November 24, 2021

ESG Portfolios Series #3 – Transcript

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ESG Portfolios Series

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Fraser Jack
Welcome back. Nathan Fradley.

Nathan Fradley
Thank you.

Fraser Jack
Thank you for coming along and being part of the series. Now in this particular episode, we are talking about impact impact investing or more specifically, what does that mean to you?

Nathan Fradley
I think there’s a variety of approaches in in this particular space. So, when I talk to my clients, we talk a little bit about the individual beneficiary and the greater beneficiary. Now, depending on the the nuance of the conversation, the client would depend on the language I use, because that can be quite a technical term. But when we look at any investment, and we link it back to a goal and outcome, retirement certificates, education, that’s the individual beneficiary. That’s their benefit from the the investment, the greater beneficiary is something broader than themselves. It’s the societal benefit. So people who tend to donate to charities more have a better bias towards this already. But I think talking about that, and saying, I mean, the question of if you could get the same return and and have a greater impact on the planet, would you rather getting one of us is not, the question becomes if you had a less return or paid a higher fee, to get a greater impact. And, and that’s where the impact comes in as a range between implied impact, which is, by not investing in this, or by investing in companies better at that, versus investing in an index or a standard product, you’ve improved things this much, you’ve invested more into companies doing great things, you’ve reduced your reduce your carbon emissions and carbon footprint and, and that that is an impact in itself. You know, within the the ethos software, we measure that in terms of tangible things like fish and fish saved and cars taken off the road. And so that is a tangible impact. Just shifting from a standard index product to an index product that excludes fossil fuels will give you a sense of impact. And it’s something that a client, at the end of the day when it comes to ethical investing, that’s what they care most about creating the tangibility around that impact is the same as creating the tangibility around the outcome of the goal, you will get to retirement or you will get to retirement and substantially reduce your carbon emissions by this much the equivalent of taking this many cars off the road. Oh, wow, that’s fantastic. You’ve got to make a tangible, because just saying this is more ethical doesn’t doesn’t help anyone. And then from there, the next tier up is the kind of funds that invest directly into solutions. Which is interesting, because a lot of these tend to have companies that are higher in emissions and hiring, and these sort of things because they might invest with fossil fuel companies that are transitioning to renewable. So they they have the old assets, but they are moving. Or they are, you know, old mining companies that are transitioning. But whenever people think impact and they think great a beneficiary and they think focusing on solutions, they think environment straightaway, they go straight to climate change, they look at the picture giant wind farms, a lot of impact portfolios have very small energy generation components. And they focus on I mean, something as simple as gender inclusiveness as opposed to be as opposed to a poor poor contracts within hiring practices, or gender identity as opposed to gender inclusiveness sort of taking a step further, it’s a social issue, that within a board within a hiring practice can create huge impact. So I think, you know, there’s that there’s things like safety. And, you know, I suppose those kind of areas, things like

a pink on a web has that kind of approach with a focus on the broad range of those things. Then you’ve got, I suppose, another tier above that, where there’s funds in particular, we’re starting to see this in the green bond market, where the bond or the loan explicitly directs money to a cause. So there’s one bond fund at the moment that has a green bond in Melbourne, which lends money to a Melbourne homeless facility for women between 55 and 65, which is the fastest growing homeless demographic in Australia, due to a range of social factors. And by giving them a place that they can be safe, that they can be feel included, that they can get back on their feet, that they can have social interaction. That’s amazing. It’s a huge impact, and also extremely important to particularly my demographic who are in the age bracket, you know, so it’s, I could, it could be me, so there’s a kind of a more direct one. And then you’ve got he kind of moving more up into philanthropic stuff where some of the investments out there some of the agricultural stuff or some of the good credit funds may have the unashamedly less performance, but a greater impact. And I think there’s at least kind of that spectrum between implied impact and direct impact, and then willing to take a hit on performance I think at the top Pinto that impacts scale, you tend to lose a bit of your own money. But you get a greater sense of social benefit. And I think clients who are comfortable in their retirement, who aren’t worried about not having enough money to have a little bit extra, or they’ve got enough to one back the risk profiles might choose a more philanthropic impact approach. Because there’s more wealth in just money. And I think people really feel alignment to that.

