Nick Ashburn:

I'm Nick Ashburn. I'm the head of Responsible Investing for PNC Asset Management. And today we're going to talk about the social aspect of environmental, social and governance investing or, more simply, the S in ESG. So hold on to your hats because we're about to do a whirlwind tour of responsible investing. And that's the umbrella term that we use at PNC under which ESG is a major component.

So, if we skip over to slide 3,the really substantive slide that we have, one of the common themes you're going to hear throughout today's session is the notion of a data forward approach. So, I thought I'd highlight some interesting if not even surprising findings from our institutional investor survey, which explored the attitudes and practices of corporate responsibility. It was done by more than 200 executives across both for profit and nonprofit organizations with minimum revenues and asset levels of 25 million. What we found was that a large percentage of executives had generally positive views of ESG investing. And what I thought was interesting was that some of the older prevailing views about ESG, like that notion of giving up financial return, are slowly being reconsidered, if not disproved.

Why I said that some of these views might be a little surprising is highlighted in a question I just got yesterday in an event that I did. A gentleman came up after seeing the slide and said, Did I see correctly that there were actually more for-profit institutions that agreed or strongly agreed about ESG investing in corporate behavior? So, I was kind of surprised by that but I had to say, Yeah. You know, there might be a number of reasons behind why that is, either from the nonprofit or for-profit perspective. And I'll leave it up to my former academic colleagues at Wharton to prove causality.

But, really, that's what our data would suggest. But what may not be particularly clear is how corporate responsibility and ESG overlap. They aren't synonymous, but they do have a lot in common. As an investor, ESG is really about understanding environmental, social, and governance factors across a company's scope of influence, of which there are three. The first scope is really within the company's operation so its employees, its board, its policies and practices, and the products and services it provides. The second scope is more about its value chain. You can think of this as organizations -- an organization's partners, the ones that help them create and distribute its products and services, suppliers, retailers, and probably other manufacturers. The third scope of influence includes a broader group of stakeholders. That could be employees' families, the communities in which the companies or organizations are operating, and even the planet.

So when we take an ESG approach to analyzing how companies are operating, it goes beyond a traditional review of just the balance sheet. I'd argue that it's a deeper, more holistic understanding of how companies are maximizing their economic utility. If you really think about a company's full range of possible influence, it's full of individual contributors or the S of ESG, where things like employee benefits, financial wellness, and employee satisfaction are hugely important to remain competitive in the market.

Other things like the digital divide that Anna mentioned in the previous session can affect employees' ability for flexible and remote work or how risks posed by climate change could disrupt supply change -- chains, communications channels, or even introduced new competition or litigation risks.

These are all ESG factors we analyze as investors, which in my view are relatively values or mission agnostic. That might be surprising to hear from me, though, because, when you hear corporate responsibility, responsible investing, or even ESG, these buzzwords probably conjure up specific images for you. Maybe it's the environmental activists, the faith-based investor, a lot of others. But we could point to a number of reports or studies from the last five to ten years that would support our own findings.

We also know government entities at state and federal levels, including regulators, are taking notice of this wave of interest in ESG too. And that interest spans everything from ESG considerations in retirement plans to more, you know, extreme state legislation that would prevent companies from even doing business in their state if they don't invest in industries that support economic development in the region or bring economic value in their region. So think about like fossil -- the fossil fuel industry in Texas.

So, in my view, it's important that whether you're running an organization, you're on the Board of a nonprofit, or even in charge of choosing investment options for your company's pension or 401(k) plans, it's important to have a pretty basic understanding of what ESG is and what it's not.

So, with that very, very long preamble, let's dive in to help provide this orientation to how hopefully your organization can think about ESG and responsible investing.

So, what is it? As I mentioned sort of at the -- on the outset, responsible investing is this umbrella term that we use to help our clients articulate how they'd like to integrate their organization's mission, purpose, and values into their investment portfolios. Perhaps more importantly, it's a process and not a product. We aren't in the business of saying, Ah, you want an ESG strategy? Here's this ESG labeled fund. Instead, for us, it's a goals-based implementation strategy, not a distinct investment philosophy or a separate asset class.

