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ESG Portfolios Series #2 – Transcript

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ESG Portfolios Series

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Fraser Jack
Welcome back, Nathan.

Nathan Fradley
Thank you.

Fraser Jack
Wonderful to have you here. Now we’re talking about the approach and specifically how to advisors approaches conversation with clients want to give us how you do it?

Nathan Fradley
Sure. So I’ve been in a bit of a journey. With my approach in this space, I used to focus more than a checklist kind of approach, where I’d pulled out a checklist and go, is this something we want to invest in? Yeah, you don’t want to invest in or you’re neutral on some sort of avoid more or less. And then I started going to bit more detail around education around the different types of sustainable products and advocacy products and impact production, and kind of moving through that phase. And I’ve moved away from that now into focusing more on the causes. Now, obviously, I used Athos, software to do this, but that’s neither here nor there, I think the focus should be on everyone cares about something. So having a list of topics that they can care about, and then paying attention to the conversation cues prior to that point, you know, what have they talked about what you know, with regards to their diet, exercise, or routine or hobbies, their location, if they’ve got family, for particularly grandchildren, what they do for a job, what they have done for a job. It’s really interesting, whenever I bring up this sort of this area of the conversation, how often they’ll come I used to work for, you know, the EPA a few years ago, or I’ve always been in the space or occupationally, they’ve aligned themselves, as well as things like charitable donations or religious affiliation or anything like that, I think they’re key points that you can pick up for the conversation so that when you get to the values component of the causes component, which I usually have around the risk profile and, and product preferences point that you can really lean on and also show that active listening that you’ve you’ve previously identified, they’ve said this, this and this, and it doesn’t seem so disjointed to drop into that conversation.

Fraser Jack
I was gonna I was just gonna pick up on that, that causes conversation and, you know, in the values, and does that mean that you’re actually when you say you’re talking about the causes, you’re actually really putting some tangible content around? You’re not just saying, you know, fossil fuels, you’re going deeper into a sort of examples, and causes and outcomes and numbers that might say, Is this something you want? So it’s more tangible for them rather than just a general category?

Nathan Fradley
Yeah, I think, I think when you look at the tangible causes, they’re more broad, and not fossil fuels, their climate change, their peace and justice. You know, something is, you know, political conversation that comes up, which, you know, sort of reunion time, they’re really linked to a value. Absolutely, that who they are, what they do, what they think about what they talk about the conversations you have, that aren’t related to the assets, liabilities and specific goals. That’s the information you can bring in to tie back to the themes that they will see as important. And so that sort of been shown to the initial areas. And then from that point, you’ve earned the right to start talking about four themes. And I think there’s two parts to that there’s Did you know you could do this. And also, this is a good thematic from an investment perspective, things like water, food, waste, healthcare, technology. These are all generally speaking, responsible and sustainable things, but also over the next 30 years going to be good places to your thematics to put your money in. So that adds to that they’re also highly diversified. So you start to get a broader conversation about asset classes in diversification. And it all ties in together. So it’s, I think it’s about it’s the active listening piece. It’s identifying, you know, who they are and what they do. And then that gives you the license to dive into some of those other areas. And then you go back to the checklist, you can go back to the the box approach, and but you’ve you’ve done it in a much more holistic manner, instead of simply just Yes knows, yes. Knows.

Fraser Jack
They mentioned this forms part of your risk profiling and preferences questionnaire. How long from a practical point of view are you spending on this with with a, say, a new client?

Nathan Fradley
Well, I have a, generally speaking, I’d have an entire meeting in some instances or half a meeting on these areas. I think risk profiling is not a questionnaire, I think it’s an entire conversation. The booklet that your licensee provides to you is the the ability to talk through those questions that what they say outside of their answers is more important than what which box they check. So you know, my process will be a goals meeting, which gives me some insights, and then a strategy meeting. And then sometimes in that meeting, we’ll talk product and risk assessment. Sometimes we’ll have an entire another meeting to walk through those things before we go to statement of advice. I just think it’s such an important part that we rush through a compliance check box issue. And it’s if you look at the Africa complaints, it’s the number one issue advisors face is inappropriate risk profiling. And, you know, a signature on a on a booklet that you’ve hit yes, no five out of 10, or you are at this investor isn’t going to save you from that it’s a comprehensive conversation, that that says this is what’s important to them. And this is their timeframe goals. This is their values. This is their preferences. And I’ve given them the options A, B, C, and D. And they’ve self selected that knowing full well that they understood the options there were therefore informed consent. There’s nothing, no one could be beat that in it in. If it’s properly recorded, of course,

Fraser Jack
yeah, this is feels to me, like you’re really allowing the the clients to take ownership of those decisions that are made in that meeting,

Nathan Fradley
I bet much of my process, so I don’t subscribe to the feel like this fact, fine, I’ll see you in four weeks go do this. Every client of mine goes through a, these are the available options. These are the pros and cons of each. I still got them. I think this is a bit of one from what you’ve said, here, here and here. But they need to understand to the barbecue conversation. They can defend themselves. If someone’s their uncle star, you should get a self managed Superfund do it this way. Because I said, Well, yeah, we thought about that. But we went through that as a process. And we didn’t go for these reasons. So it becomes the informed consent is really what I’m trying to achieve with that, that process of guidance, because we’re advisors that we advise them they decide. So I think that’s a softer word than we tell them. We should be listeners not tell us.

