By Louis Coppola, Governance & Accountability Institute
Calvert has a substantial presence at the 3rd Annual CSR Investing Summit. Why was Calvert motivated to get involved with the conference?
We are big fans of S-Network. We recently chose S-Network to provide the underlying index construction and daily maintenance associated with the Calvert Responsible Index Series, and I think our reasons for sponsoring the conference are very similar to our reasons for choosing them for that task. S-Network really is a leader in custom index creation and they have a particular niche in understanding and working with Environmental, Social and Governance (ESG) data and “smart beta” indexes. We have had a long-standing relationship with them through work they already do providing custom indexes for two of our actively managed global investment strategies. Supporting the S-Net CSR Investing Summit is also one of the ways that Calvert can act on its commitments as a signatory to the UN Principles for Responsible Investment (PRI). We see forums like this as an opportunity to help educate others within the investment industry – particularly those who might be newer to responsible investing. We know that S-Network will bring together a conference agenda that is really at the cutting-edge of how best to define, manage and measure responsible investing. It’s in venues like this that the responsible investment community can work collaboratively to enhance how the UN PRI is being implemented within the field.
I understand that Calvert is presenting some new research for the first time. Could you elaborate on this please?
Sure. As an integral part of Calvert’s fixed income investment process, we have long evaluated ESG factors alongside fundamental security analysis. Over the years, our relative-value analysis has identified significant ESG performance impacts (or you could think of these as insights) in many areas, such as sector analysis, credit ratings, credit spreads, duration, and security selection. We’ve recently published a paper explaining our finding that ESG factors appear most influential on spread performance for companies that exhibit combined outlier fundamental and ESG characteristics. Specifically, we’ll be sharing the results of a paper in which we designed an empirical, back-tested study of the impact of ESG on the performance of credit default swap (CDS) spread performance over a 10-year period. We used six distinct scenarios, or simulations, and I don’t want to be providing a spoiler, but the exciting thing is that for all six simulations, the data demonstrated that ESG analysis added value, positively impacting performance.
I’m also excited to share that Calvert is working with George Serafeim, the Jakurski Family Associate Professor of Business Administration at Harvard, to conduct additional research that we’ll be sharing later this summer and throughout the fall in a series of thought leadership papers. George and several members of the Calvert team are exploring a range of topics and the exciting thing about this partnership is that we can really pair George’s intellectual curiosity with the proprietary insights and data from the Calvert research system.
You say that Calvert’s approach to Responsible Investing is shifting from being primarily values-driven to primarily research-driven. What do you mean by that?
There is a lot of baggage that can come with the word “values.” It is a word that has gotten a bad rap lately and I want to be very clear about the fact that everything Calvert Investments does on behalf of our clients – whether it’s a large institutional asset owner or an individual investor – reflects a set of values that we refer to as the Calvert Principles of Responsible Investment. These Principles outline our perspective on the role of corporations in society, the ways that we believe corporations should interact with our natural environment, how they should contribute to building equitable societies and how we believe they should be governed. So we’re not moving away from our principles.
Often when you hear someone talk about a “values-based” approach, that’s a euphemism for employing negative screens. Our new research system puts us in a very different position to be able to differentiate between companies that are minimally acceptable – those that barely clear the bar – and those companies that are good, better and best. This much more methodical approach allows us to make more nuanced decisions without the performance trade-offs of less sophisticated approaches.
Getting very tactical about how this works, Calvert’s sustainability analysts have developed performance indicators and models in conjunction with our equities and fixed-income analysts for all 156 GICS sub-industries. The research system is focused on the materiality of specific ESG factors. It’s a very holistic approach.
It sounds like change is a consistent theme at Calvert these days. As a Chief Executive Officer, how are you communicating this change – both internally and externally?
Change is another word that can be loaded. I have great respect for Calvert’s history as a leader and a pioneer in the socially responsible investment space. I think that the next step forward for our firm – our next evolution – is to become a global leader in responsible investing. The differences in the language seem subtle, but the expectations we have of ourselves as a steward of other people’s capital are profound. Being a responsible investor means that you are balancing your responsibilities to many stakeholders.
First and foremost, we have to produce an expected investment return consistent with the risk budget of each client. It is fundamentally what we do. But truly responsible investors (and other large asset owners) do that in a particular way. The “how” is also important. We look at the full scope of impacts – risks and opportunities – associated with the non-financial characteristics of each company in which we invest. We see these environmental, social and governance (ESG) factors as a two-way street. Companies can create risk through their behaviors or they can be exposed to risk because of the changing natural environment, shifting social norms, changing regulations, etc. The third aspect of a responsible investment approach is being an engaged shareholder. This means voting our proxies in a way that is consistent with our Principles, it means shareholder advocacy – bringing resolutions where companies are not acting fast enough. It can be dialogues and multi-stakeholder initiatives to raise awareness of issues that are going to be critical in the future. We are an active and engaged shareowner in the companies in which we invest. And finally, responsible investment is also about acknowledging the obligations that companies have to the communities in which they operate. That includes Calvert and the companies we hold. Responsible investors understand that we must work to solve the most vexing problems facing society today. I would point to global poverty as one of those issues. How can we create inclusive prosperity? At Calvert, we do this through our own philanthropic giving and we enable investors to do this through community investing and an ability to channel assets toward early stage companies that are creating solutions to global problems.