In our experience, investors generally look to implement RI across these ABCs here -- Avoid harm, benefit stakeholders, and/or contribute to solutions. And I use "and/or" intentionally because they're not mutually exclusive. We find that this spans the gamut of values from maybe traditionally conservative issues or those that are perceived as such to traditionally progressive issues. So that's why the ABCs are a helpful framework from which to start, instead of those issues themselves.

So, quickly, avoid harm is probably what you're most familiar with, removing companies from a portfolio that are misaligned to the goals of an investor. That's really where the industry started. But the industry has really evolved into the B and C's, where investors are interested in understanding ESG factors in their portfolios. And, in this case, the stakeholders are planet and people, or the E and S. They're looking to assess E and S issues, the ones that could pose risks to their investments or where there might be opportunities to capitalize on. And the C or contributes to solutions is where investors actually do come to the table with an explicit environmental or social impact objective, and they view their investment capital as complimentary, maybe even necessary to moving the needle on that issue. In this case, it's really about I guess expanding the toolkit to achieve that desired goal.

And, on the next page, I want to highlight that response, so investing is a set of capabilities. And that implementation of those capabilities is really more of a journey. Investors enter this conversation in a variety of ways, different points along the way. And they're looking for advice on how to implement it. They often don't go all in on day one, overhauling their portfolios, but they instead engage in a thorough process with us to find the right investment solutions that meet their own unique combination of financial and RI goals.

More often than not, we actually hear some version of we don't know -- or, sorry, we know we want to implement responsible investing, but we don't really know where or what or how. Or, gosh. We keep hearing about RI and ESG, but we don't quite know what that is. Can you help us figure out if it's right for us? And this is especially true with diverse thinking boards and executive teams where they may not immediately come to consensus on how they should move forward.

So, for folks in that camp, we actually provide a questionnaire that helps our clients uncover those issues where there are high degrees of consensus. And, for us, that's generally a supermajority, or greater than two-thirds agreement. So, the issues where there are consensus, the tools that might be best for them to consider in terms of implementation, and to what degree? Is it just their domestic large cap position? Is it a carve out of the overall portfolio that then sort of is managed separately with an RI overlay? There are a lot of options. In our experience, this type of approach can introduce a bit more objectivity into the decision-making process because it relies more on the findings from the data and not the loudest voices in the room.

And on the next page, when I talk about those tools of responsible investing, these are generally what I'm referring to, investment solutions that intentionally integrate ESG factors into that investment process, which, like I mentioned, is generally more values or mission agnostic, and it's focused on risk and opportunity.

The second approach is customized screening where we're screening things out of the portfolio, that avoid harm approach, or it could take an inclusionary approach, where we're tilting a portfolio in a constructive direction based on an organization's responsible investing goals. For instance, that could be gaining more exposure to companies with strong diversity programs, data privacy and security practices, or maybe just other human capital factors.

And then thematic and impact investing, which kind of gets more at the C of the ABCs, we would say thematic investing would be finding investment strategies across asset classes, mostly in public equities and fixed income, that explicitly seek to invest in themes like environmental sustainability or diversity, equity, inclusion, and we take that theme across the portfolio.

But when we're talking about impact investing, specifically we're talking about alternative investments or investments in private markets where there's a clear intention to invest for both the social and environmental impact alongside the financial return. So that could include something like a venture capital fund that invests in companies founded by racially and gender diverse teams. It could be a private debt fund that focuses on supporting the development of affordable housing. That's much more impact investing focused.

And then, finally, proxy voting, which I bring up because I think it's such an underutilized tool in the RI toolkit. Sometimes investors decide not to divest from companies or industries that are, you know, misaligned or conflict with their values. And, instead, they choose to stay in the investment and use their voice through proxy voting to guide companies in a constructive direction.

We definitely see an uptick in ESG-related shareholder resolutions coming to a vote. And while they may not pass, an increased number of them are gaining enough traction that company management is taking notice and they're starting to enact ESG-related change within their organizations. Maybe that's why we see such interest in ESG from the private sector. So, on the next slide, when we start to think about the tools and the ways they can achieve our clients' RI goals, they -- we start to put them on a spectrum. I can't say this strongly enough, though. This spectrum is not a financial return spectrum. It's more of a ways to have impact spectrum with thematic and impact investing closer to the impact goals of philanthropy than exclusionary screening and ESG.