Fraser Jack
Yeah, so got your guidance, essentially, then guides them to solutions to say there are there are several solutions here that might still meet your needs. You can you can you can exercise a preference or we can or I can make a recommendation? Is that what you’re saying?

Nathan Fradley
Yeah, yeah. So because sometimes they they go, I’m not sure it’s a bit overwhelming decision, or, you know, that you’ll tell the ones that are more self directed. And the ones that need a bit more, you know, give me some better guidance. You don’t want to overwhelm them with choices. But I think, you know, this price performance. And, and ethics tends to be sort of three main points when I’m looking at a product. And I could go from an industry farm to an index for approach an industry fund, the industry fund, their ethical option, my dark green portfolio, and somewhere in between. So I’ll generally put up three options and say, This is the cheapest way we could go, we can get these costs down as much as possible fee was the biggest issue. This is it here. This is the most expensive way. And it’s got huge amounts of impact in a moment safe score and debt. And great alignment. And this is one or two options in between, or we can find something in between what’s more or less important to you. And these are the performance figures as well, which you’re always I think we we’ve got used to not including them, because historical performance can’t be replicated. But I think it is an important thing to bring up. It’s a client centric question that always ask for performance. And you know, seven year performance is indicative of something may not be future performance, but it’s definitely capability and competence. So I think within that realm, you know, those three things, clients can make pretty informed decisions, or at least give you through the the way they looked at the through the faces, they pull through their responses. That’s That’s it necessarily what they say. It’s how they say it starts to give you the insight into, okay, this is the way we should go. And there’s been times where I’ve talked them through and they’ve sat there and gone. Oh, you know, not really sure. And I said, Well, based off the way you looked at that the question she just asked me, Would it be fair to say that are somewhere between here and here? And you’re looking for something of this level, but it’s cheaper fees? And then yeah, that’s great. I know where we’re at. It’s not about going here with a tree of choices, you know, choose your flavor, it’s using the options as the guidelines, or the of which to find the path between I think it’s probably the better way.

Fraser Jack
Yep. I think the performance question in there because I believe the question is mostly in somebody’s head, where they asked it or not with an insider client. So just demonstrating that past performance, I guess, you know, you’re looking at past performance, but you’re comparing, you know, as you say, price, price sensitive indexes all the way through the ethical portfolios, and you comparing those based on the past. And it just shows some credibility, I guess, not for everything’s

Nathan Fradley
based off the past, isn’t it the ethic was caused based off the past that feeds based off the past. And the government’s own comparison software compares performance and fees. It is a very relevant option that needs to be considered. It’s just not the only thing and you can’t trade only on it. And I think that’s where we went too far. One way, generally speaking, where we just avoid talking about performance, which is silly.

Fraser Jack
Nathan, thanks so much for coming on and talking about your approach. declines we look forward to catching you very, very soon. Welcome back, Karen.

Karen McLeod
lovely to be here. Thank you for inviting me back.

Fraser Jack
Now we’re talking about the advisors approach and the conversations that advisors have with their clients. Tell us about some of the conversations that you’re having with your clients, and how are you introducing these topics?

Karen McLeod
So great question, I think, I think you’re going to come across clients that have a varying degree of expertise, I suppose in ESG issues depending on the clients that you’re looking after. So, you know, you might come across a client that has, you know, great knowledge on a particular topic, maybe because they work in that particular field. And they explicitly know they do not want to invest in a particular area. So I’ve found, like, for example, clients that are environmental scientists, for example, with large oil and gas companies know exactly where they don’t want to be invested. Or you might have a client, that’s a social worker, you know, that really wants to focus on issues that are providing social impact, for example. So I’ve got doctors that work in alcohol and drug rehabilitation clinics. So they really know that they don’t want to have any investments in alcohol, because, you know, they’re trying to rehab people out of that particular role. So depending on the clients that you’re servicing, and their particular background, I’d sort of get you to lean on, you know, where they’re coming from, because they’ll certainly be ways you can really ask some meaningful questions based on their background, you know, that where they’ve lived to globally in the world, what their hobbies are, they might enjoy gardening, you know, and they might know, for example, that they’ve certainly seen less native bees in their garden, or they might be interested in, you know, the impact on native wildlife because of large scale development and land clearing. So there’ll be ways you can tell your conversations to clients, depending on who they are, and what’s important to them. And that’s really, I think our Knack as an advisor is knowing our clients. And I think a lot of us take a lot of pride in knowing all of those things about our clients, what their work is, and what’s important to them and their hobbies are and the values that they hold, dear. So by doing that, you can really have a nice conversation about where they come from, and some issues that they may wish to address, actually, with their investments.

