Sustainable Insights is a series of interviews between Head of Sustainable Investing Aniket Shah and senior leaders at the firm, as well as outside experts in the field of sustainable investing. In this edition of Sustainable Insights, Aniket speaks with Sharon French who, in her role as Head of Beta Solutions and a member of the Senior Leadership Team (SLT), was instrumental in introducing sustainable investing to the firm and launching OppenheimerFunds’ first ESG strategy.
Aniket Shah: How did you build support for sustainable investing within the SLT and more broadly at the firm?
Sharon French: When OppenheimerFunds made its first foray into smart beta with our revenue-weighted strategies, we knew we’d be moving quickly in terms of product development. We asked clients about what they were looking for, and fielded significant interest for a broad-based ESG strategy within an ETF. Through partnerships with S&P, MSCI, and Sustainalytics, we were able to bring our ESG revenue-weighted ETFs to market.
We knew, however, that being in the sustainable investing space in a meaningful way requires more than building product. You need to develop a perspective as a firm about how you approach sustainability, and it needs to be pervasive. Our CEO, Art Steinmetz, agreed with the importance of the initiative and asked for participation from everyone on the SLT. From there we developed an ESG working group that has representation from every area in the firm, from distribution and marketing to technology and operations. Last year, OppenheimerFunds became a signatory of the UN Principles for Responsible Investment, signaling our deep commitment to this space, and we’ve expanded our sustainable investment product offerings. Ultimately, we decided that we needed to hire a head of this important area of focus. That’s where you came in, Aniket.
Shah: In your view, is ESG more about alpha or risk management?
French: There can be elements of both. Considering ESG characteristics in the investment process gives you an opportunity to access data that goes beyond a company’s financials. This deeper information can provide a more complete picture of a company and help you choose those that are better run or more persistent in their approach and purpose. In this regard, there’s an element of ESG investing that’s alpha in orientation.
But if I had to choose between the importance of alpha generation and risk management within ESG investing, I’d say it’s more about risk management. Looking at ESG data can help you avoid potential traps that might not appear in traditional financial data. Under certain circumstances, it can give investors a chance to back away from a company before a problem manifests itself in the company’s stock price. MSCI, for example, dropped Volkswagen from its MSCI ACWI ESG Index in March 2015 because of concerns about corporate governance at the company. That was six months before the company’s emissions scandal broke.
Shah: Is there a place for passive approaches within ESG investing?
French: I believe there is, with a caveat. It’s important to recognize that there is risk inherent in buying a purely passive market-capitalization-weighted index. On their own, these index-tracking funds don’t offer the risk management elements of ESG investing. However, there are less traditional options that overlay ESG data on a more passive strategy, similar to our Oppenheimer ESG Revenue ETF, which uses Sustainalytics data in conjunction with the S&P 500 Index. Smart beta products like this, which offer non-traditional approaches to slicing an index, can be a proper and appropriate application for ESG investing.
Shah: Let’s end with the big question. What is the future of ESG in the asset management industry?
French: Clearly, I feel passionately about sustainable investing and what it could mean to clients. There are some challenges that need to be addressed before sustainable investing strategies can move from the more niche position they occupy today and into the mainstream. The industry has struggled with the lack of consistency in ESG data reporting and due diligence. As we see more consistency in the future, that will help drive the widespread acceptance these investment approaches.
Most importantly, I believe that the widespread adoption of sustainable investing approaches is the target state that our industry will reach in the not-too-distantfuture because it is the right thing to do for clients. OppenheimerFunds’ tagline is The Right Way to Invest. The routine incorporation of ESG data into the investment process meets that standard. Right now, we can look to Europe for an example of the direction we’re likely headed. Europe is ahead of us on the sustainable investing front – they look at the role of corporations in society differently and have higher expectations for them than we do in the United States. I believe we’re heading in that direction, and will see real progress within the next decade.
ESG practices may underperform the market as a whole. Alternative weighting approaches (i.e., using factor weighting as a measure), while designed to enhance potential returns, may not produce the desired results.