Fraser Jack
Oh, well, absolutely. Well put so and in great questioning to with regards to if you, you know, you can keep the same, the same returns, spend the same and still have impact on you, of course. But then what what are you prepared to give up? You know, how much more are you prepared to pay or how much less you prepared to give? When you ask those questions appeal, what are they say,

Nathan Fradley
a lot of the time, I don’t want to lose performance, like most of the time, the same performance, absolutely. high fee, absolutely. But I don’t lose performance, which is really funny, because they’re willing to pay a higher fee, which would detract from performance, but they don’t lose performance. So or detract from net performance. So I think that’s, that’s an interesting insight into the mind of an everyday investor. But we do get situations where some of my wealthier clients are happy to providing the goals are being met, yet, we’ve got a retirement locked down, we’re happy to take a lesser outcome. And then, you know, I’ve worked with some advisors and done some coaching with some advisors that are in the high net worth space. And in the the, the clients have substantial amounts of money, that they really want to see change, and they’re willing to take larger hits from their on their performance, it’s like cash plus kind of mindset, because to them, they’re responsible, they’re custodians to, they’ve got a custodianship to, to the planet, or to a particular group of people they feel an affinity towards, and they want to see outcomes. So that sort of another level, again, that I think we’re going to see the rise of the everyday philanthropic action, in a lot more in that high net worth space.

Fraser Jack
Yeah, and this, this almost plays into a conversation that you can have to them around, you know, leadership or status, even in the community.

Nathan Fradley
I think wealthy used to be defined as, it’s like the transition of a modern society, it used to be defined as nice cars and fancy things. But I think it’s transitioning into, you know, electric vehicles, organic grass fed, corn, honors, things like where they’re, the sustainability becomes the competitiveness of a sign of wealth. You know, I’m doing more for the planet I donate to here, I’m helping out here, I think we’re going to see some of that. I think that’s the natural transition away from materialism, particularly with high educated people. Of all of all political affiliations, I think that people who tend to have a higher IQ, will see that as either a good outcome for themselves or a good set of symbols themselves, depending on their motives. But EQ, those people have always been have been interested in this kind of thing.

Fraser Jack
Wonderful. Thanks, Nathan, for chatting to us about impact, we look forward to catching you in the next episode when we touch on climate change. Thank you for joining us again, Karen.

Karen McLeod
Good morning. lovely to be here.

Fraser Jack
Wonderful to have you. Now we’re talking about social change and impact and different opportunities for impact investing in conversations to have declined. What are you saying to your clients about the space? And what conversation Do you have him with?

Karen McLeod
I think clients really understand impact investing to be, you know, your cake and eat it too, is the way I would describe it. So it’s having you know, all the beautiful returns we would expect for the clients that we deal with Anyway, look, they really are looking for market returns or better. And then that additionality of having positive and measurably articulated change through what they’re invested in. So an example of that would be a lot of the funds are really quite good at articulating their impact at the moment, but the equities funds in particular. But certainly, we’re also seeing that the bond funds that are investing in the green and the social bonds, or even the sustainable bonds, which is sort of that combination of a project that might have green and social benefits are really good at articulating exactly how the money your clients have invested has actually been put to real world outcomes. An example of that I was going to raise is that one of the global bond funds we use, you know, 94% of their bonds are in impact bonds. So they’re focused on really and this is things you know, you can share with your clients, which clients love to read about. We put this in our recent newsletter to clients and we explained that thematically the top three sectors in terms of environmental focus for this fund were infrastructure, energy and water. related outcomes, and in. And in fact, they were able to, you know, get an investment in the African Development Bank fight COVID-19 bond. And what that bond has done, it was issued by the World Development Bank, you know, they’ve actually use that money to basically support companies that are manufacturing essential supplies, including reducing your test result timeframes from 36 hours to a week. So protecting basically livelihoods and 6000 businesses, and all of that with a really strong credit rating. So I think clients are really interested in how they can be a part of a solution like that and still receive, I can measure it return.