Fraser Jack
As I say, it’s a really, it’s a really great starting point, isn’t it understanding their knowledge, their motivation and their values, during that conversation, that everything then comes back to that and certainly helps with the, with the ideas of, you know, individualized portfolios for each individual and gives them something to, to fall back? And really, you know, hang their head on to say, this is why I’m investing this way.

Karen McLeod
Yes. And certainly there’ll be issues that they might be neutral, and they might not really know about. So you know, that’s where you are that trusted point of contact to say, this is one view on that particular topic, which, you know, they might comment on. So whether it’s genetic modification, or, you know, other things that are might be more controversial, like carbon capture and storage, they might not have any ideas on some of these new technologies. But at least you’re raising the question so that it from their point of view, they’re aware that you’re across, you know, key thematics that are really driving markets, and where does that leave their portfolio? Do they want to be across that? Are they neutral on that? Or is that something that actually you’ve just uncovered? That’s really important to them that they would like addressed? Do you

Fraser Jack
find people people are approaching that conversation with I don’t want something? Or is it? Or is it sometimes it’s more I want this thing, or

Karen McLeod
at least probably for our clients, it’s more I’d prefer to be making money if I was invested in these sectors. So they’re more looking at the opportunities and the benefits of particularly renewable energy and focusing on recycling and doing more with what we’ve got. Rather, obviously, they do obviously, explicitly, often say, I would rather not be in these areas such as all for example, tobacco is an easy one, because we know that that has been proven to, you know, have detrimental cancer impacts. So that’s often easy. Or it might be you know, we’ve got the modern slavery act. So most people are pretty okay, avoiding slavery. So most of those issues are fairly straightforward. And certainly the UN has, you know, certain issues that are quite topical and avoiding harm. According to those conventions. Most investors would generally agree and nod their head to say, yes, I would prefer to avoid harm, and knowing that my money is creating harm in that regard. But the more interesting and probably more uplifting conversations are about where your capital can be put to work in generating a return that’s in line with mainstream peers. And certainly also delivering that additionality of knowing exactly where the money is going, and the impact that it’s creating and the positive solutions that it’s generating, whereas so it might be, you know, water leak detection, or it might Being water membranes that the clients particularly interested in, because they’ve worked in their water engineer, whatever it might be. So they find comfort in the fact that they’re having an allocation to some of the technologies that are solving some of these issues.

Fraser Jack
You mentioned, returns and in line with mainstream peers. Is that Is that something that you’re you bring up to your clients in the conversation? Or do they ask you about that?

Karen McLeod
Yes, definitely. It’s less of a question, I guess. Now, because most people are fairly aware that you don’t have to sacrifice returns to invest responsibly. But if clients are unaware of that I usually point them to, there’s many research pieces being done globally. But I point them to the Responsible Investment Association for Australasia, have done a benchmarking report each year for the last 20 years since the association’s been around. And that compares an average pool of responsible investments across many sectors. So balanced growth, Ozzie shares international shares against mainstream indices. And by showing them that they can see, okay, over the course of that period, how have responsible investments as a cohort performed compared to market and they’ve that gives them some comfort, because that’s quite a long, long time period. And of course, past performance is no guarantee for future performance. You know, that’s fairly clear. But it’s good to have something that is impartial, I suppose, because it’s the association’s data. It’s not our data. And it’s been going for a long time. Yeah,

Fraser Jack
that’s a really good, valuable resource. In the previous episode, when we chatted, you mentioned, Persia and, you know, the around disclosures and conversations and in that, you know, 86% of people want to know, or have had that conversation. I think I feel like a big part of this is around client understanding client, understanding what their what their money is invested in?

Karen McLeod
Oh, definitely. Like you could you could start the conversation. And I think this is a great way, one of my colleagues on the Central Coast, he starts a conversation to say, you know, did you know that like, in 2019, asset name, climate change is a systemic risk in our present, you know, said that the fiduciary duty for company directors needs to include climate change impacts and ESG on their operations, like Effective immediately, the central bank, reserve bank, you know, the deputy governor said that climate change must be factored into all their monetary consistent, you know, decisions, this is not a nice to have anymore, these large bodies are saying that climate change is a factor that’s infiltrating all financial performance going forward. So not only is fasea suggesting that, you know, this code of ethics, we need to talk about what’s in our clients best interest. But all of the regulators are saying the same thing for those of us of, you know, those higher up on the tree, I suppose to us. So it is, it’s important that you ask some questions. So that you, you know, where your client stands.

Fraser Jack
And just on this, the advisor approach, do you have any practical tools that you use with your clients?

