Can you outline some of the key aspects of AllianceBernstein’s ESG philosophy?
We think about ESG as simply good research. As analysts, we are looking at companies – but you need to look at all factors that are important to a company in a particular industry. As a signatory to the UN [Principles for Responsible Investment], we agree to integrate ESG factors into the investment process.
When you think about it, shouldn’t analysts be considering everything that’s material to an investment when they’re doing research? Just as they’re looking at capital allocation, company strategy and whether the company has the right management, they also need to be considering all the other factors that could potentially impact the business.
What goes along with this is engagement. Our analysts have been talking to companies as part of their research forever, and we engage directly with companies on proxy-related issues – and a lot of the issues that are discussed concern ESG.
I think the challenge has been the taxonomy: people think ESG is something new and different, but I would argue that it’s not. It’s [just] probably been done more implicitly and now the market is asking for a more explicit approach.
Given that ESG is part of all your investment decisions, how does that work organizationally within AllianceBernstein?
There are a couple of models in the marketplace. The one we use is that the analysts are ultimately responsible for assessing these issues. We think that’s best because the analysts have very deep company and industry knowledge.
To employ a separate analysis that feeds into the fundamental analyst perspective can somewhat complicate things and – I think – potentially lead to a much less holistic approach.
What are some of the key criteria the company uses in terms of screening investments?
Screening is how the responsible investing space started decades ago, with religious organizations asking to exclude a whole host of sin stocks, if you will. We’ve been working with our clients for decades on a case-by-case basis to meet their individual needs. What may seem against my values may be perfectly valid for somebody else, so there really isn’t a one-size-fits-all answer when it comes to screening and exclusions.
The one area where we do exclude more broadly is controversial weapons in our Luxembourg-based strategies. That was driven by legislation in certain European countries that made it illegal to invest in companies that were involved in producing components that go into making controversial weapons.
In general, it’s difficult for us to come up with what we think is morally repulsive to a broad group of clients to implement broad-based exclusions, so we do this through individual client mandates. And then what we’ve been doing for almost five years is creating very highly differentiated strategies that go beyond exclusions.
For example, we have a thematic strategy the portfolio manager built to align with the [UN’s] Sustainable Development Goals (SDGs). The portfolio manager didn’t have to explicitly say, ‘I’m not going to invest in tobacco, I’m not going to invest in weapons, I’m not going to invest in high fossil-fuel[using] companies.’ Those are contrary to the SDGs so that portfolio would never invest in those types of companies.
One of the difficulties of dealing with ESG-related issues is that they often entail intangible or newly understood developments. How do you make sure you’re getting the best data?
Data challenges are another reason we think you have to be an active manager. We see several problems with data, the biggest being that there really are no standards for the most part, other than around governance data. As a result, even if two companies disclose what may appear to be similar metrics, they can be very different. We see that a lot around carbon-related data.
I think it goes back to having analysts who can identify which issues are material for a particular company in a particular industry. They’re doing their own proprietary research and they may also use other external sources of research as reference. Some of the ESG research providers [offer] some interesting frameworks on how to go about [assessing] materiality. But I think trying to narrow down a company into a single score can have some unintended consequences.
In terms of voting, do you plan to focus on certain areas during a specific proxy season, or do you make decisions on a case-by-case basis?
We have our own proprietary proxy voting policy that guides all of our proxy decisions. It’s made public, it’s extremely detailed, and it gives our philosophy and approach to proxy voting in general – which is concerned with supporting shareholder rights, transparency and strong corporate governance structures.
We have a section on various shareholder proposals. As we all know, proposals tend to change from year to year, so we address them as they come up. Rather than taking an issues-based approach, however, we’re looking at all the shareholder proposals that come up to determine how they align with our philosophy for strong disclosure so that we can make good investment decisions.
A recent Ceres report finds that AllianceBernstein voted for 88 percent of climate-related proposals in 2018, up from 76 percent in 2017. What’s the reason for that uptick?
Certainly, the way shareholder proposals are composed is very important. Some shareholder proposals are so prescriptive that we don’t think it’s up to us to tell a company exactly how to implement something. Over time, individuals who are putting proposals forward are realizing there are better ways to construct [them] in order to increase support.
We engage with companies on a regular basis. If we’re talking to them about increased disclosure, we may have a conversation one year where we feel they are committing to making good strides. Then if we look the next year and they have not implemented what they said they would do, and a shareholder proposal comes along that is trying to drive that increased disclosure, we’ll support it.
In terms of engagement, there appears to be increasing coordination of issuers’ corporate secretary and investor relations teams. Does this add value?
You want to make sure you have the right people in the room. We take a collaborative approach, so a very high percentage of our engagements are done jointly between our stewardship team and our investors – our analysts know the companies really well and the stewardship team understands good practice around corporate ESG issues.
Having a joint conversation on our side is important and then the question becomes: what issues are we engaging the company on? If we’re talking to it about how it’s preparing to transition to a low-carbon economy, we’re going to want to talk to the individual in the firm who’s responsible for that. Investor relations can often give some high-level feedback, which is helpful. But we also think the individuals who are responsible need to be in the room.
This interview appeared in Corporate Secretary’s special report on ESG engagement, reporting and integration
