, that are creating a tremendous amount of noise and are pushing us over into this, this tipping point of which investors are a huge–play a huge role. Capitalism is absolutely going to be there, but whether they're driving or following, I'm not sure.

Robert Gertner: Yeah can I jump in on that too?

Chris Wheat: Please.

Robert Gertner: I think Liz's point is a very important one. And I think to some extent, it's the other, it's clear that these other parts are at least in part driving, right? So I think companies are coming to the realization that their customers care about supply chain issues and the environmental impact of their business. And I think also importantly, employees care about the role of the companies that they work for in the world. And I think all of that is affecting the fundamentals of the business and because those things are affecting the fundamentals of the business investors have to care about it. And I think that's an important driving force of what's going on here. And I think that one question is to what extent is the investor part incremental to that? Or is it merely following? And to what extent are investors sort of either pushing companies more because of the values of the investors themselves, or are they just merely responding to these other forces, that are coming from mainly from consumers and from workers?

Chris Wheat: Well, Blake, I'm curious for your thoughts there, because you make the distinction between integration and ESG integration and fundamental analysis, which some people could argue that some of this is just doing good research for a long term investor versus the actual distinction between an ESG fund, a green fund. So when thinking about all these different forces that are pushing in from your standpoint is one leading the discussion versus the other, is it as Liz, mentioned a concern or fear of government intervention or policy coming down the pike. Is there a specific driver or drivers there?

Blake Pontius: We really view it as multiple drivers: the regulatory element, the consumer, and evolving societal expectations element, investor pressure, so it's a kind of multidimensional effect, impacting companies. And it's, all of this is making at financially material so that if you are, if you are an active investor, with clients who have hired you to, to outperform a benchmark, to us it's, it's critical that we're taking these into consideration because you're seeing it have an impact on financial performance. And I think it's a matter of, for the dedicated strategies. You have specific clients who may want you to prioritize, certain factors. And I think we are seeing a lot more emphasis in particular from our, our European clients are coming to us, asking about environmental, oriented solutions for decarbonization, energy efficiency, et cetera. So I think there is a role for those more, focused strategies where again, you're prioritizing certain factors based on client preference. But we just view it as part of very good, fundamental research that's and being kind of fit for purpose here as an asset manager in the 21st century, You've got to be integrating these factors, to have that better risk adjusted return profile.

Chris Wheat: One of the things I'm curious about for, and maybe Liz and Blake, I can say with you with you all given that, you're taking complimentary, but somewhat different approaches with respect to your organizations. I think a lot of this conversation focuses on the E and as someone who spent a large portion of the last decade working on environmental policy, I am appreciative of that, but often we don't talk a lot, or it seems like the S and G get a little shortsighted, and I'm actually seeing in the, the Q and A, as you have questions, please put them in. Some people are asking about the S and the G. So maybe just talk a little bit about what, what is the S and the G? And how either your clients, or how companies are attempting to approach that, particularly in a time of social upheaval? Don't everyone speak at once.

Liz Michaels: Sure. So let me start with the S piece. And one of the challenges with the S and I think we're going to see this theme a lot, two things. One, the data is less readily available that has gotten better, but it is less well defined. People are less comfortable-people, corporations being transparent about it. And so it is more difficult to use it in any systematic investing way. The second thing is the definition of what is good S like what is good? I think varies tremendously, by person. And whether that good is a world that I, or an investor or an employee want to be a part of that's the world I want to see, or whether, and or, I believe it is going to drive better performance.

Liz Michaels: And you see this a lot with diversity, right? You have studies that will talk about more diverse boards. Senior executives, employee bases will drive better risk, will drive better returns, whatever it might be, and yet the data isn't fully available. It is not comprehensive, it is not universal and then we live in a global world. And at the end of the day, I think for some, and many of our clients, whether diversity drives better performance or not, they want to live in a world that represents, the people of the world or the people of their city, or their people of their state, and to not have that, and is problematic. So I think that's so S can mean many things. It can mean issues. Rob had talked earlier about the SRI and some of the exclusionary stuff. We've talked a lot about sort of main more mainstream ESG discussions, but the faith-based community had a number of things as well, and those are their Ss, and those may or may not be yours, but they believe that they drive a particular type of outcome, which for them is alignment with their faith.

Liz Michaels: On the G side, that looks different because some of that data is, is mandated to be shared. Do you want your chairman and your CEO to be the same? Is that the best governance for your entity? Do you want the board overseeing your human rights vis-à-vis your supply chain, does that matter? And those are the kind of nuances that ESG investors are looking at in order to make sure that what they want to see whether the outcome is alpha or values alignment is actually happening within the entity and it is being done reputably.

