During more than 20 years working in the sustainable and impact investing space, I’ve watched the growth of AUM and the incorporation of ESG factors by some of the largest mainstream asset management firms. So it was with great interest that I interviewed Jennifer Sireklove, director of responsible investing (RI) at Parametric, whose team is driving ESG incorporation and shareholder engagement through a unique approach to integrating passive and active management investment strategies. As Sireklove explained, until recently “only the large owners who had the resources, knowledge and assets could make it worthwhile to go down the path of owning and influencing. And what we’re seeing now is a sea change in individual owners and small organizations who are really interested in how their assets in collection with other like-minded assets can influence change.”

Parametric, with $120B+ in AUM, is known for its disciplined, rules-based approach to investing. Their clients are institutions and private wealth investors. Parametric is also highly consultative, focusing on client mandates and building customized portfolios to meet individual needs. Six years ago, based on client requests, Parametric started developing its RI framework. Sireklove was tasked with developing strategies that would expand ESG integration across the company’s client base while maintaining its core focus on controlling costs and taxes and giving clients a variety of choices as shareholders in how they want to use their assets to support and influence companies.

Enhanced Portfolio Construction

Parametric’s investing approach focuses on clients who want good pricing, availability and flexibility rather than simply the rock bottom costs popular passive products like ETFs offer. Parametric’s SMAs, for example, occupy what Sireklove calls “an in-between space where there isn’t an off-the-shelf ETF that fits a client’s needs, or they need a tax-managed component.”

Sireklove explains that creating high performing ETFs with an ESG component is challenging because of lower asset flows. “Getting everyone to agree on what are ‘good’ versus ‘bad’ companies from an ESG perspective is difficult when it comes to highly sensitive environmental and social issues,” says Sireklove. “But you need that agreement to sell enough passive investors on that kind of ETF, otherwise you can’t get enough assets. It’s a high hurdle, and it’s why those kinds of ETFs don’t really see much in the way of flows.”

Sireklove’s RI team has solved this challenge by customizing each client mandate on the portfolio construction side to align with their values and then doing active ownership on the engagement side. To customize a portfolio a client can choose from a number of options that include screening out all companies that don’t have good ESG characteristics or overweighting higher scoring companies and choosing an appropriate risk-return profile. This customization gives clients diversified equity exposure to companies with strong ESG characteristics while achieving market-like returns.

Active Ownership: Proxy Voting and Shareholder Resolutions

Active ownership is the second component in Parametric’s RI investment process. Sireklove eloquently explains why this is such a critical part of the RI landscape: “Active ownership is about influencing change, and you don’t get that by trading stocks. You get that by not avoiding the so-called bad stocks—either from a return perspective or from an ESG perspective. You have to actually own that company and try to use the voting or engagement options to change the company, which is no small thing.”

Sireklove describes voting proxies and introducing resolutions as methods to help achieve goals like reducing carbon emissions or changing the gender and racial makeup of boards and senior management. Importantly, an active ownership approach doesn’t require the investor to make specialized portfolio construction decisions that may result in performance deviations. “We encourage clients to first look to what can be done in active ownership, then do the portfolio construction,” says Sireklove. “The process used to be the reverse.”

I asked Sireklove about the impact from proxy voting and how much of this process is about gradually increasing the percentage of shareholder votes on a particular issue. Parametric is a bit newer in this space, and Sireklove credited the many entities that have done the hard work of building proxy voting coalitions over the years. “The simple truth today,” she says, “is that as RI assets under management continue to grow, collaborative efforts that include large asset owners and managers can often tip a vote.” Sireklove sees this type of collaborative shareholder effort raising the expectation that passive investors are going to consider certain environmental and social issues more carefully, rather than voting with management by default. She points out that in recent years some proposals, especially related to gender and climate risk issues, are getting more than 50 percent of the shareholder vote.  

In Sireklove’s experience, a consensus is building that “certain environmental and social issues absolutely fit within the framework of good governance, and those with large voting power and growing assets have a responsibility to take that seriously. But it’s all an ecosystem, and there are a lot of different participants who play different and critical roles in the process of owning and influencing.”

Understanding Generation ESG

Sireklove is clear that the so-called generational divide on ESG investing is not so much a divide as a difference in strategy. Parametric’s 2019 Responsible Investing Outlook: Generation ESG, written by Sireklove and available on the firm’s website, makes a case for generational similarities as well as differences when it comes to multi-generational family asset management. I was surprised to learn that millennials and their parents and grandparents agree, at 80 percent, with the statement that “companies should take responsibility for their impact on the environment and social well-being.” They differ on how to achieve it, with millennials taking it for granted that the ESG impacts of their choices should be considered when building an investment portfolio.

Finding common ground then, stresses Sireklove, is supporting older generations to see how portfolio construction and active ownership can achieve RI goals without jeopardizing performance. Active ownership, which facilitates the pooling of assets with other like-minded asset owners to influence change, is something that older investors often don’t realize is an option. “That this is available really gets them interested,” says Sireklove. “We’re seeing opportunities to forge common ground, and part of that comes out of the fact that there’s often long-standing generational support for the ideas at stake. It’s a matter of figuring out how to practically implement them, and that is a solvable problem.”

For Sireklove, her work as director of RI at Parametric has given her the opportunity to put the two parts of her life together: “After 20 years of writing and speaking about the financial markets, investing and public equities in particular, I can now ask the important questions that have interested me for years: How do climate change and capital interact? What is the role of companies intersecting with opportunities for everyone regardless of gender, race or economic background? My goal is to meet all of these client needs in a way that satisfies the investment professional in me.”

Paul Ellis founded Paul Ellis Consulting to work with financial advisors who want to integrate sustainable and impact investment strategies for their clients.