October 10, 2024 • 32 mins
Join us in a captivating conversation with Jason Britton, Founder and CEO of Reflection Analytics as we explore the dynamic realm of ESG (Environmental, Social, and Governance) investing. Learn how Jason transitioned from equity research to creating the SEE methodology, which prioritizes Stakeholders, Environment, and Ethos to address the growing consumer demand for value-based investments.
This episode dissects the potentially transformative impact of ESG investing across different asset classes and markets, delving into the influence of consumer behavior and capital allocation on ESG criteria. Jason offers his insights into the evolving regulatory landscape, including the stark contrasts between the U.S. and Europe.
Don't miss this episode packed with valuable insights for both seasoned investors and those new to sustainable investing.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:06):
Welcome to Trading Tomorrow Navigating Trends in
Capital Markets the podcastwhere we deep dive into
technologies reshaping the worldof capital markets.
I'm your host, jim Jockle, aveteran of the finance industry
with a passion for thecomplexities of financial
technologies and market trends.
In each episode, we'll explorethe cutting-edge trends, tools
and strategies driving today'sfinancial landscapes and paving
(00:29):
the way for the future.
With the finance industry at apivotal point, influenced by
groundbreaking innovations, it'smore crucial than ever to
understand how thesetechnological advancements
interact with market dynamics.
In today's episode, we have afascinating discussion about a
(01:00):
topic that's reshaping theinvestment world ESG investing.
Joining us is Jason Britton,the founder and CEO of
Reflection Analytics, a pioneerin values-based investing and a
developer of Reflect, the wealthmanagement industry's most
rigorous and scalable platformfor ESG and values-driven
analysis.
Jason has been buildingportfolios for ultra-high net
(01:20):
worth clients, foundations andendowments for 25 years using
his proprietary CSEE methodology, which I'll explain a little
bit further.
Today.
We'll delve into how his Capproach aligns with the
evolving regulatory landscape,particularly the SEC's recent
amendments to the Names Rule,which require stricter adherence
(01:43):
to ESG labeling.
We'll also explore Reflect,jason's revolutionary software
platform that not only helpsinvestors uncover what matters
most to them, but also ensurescompliance with these new
regulations.
Whether you're a seasonedinvestor, a wealth manager or
simply interested in the futureof sustainable investing, this
(02:03):
episode is packed with theinsights you won't want to miss,
jason, first of all, thank youso much for joining the podcast
today, jim, it's a pleasure.
Thank you for having me.
So, just to get us started, canyou explain what drew you to
the world of ESG investing?
Speaker 2 (02:17):
Absolutely so.
I got my start in Wall Streetas an equity research analyst at
a firm called Keefe Broiet andWoods in Hartford, connecticut,
covering the insurance sector,and one of the things that
struck me as a research analystwas that four times a year when
companies drop their earningsreports, everyone rushes around
like mad to take the information, synthesize it and get out into
(02:39):
the marketplace with theirrecommendation based on the
information the companydisclosed.
And it occurred to me afterabout the second or third year
in a row of doing that from arat race perspective, everyone
was using the same information.
Esg, to me, was a way tocompile extra financial
information so things thatweren't normally contained in
that earnings report to try touncover value and explore how
(03:02):
corporations were engaging onhuman capital practices,
thinking about governance andthings that I thought really
drove value that weren'tcaptured in financial statements
.
So to me it was about trying touncover an edge.
Speaker 1 (03:13):
I remember KBW back in the day.
So what would you say are themain factors driving the demand
now for ESG and value-basedinvesting today?
Speaker 2 (03:24):
I think you can even make that a singular.
I don't think you need to makeit plural.
I don't know that.
It's factors.
I think it's a factor consumerdemand.
If you look at women asinvestors, regardless of age,
and you look at millennials, genXers and so on and so forth,
those folks really are thinkinglong and hard about where
they're spending their money interms of companies that they're
buying products and services for, and they're also starting to
(03:47):
think about that as they'recoming into the workforce and
employing their 401k and buyingstocks and bonds.
It really matters to them.
They see that their dollars arean extension of their voice and
they care very much about whatthey own.
And that's why it's become amulti-trillion dollar industry.
Not because of regulation, notbecause of government
intervention, but because ofconsumer demand.
That's why BlackRock has aproduct.
Speaker 1 (04:08):
And you use the C methodology.
Can you explain what that isand how it differs from
traditional ESG investingstrategies?
Speaker 2 (04:17):
Absolutely so.
When you say C, I'm going to goahead and spell that for our
listeners it's S-E-E, as invisual C.
We came up with that monikerbecause it stands for
stakeholders, environment andethos, or ethos in our language
is culture or ethics.