Fraser Jack
Yeah, I love the phrase heavy cake and eat it too. It certainly, it certainly sums it up for for clients, when you when you mentioned that, and then then you can chunk down obviously into the specifics of it. Is it very hard to find these things? You mentioned that, you know, there’s some, you know, some funds have high levels of a but how do you find them? And how do you go about researching them?

Karen McLeod
Yeah, certainly. So there are no, I think that the the bond funds that are available in the country, for the most part, are actually not as green washed as the equities that so I think you’ll have some success there. If you you do your due diligence and have a look at the underlying holdings. You know, what you’re really looking for there is good quality issuers that I’ve obviously got complete that certification on that they are green bonds, they are social bonds. And they’re disclosing to you obviously, how the funds are being put to use. There’s also domestically, obviously at home here, we also have some green and sustainability bonds that are being issued to market. So you can either purchase those directly through a fixed income broker for clients, or which we were doing many years ago before these sort of bond funds were issued. But an easier way might be just to have a look at some of the the bond funds themselves. And within those there are there’s like a handful of them domestically. But you’ll find that, you know, clients are invested in some really interesting social and sustainable bonds with names that they’re familiar with. And I think that’s what makes clients you know, it makes it relatable for them. So if they know, for example, the Queensland Treasury has issued a green bond that went to finance, for example, this is in my home state, you know, the Gold Coast light rail, stage two, and also a solar farm at the Sunshine Coast, and Brisbane bikeways extensions, that’s something that they can understand. So there’s many examples of that, where you can sort of pull out examples of bonds within these portfolios that your clients are invested in

Fraser Jack
incredible and again, goes back to those values of understanding and knowing why they’re invested in something. When it comes to the conversations were you having with your clients? Are they are they more towards this? Is that something that you’re with, towards? Because it sort of, to me, it’s not something that you said, Well, you want to try and stay away from something, or it could be with, you know, small communities and human rights, but it feels like it’s a more of a feel good type of an environment where you’re promoting it, or you’re not promoting it, but you’re talking in a positive way.

Karen McLeod
I think you could just raise it from the point that, you know, did you know that the bond market is, you know, x times as big as the equities market. And, you know, the fastest growing issuance on those markets at the moment is green and social bonds. And the reason is because, you know, corporates, and local governments and state governments realize that they need to be part of basically funding the transition to low carbon. So with, we’re relying on, you know, external parties, that’s your capital to basically deliver the technologies and solutions to get us to where we need to be. So this is this now exists, and you can invest in this. So clients will just not be aware. And when they know that their own home state, and this is across all states have issued green bonds. I think that that gives them confident understanding and why you know why they issued green bonds because they realize that there are projects that the state needs to deliver that they can’t fund themselves, they can issue it at a fair price, and receive external investment to fund that in that infrastructure project.

Fraser Jack
Wonderful. Karen, thanks so much for coming on and chatting to us in this episode. We look forward to catching you very soon in the next one. Thanks. David Graham, welcome back to the conversation.

David Graham
Thank you. Once again,

Fraser Jack
we are talking about the impact or impact investing in social change something that’s I feel like it’s a fairly new area of the ESG. The the the s&p ESG is sort of a more of a newer area governance has always been there for quite some time we used to this now. And the environment certainly been a topic of conversation, but the social sort of missed out a little bit, sort of is lagging behind a little bit.