Karen McLeod
Yeah, for sure. I mean, we obviously have a client questionnaire that, you know, specifically outlines many different ethical topics. And we could probably add more every year, the responsible investment also has one that’s on their website, I’m pretty sure you like in a toolkit that you can download fairly easily. Just just contact them. And mostly, what you’re trying to extract from your client in that first questionnaire is, say the topic is mining, for example, or tobacco or whatever it might be, you want to get some sort of response from them, whether it’s like, are they neutral on that position? Would they prefer to include it prefer to avoid it? Or wish to have a further discussion about the topic? Because they might not understand the question? So that’s a really good starting point. And what I usually do, as well as I usually have another open ended question that says, Is there anything in particular that you’d like to focus on in terms of the Maddix? And that or avoid, for example. So that’s gives clients a really good opportunity to say, I’d really prefer not to own x? Or I’d really prefer to support businesses that are involved in why. And once you know that, you can then start asking them why and what’s their background? And what are they expecting? What kind of investments do they want? So it’s not just equities, it could be sometimes you’re able to deliver some of these solutions through I would say, like direct property is also becoming quite a popular way to deliver some of the social benefits that clients are seeking. So the specialist disability accommodation that’s being built for the NDIS recipients. Clients are interested in supporting that clients might have might be interested in aged care or health care as a solution because they’ve got elderly parents, or they might have a particular desire to support them either more Electric Vehicle and they really want to support battery technology or whatever it might be, that will give them a chance to provide an answer. That’s not a yes or no, they can explain why those things are important to them.

Fraser Jack
Yeah. Wonderful. Thank you for that year. So getting your tools straight, exclude avoid or neutral. And then a prioritization process that allows the client to to understand it. Karen, thanks so much for coming on this particular episode, we look forward to catching you in the next one. Welcome back to the conversation, David, thank you, Roger antastic, to have you along. Now, we’re talking about the approach that advisors take when they’re, when they’re talking to their clients. Obviously, there’s a there’s a, there’s a lot in this tell us about how you are the conversation you have with your clients and how you work out how to, you know, put a portfolio together that it’s aligned to their values.

David Graham
Yeah. So, you know, further to our last conversation, going from a position of a default portfolio, which is our our model portfolio, basically, already having those ESG or sustainability factors built into it starts the conversation at a point where it doesn’t really, it’s just, I guess, it’s just a portfolio, it’s not necessarily an ESG portfolio, per se, but this is what we think is the best portfolio for to meet your outcomes going forward. So with a new client, that that’s quite easy, it’s just this is the way we do things. You know, if there is an issue with it, with costs through for example, then we can scale that back down into standard funds or index funds, depending on you know, what their particular pain point. Point is. So it’s a little bit more difficult with existing clients, going from something they used to, from us to something which looks quite radically different. But, again, we’ve tried to term this not in any, save the world kind of framework, but what is best for your long term outcomes. And again, using that term sustainability very broadly, and talking about the economic sustainability of certain investments and how that goes to meeting your long term outcomes, rather than something which we can talk about coal saying, well, it might be a quick bet, you might make some money over the next five years, but it’s not necessarily going to be sustainable investment going forward. And we’re not necessarily saying we’re good enough to call timeout on when Whitehaven is going to finally, hit hit a brick wall or Woodside or wherever the case may be. So part of our basic investment philosophy is to put something in place, which needs a minimal number of changes. If you get it right first time, then you don’t have to make a lot of changes the expense and all that. There’s involved with that. So if you can include sustainability in that as well, theoretically, you should be able to get more mileage from an investment decision you made early on.

Fraser Jack
Yeah, so you’re you’re overlaying both the quality, quality investment framework, which you spoke about in the in the previous episode. With is, is this also some of your own with your investment philosophy, some of your own values in the business values around that, you know, a better world better outcome better place over the long term?

David Graham
Yeah, definitely. When we, when we got our own license, and a year or so ago, we made a couple of significant changes within the business. This was about investment philosophy, but also platforms. And now we looked at SMEs and all the other technologies, which are out at the moment just to see if our business was doing things as efficiently as it could. So part of that conversation went to the fact that well, if we think about blowing all these things up, why don’t we build it how we want it to end rather than incrementally, you know, looking at a new platform, looking at this and looking at this, how do we feel about sustainable and from from an investment ratios perspective, that made sense to me, but for the other stakeholders in the business, the directors and the other advisors that they were kind of on board suggesting? Well, this is something that we believe in as well, for broader reasons than just the business reasons. So it was quite a nice, neat fit in that some in that period of, you know, going back to the drawing board. Yeah. And

Fraser Jack
certainly, if you’ve got belief in what you’re doing, then that’s for the right reasons, and the right returns and all those sorts of things. Yeah,

David Graham
look, I don’t think any of us, well, certainly not myself, but any of us would would say we’re super salesmen. What we sell is advice, not necessarily products. So from our perspective, if we don’t believe on it, believe in it, we can’t sell it, and we probably shouldn’t be selling it. If you know, take the fancy code, that sort of stuff at its word. So this kind of makes it easy to say, well, this is how I’m invested. This is what we believe in and you know, it’ll take a fairly good argument to work to convince us otherwise. Yep.

