Ruth Saldanha: We recently held the Morningstar Executive Forum here in Toronto with the topic "Is ESG a Source of Alpha?" Jon Hale, Morningstar's Global Head of Sustainability Research, joined us from Chicago to discuss the evolving nature of ESG, the impact it has on investor portfolios and the future outlook of ESG investing. Jon is here with us now to discuss the theme a little further.
Jon, thank you so much for joining us here today.
Jon Hale: My pleasure.
Saldanha: We discussed how each pillar of ESG is not equal with governance gaining more prominence than the other two. Can you tell us why that is the case?
Hale: Well, the reason for that is that governance factors really play a role across all companies in all industries, whereas the social and environmental factors maybe more material in some industries than others. But governance important across the board.
Saldanha: One more fair way of talking about ESG sustainability and a company sustainability in the long-term is materiality. Could you please explain that to us?
Hale: Well, you know, for a long time when we thought about ESG issues, there was an entire range of issues that investors might consider particularly when they are wanting to kind of assess like what is a good company, what is a company that's living up to its – some idea of social responsibility. Materiality really focuses on what ESG issues are going to be financially relevant to a company and its strategy and its performance over the long run. So, I think, it's really an advance in a lot of ways to focus on those kinds of issues. Because every single environmental and social issue that is out there in the world does not have the same impact on every single company. But we do want to focus on and understand as investors what companies are more affected by things like carbon risk, or on the other hand, maybe data and privacy issues which is kind of an S-type of an issue.
Saldanha: Right. One thing that a lot of investors worry about is that if you go in for an ESG slant to your portfolio, you have to give up returns. However, this is not really supported by research, is it?
Hale: No, not really. It's not supported by research. And in fact, most research that's been done, careful research over the last now up to about 20 years has shown that ESG can enhance performance and that it is not a detractor from performance. There are many ways to actually implement ESG into an investment strategy. So, there's going to be a variation in returns, but investors should not accept that idea. They should, in fact, demand financial performance alongside the idea that they are putting their money towards companies that are going to contribute to a more sustainable future.
Saldanha: Finally, going ahead, do you expect sustainability to be a key theme in investment for the next short to medium to long term?
Hale: Yeah. So, I think it's going to become exceedingly important for a couple of reasons. One is just that, you know, most companies in the world today face key sustainability challenges, whether that is climate change or natural resource scarcity or just how to deal with the changes that modern technology is causing to gender equality. Companies have to face those issues. And so, investors need to be able to evaluate how well companies are doing that, because I think it's going to be a key to understanding the quality company of the 21st Century. And the other reason – they are interrelated – the other reason is that a lot of end investors want to invest this way. And those investors – big investor groups like women and millennials are only growing in terms of their importance as investment decision-makers. So, I think, the demand is going to be there and just the necessity for using ESG to help evaluate investments is going to be there as well.
Saldanha: Thank you so much for joining us today, Jon.
Hale: My pleasure.
Saldanha: For Morningstar, I'm Ruth Saldanha.
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