David Graham
Yeah, it certainly has to point governance, I think has always been a must have, even when we’re talking about quality, invest in quality stocks and that sort of stuff. Governance is a given. So I’m not sure why that was ever controversial, or why it actually formed part of the conversation. You know, we’ve avoided things like, you know, I don’t say crap casino, or people who, you know, you kind of think, well, can I say, dodgy? I don’t really want to offend anybody or get sued. But you know, what I mean, it’s about the smell of something, sometimes you think, Well, okay, I really want to get my clients money in there, where it’s a fund manager, we’ve had conversation with fund managers to, you know, express that view. So, governance, as always stood as you must have what what else you got? Environmental, yes, very, very topical at the moment, and getting it getting a lot of air. I mean, I think one of the ETF providers open to climate change Fund recently, and so it’s all very, very popular and very, very sexy, the social part is a lot more difficult. So, you know, when we’re looking at a portfolio, one of our overlays is the UN SDGs. So clearly, there’s, there’s some capacity in that to look at the social goals as well. Running, running our filters through that, we tend to see that still lagging a little bit in a lot of fund managers, but there are fund managers out there who are further along the ESG spectrum and looking to have specific impacts in specific areas. So we will kind of blend those into a portfolio, a diversified portfolio to have that some, you know, more impactful part of the portfolio. But with that, the the risk that goes with that as well. So it’s almost like an traditional portfolio, having a small caps, you know, party portfolio, you know, it’s going to be more volatile, but you hope it’s going to have bigger impacts from a return perspective. So I guess, going out in the spectrum with those impact style funds, you’re getting some of that alternative beta, if I could use the jargon.

Fraser Jack
Yeah, that’s, that’s a really interesting point that you raised the risks in the in the analogy of the small caps, you’re absolutely right. As a quality, you know, as an investor that looks for quality stocks that people be listed around, because they just haven’t had that chance, either chance for the time, or the length of time for those small gaps to become big gaps in the space.

David Graham
And by definition, as well, if something is going out on the spectrum to have an impact. That there’s there’s a, it’s not like it’s, say a mining company or a bank, who has been doing the same thing over and over again, just making money, relatively easy, they’re really taking some some idiosyncratic risk out there with the fact that they will have an impact change that social condition and generate a profit from it at the same time,

Fraser Jack
yet, is that there’s certainly the the the profit, impact against the profit, the profitability of these companies, which is very important for constructing portfolios. And then there’s the social aspect of that where, you know, society might be better off for. And I think, do you think clients can sort of take hold all that tangible outcome and be able to then relate that back to, to an interesting part of a conversation where they might relate that to a friend at a barbecue about how their portfolio was, is doing these good things in the community? Not just, you know, producing returns for them?

David Graham
Yeah, I think it’s certainly a fringe benefit. If I can put it that way. I haven’t had the conversation. Again, I think a lot of our clients, at least initially, don’t really fully appreciate that they’re having an impact. But once once the they start to get used to it, and we get some feedback from the fund managers about how it’s having an impact. And a couple of funds out there produce some very interesting stuff about where it’s having an impact and why it’s having an impact. And once we kind of get people into that conversation, yeah, that that they want more of it. They want to know more, and they want that they they take ownership, I guess is the way to put it. Yeah, the

Fraser Jack
power of story storytelling in the space. It’s a really good lesson for a fund manager or anybody constructing portfolios to tell a good stories out the back of the investment portfolio, so people can, you know, share in that story, and as you said, Take ownership.

David Graham
Yep, I should also relaxer as well within within our business. It’s a bit of a social impact story as well. So, as I said before we run the business and until probably about 12 months ago, we were very Underverse business we had 11 women and one male, which was me. So you know from from a social impact. Having having this female dominated business This gave us a slightly different perspective. And, you know, certainly kind of feed into our narrative of, you know, what, what shows social change look like at that gender parity level?

Fraser Jack
Yeah, exactly right in. And we’ve seen that increasingly with firms now and more and more women coming into the profession. And it’s been it’s been a fantastic thing for the profession to say that and but you’re absolutely right, getting that diversity across genders. There’s all sorts of issues in this social spectrum that really get sort of don’t get a lot of airplay. And I, I guess, the more we can talk about it, the more apply it gets, the more becomes part of the norm. Yeah, absolutely. David, thanks so much for catching up. In this episode, we’ll jump into the next one with you very shortly, when we start talking about the environmental climate change. I look forward to welcome back, Claudia and Michelle. Okay. Thank you for being part of this episode, we’re talking about social change and impact investing, sort of, from what I see as sort of a more of a newer approach to ethical investing a lot of ethical investing started off around climate and those sorts of things. But tell us about what you’re seeing in the space for for social change.