Fraser Jack
Do returns come into these conversations you have with clients? Is there an expectation that, you know, maybe sustainable, you might be sacrificing returns.

David Graham
It’s very interesting in the current context. So if you look past it back the past 553 years, you can actually make the argument that some sustainable investments have outperformed. So what we do, again, going back to the, the old chestnut of managing expectations is basically how’s that down? You know, I had a conversation recently with climate I said, Well, you know, this sustainable fund did really well during the downturn last year. But if you look at if you look at broadly, if your fund held oil stocks, and oil went to zero last year, at a period, you would have underperformed. And by definition, a lot of ethical funds did not. So they perform for reasons, which are unintended, relevant, but unintended. So that repeating itself is unlikely. So we try to hose down that short term expectations, conversation. But going to the risk management side where yes, we’re saying that we believe returns will be better risk adjusted returns, because these industries, which are not part of the portfolio, just don’t have the future. Yep.

Fraser Jack
You seeing a little bit of all the term greenwashing out there where there’s a lot of people who are coming at things from a certain angle, and saying, Hey, this, you know, like this, like, as you just mentioned, with regards to you know, certain sectors do better than others and certain times and you don’t take the credit cuz you got to take the blame later on. Yeah. But you facing a lot of, you know, people taking the credit.

David Graham
Yeah, I think it’s a very easy pitch for fund managers to make now in and everyone seems to be emphasizing even if they’re not labeled a sustainable or HD focus fund. They kind of promoting their their bona fides to some extent. So I don’t know that that’s greenwashing per se. greenwashing, to me was, is something like, a couple of years back, there was an ETF on the Australian market, which was a sustainable Australian Equities fund. And you know, it excluded Tobacco and Firearms. And I’m not sure how many listed Australian companies deal on Tobacco and Firearms. Exactly. So you can kind of pick those things out fairly easily. So from our perspective, we do get this question quite more often now from clients. And again, that’s a bit of a blowback against the, the general, you know, popularity of the subject. But, again, we point to our research and say, Well, you know, these fund managers that we’re using have been doing this for 10 or 15 years. It’s not like they just fell into this. And with other fund managers getting into this space, you know, we’re brutal. Yep. Which we see ourselves as the gatekeeper for the client to everyone’s trying to sell them something. So, you know, we filter these things fairly hard, what are the best we can have our ability,

Fraser Jack
the truth keepers, somewhat? And just overall, from the clients response? Have you found you know, the conversations and in the approach that you’re taking, you know, they are they mostly very positive about it?

David Graham
Yeah, I think they are, because especially for existing clients, I think, know that we have a fairly solid process for building a portfolio. Again, to our previous conversation, I’ve been building these for our clients for nearly 14 years. Or not these portfolios, but broader portfolios, and they’ve gotten comfortable with that. So for the most part, they have faith that we’re looking after their best interest and see this as being in their best interest so that they tend they tend to be on board.

Fraser Jack
Wonderful. Thank you, David, so much for coming on this episode. We look forward to catching you in the next one where we really take all the the idea around impact and social change.

David Graham
Thank you.

Fraser Jack
Welcome back, Claudia and Michelle.

Michelle Brisbane
Hi, Fraser.

Fraser Jack
thank you for being part of this particular episode. We are talking about the advisors approach and all the conversations that advisors have with their clients, specifically one off specifically, but particularly in that sort of discovery discovery phase in that entry conversations. Michelle, what are the conversations and how do you you have this conversation with your clients?

Michelle Brisbane
Well as part of the initial meeting and the fact find we have an ethical profile. So apart from doing everything else that you do in regular financial planning, like your risk profile and your needs analysis and getting your objective sorted out. Part of the reason people come to see us is because they want to make sure that their money is is a lot invested in a way that’s aligned with their particular values and what matters to them. So we have that conversation initially. And then sometimes, like the investment managers might change the way they’re investing. And claudia, who’s our analyst, she, she tells us all right, such and such a manager or such and such a company’s doing this now. And then we might have to have that conversation with clients saying, well, we’ve found this out now, do you still want to be invested in this manager or in this company?

Fraser Jack
Yeah. Wonderful. And talk us through that questioning technique. You sort of mentioned in the last episode we talked about towards and away from types of motivation. Tell us about the types of questioning your profiling,

Michelle Brisbane
sorry, so we have a list of different things that clients might wish to support with their money. So they might want to support the environment or positive social outcomes, that that sort of thing? Or they might want to avoid pollution, obviously, or weapons manufacturing? Or one of the things

Claudia Mah
would you say the clients also genuinely come to us knowing there is a certain area they don’t want to support already? So that sparks the whole conversation, doesn’t it? Yeah, that’s

Michelle Brisbane
right. And then we might have to sometimes make sure that if there might be a client that comes who is very keen on in renewable energy or something, but we can’t make the portfolio or renewable energy, so we have to sort of say, Look, that’s great, but you need to have a portfolio that’s going to make money and is not extremely risky. And, yeah, Claudia comes up with those.