And it's different thantraditional ESG, which got its
start around avoiding certainkinds of companies and
(04:40):
industries alcohol, tobacco,firearms, gaming companies and
industries alcohol, tobacco,firearms, gaming, pornography,
sort of the big six, if you will.
C is different.
C is about aligning theinvestor's values.
So the actual investor, believeit or not, we do care about the
actual investor and what it isthat they want in this
particular experience calledinvesting, and it's measuring
(05:00):
and marrying that to their lensof the world.
So C gives us the opportunity,differently than ESG right,
because ESG right now, as itsits, is a business decision
tool where the big ratingagencies are actually providing
their view to corporatemanagement on how they avoid ESG
risk having nothing to do withthe investor.
(05:21):
C is investor-focused, it'sinvestor-centric, it's around
what do you want to own and whynot?
What can companies try to sellyou?
Very nuanced, but different.
Speaker 1 (05:33):
Can you give us a real-world example of where this
methodology significantly hasimpacted investment decisions?
Speaker 2 (05:41):
Absolutely Throughout my career and I'm going to
probably age myself a little bithere, not that, if your
listeners could see, I'm stillin a suit and tie these days,
which is a little bit outlandish.
There are four companies thatimmediately leap to mind and I'm
going to go back to forward.
So take you way back in the dayto WorldCom.
Most people on this podcast maynot have even heard of it A
(06:01):
gentleman named Bernie Ebers whodecided to basically take over
the world, one telecom at a time, using junk debt and funny
accounting.
I never got comfortable withhow all of those vehicles were
set up and all of that specialaccounting and all the one-time
charges.
When you look at C S-E-E andyou look at stakeholders, they
were completely mismanaging thehuman capital side of their
business and it stuck out like asore thumb if you knew what you
(06:23):
were looking for.
So it helped to sidestep thatlandmine Company went to zero.
Enron and all their creativeaccounting and all of the fun
things that happened there withspecial purpose vehicles,
enriching the CEO and the CFOand the C-suite at the expense
of shareholders.
That gets picked up in ourethos and our culture, right?
Is it a culture oftruth-telling and value creation
or is it literally manipulationand sort of financial
(06:45):
engineering?
A little further along the path,we have British Petroleum and
Deepwater Horizon and all ofthat.
If you looked at dollars spenton a market capitalization basis
for fines and penalties, if youlooked at how they had
offloaded risk onto theirpartners Apache and Schlumberger
and the folks downstream whohad really they were on the
(07:06):
ground on the platform but itwas really BP who was driving
the boat you could have avoidedthat company.
It didn't go to zero but itcertainly didn't do well for a
lot of years.
And then a more recent exampleis Boeing.
If you look at how Boeing hascreated its relationships, it's
wildly unfair relationships withits suppliers and the way that
it's forcing them into thesepurchasing contracts and then
really incenting delivery oversafety and quality.
(07:29):
It was just a matter of time.
I mean, you can't take two tonsof aluminum and move it at 800
miles an hour and not do itsafely and expect things to go
well.
So those are just a handful ofthroughout the decades where
just thinking about these kindsof things would have served you
very well.
Speaker 1 (07:44):
Well, the funny thing is three of the four of those.
I was the media spokespersonfor one of the bond rating
agencies during that time, but Iput down the tie and put on the
golf shirt.
Speaker 2 (07:57):
Well, not to riff on that, Jim, but just again to let
a little skeleton out of thecloset.
I used to work at LehmanBrothers, so I worked for that
firm on September 15, 2008, whenthe credit rating agencies had
us on Friday as a single A andwe never opened for business
Monday morning and went to zero.
So I understand what it's liketo be a reformed credit rating
agency person.
(08:17):
You're in good company.
Speaker 1 (08:19):
I think we have some war stories we need to take
offline Absolutely.
Have some war stories we needto take offline Absolutely.
So in what ways does theReflect platform enhance the
value discovery process forinvestors?
And even let's take a step backTell us about the Reflect
platform.
Speaker 2 (08:34):
So the platform is essentially software as a
service, which is a fancy way ofsaying.
It's something you accessdigitally.
It is a platform that allowsinvestors meaning asset owners
and their advisors, orseparately.
You can do it in conjunctionwith a financial advisor, if you
have one, or you can use it onyour own.
That will take you through twodistinctly different steps of
(08:55):
the process.
The first would be what we callyou just mentioned it the
values discovery process.
Believe it or not, a lot ofpeople know how they feel about
things when presented with adirect question, but it's very
difficult for them to articulatefrom a blank sheet of paper
what it is they care about inthe world or how they think
about comparing things that theycare about.
