We sat down with Randy Brown, Head of Insurance Asset Management at SLC Management and Chief Investment Officer at Sun Life, to learn more about how SLC Management is thinking about the crises of today when incorporating ESG factors into its investment portfolios.
Why are institutional investors more focused on ESG considerations now? Has the pandemic affected their thinking?
At SLC Management, we have always tried to invest sustainably across all our portfolios. Our parent company and largest client, Sun Life Assurance Company of Canada, has been recognized as one of the top 100 most sustainable companies in the world for over 10 years.2 The way we invest for Sun Life is consistent with how we invest for all our clients: with conviction, purpose and alignment. As investors prioritize ESG factors in their portfolios, our approach to investing and understanding their approach to sustainability and governance is more important than ever.
ESG investing really hit a bend in the road, so to speak, because of the Covid-19 crisis. Institutions recognized that if we do not have an early, concentrated global response to emerging threats, the impact on our planet could spiral out of control. Comparisons of how the world managed Covid-19 to how we manage climate change became apparent very quickly. In both instances, we learned that everybody has to do their part because these are not local problems. A coal plant in Asia can affect the entire global climate. We are all connected, and the pandemic has shown us that in full color.
And that is just the “E” part of ESG. Social investment factors also took on new meaning through the pandemic. Covid-19 highlighted financial inequity among various social groups around the world. White-collar workers kept their jobs and their benefits while millions of people lost work as the world sheltered in place. Those who could afford a computer and an internet connection were put in an even more distinctly privileged position. The wealthy got wealthier, saving money they would have otherwise spent on commuting costs at restaurants, shopping centers, and on live entertainment. Meanwhile, hourly workers at those venues were laid off or working outside their homes, putting them at higher risk of contracting Covid-19. The immediacy of issues like fair labor practices and income inequality in every facet of life made ESG considerations core to institutional investors’ decision-making. This divergence of social outcomes has also led to a resurgence of nationalism around the world, which disrupted supply chains and has now led to extreme political and policy changes that directly impact companies across various sectors.3
How does SLC Management view ESG?
We believe that incorporating quantifiable ESG factors and less quantifiable non-financial risks into our investment approach will lead to strong financial results over the long term. ESG analysis has always been core to our mission as a fundamental active investor. Now more than ever, we fully recognize that our actions can have a positive impact on the well-being of the communities in which we work and live. As an example, we recently joined the Climate Action 100+, which is an investor initiative to engage the world’s largest corporate greenhouse gas emitters on climate change.
In terms of our process, we describe our sustainable investment research model as ESG Plus. The term “Plus” is critical to understanding our worldview, as it refers to our heightened consideration of a wide array of non-financial factors. In addition to ESG risk analysis, we attempt to consider a myriad of future events and developments that are difficult to quantify. There are many non-financial trends, such as disruptive technology and innovation, that will impact investment returns now and in the future.
We document the findings (i.e. material risk factors and considerations), and incorporate these factors into our “normal course” of fundamental risk analysis of individual credits, investments and sectors as a whole. Our ESG research is available to all SLC Management investment teams, which allows the different teams to tap into these insights and leverage it for their own portfolios.
We believe that investing with a rigorous analysis of both financial and ESG factors can generate attractive risk-adjusted returns over time. Considering ESG in our investment decisions improves our fundamental credit risk analysis, and better credit analysis leads to better investment decisions and portfolio management.
As we learned in 2020, the world can and does change quickly. This underscores the need for a holistic, evolving, sustainable investing approach rather than static guidelines. We will continue to strive to develop and improve our research capabilities, both ESG and otherwise, to help make the best investment decisions for our clients.
Does SLC Management consider ESG factors in all your investments? How does this differ by sector or asset class?
Yes – we consider ESG factors in every investment. This type of analysis is baked into the work of our public and private research analysts covering every industry in which we invest. While we do use external providers as a source of information when making our assessments, as bottom-up investors we rely more heavily on our own research and ratings when conducting an analysis. Our credit research analysts own both the development of a security’s fundamental credit rating as well as its ESG rating, where appropriate, which incorporates our ESG views and research for each credit and investment.
Our portfolio managers and credit risk analysts continually discuss developments in the credit markets. Before buying, selling, or adjusting portfolio holdings, our portfolio managers ensure that they have the most updated fundamental view on the credit/investment under review. For public credits, our analysts dig deep on each security, directly engaging with companies to fully understand how sustainable a security is over the long term. Understanding factors like a building’s flood risk as the climate changes, or how diverse a private company is, forms part of that process. These factors may not be so readily apparent. For instance, it can be hard to know how much plastic a consumer goods company is using and what their recycling distribution plan looks like. It is up to our analysts to uncover as much as they can before they determine an ESG rating.
Another element that comes into play when considering ESG factors in portfolio construction is investment horizon. For example, private debt is typically held to maturity, so we need to focus our ESG analysis prior to making any initial investment. Additionally, private assets are often linked to specific projects, which makes it easier to identify their environmental impacts. Other areas of the market – such as securitized issuance, an area where we’ve been doing a lot of work in recently – are more nuanced when it comes to interpreting, accessing data, and understanding ESG factors.
What about institutional investors – how do their ESG investing approaches differ?