Claudia Mah
Don’t put all your eggs in one technology. Yeah, that’s right.

Michelle Brisbane
So it’s diversification, but so we have all the regular conversations, but there’s an added level with the values and making sure your portfolio’s aligned with those things. And we try to make that work. We try and be as transparent as possible. So Claudius job is intense.

Claudia Mah
Now, it’s, it’s really good fun. It’s, you know, you it’s a very positive thing, you you walk into an investment, and you say, Okay, what does this do? You know, you put on a, you know, you put on a really neutral lens, and you absorb in not just filtering out negative, but you’re also trying to absorb, Where can this investment take you? Where does it stand in, in our children’s life?

Fraser Jack
Amazing. And it’s, it’s interesting that you mentioned the the idea that often it’s an avoidance of something that is the primary motivator for somebody to walk in the door. And yet, then you you go through the prioritization process, and the diversification process, and you’re looking at supporting some avoiding some supporting others and unable to to use that time that profiling to then work out your portfolio attend some sounds incredible. And, and so with, with, with your new clients, as they come in, how long is this process taking to get from sort of that process of I don’t want this to, through to an investment portfolio?

Michelle Brisbane
Okay. Well, that’s, that’s part of the onboarding process where we need to prepare statement of advice and make sure it’s obviously in the best interests of the client. And we might meet all the regulations to provide comprehensive and appropriate advice for everybody. That might take a couple of weeks, by the time that we’ve prepared all that work, and then, and we’ve determined the sort of investment that will suit that client. And then Claudio is always working in the background, putting together our model portfolios, and, and then we have a choice of different investment options. And that sort of depends on the client, you get a feel of the sort of things that will suit them in the initial meeting, depending on their investment experience, and that sort of thing. But generally, let’s say a couple of weeks, if they’re if they’re ready to invest at that time,

Fraser Jack
yeah, wonderful. And tell us about the different sort of green leaf rating systems that you that you use with your clients or you discuss with your clients.

Michelle Brisbane
So we like I said, we have to deep down into really trying to know what’s under the bonnet, let’s say of, of an investment portfolio, and we will be as transparent as we possibly can with the client saying this, this fund might have a couple of let’s say a bit one big bank in it, can you can you tolerate that or not? Yeah, just as an example, and some people are fine. Okay. And I can tolerate there and others are like no,

Claudia Mah
yeah, I think banks is, is quite a big target among our clients over here. And some clients will see banks that I mean different ways to look at banks. I mean, they are the biggest capital provider to funding The new economy potentially? And what did they do with it? So at the moment, you know, the big four are known for their lending books to the fossil fuel industry. And every year that changes that proportion to the total loan book changes. So is that going down? And if it’s going down with a client seat, I think this could be a good company that would, you know, been at that bondage lot of ages. Yeah, advantages position to move and transition and encourage that, that lending to the new economy. On the other hand, some clients might say, No, the very fact that they have exposure to that sector, we don’t want anything to do with that. And we respect whichever way the client prefers. And we tried to find a solution that fits them.

Michelle Brisbane
And I suppose that goes down to the sort of the deep, let’s call it a deep green or, or light green and anywhere along that spectrum. So we have clients across the full spectrum. And yeah, is that really? Yeah,

Fraser Jack
yeah, it certainly is a spectrum, isn’t it from day to day to light and and it can change from company to company? From from year to year?

Claudia Mah
Yeah, I mean, even vaccination is is a topic isn’t?

Fraser Jack
It? Certainly is it certainly is. Now let’s, let’s have a quick chat about the concept of clients maybe coming in or having a pre belief in their minds that maybe ethical investing has had to had to sacrifice returns in the past to be to be in that space. Talk to us about what you say to your clients, and around returns,

Michelle Brisbane
we say definitely, we are not about sacrificing returns, we actually try and outperform as much as we possibly can. And we’re in the business of finance and making you money. And even if you say like sometimes clients say to me, Look, I don’t even mind, I don’t mind if returns aren’t as good. And I say look, we will try and get you the best returns, we can. And you know, the portfolio and the research and, you know, all our history and our returns history indicates that over the long term, the portfolios are either at market level or slightly above. So then obviously, there’s swings and roundabouts in different market cycles. And depending on what’s trending upwards, now, obviously, in a strong mining cycle, we won’t perform as well. But a lot of other times due to the the way our portfolios are constructed in the type of investments we go into. We were quite sometimes ahead of the pack in technology, because we’re looking for the latest technology. And

Claudia Mah
yeah, and and, you know, if we look at it from a financial point of a financial analysis point of view, it makes sense because we’re looking at efficiency, you know, efficiency adds to the bottom line. We’re looking at, you know, if you’re looking at a circular economy, anything that is recyclable, you’re, you know, you’re actually supporting the costs. That is down, sorry, reducing operating costs. So it’s all financially logical, there’s nothing. When you look at renewable energy, you probably think of it more like a infrastructure, for example, it’s and it’s expensive outlay at the start. But as you you know, as you know, infrastructure is just in maintenance thereafter. So, very similar dynamic to traditional all, all technology, or all assets. It’s just that we’re working for something that’s stronger efficiency.