Claudia Mah
I think it’s, it’s amazing, that we’re actually not just focusing on climate, but it’s a more whole holistic, we’re looking at the community. So we’re talking from health care, healthcare, in terms of technology to, to property assets. And then we’re also looking at home home care for health. So these sort of facilities are, I think that that’s one part of the development that I’m seeing, we’re definitely talking about, how can we relieve the burden on the aging demographic, and that’s tackling social, we’re talking about how can we make, you know, address disability we’re talking about. So all the little pieces that fit into those issues, we’re seeing that come on to investment side where we, we as you know, we as brothers and sisters can, can then Han and and put our money to good use. So and it addresses all areas of from from from environment to governance, to, to social.

Michelle Brisbane
And sometimes the it’s like the investment community community, replacing some of the role of the government or the responsibility of the government, and then the cost to society, or the cost overall is reduced, because you’re providing better health outcomes, better social outcomes for elderly people or for disadvantaged children. And there’s a there’s a very long term benefit, which is not always immediately obvious, but sometimes it’s we can assist the Government with the responsibility.

Claudia Mah
And sometimes it has to come straight from us, isn’t it? I mean, we talk about shareholder advocacy, and that that, in many ways, is doing the job of the government. You know, we’re the one who’s pushing for companies and, and product developers. When I say product developers, I’m talking about fund managers to actually push on and do do what you know, you can. But you know, it’s

Michelle Brisbane
part of that directing capital to drive change, to drive environmental change, or social change and make things better. And, you know, we’re in an amazing position where we can facilitate that via our clients money and the demand and the, and the push that they have wanting their money to support things that they value.

Fraser Jack
It’s amazing, isn’t it? Like, as you know, the advice community knows better than anybody that if you wait for the government to make a rule changes, it doesn’t always end up but you know, the best way or it just ends up a wise decision has to be made. But certainly to be able to drive that social change from the, you know, in the investor point of view, and makes a lot of sense. You mentioned that it sort of doesn’t have an immediate impact. But it kind of feels to me like it does have an immediate impact in local communities and social communities. To me, it almost feels like more so than when you’re looking at an environmental product over a long period of time. This this area, this impact or social change around communities has a more of an instant impact in the local community.

Claudia Mah
I think it does take time then Fraser, I guess from from because it’s always you need it’s a collaborative effort. You need the demand to keep pushing and sometimes that demand needs to keep pushing for a little while longer before the supply comes onto the market and then the investors get to support that effort. So it’s always you have you have to This this, this this dynamic. But once it happens, and I think it’s like, it’s like fashion, once you see more and more people wearing purple, it just catches on, you know, and and I find that from where I sit when I find one fund manager launching a second product, and it’s done well. And that’s when you start to see an influx of a similar theme.

Fraser Jack
Sorry, Claudia philosophy at fashion. I’m not sure what you’re talking about there. But you’re absolutely right about this supply and demand. We all understand that part. Right? It’s in the right. So where are we now? I guess with consumers at that supply and demand stage? Are we still looking for more consumers to be involved in these before the the? Or are the funds now starting to produce really good impact and social change opportunities?

Michelle Brisbane
Well, I think I think that the demand is there from in terms of capital, that there’s there’s capital out there that wants to support good things. And then so it’s a matter of finding the good things that are financially logical and work from an investment point of view. So it’s sort of a bit of a juggling act to make sure that we can we can find an investment that is suitable, sensible and appropriate for the right clients.

Fraser Jack
And these investment managers in that space that are doing that, are they working with the business individually to make sure that, you know, they fit within the sort of parameters around the impact on social change? Or they were the businesses coming to those funds to sort of, you know, to then invest in them to say, hey, we already do this thing, can you invest in us,

Claudia Mah
we’re quite privileged, we are actually sometimes get invited to participate in the development part of it. So before this is all put together, so the bright embryonic stage is really fascinating, because it allows us to then convey what we’re hearing from our clients, and let them let them find options and solutions to put them into a product. So, so a little bit of both. Fraser?

