Wendy Cromwell, head of sustainable investing at Wellington Management, began her career at the firm 25 years ago. Previously, she led the companys multi-asset group, and over the past decade she has helmed Wellingtons venture into impact investing and sustainability. Cromwell is also a board director at Principles for Responsible Investment.
Here she speaks to ESG Clarity about why some parts of the firm are more ESG integrated than others, talking to clients about physical climate risk, the issues with ESG data and ratings and why she doesnt like the term divestment.
Emile Hallez: How does Wellington Integrate ESG?
Wendy Cromwell: Wellington is a community of boutiques, all organic. We havent done buyouts or mergers or anything like that. But we have 50-plus investment teams, and each of those has their own investment philosophy and process. The investment philosophy answers three questions: What inefficiency do you see? Why does it exist? And how are you taking advantage of it? You should be able to express how you envisage ESG or incorporate ESG in that answer. Whats your genuine, incredible way of integrating ESG considerations into your investment philosophy and process?
The level of integration is on a continuum, and thats generally determined by the availability of frameworks and methodologies and data for various asset classes. Our equity portfolios and our corporate portfolios are much more integrated because they are meeting and engaging with companies on these topics, and the data is available. And they can look to see if theres a plan with regard to the low-carbon transition, etc.
You get to structured product, and its a little less so, because theres not that data available, or theres not a framework as readily available. However, wherever across the spectrum we uncover an impediment to adoption, we try to figure out, how can we either contribute to the ecosystem to improve it, or how can we develop our own data just to improve our own processes.
An example of that would be in sovereigns analysis, particularly in emerging markets. Physical climate risk is particularly important. Back in 2018, we launched a physical climate risk research partnership with Woodwell Climate Research Center to really figure out where were going to see more heat, drought, wildfire, hurricanes, floods, access-to-water issues and how they would impact the securities that we own and how we should be thinking about that with regard to our muni book of business.
Weve also made a net-zero commitment. When we made the commitment, 1,400 companies had science-based targets or commitments to science-based targets. And now its more than 2,200. And thats before the initiative hits its full stride.
EH: What do clients want to know about sustainability and ESG issues?
WC: Physical climate risk. No matter what we do on mitigation, were still going to face physical climate impairments. We need to understand those, and we need to encourage companies, society, economies to adapt to the new climate regime that we face, no matter what we do on emissions. Most forecasts suggest well pass [an increase of 1.5 degrees Celcius] by mid 2030s.
EH: For companies that are distributors, does that mean just not carrying products that are made with petroleum? Does that mean not carrying meats? Or is it mostly using carbon offsets?
WC: Yes and no. Science-based targets initiative doesnt really allow for carbon offsets except for hard-to-remediate emissions. But its only meant to complement your core business operations.
Were trying to get as many companies in our portfolios as possible to decarbonize their own business operations so that we decarbonize our portfolios from the bottom up and we meet our net zero-commitment and in a way, thats going to help our clients be less impacted by climate risk. Because if we just sold out of security that doesnt really work. Some parts of the market can do that, but it doesnt truly affect the real-world emissions profile.
EH: They’re still going to exist.
WC: Theyre still going exist and theyre still going to emit, so to really change the real-world emissions profile and to really try to help your clients navigate climate risks you actually need to get the companies to decarbonize themselves. Thats the more meaningful impact we think we can have.
EH: How do you get an oil company to decarbonize?
WC: You see meaningful differentiation in the approaches of different oil companies that define themselves now as energy companies. Many of them understand there is this transition happening, and they dont want to be caught with stranded assets. They need to be investing in new technologies and they need to be shifting their capital allocation to other forms of energy.
Not all of them have that same approach Its a better long-term strategy to have a plan for the future than to not have a plan for the future. Some will just say, Were going to take advantage of the oil beta right now for as long as we can. And others are getting out, so were going to make a bunch in the short term. That might be a good short-term strategy. Its not a good long-term strategy, if you accept that the low-carbon transition is happening. Its one of the greatest economic transformations weve ever seen.
EH: How does Wellington handle divestment?
WC: Instead of using the word divestment, we use the words sell discipline. Divestment conjures up this idea that youre going to sell something because youre mad at the company or based on your own values.
Were choosing to sell a position because we no longer think it meets our investment criteria, because it doesnt have a plan for the low carbon transition, and thats an important economic transformation.
EH: In working with the companies that Wellington holds, what are some of the challenges they have with incorporating ESG? And how do you address that?
WC: One of the challenges we hear throughout the whole system is that the datas not good. Theres not enough data. And we hear that from asset owners, asset managers and the companies themselves.
Through time, company disclosures and company accounting practices have evolved. When financial accounting standards were originally introduced, the economy as we know it was very different, much more manufacturing intensive. And therefore, we were counting physical assets. Now we have evolved globally as an economy. We should be thinking about things beyond physical assets in terms of those accounting rules. Youre starting to see pretty major initiatives throughout the system to help build that, starting with climate. Weve been very involved with the SEC and their questions about whether there should be mandatory climate disclosures for issuers.
EH: There are a lot of different companies offering some types of sustainability ratings or ESG ratings. Does Wellington rely on any of those? And do you have any concerns about them?
WC: There are, at last count, 14 different vendors providing ESG ratings, but there are two dominant ones: MSCI and Sustainalytics. The work those two companies and the broader group of vendors is doing is good and is additive to the ecosystem. Its the interpretation that can be problematic and the use case of those ratings. For example, a lot of people like to think of those ratings as being like credit ratings.
Instead of thinking of those ratings as credit ratings, we suggest that people think of them as sell-side recommendations. Would you expect Goldman Sachs and Credit Suisse to have the exact same recommendation, price target or earnings per share estimate for a company? No. Would you expect them to converge over time, to think the same way about companies? No. Would you work with them and take on their research reports to inform your own mosaic and help you think through how you would want to think about them and what questions you should ask those companies? Yes.
Thats the major issue. Some people think they will converge. I dont think they will. The way theyre applying different methodologies, theyre using different data. They have a different emphasis. But they can both contribute to a greater understanding of a company and using the underlying data in a way thats effective.
EH: In a perfect world, should every investment include an ESG component?
WC: Im going to say something thats going to sound kind of crazy. If you think of ESG as a research discipline, I think to a certain extent, every investment already has an ESG component. Because if you break ESG down into its subcategories, youre thinking about culture, youre thinking about governance. Youre thinking about capital allocation.
Do we need to build more frameworks and practices around deeper adoption of those concepts? Yes. So, both things are true. And a lot of that does have to do with overcoming the data gap apps, having more out in the public record.
The post Q&A: Wellington Management’s Wendy Cromwell appeared first on InvestmentNews.
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