But how we've done this on the next slide is when we do incorporate the investment parameters, portfolios might look more like this, along an impact risk return framework. Because there's no one-size-fits-all approach to implementing RI, each client's portfolio will look dramatically different. And this is really intended to be illustrative of how we can conceptualize the investment and impact objectives and where we are putting an emphasis vis-à-vis capital in portfolios. So, just briefly, on the bottom left-hand side, there's likely a short duration fixed income instrument, pretty liquid, not much return potential, and really not a lot of impact.

But as you move across to the right, we could include maybe a green bond fund that explicitly looks at the types of environmental sustainability issues of corporate issuers and the types of things that they're trying to address. Or maybe it's an ESG integrated S&P 500 strategy, all the way to those orange pins, which could represent an allocation to impact investment funds in private markets. So, they're less liquid and likely riskier, but they also have a higher potential for financial return and significant impact. But, based on the sort of size of the bubble or the head of the pin, they aren't a huge portion of the overall portfolio. So, it's just an interesting way to think about the impact and return and risk objectives of portfolios.

And then, on the next slide, really, it's sort of how do we know this? How would we monitor our progress over time? Well, like I said, we take a data forward and analytical approach to report back on -- that report back to our clients on what they own in relation to their RI goals. Just like we talked about financial performance, we're going to show the different ESG characteristics in their portfolio too. So, this slide highlights different ESG risk factors. But, on the next slide, this type of report, which I recognize you can't probably read, is focused on ESG factors a client cares most about implementing in their portfolio.

The orange and blue, kind of the bars in the middle there, represent detractor and promoter factors, ESG issues that the client might want to minimize in the portfolio, as well as those that are hoping to optimize their exposure to. For example, an investor may say, I want to avoid fossil fuels but optimize for renewable energy in my portfolio. The orange bars might be correlated to those blue bars, as many fossil fuel companies are also some of the biggest players in the renewable energy space. So, understanding the potential consequences of portfolio changes provides a level of transparency and we hope, hopefully, comfort to our clients as it pertains to responsible investing goals.

But, as we said, today's session is called the S in ESG, Investing for Change. So, I wanted to walk through a little bit and speak to specific -- a specific S factor that we're working with our clients on a very regular basis, it's a very high topic, and that's diversity, equity, and inclusion, or DEI for short.

So, on that next slide -- and we come back to that survey that I mentioned at the beginning, the survey on corporate responsibility, you'll note that, technically, environmental issues did have the highest share of responses. And DEI in and of itself was number 2. But, if you look at the issues with an arrow next to them, you'll see that, in total, DEI-related issues really came up the most.

And, on that next slide, when we take that data forward approach to diagnosing and monitoring portfolios, these are the types of issues we might look at across E, S, and G. But when it comes to diversity and inclusion, we're going to look primarily at the S and generally in the first and second scopes of influence. So, within the company -- so within the company and then among its key partners.

So if we go a couple of slides further, to orient you how we -- orient you to how we approach this topic in our investment management services, we have working definitions of DEI, and that's really informing and guiding our work here. We found that our intentional definitions here help our -- guide our internal partners, our clients. And there's a level of appreciation for a less abstract approach to give us a touchstone and start a shared starting point. And so, for our purposes, we define diversity as the intentional representation of different minorities or underrepresented populations with considerations, really explicit considerations, of race and ethnicity, gender, sexual orientation, and disability status. For the most part, you know, these are represent-- these represent historically marginalized groups and legally protected classes.

But when we looked at DEI initiatives historically across our industry, we found many efforts focused on counting diverse ownership of firms and the diverse makeup of boards of directors. A lot of our client conversations start there, too. It's a great place to focus on. But we were concerned that such a singular focus fell short of the possibilities for investing in a DEI lens. So that slide with the four dimensions here starts to get at what we're really focused on. Instead, we wondered, who shares in the economics? And who gets to make the decisions? And even, if an asset management firm has a diverse owner, do they hire diverse -- do they hire other diverse employees or support DEI in other ways? And our due diligence work would indicate that that's not always the case. So, this led us to our primary organizing principle and really our theory of change. What makes an employer good for its diverse employees? After all, like it or not, many estimate that we spend about a third of our life at work. So we thought that, given how and where we were investing and what might be most impactful from a DEI lens, we focused on the workplace as our unit of analysis. For us, that means the asset managers we work with and those that we include in client portfolios and also how, if at all, they intentionally consider and engage on DEI criteria as part of their own investment and portfolio management practice.

