Transcript:
Karen Watkin: Welcome to AB Alpha Females, the Multi-Asset Investment Podcast. I'm Karen Watkin and I'm a fund manager in the multi-asset solutions team here at AB. As a multi-asset investor, I love the challenge of looking across the capital markets to deliver the best outcomes for our clients, and I work closely with colleagues across all areas of the investment universe to tap into their research and expertise along the way. The Alpha females are those women who have developed these unique areas of expertise and made their mark in the investment industry. We'll discuss their career journeys, the challenges they faced, and the lessons they've learned along the way. So, stay with me as we uncover the stories of these impressive and inspiring women, and gain a deeper understanding of the multi-asset investment landscape.
In today's program, we're discussing if there's a tradeoff between the issues of environmentalism, social impact, and good governance, and delivering attractive investment returns, or if they're mutually compatible. Part of the answer to these questions lies in understanding what ESG means, how it can and should be undertaken, and how it's measured. The idea of responsible investment has become ever more important in recent years. There are some who suggest it's too often an exercise in virtue signaling by businesses, but others can to this claim, saying that meaningful approaches to ESG are the best way of generating real and responsible change within business and the wider world. To help clarify or explain what ESG means and its possibilities, I'm joined by Jodie Tapscott, who's Alliance Bernstein's Director of Responsible Investing Strategy. Jodie is someone who combines deep experience of multi-asset investing alongside a personal passion for the environment and commitment to seeing greater diversity. Jodie, welcome to the podcast.
Jodie Tapscott: Thanks for having me, Karen.
Karen Watkin: Let's dive straight in. I know through the course of your career, you actually took a bit of a pivot towards responsible investing way before it actually had become, you know, top of agenda for clients and investors. Can you start by sharing with us what it was that put you on the path to focusing on responsible investing in your career?
Jodie Tapscott: Absolutely. So, I started out as an investment consultant, and then I moved into manager research and multi manager portfolio management. And then it wasn't until about 2015 when I read a National Geographic article about how they would be more plastic in the ocean than fish by 2050. And I'm a passionate diver. I used to snorkel with my dad and fish with my dad a lot when I was growing up. And so this was a really scary stat for me to come across. And it really made me start to think about how I could leverage my investment knowledge and skills, to pivot into responsible investing. Because really, from a motivation perspective, you know, I wanted to ensure that the investment managers I was working with, were allocating capital to companies and projects that were helping to solve the world's sustainability challenges.
Karen Watkin: So, Jodie, I mean, growing up in Australia, what a beautiful part of the world to grow up in and you are obviously very lucky to, you know, to benefit from that in terms of being able to go diving and snorkeling and fishing. Can you describe for us, you know, what that experience was like? Because I think, as you've said then, the issue of plastic in the ocean becomes so much closer to home.
Jodie Tapscott: I first noticed that there were fewer fish when I was snorkeling. Living in Australia, you travel throughout Southeast Asia a fair amount, and so snorkeling in Bali, snorkeling in Malaysia and around Langkawi, and Redang and some of the tropical islands there. But it wasn't just the lack of fish. It was also the pollution. Right? I remember coming across a turtle who thought it was eating a jellyfish, when actually it was eating a plastic bag. And you see those horrible photos on the internet with turtles with straws up their nostrils. It's just it's so sad. And then, you know, moving on from the snorkeling, I decided to learn to dive, and I learned to dive in the Great Barrier Reef. And this was at a point in time when Australia was suffering from the shifting between El Nino and La Nina and experiencing significant coral bleaching, across the Great Barrier Reef. And so I wanted to see the damage for myself. You know, I really wanted to get out there and say and have a look to say, is this really as bad as what I'm reading, has this really been as destructive as what is being reported? And in all honesty, it was and it's so sad and it's such a shame. And so you know that again, that's why I love diving. But, and you know why I want to get out there and say it all in case it does disappear. But the work that we do in responsible investing is, you know, is driven by a personal ambition and a personal goal to prevent that as much as possible.
Karen Watkin: Can you talk about then perhaps how you made that connection, right between seeing those real world issues, you know, alongside your career in investment management, you know, making that connection to then think about, okay, well, actually, how can I ensure that the work I'm doing, you know, has that positive impact on the world around me?