Blake Pontius: Yeah and I would just add on to that, Liz. It has been interesting to see kind of the shift in focus from more of a negative screening approach to social factors, which, will still exist. I mean, we have a number of faith-based investors and we do customized screens, but I think more interesting for us are kind of identifying companies that are very strong with their human capital management that have, very strong kind of employee engagement programs. And it's very important in certain industries that are more human capital oriented, where it's much more financially material like an IT services company or an asset management company. And so we try to be thoughtful about social factors and their relevance across different industries. And then even within industries, there could be nuances from company to company, but some of the things you mentioned, supply chain, oversight and management, very critical. But it is a lot of it is, is intangible and difficult to quantify, as you said. And I think you're seeing some more kind of interesting work done around assessing, controversies at companies and using AI to help with those assessments. So that's another way that we're starting to incorporate that sort of element of looking at social risk.

Blake Pontius: And from a governance perspective, certainly the structure of the board, making sure that minority shareholders’ interests are being looked after. I mean, that's always been very critical. And, it's often kind of the overlooked factor in all of the discussions, but you kind of think of governance setting the tone really for the environmental and social as well to the extent that ESG is really embedded in the strategy of the company, you get a sense for that when you meet with the board and independent directors and really ask them, how they're approaching sustainability, how they're embedding it into strategy, are they incentivizing management properly? All of that is really critical to the governance view.

Robert Gertner: Can I?

Liz Michaels: I sort have a question come up, like what's environmental racism, which is a term I through at which I mentioned. And I think that's about the intersection of social with all of these things, right. And you saw it with Pope Francis and how he talked about, we have a lot of Catholic clients, but sort of the impact of climate change, who's the big, who's the most hurt by climate change? It's not people with wealth, it's your most disadvantaged part of your population. And we can look to Flint, Michigan, and other places where you see the problems of environmental issues and how they play out, with our most disadvantaged groups. And so for many clients, that intersection becomes very important. So it's intersectionality across these issues and where people feel like they can connect with it and where it's important to them. Sorry, Rob.

Robert Gertner: Yeah I was just going to say that I think, I mean I agree with, I thought Liz did a really nice job of talking about the distinction between E and S and why we see a little more focus on E. I think I agree with Blake that, G is important to the extent and fits in with respect to how the E and the S are managed. But I think governance is in some ways fundamentally different. And I, if I were in charge, I would have E and S together and probably G as something separate. And I think this is probably a bit of a history. I think ESG are things that like shareholders made trouble of, you know, made us think about. And they made trouble about environmental and social issues, but there's a long history of right, of individual shareholders complaining to companies about governance as well. So I think like, this maybe got grouped together. It's don't know this for a fact, but I hypothesized that this group got grouped together, as companies were like, worried about shareholder meetings and what are the shareholders going to make trouble about? And it's going to be E, S and G issues. And I think that the governance issues feel to me kind of pretty fundamentally different.

Chris Wheat: Well, and there's a long history, right, of shareholders creating noise and, using proxy votes and whatnot around governance issues, going back to the '80s and fighting for different issues. And now you're seeing some of those same tools being used around issues of E and asset at the same time. Rob let me stay with you around the idea of metrics there are lots of questions in the chat around that. The Rustandy Center has done some research on trying to get a handle on how companies talk about this. Is there some type of universal vernacular that we can all start using around this? What, where is the research around metrics right now?

Robert Gertner: So I think it's really challenging. We work with a PhD student at the Rustandy Center to look at corporate reporting and what they put into corporate social impact reports. And it is, this is from a few years ago, but it's very much all over the map. And then you've got, you're starting to see, right. There's a movement towards some standardization around measurement and metrics. And this is strongest in the environmental space. And I think it has real legs in the environmental piece of this because of the materiality issue. So I think more and more companies feel like they're under obligations to report environmental issues, which is generating sort of this notion of doing it in a standardized way. So there's lots of, much harder on the social, on any of the social issues. And so we're starting to see, the ability to actually make comparisons across companies in a way that you can feel confident about.

Robert Gertner: But there are all these organizations out there producing sort of ESG scores and you start looking based on, self-reported data by companies often using different definitions of metrics and leaving things out. And then you've got these, you've got, hundreds of different measures that need to be aggregated to create a score. And what you see when you look at this, is that the correlation between scores for an individual company is not really all that high. So there's a long way to go to really get to a point where the metrics are such that it's easy for an individual investor, even a sophisticated asset manager to, to really be able to just look, go to your screen and sort of get a sense of the ESG performance of any firm and compare it to others.

