Sage Advisory’s Bob Smith on ESG, the rotating US economy and the joys of ‘busting out'
Sage Advisory’s Chief Investment Officer Bob Smith (pictured) is well known for his views on ESG and climate change within investment and commented last week on the SEC’s new approach to enforce ESG standards across the investment industry.
Assets at Sage have risen to USD16.5 billion, Smith reports, with a wide variety of investment ‘assignments’ in the firm’s core fixed income area, and in liability driven investing, where investors are trying to define benefit plans and lock in gains and funded ratios. “The advance of equity markets has helped to improve defined benefit plan funded status which has allowed plan sponsors to advance their efforts to immunise their liabilities through greater allocations into fixed income from equities. In this way we have benefited from Plan sponsors efforts to prepare their plans for eventual annuitisation and reduce their exposure to these liabilities on the balance sheets,” he says.
In terms of equities, there is more demand from investment platforms who are just starting to introduce ESG. “What’s attracted them to us are both our ESG optimised equity and fixed income ETF strategies, and our separately managed ESG fixed income strategies,” Smith says.
“A lot of platforms in the US are still establishing their line ups, if you will,” Smith says. “with growing investor demand ESG product development is a front burner consideration for many asset managers. This also in reaction to the new Administration’s heightened sensitivities to climate risk and related regulation which has been evident through new demand for more detailed information from companies and asset managers on this subject from the SEC”.
“Through the appointment of a climate policy Advisor, the Administration will infuse, for the first time ever, into the Commission, this sense of priority about climate risk and ESG metrics in terms of evaluating investment managers and companies themselves on what they reveal and, should reveal about their approach to climate risk management, proxy voting and other stakeholder concerns. This is important information for investors and the general public needs to know.”
Smith supports the enforcement initiative that the SEC published in March. “At least from an international standpoint they will dig into this idea of preventing greenwashing in tandem with what we have seen in the EU which has provided a good framework that the SEC can grow upon,” he says.
“If you are going to sell people on the notion of green investing then you had better illustrate and demonstrate green investment in your portfolio. We have reported to our clients our ESG Leaf Score on every security in their portfolios – whether they ask for it or not. I don’t know of many others who do that, but it should be required as you entice investors towards your product you should demonstrate that, and it should be consistent in its application. “
The top job in investment in the US might well be ESG analyst, Smith says, as they are in short supply in the US.
“It’s going to be the hot area of regulation and growing investor demand,” he says, noting that so far this year in terms of new ETFs, February saw 11 ETFs registered, 10 of which were ESG integrated.
He also notes that the trend in actively managed ETFs as opposed to index driven ETFs is picking up as investment managers are applying ESG integration with a more active management orientation. “The performance of ESG ETFs this year has been pretty good across most equity categories compared to the conventional alternatives,” he says. “While the majority of ESG products are performing well but those ESG ETFs with more exposure to electric vehicles, clean tech and clean energy sectors have suffered adverse valuation adjustments over the last 60 to 90 days. These sectors were running hot from a valuation perspective at the end of last year and due for some corrective adjustments.”
As the pandemic’s effect on society changes, Smith predicts that the rotation from the ‘stay at home’ economy, to ‘busting out’ economy will mean that related recovery stocks will appeal, with airlines, hotels, and retail sectors back on the recovery process, leaving many of the ‘stay at home’ corporate beneficiaries like big tech to lag to a certain degree.
“What was hot last year is not this year,” he says. He likes hydrogen energy, moving the focus away from fossil fuels. “It’s a very precise area of the market and gaining strength.”
He also notes that the ‘stay at home’ economy has led to consumer savings being at an all-time high.
“Normally when the economy tanks, the consumer is adversely affected and ends up at the bottom of a sharp recession, but this has been less apparent. As a result of this excess savings and the added layer of new stimulus being applied to the economy and consumers there is little doubt among most economist that GDP will go up like a moon shot over the balance of this year.”