Jodie Tapscott: Absolutely. You know, when we learn about investing at uni, when we do our MBA, when we study and then when we go into the workforce, we learn a lot about investment processes. We learn less about how financially, material, environmental and social and governance outcomes impact company performance, but not only impact company performance, but we also learn less about how to analyze those impacts in terms of the costs and also the opportunities for those companies as well. And so this is really where the intersection of investment management and ESG and, you know, real world environmental and social outcomes come into play is if we can estimate and value and cost those impacts and those opportunities better than others, then we can make better investment decisions. We can allocate capital more effectively. And we can also use our power as a shareholder to influence change within companies, to bring to light to them, why managing environmental and social risks and opportunities are in shareholders’ interests and and to bring to the table the fact that that investors do actually care about these outcomes.
Karen Watkin: So, Jodie, you've touched on this already in terms of what ESG means, but it's often a very blanket term, and actually even across environmental, social and governance issues, it can cover a really broad spectrum of issues and opportunities that we're trying to assess as investors. Could you give us a couple of real life examples just to help illustrate the difference in terms of some of these ideas that we look at?
Jodie Tapscott: Sure, Karen. And as you mentioned earlier, right. It's so much more than just climate change. So, on the environmental front, it could be water stress, it could be land usage, it could be deforestation, biodiversity, toxic waste, air pollution, all of those types of things. And so a good example there is if a drinks company is running a manufacturing plant in a water stressed area and they're extracting water from the water table rather than purchasing water from a desalination plant, for example, then that is an environmental and environmental impact that they are creating that is unsustainable in the long run for their business model, and that they will have to mitigate in some way, shape or form in the future. On the social side, we look at things like diversity, equity, and inclusion. We look at things like modern slavery and supply chains. We look at fair wages and also the social impacts of products and services that companies produce. And then finally, on the governance front, and that's really about how companies are managed.
Karen Watkin: That's a really great overview. And I think it helps bring to light, you know, when we think about these ESG related issues, like you say, actually as investors, it really is about looking beneath the surface. So, do you think there is this ability to kind of balance what might be a kind of need or demand for ESG and delivering good investment returns? Do you think they are mutually compatible or actually, do you have to sacrifice one for the other, do you think?
Jodie Tapscott: I strongly believe they're mutually compatible, but it does also come down to time frame the length of which you’re investing and how long you're prepared to wait for that return to come through. Because we know, you know, through market cycles, through different political cycles, their shifts and pivots in terms of regulation, in terms of consumer preferences, and also in terms of what drives company growth over the short to medium and longer term. As shareholders or as investors in corporate bonds and government bonds and things like that, we have a seat at the table. We are able to talk to company management, that might be investor relations, it might be the executive management team. It can also it can even be the board. And we're engaging with these issuers and with those companies for two reasons. Right. The first is to research is to better understand how the company's managing the various ESG risks opportunities. But the second reason that we engage in and is engaging for change, engaging for action, engaging to influence companies where we see that they're not necessarily managing these risks appropriately.
Karen Watkin: You touched on earlier, you know, this impact of time horizon and actually understanding the kind of trajectory of some of these issues, you know, whether it's climate change, whether it is the longer-term impact of perhaps poor working conditions. But it would seem to me perhaps the kind of G part which sometimes gets overlooked is the maybe less exciting part of ESG. But the governance piece, you know, is surely something that's always relevant, you know, is there a more consistent view, actually, of what good governance looks like in terms of investors assessing companies?
Jodie Tapscott: To me, good governance is about well-informed decision making. It's about strong risk management practices. It's about fair treatment of workers and appropriate compensation. And so, when we look at how companies are structured and when we look at the incentives that company management has, they’re the areas that we look for in terms of the company, the management teams, track record around decision making in a firm around how they allocate their capital, how they make business decisions. Do they have separation between the chairman and the CEO? What it shows us is how a company manages conflicts of interest. It shows us the strength of the decision-making processes, and it shows us whether company management and the culture of the firm is aligned with shareholder outcomes in the long term.
Karen Watkin: I think that's right. And, you know, one of the things we've talked about a lot on this podcast is the issue of diversity, perhaps in the financial services industry.