Fraser Jack
Yep. I think one of the things I’ve heard in around Europe is that a lot of superannuation style of funds now are really pushing into this space and saying, you know, that we don’t want to have any money and and things that are obviously environmentally worse off or socially worse off? How do you see that drive sort of from Europe, in translating to what might be happening in Australia?

Claudia Mah
I think it’s very influential. It’s, it’s, it’s definitely, it definitely does get a lot of support here, be it Europe, or America, or even in Asia, I mean, if we hear of any devastating, news, or, or, or initiatives, we tend to, we tend to, to, it tends to just sit in our head, and when and then it gels when we find the opportunity that we can, we can link it to, I think

Michelle Brisbane
Europe, Europe, because of the age of the society and that sort of thing in the size. They might, they might have a bit more capacity and sort of the his historic background to support those things. Whereas Australia is a very young country. And I think we’ve got to develop that history. And we’re a small country. So sometimes the volume and the capacity is not as available as it is in those larger countries. But we’re getting there, I think,

Fraser Jack
yeah, fantastic. We’re definitely on the journey. Michelle and Claudia, thank you so much for talking to us. And this episode. We look forward to catching you in the next one.

Claudia Mah
Okay, Fraser.

Fraser Jack
Joining us again, to round out this conversation on impact and social change is Grover burfi. Burthay Burthay, I got your name wrong.

Grover Burthey
So Right. It’s my wife likes to say it’s like birthday without the D – Burthay.

Fraser Jack
Burthay. There you go. My apologies. Speaking of impact and social change, tell us a little bit about what you’re seeing in that space from where you’re sitting?

Grover Burthey
Sure. Well, well, certainly first and foremost, when it comes to ESG. It is important to be balanced. And and we’ve spoken you know a good bit about about topics related to climate and the environment, and I’m sure will continue to do so. But But there certainly are other areas that are important to the firm to PIMCO into the marketplace. With regards to the potential social impact we can have. And we look at a few a few main topics when it comes to social in particular, not not easy, this is not exhaustive, but we focus quite a bit on human capital management. On on staffing on on worker treatment worker rights. As for the impact on the broader community, for from a given business or assets or government, we focus on on health and safety and wellness, particularly in areas such as nutrition or food or pharmaceuticals and a variety of other similar topics, you know, tangible goods, are those products sourced in a reasonable manner or the distributor in a reasonable manner. Are they healthy construct for the consumer? And to the extent that that claims have been made otherwise? Are they viable? And are they being reconciled? And we think about, you know, really sort of access. So areas like specialty Finance, Financial Products, mortgage lending is there access for for the consumer groups receiving access at comparable or competitive levels where they where they may not have previously, and that doesn’t mean you know, these these efforts should grow the pie doesn’t mean that you have to take an opportunity, right, or a financial tool away from one part of the market and to get someone else. But But are there is there equitable? Is there is there equitable processes in place for for distribution, and are certain business models looking to bring groups into their into their model that have had less opportunities in the past. And then there’s ultimately wasted to measure all this to look at a specific line item level and encourage more disclosures, as the theme that we talked about across ens, more disclosures from from counterparties, and issuers with regards to their efforts. And in doing so, ideally, on a regular basis, with some degree of of also projections or foresight in terms of what the future impact will be as well.

Fraser Jack
Yeah, amazing. Now, tell us a little bit more about that, that measurement and disclosure because I think it’s a pretty important part when you’re measuring that, how do you go about, you know, measuring the, those sorts of things, cuz I’ve imagined to be quite difficult and sometimes intangible.