And within our due diligence process, we examine these four factors -- representation, pay, supportive policies and practices, and satisfaction. On the next slide, I'm going to unpack that a little bit for you. So, if we think of DEI as falling into that benefit stakeholders category, we're assessing and engaging with managers on a number of S or social factors in our process. We're looking for diverse representation throughout an organization. That's top down and across. Diversity data in aggregate don't really tell us much about the diverse makeup of an organization.

So, we want to know where diversity shows up because we know it can be siloed in certain functions or in entry level positions. We're also interested in who -- I guess, to quote the musical "Hamilton," who's in the room where it happens to assess diversity in decision-making authority? We also explore how, like I said, if at all, companies approach compensation and pay equity audits. And we're especially interested in how a company might be implementing a wide range of policies and practices that the evidence base would suggest supports a culture of DEI and really supportive of all employees. So this includes areas like employee attraction, promotion, and retention of diverse talent, the prevalence of claims of discrimination and harassment, the types of family leave policies, the types they provide and to whom, and what types of diversity and inclusion initiatives they've developed, and what are they monitoring and keeping track of. We get pretty specific in our questions because we want to try to fend against managers just checking the box in any one category.

So, on the next slide, it kind of highlights our overall assessment of an investment strategy and how that reflects our main criteria that we're -- that might indicate that we're looking at an employer that's supportive of its diverse employees. So we utilize, you know, in addition to our Due Diligence Questionnaire and a rigorous kind of assessment methodology, we're also looking for input from the strategies covering analyst, and that's an analyst from our Manager Research team because we didn't want to reward managers for filling out a questionnaire or simply for filling out the questionnaire. Good job. You know, that's not a good use of our time or good due diligence. But we also didn't want to erroneously penalize them for omitting some information when where they could be actually doing really -- doing right by the diverse employees. We really believe that the covering analyst is best positioned to provide that unique insight into the firm, those investment teams, and especially their investment approach.

So our system allows us to characterize individual investment strategies on our platform into these four categories -- opaque, limited, engaged, and select. Opaque generally means that we've seen no demonstrated commitment to DEI across many of -- much or many of our criteria. But as you move across the spectrum, our data would suggest that firms have stronger representation, they have more supportive policies and practices, and they likely even integrate similar considerations into their own investment process, so the end investee companies in their portfolios.

And, finally, we want to report back on those findings. You know, we say we take this data-driven report, and we talked about reporting in other capacities. How might we share that insight back with our clients? And my final slide here really shows that, if we think of an actionable investment thesis that reflects our theory of change, we'd want to see represented in the size, color, and positioning of these bubbles on the chart. They do three things. One, we'd see capital allocated to diverse-owned firms, so those orange and blue bubbles. Two, we'd see capital located to diverse-run investment teams, dark gray or blue. And, finally, capital allocated to firms that are supportive of DEI in their own right and integrate similar considerations into their investment and portfolio management practices.

So that would be where the bubble is across that X axis in the bottom. We found this to be a really helpful visualization because it puts the different investment strategies in a portfolio in context. Even if a client is fee sensitive and only wants passive strategies, you'd likely see more and larger light gray bubbles probably toward the top of the spectrum because so many passive strategies are run by very large asset managers, so those mega firms on our Y axis. And they're likely publicly owned. So, we're not talking about, you know, diverse ownership. We could be talking about diverse teams. But, you know, we want to better understand some of those firm characteristics as well.

And so I would just say, in conclusion, this is just one way that we are assessing S factors for investors seeking change with a DEI lens. If we're seeking change, it's my view that we need to understand the right tool for the job. And I think Anna in the previous session really hit this home too. For some issues, that might be philanthropy. For others, it might be advocacy. But responsible investing might be a way for organizations -- and I tell you what, I have sat through treasury and cash management solution conversations all the way to our outsource to CIO services for endowments as ways that organizations are expanding the toolkit to align their investments with their purpose and values or even extend the reach of their impact through impact investing.

And, like I said at the beginning, it's really a journey. You may not be on the journey at all yet. You may be well down the path. Change often doesn't happen in isolation. And as they say, it takes a village. Finding a trusted partner to advise and guide you on that journey might be a really good place to start.