Chris Wheat: Yeah Liz and Blake, I'm curious for your thoughts on, on me metrics, there's no gap for ESG per se yet, although there are a variety of people trying to figure that out. So how do you think about the world of metrics and particularly is there a role putting now my political economy hat on with the Stigler Center, is there a role for government to play in terms of the definition of metrics around ESG, or should it?

Blake Pontius: I think there is a role for, government security regulators to make sure that material information is disclosed and it's done so in a consistent way, that's decision useful for investors. And you're seeing a push for, I think as Rob mentioned previously climate disclosures now in a number of countries, I know it's become mandatory in the UK, in many other countries. And the SEC obviously, you've probably read is, has been reviewing potential climate disclosures for US companies and I think is planning to announce, mandatory rules this year on climate disclosure. So that I think is very important to, coming up with, common and consistent metrics for investors to reference to, again, help with decision useful information and certain certainly government can play a role and should continue to do so in my opinion.

Liz Michaels: I think there is a role for standardized to make it easier for everyone but I also think if I can put on, I am an indexer by my background and by trade today, but sitting in Blake's shoes, I mean one of the advantages of the lack of fully transparent data is that's where the alpha opportunities are, right? Like if you believe there is alpha to be had, and you have a vision for what that is, the fact that it is so messy right now, for folks that know where to find it and know how to get to it, there's a real opportunity there, I would think. So, but I think some, there is far more systematic disclosure today than there was five years ago and that's, or even two years ago. And part of that, I think the government and regulatory bodies can play a role, but there is also the push to companies to just disclose it. And so you have somewhat of a virtuous cycle, right? Like if investors are demanding it and increasingly larger investors are demanding certain information and it's coming around that way, eventually those decisions start to play out.

Liz Michaels: And I watched this years and years and years ago at Morningstar, when we first started asking portfolio mutual fund portfolio managers to disclose their portfolio holdings in their fund. And they were like, that's our business. Like, that's, we can't share that with you. And we reminded them that perhaps they should remember that the shareholders own them and that they were there on behalf of the investors. So perhaps they might want to share that if investors wanted it. But it took time for the funds to hear it from the advisors who were buying their products. And eventually the data became more transparent. So I think there are a number of stakeholders and inputs that is driving this forward. And I think it's getting, it is getting better.

Robert Gertner: I just.

Chris Wheat: Yes, Rob, go ahead.

Robert Gertner: I just wanted to add that just one concern is that if you create measurement standards that are far from perfect, they can be manipulated as we know, with even standard accounting variables. And that can end up, doing a reasonable amount of damage, reducing transparency perhaps even, and certainly creating opportunities for companies to look good on the metrics without actually performing up to par.

Chris Wheat: Let me say on that last point, you said Rob, cause there's, I think, there's definitely some questions in the Q and A around let's call it greenwashing or whatever washing that you want to call it. How, I guess, what, how do we start looking at the world and start defining kind of what is real or material and what is a stronger term, than what is BS?

Robert Gertner: Yeah, I think, I mean, I leave it to those out in the field. I think it's---

Chris Wheat: No, you don't get to just punt the question to Liz. You also have to answer it yourself.

Robert Gertner: I think it's really–

Chris Wheat: I'll ask them, don't worry.

Robert Gertner: No, I think, I mean, I think it's really challenging, I think, right. We've seen, right. We've got all excited by the explosion of interest and investment engagement where we started this conversation, but that's really led to, there being now strong incentives to say that your, your environmentally responsible and your G to attract, to attract these investors and the like. And I think there are, that is leading to, I think, that's certainly strong incentives for things that we call greenwashing. And I think that, trying to sort out, good data, good standards will go a long way, but it's tricky, right?

Robert Gertner: And I think, we've seen this in the environ, direct carbon footprint can be manipulated easily by purchasing all the high, not producing it yourself and just moving it up the supply chain. And that's, we've seen a response to that and trying to get the metrics better, and I think sort of there's no way around sort of a fairly, evolutionary process and a costly one if we are going to take this seriously. They're going to be bad measures. People are going to claim that they're green when they aren't, and the measures will get better and transparency will increase. And hopefully we end up in a better place, not a worse place.

Liz Michaels: On the shareholder engagement front. There's been some efforts around calling, calling companies to accountability who made statements after around racial equity, who came out, in after George Floyd and said, we are all in and we are going to do something as a company. And I think there is more agency across activists to say, okay you said you were going to now show it to me. And they're using the tools of capitalism at their disposal. And they are looking to see how to play that. And they're not all going to work, but it's interesting to watch the evolution of those tools and hands outside the traditional investment industry.

