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.  

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