(09:16):
I care about the environment, Icare about gender equality, I
care about access to capital andlow-income communities, but do
I care about all three of thosethings equally?
There's no real mechanism tohave those difficult
conversations and do that mentalmath and that trade-off.
We created a process that isdigital, that allows someone to
(09:36):
get to an answer in a verynon-threatening, non-judgmental
way.
That seems something they canactually implement and execute
on.
That's good for them.
As the values discovery piece.
Right, I mean, it's almostthink of it as digital financial
therapy, but it also is awonderful tool for the advisor
to use, because it's difficultto navigate these kinds of
conversations with clients.
(09:56):
Right, because, as an advisor,it's my job to provide a high
quality advice to Republicansand Democrats, to Christians and
non-Christians, to the entireswath, but I want to be able to
do it in a way that's authenticto them.
How do I do that at scale?
Well, you can't unless you havetechnology support.
So our entire reason for beingwas to accurate and automate
(10:20):
this discovery process and thengive that tool that result the
ability to be laid over yourexisting portfolio, where we're
essentially looking formisalignment, mismatch, what do
I own?
That doesn't jive with what youtold me mattered to you.
And then, more importantly, onthe investor side and the
advisor side, how do you fix it?
There are lots of things outthere that will tell you
(10:41):
something is broken, but very,very few that will tell you how
to fix it.
We wanted to create that entireecosystem of I know what I want
versus I don't, now that I doknow where am I at.
And if I don't like where I'mat, how do I get someplace
better.
You've got to be that wholepackage or there's no real
reason to do it?
Speaker 1 (11:00):
Are you looking at specific companies, or are you
looking at, you know, equities,or you know, or is it?
You know what is the ecosystemin which you're looking at,
Because ESG impacts almost everyasset class.
Speaker 2 (11:13):
It does impact every asset class, and very astutely,
jim.
You recognize that it doesn'timpact all asset classes equally
, right?
So in the private market spaceit's much more difficult to do
this than it is in the publicmarket space.
It's a little more widelypracticed in equities than it is
in fixed income.
It's got lots more data as itrelates to international
(11:33):
securities because of thedistribution and all of the
reporting requirements, forexample, like SFDR and some of
the other things out of Europewhere we in the States are a
little behind on carbonaccounting and carbon disclosure
, but we're trying to catch up.
The long and the short of it isis that we cover roughly 6,500
companies, so we refer to themas issuers, right?
(11:54):
And whether they're issuingequity or debt, we're really
rating the company on that Cmethodology, that stakeholder
engagement, environmentalengagement and then that ethos
or ethics piece S-E-E, and we'recreating a weighting mechanism
by which an advisor or theirasset owner, investor, client
can come in, engage with thesystem and then be told at the
(12:17):
issuer level whether there'salignment.
So that could be in your equityportfolio.
If that's all you have, itcould be in a balanced portfolio
by issuer.
What's interesting to me is thatit's very difficult to do in
the private markets.
So that's not something that wehave under deep coverage.
But those 6,500 securities thatare publicly traded think of it
as the Russell 3000 plus theMSCI Acquiax US You're talking
(12:40):
about 98% of the global marketcapitalization of everything
that trades.
So it's a pretty big swath ofthe universe that you can get a
pretty good handle on.
So for most investors it willmore than sufficiently get the
job done in terms of being ableto screen in and out things that
they have.
You can look at individualpositions how is Microsoft due
relative to other companies inits peer group?
(13:01):
You can look at it at a fundlevel how is the Fidelity Large
Cap XYZ doing versus theBlackRock, versus the Vanguard?
It's a tool that will allow youto slice and dice and compare
anywhere in the funnel my entireaccount household, my
individual retirement account,one particular sleeve of that,
one asset class within that, oran individual issuer.
(13:21):
It's literally the nesting dollof your financial life that we
put under a microscope, usingyour lens to drive that analysis
.
Speaker 1 (13:30):
At some point do you see ESG investing moving beyond
the choice of what investmentsI'm making and moving beyond to
impact on pricing of securitiesthemselves?
Speaker 2 (13:45):
So I think it does, and I think it does in two
unique ways.
The first is right.
If you want to just put on yourbasic economist hat, right,
supply and demand.
If you are a company that isnot thoughtful around these
issues, or, worse, if you are acompany that is ignoring or
flagrantly violating theseissues, you're going to have a
(14:07):
consumer problem, right, andyou're seeing it with boycotts.
You're seeing it with the whatwe call the brand halo and
people's willingness to pay,like why, why would someone
who's 23 years old spend $60 foran organic t-shirt from
Patagonia versus the alternativeand the equivalent?