Chris Wheat: Blake, I'm curious for your thoughts, particularly given, one of the things you said earlier is that so many different stakeholders are coming to this conversation from a different perspective, right? Be it an employee, a customer, a supplier. And so what feels and looks genuine or a genuine effort for one stakeholder may not feel sufficient for another.

Blake Pontius: Well yeah, I think for us it's, I guess the question about assessing greenwashing risk and certainly it's increasing significantly and you can see, I think statistics around company earnings calls and the references to sustainability, terminologies has exploded. But I do think engaging, direct engagement and dialogue with companies is something at William Blair we've always prioritized. And it's becoming, I think even more critical with respect to, really filtering through the noise and everybody now at least most mid and large cap companies are producing, very lengthy sustainability reports.

Blake Pontius: But for us, we found that those direct conversations with management or independent directors, over time gives us, we kind of develop a, the view of culture and the extent to which it's embedded are they setting goals for, whatever the material, social and environmental issues are, are they credible? Are they making progress? are there specific KPIs that can all help kind of suss out the, I guess the green washing element? I mean there's (indistinct) no perfect answer for that. I relying on (indistinct) is, not all of that, all that productive in our view. So really having that, that direct line to senior management and the board is essential.

Chris Wheat: Yeah, I used to kid that we're killing a lot of trees making environmental reports. But putting that to the side, I would appreciate if, the attendees could continue to put questions in the Q and A, I guarantee you, we will not be able to get to all these questions this evening, but that's why this is a series. So we can continue to explore these issues.

Chris Wheat: I want to talk with the panel about returns, because there was a lot of discussion and dispute about what returns can or should be in the ESG space. There was actually some discussion about this in the Wall Street Journal today. So maybe first to Liz and Blake, when you talk to your clients, how do they think about returns with respect specifically with respect to those who are looking for products, indices, or tools that are focused on ESG, are they willing to sacrifice, alpha here?

Liz Michaels: Blake is probably the better person to answer this, given that at Aperio, what we do is we take somebody's views, values, mission, or investment thesis, and we optimize to minimize tracking error to the benchmark. So we are looking to deliver market returns with these parameters embedded in it. So I think Blake is better suited to answer the alpha question.

Blake Pontius: Yeah I mean, I would say our, our clients are not looking they're not looking for concessionary returns. I think if for those who maybe have more exclusions or social restrictions, I think they might, they may be willing to accept, deviation from our model portfolios and perhaps some, a different return experience. And you can argue about the impact of exclusions it varies significantly over time, whether it's tobacco or oil, I would say broadly speaking, our clients are holding us to the same standard of performance, regardless of the ESG, whatever ESG oriented objectives they may include in their investment policy statements so. And I think to that point, it just, it illustrates that they view they don't view ESG as mutually exclusive with investment return. I mean, to the contrary they are increasingly viewing it as essential to, strong risk long term, a long term view and, and stronger, long term risk adjusted returns.

Liz Michaels: I've never quite understood why this gets more scrutiny than any other active investment thesis. And I, it's good that there's a conversation going on and I'm not going to turn this into an active versus passive debate, but why should this be held to a higher bar and have more criticism come in about whether it's good or bad, if it's an opportunity to drive investment performance and Blake and his firm can do something to deliver that like great, right? Like we don't have this same debate on whether value right now is a better place to be than growth. I mean, the debate comes out very differently.

Robert Gertner: Maybe I'll, I sort of wanted to avoid it, but I'll jump in a little bit. I think maybe an answer in part to Liz's question is I think, there's a bit of sort of intentional obfuscation I think that goes on here sometimes. And I think some people try to indicate that sort of a, an ESG strategy is going to lead to higher return should lead to higher returns forever or something. And I think it's much more of a, like a short run alpha that like these, these risks are not priced, right. So environment, something like environmental risks aren't yet priced and companies that are, that have a low carbon footprint are going to do better in the long run, but that's sort of like a, that's a presumably a short run, this equilibrium phenomenon, right. Market will get those price is right eventually. And I think when the market gets those prices right, then if people are going to sort of vote where they want to invest that in a way that's consistent with their values. I think the theory basically suggests that if anything, that will raise prices and lower returns to those companies. And I think that's a little bit what you see in the green bond market, right? There's demand for those bonds. What that does is it means companies can issue them at slightly, very slightly lower yields, and that leads to lower returns to the investors. And I think that's fundamentally what you ought see in equities once the ESG risks are properly priced in the market. And whether they are, if they aren't currently priced in the market correctly, then it's an alpha opportunity and go for it active investors.

