John Streur

Calvert, a leader in responsible investing, and part of Morgan Stanley Investment Management, believes long-term responsible investors focused on risk management and opportunities must consider material changes impacting four key areas.

John Streur, Chairman Calvert Research and Management says: “The four key areas include changes to the global energy system, demographic changes, increasing costs, and new costs impacting the global economy.”

Mr Streur notes: “We believe changes to the global energy system, both in the existing fossil fuel system and in the development of a distributed, lower carbon system, are accelerating and revealing challenges for companies globally.

“Calvert has historically noted two major risks to the fossil fuel based global primary energy system: geopolitical risk and product safety related to carbon emissions. These create the potential for innovative competitive products to disrupt fossil fuel as the world’s primary energy source. Businesses dependent on fossil fuels face risks, but also could take advantage of many areas of potential opportunity across the energy system and related industries.

“Demographic changes continue to impact the workforce and the ultimate size of consumer markets globally; the vast majority of companies have yet to fully adapt to these massive changes. Higher levels of labour force participation and educational attainment by women and ethnic minorities have led to changes in overall employee makeup and boardroom diversity. However, we have yet to see this lead to higher levels of women and ethnic minorities in executive and senior management roles. As numerous studies have now linked diverse workforces and corporate performance, long-term oriented responsible investors should be demanding greater disclosure and transparency from companies on how they are attracting, retaining and promoting diverse talent.

“Increasing costs, including interest rates, wages and raw materials, present unique challenges to every industry; the result will be greater differentiation between companies that are able to manage their cost structure and improve productivity and those that are less efficient or stranded in high fixed cost models.

“Russia’s invasion of Ukraine in 2022 and the supply chain disruptions that followed led to an interest rate regime change that altered the cost of capital for companies across all industries and depressed valuations everywhere, except energy. While higher costs create challenges for corporations, they also create greater opportunities for differentiation. Long-term oriented responsible investors will need to study not only the companies that are managing their costs, but also those that are innovating to continue to grow and expand in this high-cost environment.

“New costs in the form of priced externalities, implemented by governments or through market action, are taking effect serving to raise costs, influence corporate and consumer behavior.

“Governments around the world are signaling that they are willing to step in to force businesses to address externalities, like carbon emissions and waste, by putting a price on these negative effects. For example, the U.S. Inflation Reduction Act places an explicit price on methane emissions, which are a significant cause of climate change.

“In the EU, recent notable actions to price in externalities include a deal to phase out new fossil fuel car sales by 2035 and a border tax imposed on ‘high-carbon’ products. The UK has also launched a consultation on the introduction of its own carbon border tax as part of a broader net zero strategy,” says Mr Streur.

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John Streur

The ESG and Responsible Investing markets have grown rapidly over the past decade because investors recognise that the world faces substantial environmental and social challenges, and that companies successfully addressing these challenges stand to benefit.

Looking at 2023, John Streur, Chief Executive Officer of Calvert Research and Management, a global leader in responsible investing notes: “Major events of 2022 have caused a shakeout in the industry and imply meaningful change today and into 2023.

“To stay relevant as capital market participants in 2023 and beyond, we believe responsible investors must intensify research into how well companies are managing their specific exposures to financially material environmental and social factors, analysing their near- and long-term financial impacts. Multidimensional research with clear connections between corporate behaviour and corporate financial outcomes must inform both security selection and corporate engagement efforts, including ESG activism.”

Mr Streur further adds:

Greater disclosure required of ESG Asset Managers

For years, responsible investors have propelled companies to increase transparency and disclosure of their ESG performance across factors ranging from carbon emissions to workplace diversity. Now it is critical that responsible investment asset managers provide transparency into their own research methodology. Investors need clarity around the linkages between corporate ESG performance, financial outcomes, security selection and the results of corporate engagement and activism.

Understanding corporate governance will continue to be relevant for all types of investors, but the need for depth and granularity in responsible investment research and corporate engagement will dominate the ESG and responsible investing business in 2023 and beyond.

