Hello and welcome to Morningstar.
I'm Emma Wall and I'm joined today by Diederik Timmer, Global Director for Sustainalytics.
Hi, Diederik.
Hi.
So we've heard a little bit about so far at the Morningstar Investment Conference why
investors should care about sustainability.
But we don’t really understand or at least I don’t understand that much about what
makes a good ESG company or a bad ESG company?
Yes.
So in that sense companies operate in a broader world, right in a whole environment and they
have responsibilities to all the stakeholders around the company.
So they have responsibility towards their clients, responsibility towards their shareholders,
towards their suppliers for instance.
What a good company does is that they manage those relationships really well and it doesn’t
really mean that they do everything that they want.
But what they try and do is intersect these so called sustainability drivers with their
business drivers and they look for opportunities and they look for risk management.
So that overall with their strategy they take a long term view and are also therefore able
to perform well on both the societal as well as on a business perspective.
So really it's about aligning interests.
Yes, absolutely.
And typically that also comes with leadership and that’s the second component of sustainability
it relates to, how well a company manages its operations.
How the set of responsibilities organised within the firm and also are the objectives
also met in that sense.
Do people on the work floor relate well to what management is saying.
And I think that’s really important that within a corporation there is an environment
where they look at their surroundings and perform well towards those in the long term.
So it's not just looking at those companies which we may traditionally think of as ESG
firms.
So for example those not involved in the drilling for oil, it's looking at companies across
all sectors on these basis.
Yeah.
I think when people started to invest in funds that were more ethically oriented.
They typically had clean hands if you know what I mean.
So they stayed away from these industries or these products that they felt were harmful.
And I think the industry and the funds have really moved on and they are not just looking
at what are the companies doing and what are the harmful effects of some of the products
that they create, but also more within their normal operational environment, how do they
take this into account.
How do they organise their organisation and it's really moved from just perspective of
clean hands and moving away from companies, to really effectively managing this and within
a firm also enabling change for instance.
How do you measure that, because all of that seems like beauties in the eye of the beholder
a bit.
I mean you can sort of say I quite like that Chief Executive he seems like nice chap, I'll
give him a high ESG rating.
There's got to be sort of quantitative and qualitative measures to this, don’t they.
So what our firm is specialised in is that we look at companies through a sector specific
lens.
So we compare mining companies to mining companies, industrial companies to industrial companies,
and we look at which factors are now most important.
And based on those factors we create a set of indicators and these indicators we score
for performance based on company reporting.
And it means that we can actually score them in the end on an overall ESG performance,
but also for instance at a lower level how well they do in terms of environment, in terms
of social issues and as well as in corporate governance issues.
So we try and be as objective as possible and we try and translate all the qualitative
information we get from a firm and from the outside world into a more quantitative measures.
Because scores are really helpful to have a very quick take on a company and then you
can drill down and have more insights.
Those measures, it's that analytics that you are pushing behind the new Morningstar Sustainability
Rating, isn’t it?
That’s right.
So what you really need as objective as possible measures, right on a very broad set of factors.
And that’s where it's really important to do this also in very structural, very objective
way and as you know sustainability can be quite subjective in that sense.
And what we really try and focus on is to try and create a set of criteria that's as
specific as possible that measures it and makes it objective in a best way in that sense.
What we are seeing over time is for instance 5, 10 years ago, the metrics with which we
could operate because of lack of transparency was very limited.
Right now, we're getting far and far better insights on how companies are really doing
and it also allows us to provide more insights.
I think maybe five or 10 years down the line we'll really have a far better insight in
how all companies operate in that sense.
And how are corporates doing, because presumably as well as getting greater insight into what
corporates are doing you are hopefully also seeing that they care more about these things.
So it depends of course where companies are located and we analyse companies across all
countries.
And what we typically see is that there is an increased transparency coming from companies.
So they tell the public and they tell their shareholders what they are doing.
I think what we are also seeing is that increasingly companies are developing policies and management
systems to implement those policies.
Where we do believe there is a real gap is based on performance.
So how well is a company now really doing, did they achieve the targets that they set,
did they achieve them on time and I think that’s where there is really a whole lot
to gain still and I really hope that the quality of reporting on especially those fronts are
improving, because in the end you do want to measure performance and not just activity
that leads to performance in that sense.
So people aren’t just paying lip service to these concepts; they actually are living
ESG?
Yes.
So, increasingly, companies, really from a strategic perspective, look at these factors
and these aren’t discussed within the board rooms and within the work floor.
So, I think, increasingly companies do look at these factors.
I think there really are big differences, right?
Some companies take it very seriously, others are really not and I think also there is a
bond to identify between the leaders and laggards in that sense.
Diederik, thank you very much.
My pleasure.
This is Emma Wall for Morningstar.
Thank you for watching.