What primary shifts have you observed in institutional attitudes toward responsible investing and products tied to ESG?
Leading institutions have literally gone from being somewhat antagonistic about the value of incorporating sustainability (or ESG factors) into investments to essentially requiring that asset managers consider these factors. I think there was always some perception or validation around the idea that there were brand risks tied to obvious social factors such as human rights abuses in the supply chain. However, after the collapse of the financial markets in 2008, we began to see an accelerated level of conviction around the role that good governance – accountability, transparency, diversity – could play in the financial services sector, specifically banks. At the same time, leading companies were demonstrating how better management of environmental resources could cut costs, lead to innovations, etc. Corporations are integrating ESG into their own understanding of business risk and opportunity. I think that smart institutions are focusing on two key demographics as well – women and Millennials – both of whom have been shown to prefer a responsible approach.
On June 19, Calvert announced substantial changes to its existing core Responsible Index along with the launch of two additional indexes in the large cap growth and value spaces. Could you describe these strategies in more detail along with the motivations behind the launches?
The Calvert Social Index has been a gold standard in responsible indexing for 15 years. We’ve definitely been hearing from existing clients that they wanted to be able to have exposure to more areas of the market and at the same time, there’s an undeniable trend toward lower-cost investment options. It seemed Calvert was uniquely positioned to address both of these needs. The Calvert Social Index became the Calvert U.S. Large Cap Core Responsible Index as of market close on June 19th. At the same time, we launched two additional indexes – the Calvert U.S. Large Cap Growth and U.S. Large Cap Value Responsible Indexes.
The starting place when thinking about index construction is with the S-Network U.S. Large Cap 1000 (SNET 1000) which is 99.9% correlated to the Russell 1000. When we apply our Principles of Responsible Investment, we come up with about 700 constituents that meet the criteria that we have selected. From there, we rank those constituents on a float-adjusted market cap weighted basis which is similar to the way most indexes are constructed. We then do an analysis based on the top 10 GICS sectors and look at how our constituents weigh out in those ten GICS sectors relative to the S Net 1000 sectors. We make adjustments to ensure that the Index remains sector neutral. The elimination of these potential sources of variance is advantageous – in particular it helps to minimize tracking risk for our indexes and identify company-specific criteria that are adding value to the index as opposed to cyclical factors that are happening in the economy.
From our large-cap core index we construct a growth and value index based on the same 700 constituents. Think of them as stack-ranked from most growth-oriented at the top to most value-oriented at the bottom. The top 30% are exclusively in our growth index and the bottom 30% exclusively in our value index. The 40% that are in between will appear in both indexes.
Are these new indexes a harbinger of things to expect in the future? If so, why now?
Definitely. By bringing the new Calvert research process to more global capital markets we can create additional indexes and we can also strengthen our active portfolio management. It is only by having this quantitatively oriented dataset of the full rankings and ratings of ESG risk and opportunity that the best investment decisions can be made.
You will see us bringing this approach to several additional investment universes in the coming months including small cap, mid cap, non-U.S. developed markets, emerging markets and the fixed income space. Additionally we have the ability to customize passive solutions for clients and I think that’s a great application and additional evolution of passive investing – custom passive investing.
I see you are scheduled to deliver the closing remarks for the conference. What roles do conferences such as this one play for its participants and audience members in terms of the overall direction of the investment industry?
Conferences like the S-Net Summer in the City CSR Investing Summit are really important because they aren’t designed to be sales-focused, but really thought leadership focused. It’s a very different environment when you bring together expert practitioners such as plan sponsors, endowments, consultants, academics, non-governmental organizations, the sell side, and even the media. I think when you look at the agenda; you see opportunities to really challenge your own thinking, challenge assumptions about where the industry is headed and how we should get there. I am eager to engage with fellow practitioners, both those who are actively engaged in supporting the UN PRI and those who are new to that framework, to identify what’s new, what’s next, and how we can best further the goals of responsible investment.
About Calvert Investments
Calvert Investments is a global leader in Responsible Investing. Our mission is to deliver superior long-term performance to our clients and enable them to achieve positive impact. Founded in 1976 and headquartered in Bethesda, Maryland, Calvert Investments had more than $13 billion in assets under management as of May 31, 2015. Learn more at www.Calvert.com.