The responsible investing teams and firms that can succeed in doing this will continue to thrive and gain investor market share, becoming increasingly relevant participants in global capital markets.

New responsible investing framework

We believe the events of 2022 will prove to have been seminal for responsible investing and ESG research, helping shape the framework for a rapidly changing investment landscape. The combination of powerful geopolitical events, along with ambitious government regulations aimed directly at responsible investing, are together creating a new reality for market participants.

The sum of geopolitics largely shows that individual entities — people, companies, countries — predominantly act in their own self-interests, as opposed to the long-term needs of global society. This makes solving issues that impact the global commons, such as climate change or COVID, very difficult for society to solve. Multiple situations today serve as proof points: the war in Ukraine, numerous conflicts between China and the West, divergent outcomes between rich and poor countries in the response to COVID, and inadequate progress among the world’s large and rich countries to effectively deal with climate change.

Understanding this reality is critical to grasping the need for voluntary, market-led solutions to these massive challenges, and the need for stronger, deeper ESG research and engagement. We need corporations that can advance viable solutions do so while producing competitive financial returns for investors. Finding those winners and differentiating the rest requires exhaustive ESG research.

Government actions in 2022 — in terms of setting standards for ESG and responsible investing, as well as intervention in trade and industrial policy — underscore how a shift to deeper research and voluntary, market-led solutions are under way and will likely dominate in 2023. The United States Department of Labor new ESG rule, “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights,” makes clear the need for in-depth ESG research focused on financially material factors. This rule will set the entry-level standard for responsible investing going forward. In the EU, the Sustainable Finance Disclosure Regulation (SFDR) rules make clear the need for investment firms to define their approach to responsible investing. These rules, combined with ongoing enforcement actions in the UK, EU and U.S., make crystal clear that responsible investment firms and products must provide realistic expectations and real transparency into research and investment processes.

Stronger capital markets

The impact of deeper ESG investment research, clarity on ESG linkages to financial outcomes, and greater transparency into responsible investment processes has already created a narrower and more competitive field. Firms are adjusting their marketing claims and investors are conducting intensified due diligence. At the same time, corporations that are the subject of this research are adjusting their public-facing statements and strengthening the financial discipline of their sustainability-related capital investments.

We believe the outcome will be to strengthen capital deployment, create measurable differentials between corporations that can manage well and those that cannot, and enhance how capital markets function. Greater transparency, greater disclosure, greater focus on financial outcomes — these are the required underpinnings of successful, market-led solutions, consistent with the realities of the world we experienced in 2022.

We have seen how individual entities behave in promoting their own self-interest, with minimal ability of governments to exert control, despite their efforts. Strong capital market function can counter this, advancing the needs of society while providing competitive returns to investors.

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Chris Briant

Retail Employee Superannuation Trust (REST), one of Australia’s largest super funds, with over $60 billion in assets and more than two million members, appointed Parametric and Calvert Research and Management (Calvert), part of Morgan Stanley Investment Management the asset management division of Morgan Stanley, to manage the equities allocation across the newly launched REST Sustainable Growth Option (the Option).

The REST Sustainable Growth Option is a diversified portfolio with enhanced environmental, social and governance investment characteristics weighted towards growth assets. It has an asset allocation across Australian and overseas shares, property, infrastructure, bonds and cash.

Global responsible investment leader Calvert will manage the equities portion of this new Option (which make up approximately 72.5% of the total portfolio), supported by implementation specialist manager Parametric.

The portfolio is positively tilted to companies who are demonstrated leaders in environmental sustainability and resource efficiency, or who are socially equitable and respect human rights, or can demonstrate accountable governance and transparency.

Companies who are involved in labour and human rights abuses, unethical supply chains, fossil fuels, animal cruelty, gender discrimination, tobacco, gambling, palm oil, controversial weaponry, or have a recent track record of environmental damage, or excessive executive remuneration have been excluded from all equity allocations.

The Option’s investments in Australian and overseas shares also aims to have a lower carbon intensity compared to their relative benchmarks.