Blake Pontius: That's what we would assert Rob, is a lot of these risks just are not accurately reflected in market prices and there is an opportunity. And I think that's like----

Robert Gertner: Like other alpha strategies I agree.

Chris Wheat: Right, the market. And there are a lot of active, the markets are not truly efficient as we evolve figured out despite what I was told in class. So Rob, going back to you to that point does, if we assess ESG risk and opportunities that begins to get priced into the market is, does ESG investing eventually just go away because theoretically at least that it would be fully encapsulated into the market and then it's just a part of fundamental analysis that research analysts should do.

Robert Gertner: I think the opportunities for our performance go away, but I'm not sure, right. Liz's, religious investors right, are still there and they're still going to care about, so to the extent that that investors view their investment choices, as they want those choices to reflect their values. They want to own companies that are consistent with their values, then there's always a role for ESG. There's always a way for tailoring portfolios to the objectives of investors. There's always an opportunity for shareholders to voice their views about the corporate, the social responsibility of the companies they invest in and try to shift those policies. So I think there is always a role. I think perhaps the, the market opportunity and therefore the, the dollars flowing in or the perception of market opportunity might shift.

Chris Wheat: Let me put, thanks for that Rob. Let me put one final question to the panel. We're in January, so it's time for resolutions. Some of us are, are even on our second or third set of resolutions. When you look out into the ecosphere of, of ESG investing, right now what do you want to see come out of the discussions of companies, of investors, of other asset managers, of employees, to drive and move the conversation along in 2022?

Robert Gertner: OK, I'll go first. I think maybe Chris, because the Stigler Center is co-sponsoring this event, I will, say that I think one area within ESG, that's gotten less attention than I think it deserves and I'd love to see investors starting to pay more attention to it is the way in which companies exert political influence and seeing much more disclosure, transparency, and active engagement by sort of the ESG community around the political influence of companies.

Liz Michaels: Mine was around transparency and disclosure. And that, that continues to move a pace and particularly on the S side of things. And I think if I have one specific, companies are required to disclose their workforce data to the EOC, they have it, disclose it and let people see, what your employee makeup looks like. So one concrete wish, not my resolution, somebody else's, I guess.

Blake Pontius: I guess mine is also related to disclosure transparency, but more for, with respect to investment products. And in terms of kind of demystifying how managers are actually going about ESG integration. And I think the, what we're seeing in Europe with the sustainable finance disclosure regulation is a good, is a great way to kind of help start to reduce the green washing risk. And hopefully that kind of has a positive spillover effect into the US. But I think there's just so much confusion in the marketplace amongst even our, our institutional clients advisory clients, about what it really means and you know what, how managers are actually doing it. So better articulate your process, the characteristics or objectives that you're targeting, reporting on the portfolios and specific metrics. I think all of that would be a welcome improvement to again, sort of demystify what ESG means from an investment product perspective.

Chris Wheat: So it feels at some level we're ending this conversation where we started it, right. What does ESG mean? How do we measure it and evaluate it? And how does that evolve over time, particularly given the various stake holders who have some skin in the game, and how do we really define this concept of stakeholder capitalism? And this is something thanks for all, for the plug that the Stigler Center has spent a lot of time and working on. If you go to pro market.org, you'll see a variety of essays on the issue of shareholder versus stakeholder capitalism.

Chris Wheat: I want to briefly talk about all the things that we did not talk about tonight, or we didn't spend enough time talking about. We spent very little time talking about green bonds or debt. We didn't spend a ton of time talking about the private market, which is obviously a huge driver to a lot of these discussions. We touched on, but what probably need to spend more time thinking about the US versus EU in these discussions, particularly as there continues to be the fight for exchanges and the fight for regulatory capture, if you will which is something that we talk a lot about at the center and more time to be spent around what does S and G really mean. E feels like we can kind of touch it or feel it, or figure out our way around it. S and G can often be more nebulous.

Chris Wheat: Rob, Liz, and Blake, I can't thank you all enough for participating. This will not be your last panel, sorry to inform you of that, but we hope to keep the conversation going. But thanks, thanks very much to, to Ali Galloway at the Rustandy Center and my other colleagues at the Rustandy and Stigler Center for their participation and involvement. We hope that you all continue to stay engaged and active with both the Stigler Center and the Rustandy Center over social media. You'll see a link, you'll see links to some of our sites come up on the screen shortly. And we look forward to continuing to have this conversation with alumni, with faculty, with practitioners, with those in policy. And we wish you a great 2022 and a good night. Thank you, Rob, thank you, Liz, and thank you, Blake.

Liz Michaels: Thank you.

Chris Wheat: Have a good night, everyone.

Blake Pontius: Good night.