Grover Burthey
Sure. And the other, there’s so many opportunities in the marketplace, right. To some extent, this is why increasing market standards are so important for foreign investors. But we, this is one reason why we really want very much like ESG, legal bonds, green bonds receive a lot of attention. But this year, there’s actually been more growth and other types of ESG labeled bonds, then green bonds. And what I mean by that social bonds, sustainability bonds, and then sustainability link bonds. And with all these different structures out there, you can sometimes get a little tongue tied. But what what these structures generally do is is not only are they are they valuable in their own right in terms of the issuers telling you where the proceeds is going to go and giving you information on that. But generally speaking, they’re supportive of more disclosure and information in the marketplace, that only you receive a framework, ideally, upfront when a bond is issued, and we at Pimco, review those frameworks in real time and ensure that they’re coherent, and sure they’re comprehensive and transparent. But then the issuers are then going to update you on their progress. And they’re going to provide information about proceeds that were not allocated upfront or about, ultimately, so the outcomes of the capital allocation over time. And so as more hopefully, as more issuers continue to adopt these structures, then it will provide that a track record of progress and efforts in this regard. And then when it comes to sustainability linked bonds, we actually quite like that structure. When done well, when done in a manner that’s ambitious, ideally, with with real materiality to the business of the respective issue, wherever that business may be, because it then leads the issuer to put a specific target in place allow set in place make a commitment to reaching that milestone. So from a social social standpoint, it can be lending to a certain number of businesses, it can be a certain dollar store a certain community, it can be producing a certain number of jobs producing a certain number of affordable housing units, there are various KPIs that an issuer can use. But if those those targets are not met, then there’s a there’s a penalty associated with it with regard to the the interest expense to the coupon. And so there’s degree of accountability with regards to hitting those efforts. And so, these the the structures are great, not only because of the fact that it continues to grow the ESG market in general, but because they do encourage more disclosure and more information from from these issuers that investors can utilize.

Fraser Jack
Yeah, fantastic. The the, you know, exactly right, targets, looking at targets, having them publicly, you know, available, disclosed, and then also whether they’re hitting them or not. And that’s something that I guess the accountability piece that comes in from from where you’re sitting and in the fund manager space. Talk to us a little bit about the you know, the different sectors, within you know, human capital, you mentioned, as was one of the first ones rights, health, safety, those sorts of things. How are you sort of, are they all categories? Are you are you like, how are you finding these and, and monitoring them or looking at them in different ways.

Grover Burthey
Or a big part of that is through direct conversations with with the the issuers we’re lenders or investors. That’s why engagement is such a key piece of all these efforts. In that there is more information being provided proactively by by companies and market participants, not only with regards to some of the points I made about ESG securities or labeled bonds, but in in for example, stainability reports increasingly and more mainstream documents just annual reports or investor reports investor material There’s increasing focus on these areas. And for and for those where this has been largely voluntary thus far, with various regulations coming through different geographies, different regions globally, much of this will now be increasingly required from a regulation perspective. And so where where there hasn’t been perhaps as much participation, either in certain sectors or in certain regions. As certain regulators move ahead of these trends and want to encourage more sustainability efforts in markets at large, then we certainly expect to see there being more information expectations and reporting expectations, plays plays on issuers. So what does become difficult in this space is is trying to do all this research on your own from a desktop, we believe that PIMCO we can differentiate ourselves in terms of how we how we wait, these efforts, whether it’s quantitative information being put in place, testing that making sure that it’s, it’s, it’s honest and transparent. And it’s science based, for example, in the climate space, using that to model portfolios, overall risk and portfolios, overall carbon exposure, for example, are measuring the impact from a social standpoint, accurate in that information, there’s a lot of analysis that can be done. But the analysis in terms of just the inputs and sort of the sources of information, very much encouraged the marketplace to continue to provide that and to hopefully do so in a more unified and universal manner. Absolutely.

Fraser Jack
Now, one of the things that I’ve imagined is very difficult is that supply chain conversation, because it’s probably a lot easier to look at stuff that’s more localized, and, you know, be able to walk into a business and see how its operating and seeing how it’s trending and stuff. But tell us about how you go through that supply chain piece and then look, look deeper into where the, you know, the down the track how things are, sort of before products made into that factory, whatever might be. How do you how do you do that?