“We are delighted to have been selected by REST for their industry-leading, low-cost Sustainable Growth Option and after-tax solutions,” says Chris Briant, Head of Australia and New Zealand, Parametric and Calvert.

He says: “This is the first time in Australia we have been able to combine the deep alpha-seeking Responsible Investment capabilities of Calvert with the specialist after-tax-focused implementation strategies of Parametric.”

Calvert’s deep company-level ESG research and over 40 years of experience in areas such as active proxy voting, custom screening, and a focus on an improved ESG performance, as well as Parametric’s specialist implementation offering provides the customized solution REST was seeking.”

Mr. Briant says there is a growing demand from Australian super funds for responsible investing strategies and after-tax solutions, so to be able to secure this mandate with a combined offering is a milestone achievement for Eaton Vance in the Australian market and testimony to the quality of the Calvert and Parametric offerings.

John Streur, CEO of Calvert adds: “Australian super funds are focusing on responsible investing, and have been active in the market for that reason. We were able to demonstrate the intellectual capital behind Calvert’s decades long dedication to responsible investing, and look forward to working with REST to enhance its investment offering to its more than two million members that may choose this Option.”

“The launch of our new Sustainable Growth option is a welcome expansion to the range of options that we offer to our members. Our REST Investments team are pleased to utilise Parametric and Calvert’s equity portfolio construction skills to deliver a diversified investment option offering strong long-term returns within enhanced environmental, social and governance criteria,” says Andrew Lill, Chief Investment Officer at REST.

“REST remains dedicated to providing our members with the opportunity to reach their personal best retirement outcome, by providing greater choice and consistently low-fees across our investment offerings. The introduction of this option has also allowed us to respond to the wants and needs of a number of our members, who have expressed that ethical investing is an important consideration for them when making decisions about how to best invest their super,”  says Mr. Lill.

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John Streur

Ending racism in America is a responsibility of corporations, and corporations must recognize that their current efforts to promote their core values, and diversity and inclusion programs, fall far short of what is needed today, according to Calvert Research and Management, part of Eaton Vance.

“What good is it to live in a prosperous country when police forces routinely kill black people?” says John Streur, President and CEO, Calvert Research and Management.

Mr Streur notes: “It is time for investors to recognise this issue for what it is: a system-wide failure that the US government is complicit in fostering and that violates the Constitutional rights and human rights of black people. And let us call it what it is: racism.

“Let us also be clear: This is an ESG problem. Responsible Investors have come to trust environmental, social and governance (ESG) research and investment strategies to avoid investing in corporations that are lagging on taking needed action to address human rights violations and to take real action to drive needed change. As a group, we are failing to meet these needs.

“Although Calvert has been a leader in dealing with inequality and pushing corporate boards to establish greater diversity, we have not done enough. As CEO of Calvert and a part of the system, I recognise that much more needs to be done. More open and forceful action is required by investors and by corporate leaders and boards.

“The reality is that black people do not have the same educational and employment opportunities that white people have in America, and, therefore, do not have the same income opportunities. The cultural impact of this level of inequality holds our entire system back, economic and otherwise, and is a contributor to racism that creates the risk of civil unrest and instability.

“As a first and immediate step, Calvert will call on companies to provide the information required to accurately assess their racial diversity. Although companies are not required by law or regulation to disclose publicly the racial makeup of their board and management, they generally have this information to the extent employees have self-identified, and should make this public so investors and everyone knows where they stand on diversity. Additionally, Calvert will call on companies to provide pay equity disclosure across race and gender. This is long overdue.

“Companies must also speak out and make clear to local, state and federal governments that they must address police brutality against black people; companies enjoy the benefits of law enforcement and must act to assure that police forces behave responsibly. Obviously, failures are occurring and must be addressed. Companies have power and must use it to address this problem. Doing nothing adds to the problem. Companies should publicly state what they are doing to combat racism and police brutality.

“Companies must also take action to address systemic failures in our education system; we all know that our system fails to provide an equal education for all and that in order for equal employment to become a reality, equal education must also be a reality.

