Hortz: What major issues or areas of corporate activity do you see as the most effective in determining how corporate managements are doing on these issues?
Conley: This is, we think, a big point of differentiation for us relative to other social investors. JAG believes that if corporations are developing and supporting employees that turnover should be low. We believe that if corporations are conserving resources that margins should be advancing as a result. We believe that if managements are acting in an ethical manner that legal and regulatory costs should be falling. In short, we believe in measuring corporate financial reports to find proof that their social efforts are producing tangible results.
Hortz: Are there any studies you have done that you would like to share with us that you feel are helpful in developing and implementing SRI/ESG investment strategies?
Conley: We believe JAG is a thought leader in the social investing area, and we publish some of our own research. Most recently, we distributed a report questioning how investors hoped to make an active contribution to social issues by investing in a passive social index. We know that index and ETF investing is popular, but we wonder aloud how those structures make sense in social investing areas. Investors are neither directing capital nor are they capable of impacting management teams by putting money into a passive investment product. You could call that research self-serving as we are an active manager, but we believe in social purpose, and we do not see a way to achieve a social purpose in a passive investment product.
Hortz: What other tools/processes are you using to implement your ESG investment process? Are there enough tools for asset managers to truly identify companies that can deliver on their ESG processes?
Conley: SRI exclusions are hard coded into JAG’s factor model, and we previously described our analyst interface that requires the analysts to address social considerations in the normal course of their analysis. In addition, JAG offers an ESG Impact strategy in which we select certain ESG data from an outside vendor, and we integrate that ESG data directly into our factor model. As such, ESG is integrated into our investment process, and it is a critical part of every investment decision.
To address your question on tools, JAG believes that information is sufficient in the marketplace and that there are several good vendors of social investing data. We believe that we have an advantage given our history in how to utilize that data. Vendor data though has a pronounced large cap bias in our opinion. In addition, vendors seem to be very active in their weighting choices of ESG sub-factors (factors that ultimately make up the aggregate scores). JAG has a method to cut through those outside emphases and biases.
Hortz: Are there third party firms and systems that analyze and rate ESG/SRI/Impact funds and do you feel they gauge well what competitors in this space are comparatively doing?
JAG decided long ago to promote its Large Cap Growth equity strategy as a regular large cap growth fund instead of as the SRI product that it is. We did not (and do not) think that using SRI restrictions and incorporating ESG/impact investing elements to our core investing process provides an excuse to compare ourselves to a different benchmark than the Russell 1000 Growth Index. We are likely being evaluated on a different basis than our peer group, but that has been our choice.
In a recent development, we have had growing pains with one of the new tools in the social investing market. We were disappointed with the newly launched Morningstar Sustainability Rating for our mutual fund. We suspect our active investment choices and custom social scores do not align with their methodology. We sense that the tools to measure ESG funds are not adequate at this time.