Grover Burthey
Yeah, we do it, we do that first and foremost, areas like this, where where it does require scale, to really get the information, we certainly rely on use various collaborative engagement groups in the marketplace. So for example, right, where were participants in groups, such as climate action 100, were participants in a variety of efforts that have to do with with food nutrition supply chains, such as the access to nutrition initiative, and they’re, you know, really targeting a certain specified number of issuers that are significant in their space, right, that can that can serve as role models and leaders, and using those initiatives to really get to scale and to and to create, hopefully standards that can then be adopted by by many others. In an ideal world, and we do do this where possible, but it’s it’s it’s been certainly difficult over the last 18 months, you know, you’re able to do your own diligence on the road as well. It’s hard to do at all. But but there’s there’s really nothing that substitutes, right doing your own core primary research and diligence. And you have to do a little bit of that as well. And that goes with being with companies but also doing some of these you doing some of these more labor intense research efforts. And that’s an area that we’ve done in the past and with the economies reopening look forward to hopefully doing some more of that over the next the next couple of years as well.

Fraser Jack
Yep. And when the advisors are talking to the client, and they are looking for tangible conversations, I mean, things like access to nutrition initiatives is great. What sort of conversations were can advisors have with their clients around? What benefit this is doing in society? Like I mean, I think when we get to the environmental thing, we might talk about taking these mini cars off the roads, it’s sort of a tangible thing that consumers can or clients can hang their head on. What can I do in this space when it comes to impact in social governance, social benefits for communities? How can they explain that to clients? Yeah,

Grover Burthey
well, you know, it obviously differs by by sector, and in the social space, right? This is an area where there hasn’t been as much, you know, in the climate space, there’s been a lot of coalescing around around, okay, absolute carbon emissions, carbon intensity. But that’s because we’re striving for sort of one one broad target, which is, you know, a lower carbon World Social, the market hasn’t adopted one standalone topic where it says, Hey, we’re all going to work around and unify this specific topic from a social perspective. So it will vary depending on the asset manager and the strategy. But things that we do look at very regularly very frequently and I noted health and safety earlier you know, sort of accident incidents reports, right. You’re talking about labor intense areas, okay. There’s there’s construction or there’s manufacturing anything that’s very labor heavy. Having this this this also applies in certain areas in the energy space. Let us know how your workers spare on the sites on the rigs. In the in the in the facilities This was particularly relevant during COVID Where were these areas? You know, there are there are tremendous disruptions to businesses based on outbreaks. So so give us accident reports give us information about what happens in the field. When it comes to banks, financial institutions, give us disclosure. About the breakdown of your of your those who borrow from you, you know, is it going to small and medium sized businesses? Is it going going to minority communities? Are you going to female entrepreneurs, there give us specific information about your your own, you know, your own client base, trying to make commitments with regards to growing those that representation of those groups and your overall in the book, give us some information on what has been in the past what you could do in the future. And and also to the extent that you can encourage specific outcomes with regards to you know, any KPIs that are sector specific, then you can engage on those in a in a very direct manner. You’re dealing with the housing space, okay, get let us know, isn’t going to be a certain amount of affordable units within a multifamily building, or if you’re building single family homes, right. Give us some information about the impact you’re having on the respective communities. There’s there certainly topics with regards to providing jobs, jobs as another one are you if you’re going into an emerging market, are you hiring the local populations? Are you bringing staff from other areas? Right? Are you producing sort of economic benefits for the locals for the for the population that’s immediately impacted by your presence? And so you so is an area where you can certainly have have that impact and you can measure it, but you do need to be somewhat intentional about the question you’re asking depending on the sector.

Fraser Jack
Yep. Greg, thank you so much for chatting to us about that. It’s great to to hear, you know, the influence that you’re having on on those businesses and those, those funds that your those the larger companies and companies that you’re lending to so appreciate it. We look forward to catching you in the next episode when we start talking about climate change before the next session.

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