“As investors, we need to do a better job differentiating companies based on where they stand on these critical issues, and push hard for positive change. We need the information to actually see what companies are accomplishing through their diversity and inclusion efforts. We need information from companies about the outcomes they are achieving, not only the values they espouse, and it is our duty as shareholders to hold them accountable for inaction.

“We are failing to change the system and address racism in America. Responsible Investors like Calvert, who took action to help fight the apartheid regime in South Africa decades ago, have a special role to play. I recognize that we have not done enough.

“Calvert will take more action to push for the changes needed to eliminate racism and police brutality in America,” says Mr Streur.

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John Streur

The global energy system is undergoing a transition away from fossil fuels toward a new energy model, a transition that will continue and accelerate over the coming decades.

“This has implications for all areas of society and will impact your day-to-day life”, notes John Streur, President and CEO, Calvert Research and Management, a leading voice in responsible investing.

“Investors must have an understanding of the energy transition to fully understand how climate change may impact their portfolios, what risks they may currently have exposure to and which opportunities are worth further research and investment.

“In pursuit of this transparency, DNV GL releases an annual energy transition outlook that forecasts trends ahead to 2050. We have collaborated with DNV GL on this and other projects since 2015 because we believe that it is essential for investors to understand this transition.”

Rapid response expected – but not rapid enough!

The DNV GL analysis projects that the transition away from fossil fuels will take place within the span of a single generation, between now and 2050. It anticipates that half of all passenger vehicles sold worldwide will be electric by 2032, and the demand for oil will decline steeply after 2030.

However, this transition will not be fast enough to deliver the Paris Agreement’s target to limit the increase in global warming to 1.5 degrees Celsius or below. It projects the two-degree budget to be reached in 2049, and a total of 2.4 degree Celsius warming of the planet by 2100.

To speed this process, we must make progress in three areas simultaneously

• Generate much more energy from renewable sources
• Increase energy efficiency
• Capture carbon emissions on an industrial scale

Taken alone, none of these three approaches would be enough to prevent global temperatures from crossing the 1.5 degree Celsius threshold. Only by making significant progress in all three areas can we hope to stem the tide.

Keys to short-term progress

The report also cites three accelerators for more rapid positive change in the next five years. One of these is the increasing voice and power of the youth movement speaking up about its concerns surrounding the environment. Another is the possibility that countries will invest in domestic renewable energy because of energy security concerns.

The third group is investors. DNV GL notes that large corporations could continue to set internal targets on clean energy use thanks to investor demand, adding that “the investor community is increasingly funding clean energy projects as good business, and not just for corporate responsibility greenwashing.”

As investment firms withdraw from fossil fuel-related investments because of the perceived risk, the increase in the cost of capital for companies with significant fossil fuel exposure will increase. The faster this cost of capital increases and companies seek alternative energy sources instead, the better the chances that the transition to a low-carbon energy future will be faster than expected.

Mr Streur notes “We believe investors should understand the impacts of an acceleration to a new energy model on their investments. DNV GL’s forecast of the most likely path ahead for this transition is a helpful resource for anyone interested in examining the future of energy.”

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John Streur

What the SASB standards mean for investors?

Calvert Research and Management, a leader in Responsible Investing and an affiliate of Eaton Vance, believes the competitive functioning of securities markets requires that companies provide transparency through disclosure of material environmental, social, and governance (ESG) performance factors.

“That is why we are delighted by the announcement of the official publication of standards from the Sustainability Accounting Standards Board (SASB). These standards fill a void that had presented obstacles to investors in the evaluation of ESG considerations and companies in their ESG disclosure practices,” says John Streur, President and CEO Calvert Research and Management.

SASB took on the crucial task of establishing a framework, in close collaboration with investors and companies, to determine the financially material sustainability issues relevant to an industry and the companies within that industry. The SASB standards will give companies a guide to focus their disclosure efforts appropriately, thereby providing investors with the ESG information most relevant to longer-term financial performance.