Fraser Jack
Fantastic. Thank you, Michelle, and Claudia, I love that. I love that term, financially, financially logical, hopefully, I can use as many, many more times in the future. Look forward to catching you in the next episode when we talk about impact and social change. Okay, great.

Claudia Mah
Great talking to you. Fraser.

Fraser Jack
Grover Burthey from PIMCO. Thank you so much for joining the conversation. Again, we are talking about the advisors approach. Welcome to the conversation.

Grover Burthey
Excellent. Nice to meet nice to be back with you, Fraser.

Fraser Jack
Now we talking about the client conversations and conversations that advisors have with their clients every day. Tell us about what you’re hearing and seeing and some of the some of the great advisors and how they’re talking to their clients about ESG portfolios?

Grover Burthey
Sure. Well, what we’re really seeing is is ESG means different things to different potential clients, different investors. Some interpret that as as a specific optimization, or investment strategy with regards to climate and environmental issues specifically, and they really use ESG as a proxy for climate. And and there are certainly many tools that we have, that we’re developing that we utilize to take into account climate risks and climate opportunities. There are others who have you as part of their diligence and part of their research efforts really view ESG as something to be taken alongside many other investment research and bottoms up approaches that they implement. And we do that as well, we certainly want our ESG process and ESG tools to be utilized for the platform at large and do that alongside our colleagues across the firm. And then there are those who who look at ESG as a way to really make sure that they’re having some some impact in their capital from their capital beyond beyond only returns. And thinking about the the holistic view of the impact of their capital and looking for certain outcomes, looking for certain metrics to judge the impact of where they allocate their their funds and their proceeds. That can be something like 100 emissions, that can be something along the lines of jobs produce, that can be something along the lines of, of different sectors and areas where that capital has been allocated. So it means different things. And then what’s important is to find the right solutions to have a comprehensive set of tools that can be utilized, and add value in a specific way that the client or the partner has, has prioritized and explained in terms of what they’re looking to achieve. Yeah, really interesting.

Fraser Jack
So there’s, there’s three things there that we sort of covered on the, you know, the climate, which we’ll get to in another episode, actually, and then the impact which we’ll also cover another episode. But we’re talking about from the research in the in the bottom up type scenario, and some of the ESG tools. Tell us about how that was a bit more in depth into that conversation that advisors can have with their clients around, adding this to the research and making sure that it’s a prominent part of the compensation. Sure.

Grover Burthey
Well, the what we really prioritize here is being first and foremost comprehensive with regards to how we think about ESG across asset classes, how we think about ESG, across different parts of the PIMCO platform of our firm. And we have approaches and frameworks and efforts in corporates, we have efforts in municipals. We have efforts in sovereigns, structure credit or securitize, there’s this relevancy for from an ESG standpoint, and all of these areas, naturally, they’re they’re going to be different points to emphasize different data points to utilize. But But ESG is is a is an integration tool that we use across the the entire marketplace. And we do that with with overarching frameworks and tools that the ESG team here that I oversee is developed, we have what we call an ESG taxonomy that’s informed by internal research and internal collaboration, as well as external resources, such as TCF D SASB, a variety of other sources. And we convert that into a framework for sectors, we think about what’s material on a sector by sector basis, and feed that into an investment recommendation and a view on credit risk and relative value. And so if I had to summarize this this point, it would be that this is relevant across across a portfolio across a mandate, even if the specific asset classes and exposures differ. And it’s about identifying what’s material and identifying what those risks are, and identifying opportunities to drive performance and drive alpha as a result.

Fraser Jack
Yeah, yeah, spoken like an amazing true fund manager, we’re talking logical and practical and you know, the numbers and making sure that they all stack up and the research is perfect. And which is, which is a very important part with a lot of conversations with a client. And then there’s the emotional side of it, isn’t it? There’s the conversations around, which we’ll get into later around, how do you want your funds to be invested? That the feelgood factor of by doing this, you’re doing x y Zed, your bit for the for the globe?

Grover Burthey
That’s right. And it’s and sometimes a mandate or strategy will differ. And oftentimes, these are not mutually exclusive points. We have funds and vehicles here that are not ESG dedicated, that are not ESG driven on a primary basis, but are still going to utilize some of the information and research that my team produces. Because it’s fundamental to risk and return and thinking about value. And on the other side of the spectrum, we have funds that have very specific orientations focused on on specific outcomes, for example, a climate bond fund concept and vehicle we have here, where it’s really going to heavily emphasize some of the outputs and and suggestions from a climate perspective, not even all environment, but really climate. And it’s going to play significant emphasis on those topics. But but the point is, is that depending on what what an investor has in mind, and what they want to prioritize, there is a way to strike a solution. And our goal here is to is to be as as market leading as we can in terms of those those capabilities.