Can you perhaps touch on what you've seen from your work in terms of how diversity plays an important role in, looking at kind of good governance in companies?
Jodie Tapscott: Absolutely. And so, diversity means more than gender, right? It also captures age, it captures race, it captures ethnicity and cognitive diversity. The research that we've seen across multiple sources is that diverse teams make better decisions. They're more risk aware. And in fact, and you like this because you are one of these amazing ladies, there's a research study by Goldman Sachs that indicates that female portfolio managers actually outperform male portfolio managers on a risk adjusted basis over the long run. It's common sense, right? When you've got a more diverse team within a business, whether it be a management team, whether it be a board, the diversity brings a wider variety of perspectives.
Karen Watkin: Well, you're definitely preaching to the converted with that. But, you know, it makes perfect sense to me. And I, you know, I see this in my day-to-day role as a portfolio manager. You know, the debate that we have as an investment team and how we challenge each other is a vital part of the process of managing risk. And like you say, you know, pushing the envelope in terms of making sure we have considered all points of view.
Jodie Tapscott: Absolutely. And, you know, we say it in my team, too in the responsible investment team, we have human rights lawyers, we have environmental scientists, we have an ex-journalist on our team. And the level of debate that we have in our team as a result of that is very different to what I've experienced elsewhere when everybody sort of come from the same education background or same socio economic background, and therefore has a very particular view on the world.
Karen Watkin: I would ask one question which you may not like, but one thing I do if I'm really interested, actually when I look across the industry, is that actually, while we have a big issue with gender diversity across many parts of financial services and investment management, within ESG and responsible investing, you do tend to see far more women in that part of the industry. Do you have any thoughts on why that is?
Jodie Tapscott: I have observed a similar pattern, and my own personal observations are that women are often very, very passionate about social outcomes and whether it's through their families, whether it's through the community and the outcomes that we look to achieve. I also think it's a function of the way we collaborate and the way we work in terms of how we bring our emotional intelligence to our roles. What I've also seen is that because ESG can be very misunderstood, it sometimes is rejected by the more traditional, I'm going to call the blue suit, investment management workforce. And as a result of that, there's more opportunities in ESG and women who are confident in themselves, confident and passionate about what they're looking to achieve throughout their career are more open to taking on opportunities. And so personally, I saw ESG as a growth area. I saw ESG as and not just from a personal passion perspective, but as an area where I could grow into and differentiate myself from my peers in a consolidating market and also an area where I could roll my sleeves up and really get stuck in, in a way that really excited me and motivated me.
Karen Watkin: That's fantastic. So, as you think about that, you know, and what drives you and potentially you know other ESG focused teams, can you perhaps touch on, you know, how do you measure the impact that you're having or that our approach to ESG is having kind of beyond just the data, but what have you seen in your history kind of working in this area in terms of the meaningful change that this approach to investing can have over the longer term?
Jodie Tapscott: Yeah, I'll touch on the data piece a little bit and then I'll come back to, you know what I've really seen change. On the data side we can measure impact, but we have to be really careful about what it is we're measuring and how we're disclosing that and articulating that and not be and not greenwash when we are measuring impact. And the reason for that is when we're investing in equities and bonds, we're buying those securities from sellers on the market, we’re not directly allocating capital to the companies. So what that means is we're not creating impact with those investments, the company itself might be creating impact and impact there I'm going to describe as both positive and negative outcomes. But we can't directly tie our investment to the number of jobs created or the volumes of water saved. When we're investing in direct assets, we can actually, I would claim that impact, because there is a proportion of our capital that is directly linked to the asset in question and the benefits and outcomes that that asset is creating. Coming back to the other part of your question, which is about what have I seen change in the last 17 years? The first thing is that ESG has really become table stakes in our industry. And what I mean by that is, if you don't consider environmental, social and governance outcomes in your investment process now, it's pretty rare that you're going to be in business or in business for long. That's because it's a groundswell from retirees, from retail investors, from the younger generation all the way out to the older generation really starting to recognize that they want to see a better world. So, it really has been driven by a consumer uprising, I would call it, in terms of demand for more sustainable products and services, and that includes investment products and services. The second is a recognition of the power of our capital. And that has come from government, it has come from regulators, and it also has come from retail investors. And so that has put pressure on investment managers to really focus more heavily on ESG. And then finally, I would say I've seen a change in business and government activity. Right. Net zero didn't exist 17 years ago. We didn't have a carbon tax 17 years ago, wind farms were a very rare occurrence. And now when I go on a road trip here in the UK, they're everywhere, right? And so, I can genuinely say there has been a real shift in the energy infrastructure. There's been a real shift in corporate sustainability approaches and a true investment in making products more sustainable, making services more sustainable, and being more inclusive in hiring practices as well.