Mr Streur says “Calvert is honored to have been involved with SASB since its earliest days. We are founding members of both the SASB Investor Advisory Group and the SASB Alliance, and through these channels have been able to voice our views as the SASB standards evolved over the past several years.

“Our collaboration extends across our organization. Our analysts – some of whom participated in SASB’s standard-setting industry consultations and working groups and hold SASB’s Fundamentals of Sustainability Accounting (FSA) credential – incorporate SASB’s concepts of materiality into the research we do on sectors and companies.”

The codification of the SASB standards allows responsible investors like Calvert to evaluate and compare how effectively companies manage their material ESG risks and opportunities.

“Calvert incorporates SASB tools into our proprietary research and investment processes to create investment products that reflect ESG materiality. We evaluate the risk characteristics and exposures of our index strategies not only through traditional financial measures, but through the lens of SASB’s industry classification scheme, the SICS, as well. Our corporate engagement work includes active dialogue with companies on disclosure of material ESG issues, and we look forward to working with other SASB Alliance members to engage with companies to disclose more information in accordance with the standards.

“All this has contributed to bringing more uniformity and transparency to the market as market participants look beyond traditional financial metrics to assess the risks and opportunities facing a company,” notes Mr Streur.

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John Streur

John Streur, President and CEO, Calvert Research and Management, a leader in Responsible Investing, with approximately USD$12.9 billion in funds under management and an affiliate of Eaton Vance, stresses that framing a Responsible Investing conversation in terms of principles and pillars can help both financial advisors and investors get on the same page in constructing a portfolio that meets risk-return goals, while also addressing investor concerns about ESG issues and their own values.

He elaborates “As Responsible Investing draws more interest in the marketplace, many financial advisors need deeper education to become more comfortable talking about it with their clients.”

Results from the U.S. Trust Insights on Wealth and Worth annual survey in 2016 indicated that among high-net-worth individuals, 93% of millennials, 88% of GenX and 51% of baby boomers say they are interested in environmental, social and governance (ESG) investing. However, that survey reports that just 44% of advisors use ESG in their practice currently.^[1]

The client interest is easy to understand. Some comes from current events. It is difficult not to consider the investment risk faced by some companies as the result of climate change when watching coverage of a devastating hurricane, for example. There are more available academic resources that support Responsible Investing, and more sophisticated metrics to measure impact. In addition, corporations are increasingly taking a proactive approach to addressing ESG issues material to their operations, and asset managers like Calvert engage with companies as necessary to improve performance.

However, while the investor interest is apparent, starting a conversation about Responsible Investing with clients may be difficult for some financial advisers. Becoming comfortable talking about the principles behind Responsible Investing, and the pillars on which it stands, can help meet those client needs.

The Calvert Approach: Principles and Pillars

Calvert seeks to invest in issuers that balance the needs of financial and nonfinancial stakeholders and demonstrate a commitment to the global commons, as well as to the rights of individuals and communities. In doing so, the fundamental basis for Calvert’s investment decisions are the Calvert Principles for Responsible Investment, which provide a framework for our evaluation of investments and guide Calvert’s stewardship on behalf of investors through active engagement with issuers.

The Calvert Principles seek to identify companies and other issuers that operate in a manner that is consistent with or promote:

• Environmental Sustainability and Resource Efficiency
• Equitable Societies and Respect for Human Rights
• Accountable Governance and Transparency

Using the Calvert Principles as a guide, we believe that there are four pillars that must be present to form an acceptable Responsible Investment strategy.

1. Performance: Our first responsibility is to seek strong portfolio returns.
2. Research: We conduct deep, proprietary research focused on material ESG issues.
3. Engagement: As shareholders, we actively engage with companies to help drive performance and social value.
4. Impact: We believe the impact of your investments should be material and measurable.

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[1] U.S. Trust Insights on Wealth and Worth annual survey, 2016. Accessible online at http://www.ustrust.com/publish/content/application/pdf/GWMOL/USTp_AR9R6RKS_2016-05.pdf

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