Fraser Jack
Yep. Now, one of the things a, an investor may say, not knowing the answer to this to their to their advisor is that is the conversation around our ESG returns low or do I have to sacrifice returns to have something that’s impactful or better for the environment? What do you say to those investors or what can an advisor say to those investors?

Grover Burthey
Well, it’s not a bond Every question or black and white question, and it depends on what the criteria of the strategy is. Now, for some ESG, primarily or even solely means exclusions, it means taking parts of the market and saying, I’m not going to invest in those, I don’t want to invest in those. And if you take out large parts of the market, significant parts of the market from an opportunity set, then you you miss out on potential opportunities that may come up in those areas over some period of time. And similarly, you may end up with more concentration in other parts of the market, because you’ve reduced your opportunity set that can have an impact on on on returns. The other side of this is, as an active manager, such as Pimco, where we utilize these tools, again, as part of the overall investment recommendation. And so our goal is for this to to enhance the investment process, and to overall feed into our allocations on the sector basis on a line by line basis. And at some funds will have more or less use of the relative exclusions in accordance with that. So so it very much depends on how strategy is constructed for foreign investors who have have less appetite or very limited appetite, to to just purely use the exclusions tool here and really looking for for specific outcomes based on what change they can have. Oftentimes, you actually want to be invested in some of those controversial sectors, you want to say, let me go into the hard to abate sectors or rephrase health from an environmental standpoint, let me try to capitalize it finance, the leaders, those who are making a difference, those are going to take very, very carbon intensive part of the economy and make changes over the next 20 years. That can be a strategy in and of itself. And and though there’ll be winners and losers there, others say I want very limited carbon exposure. And I don’t want exposure to to that to those sectors, regardless of what their respective names or potential investment options in that space are doing. And so it means different things to different people. And the point is that you can strike a balance between what what you’re looking for in terms of exposure in terms of what you’re looking for, from a return perspective, versus either non ESG, or conventional products, as well as the respective benchmark.

Fraser Jack
It sounds like you mentioned the exclusion tool. It sounds like you mentioned, you can either use an exclusion approach where you’re putting downward pressure on, you know, you’re basically trying to starve the staff, the funds available to those to those companies that are that are meeting or doing the wrong thing. But then there’s the influence approach. And so that’s that’s the conversation or the sound of it that you say to the client, do you want to influence? Or do you want to starve or put downward pressure by limiting or removing?

Grover Burthey
Exactly, exactly. And we utilize both right, we certainly have core exclusions for our ESG vehicles. But we also very much think that we wouldn’t be able to make a difference. And it’s difficult to make a difference in some of these sectors. So he’s areas of the economy, if you’re not involved, and if you’re not exposed. And so ideally, you have as many tools as possible when you’re pursuing these types of strategies.

Fraser Jack
Yeah, so as a fund manager, you know, the seat at the table, as you mentioned, to be able to influence and make a difference. Having a seat at the table is really important to do that. Because if you’re not at the table, you didn’t you don’t have a voice, I guess, as a fund manager, how important is that to you? And what sort of things are you doing in that space to then put pressure on or create that influence?

Grover Burthey
It’s, it’s critically important, and in particular, for a fund manager of our size with over $2 trillion globally, we really, really do have a duty to utilize our platform with regards to our ESG efforts to try to have an influence and to try to drive changes in areas where we believe there’s there’s broad benefit for for our investors, for our clients for portfolios, and ultimately for for society at large. And we do that through the engagement efforts part of some of that bilaterally, that can be more private, that can be more utilizing relationships that the firm has had. far before. ESG was a popular phrase, we’ve been a lender for several years or even longer. We’ve know the management teams. And when we went out, we would have candid conversations about what we believe our deficiencies are risks or opportunities for improvement in a business mix and in terms of capital allocation and other parts of the business model. But then we also are very active in certain collaborative efforts. Bodies where as a as an active investor and market participant we can contribute to develop the development of frameworks, areas like IGCC, where we’ve been an active member for several years, we can give the market guidance in terms of what we look for and what we’re utilizing our own tools, wanting to see things such as science based targets, wanting to see alignment with the Paris Agreement wanting to see actual interim reporting and disclosures on some of these efforts, particularly as more and more commitments are made, being able to judge success and doing that through through groups where there can be power numbers with other like minded and other sophisticated investors, but also in a way that that you know, within reason and in a constructive sense is public so that so that the market can can look at it can also judge this progress. And hopefully that drives more more activity and it becomes a process where our engagement there’s a there’s multiples of return on our engagement because it changes market standards more broadly.

Fraser Jack
Yeah, fantastic. They really when that accountability and transparency of what’s going on, and I guess that it sounds like that’s the probably the best approach to start with that influence. piece, hold people accountable. Add transparency, and if they don’t do anything, then then look at the exclusion side. Exactly, exactly. Right. But thank you so much for being part of this particular episode. I look forward to chatting to you in the next one where we start talking about impact and social change.

Grover Burthey
They get very much I look forward to continuing the conversation.

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