Karen Watkin: So, Jodie, we've talked about a huge amount today, which has been fascinating. I wonder if you can bring together some of those key ideas and give us your three key investment insights across responsible investing.
Jodie Tapscott: I'd like to wrap up, instead of, discussing three investment insights, I think I'm going to focus on one with a couple of tangents. And the one really is tying what we've said together is around diversity, equity, and inclusion. You know, from a good governance perspective, from a social risk and opportunity perspective, from building a better workforce, building a more effective workforce, and opening up opportunity and improving DE&I within the industry. Investing in DE&I really does have some significant positive impacts. And so, for example, our research shows that there's a positive correlation between the presence of women in senior leadership and company profitability. Other research shows that by 2050, 1 in 6 people in the world will be over the age of 65. We've also seen research that shows that companies that win the best company to work for awards actually more often than not, have future earnings surprises and outperform their peers. And then fund the final piece of research that kind of wraps off that trifecta is that not only is the diversity of the workforce changing from an age demographic perspective and a gender demographic perspective, but also from an ethnicity and race perspective. What we've seen is that in around 2010, there was only about 25% of ethnically diverse workers in the workforce. And these are US based statistics. But the ten years after that, so by 2020, that increased to about one third of the workforce was ethnically diverse from one quarter and in the future, in the next 10 to 15 years, it's actually forecast to be a more even 50/50 split. And so if we think about what investment opportunities that brings, we've got an aging demographic, which means that companies now can target a different customer base, a different customer segment, they've got a different age workforce to employ and targeting, say, customer service or product development or client service, people in sales, people who are of the demographic that they're selling to really brings business benefits. Similarly with ethnicity, if you've got a more ethnically diverse workforce, then again, you're able to target a new customer segment, you're able to produce products and services that are more fit for purpose for that client base. And that means the world is your oyster. And so, you know, to me, there is so much opportunity with respect to targeting and investing in companies that are open minded about the opportunity that DE&I brings to their business, not just through the employee lens, but also in terms of new market segments, new product segments, new customer bases that they can support and grow into.
Karen Watkin: That's a really insightful way of bringing both the research together and actually the real-world impact that thinking about ESG and a responsible approach to investing can bring. Thank you so much for your time today Jodie, I've thoroughly enjoyed our conversation.
Jodie Tapscott: No problem, Karen. Thank you for having me, it has been a great chat. I appreciate it.
Karen Watkin: I think the key takeaway for me from that conversation with Jodie was really what she told us in terms of the measurable and financial impact we can actually see in companies when they take a thoughtful approach to diversity, equity and inclusion. And she did a great job, I think, in terms of making that very clear linkage between, actually, when you have a more diverse workforce, how it can better represent the cross-section of society we live in, but also then the consumers and client base that companies are dealing with. And so I think what Jodie really did for me was bring to life how ESG works in practice, how it really relates to the world around us, and ultimately what it means for us as investors when we're assessing those companies that will have sustainability and a long term trajectory for delivering financial returns. I think she also, you know, clearly demonstrated that she has a real passion for this, you know, and it came from her personal experiences, you know, growing up in Australia and snorkeling and diving. But I think has she alluded to, you know, actually having this kind of emotional response to, to the change that some of these decisions can make and that it's that can be a powerful force in terms of driving things forward and taking action to ultimately kind of drive towards what will hopefully be a better world.
That brings to a close this episode of AB Alpha Females: The Multi-Asset Investment Podcast from AllianceBernstein with me, Karen Watkin. If you've enjoyed this episode, don't forget to tell your colleagues and friends about it. It's only remains for me to thank Jodie Tapscott. This episode was produced by Richard Miron from Earshot Strategies.