Institutional investors are constrained by the specific regulatory environment in which they operate. From an insurance company perspective, there are policy changes on the federal, state and local level that affect how these investors can allocate capital. In addition, we must remember that insurers’ existing portfolios and new purchases should be thought about differently. On the new purchases side of the ledger, insurers are rapidly changing their allocations. There is less investment in fossil fuels, less investment in coal and less investment in tobacco across the industry.4,5,6 Insurers are more focused on governance and social factors as well, such as supply chain and diversity. However, the ability of an insurance company to sell existing holdings – which may have been initiated 10, 20, even 30 years ago – is difficult because of accounting and tax constraints.
Pension plan sponsors do not face the same restrictions in terms of rotating their portfolios. Therefore, many plan sponsors have been able to more quickly adopt an ESG lens across their full portfolio. There are two key reasons for this trend: one being the pressure stakeholders, including pensioners, are putting on pension plan sponsors to quickly adopt this lens for their investments; and second, the desire of corporate plans to better align their pension strategies with increased ESG transparency. Pension plan sponsors are also facing a fast changing regulatory landscape. For example, in the U.S., the prior administration’s legislation restricted the consideration of ESG risk factors in their decision-making. The Biden administration announced that it would not enforce this rule, with additional clarity expected later in the year. In Canada, the Ontario Capital Markets Modernization Taskforce’s has recommended enhanced disclosure of material ESG information, including forward looking information, for all public issuers.
I also think the defined contribution space is becoming an area of significant growth for ESG investing. This market is the fastest growing area in terms of retirement savings,7,8 and it is also a market that serves the younger members of the workforce who do not have access to historical defined benefit plans. Research shows10 that younger participants are increasingly linking their spending, saving and investing to the impact that companies are having on the environment and their communities.
Would you consider divestment based on ESG decisions?
Although there are many factors that we take into consideration when analyzing an investment, at times ESG has tipped the balance in the overall assessment and our decision to buy, hold or sell. For example, we divested from a number of companies that were heavily invested in coal. For some clients, we have excluded certain sectors from consideration to align with their investment objectives and ESG views. For instance, we have excluded investments tied to tobacco.
However, the saying that “change takes time” rings true when it comes to ESG investing. There is a transition happening, with investors and policy makers shuffling their portfolios to meet new ways of thinking about what makes a company successful over the long term. Companies need to adapt, but they cannot meet emissions targets overnight. That is why we do not just judge companies by where they are today – we judge them by where we believe they are heading.
It is also important to remember that we do not wield the power of the proxy vote like asset managers with deep stakes in public equities. Therefore, it is up to us to make our questions and concerns known to the companies whose credits we would consider holding in our portfolios. This engagement and investment stewardship is especially critical for a firm like SLC Management, which primarily invests in public and private fixed income. As asset managers, we feel it is our duty to hold these companies accountable to their sustainability goals for the benefit of our investors, their shareholders, and the world.
SLC Management recently acquired Crescent Capital Group. With four partner companies under SLC Management, how do you all work together on ESG strategy?
We think it is important to let our investment managers operate independently, but with like-minded goals. Asset managers typically buy other asset managers because they are successful, have a great performance track record, a great culture, and can add and/or complement a growing business. Within the industry, we have seen ineffective acquisitions because parent firms can lose sight of why they bought another organization in the first place. We have been fortunate to bring top-notch companies like GreenOak (which we merged with Bentall Kennedy to form BentallGreenOak), InfraRed Capital Partners and Crescent Capital into the SLC Management family, and we did so largely because their values around tailored client service and delivering excellent results that align with our own.
Each of our partner businesses has a specific client base and ESG mandates. However, we are able to leverage each company’s data and experience to strengthen our overall intellectual capital, research and process. As the saying goes, ‘the whole is greater than the sum of its parts.’
We also bring our collective ESG capital together through a formally established Sustainability Committee. This group of senior leaders across SLC Management work together to identify sustainability initiatives internally and externally - from ideas about how we interact with communities and companies to sustainable investment outlook in the public and private spheres.
How does SLC Management compare to other ESG investors?
We are in a special position to help institutional investors meet their ESG investing goals. As an investment firm and a member of the Sun Life group of companies, we understand what it means to be both an asset manager and an asset owner. One benefit of having our parent company as a client, and working alongside our partner businesses, is that we are able to look across a number of different asset classes and understand how ESG factors affect different types of investments across a broad range of portfolios. Additionally, our work with insurance companies, pension plans and other institutional investors with significant time horizons has always made us think like a long-term investor, which is what sustainability is all about.
We realize that this is where the puck is going. We know that companies need to be more mindful of their ESG practices, and if they are not, their returns may suffer over the medium and long term. Advancing sustainable investing is an important pillar of our organization and is something we are proud of. Each of our investment teams has supported a number of projects around the world that are making a difference relative to our environment, social progress and good governance. Currently, we are investing in emergency homeless shelters, opiate recovery clinics, energy and water efficiency improvements in schools and hospitals, renewable generation, microgrids and district heating – all programs and initiatives effectuating sustainable change across various business sectors, communities and people’s lives.
At SLC Management, we have invested $1.96 billion10 in green and sustainability bonds across North America and Asia, as well as $45.2 billion11 in sustainable real estate and infrastructure. InfraRed made their first investment in renewable energy in 2006 and since then, have invested in over 6 GigaWatts of wind and solar power. Crescent Capital has implemented an ESG screening for every position that is over $15 million. Moreover, BentallGreenOak has invested in a number of real estate projects that are focused on revitalizing existing buildings to improve air quality, safety systems and green spaces for community use.