Because it's positive,signaling, right and
economically.
We refer to that as I considerthat brand to have something
(14:30):
more impactful or more powerfulabout it that aligns with where
I'm willing to spend my capital.
So you're going to see that onthe demand side.
I also think you're going tosee it on the supply side, where
those companies that are notbeing thoughtful around these
issues are going to not have thesame pools of capital that they
once did.
I mean, best example I can giveyou and despite the fact that
(14:51):
it's a little bit on the nose,how much easier was it for
somebody to get a thermal coalproject financed 50 years ago
than it would be today, thenumber of big banks that are
willing to lend into thatindustry?
Maybe now a handful Firearmsmanufacturers?
Right, when Walmart says we'renot carrying ammunition or guns
anymore, that messes with yourbottom line if it's your single
largest point of distribution.
(15:11):
So you can't isolate thesethings and think of them as
someone else's problem or a niceto have right.
It really is something that'svery real.
And the other dirty littlesecret about it is and I think
we're going to talk about thishere in a minute when you look
at what's going on in the restof the world specifically I mean
even China on the environmentalregulation side.
(15:32):
But pivot away from that andlook at Europe and the
disclosure side.
About 30% of an American'scompany's earnings in the S&P
500 come from Europe, come fromoverseas.
Right, you're going to have toreport that way.
So I find it very difficult tobelieve and have trouble
stomaching the belly aching thatyou're hearing from industry
around, pushback to the SEC andthe commissioner saying, well,
(15:53):
we can't get that, it's tooonerous to compile that
information.
But when the European, you know, when the EU said if you don't,
you can't sell products herethey figured it out.
So capitalism is a marvelousmotivator and the ability to
sell your products into one ofthe first or second largest
market in the world should drive, I think, their willingness to
do those kinds of things, thosewillingness to collect the
(16:14):
information and to report.
Speaker 1 (16:16):
You bring up a really interesting point on, let's
call it.
You know larger systemic issues, right, you know a Target or
Walmart you know being adistributor point for, say,
firearms or something of thatnature, but you know you also
mentioned protests and you knowa lot of protests lately just
(16:37):
seem to maneuver just very shortnews cycles.
You maneuver just very shortnews cycles.
So when you approach theratings, how are you taking kind
of short-term events versuslong-term and do you have
similar movements in thoseratings over time?
Speaker 2 (16:57):
Or what are the triggers?
So that's a great question andI think it's one of the
fundamental differences betweenthe way we use C and rate
companies and the way some ofthe traditional data providers
do.
The traditional data providersoftentimes will take company
self-reported information andscan it about every 18 to 24
months.
I think is sort of theirgeneral rule of thumb.
(17:17):
What's particularly distressingabout that is where the company
doesn't disclose a piece ofinformation.
Oftentimes they will use anindustry average and not
necessarily tell you that that'swhat they're doing, because
they don't want to have holes intheir ratings, because they get
paid based on coverage and theyget paid by the companies
themselves.
Back to your credit ratingconversation.
Earlier we had right.
(17:38):
If I'm asking you as MSCI orsomeone else to rate my company
and I'm paying you to do that,there's a moral hazard, conflict
of interest there.
We don't allow companies toinfluence their rating or to pay
us to have coverage.
We collect the information,break the companies into their
corresponding gig sector.
So healthcare versus healthcare, it versus IT, because
(17:58):
otherwise it's meaningless tocompare a company.
So just pick for random exampleI'm MSCI and I'm putting
ratings out there on the foodand beverage space and I've got
Pepsi and I've got Coke.
I can compare those ratingsbecause they're similar.
I cannot compare an A in theconsumer staples space with an A
in healthcare or financialservices.
(18:18):
The ratings don't translateacross.
Ours do.
Ours are mathematical in a waythat, while we have a quartile
rating that we then translateinto a word not aligned,
somewhat aligned, aligned andcompletely aligned.
All we're really doing thereand my high school algebra
teacher will be very pleasedwe're running min-max functions,
(18:38):
which is not the sexiest mathin the world.
Who's the best, who's the worst?
Find the median, break theminto quartiles, assign them a
score of one to four.
Right, I can explain that to myseven-year-old.
How many quarters are in adollar?
Okay, do you want threequarters or do you want one
quarter?
Very easy conversation to have.
And that's another thing.
I think that's super important.
You can't have a black boxrating.
(19:00):
You can't have a.
Oh well, this is what we'reputting out in our ratings
methodology document, but wereserve the right to alter or
adjust what that looks like.
Okay, well, alter it and adjust.
On whose behalf?
On behalf of the people who arepaying you for the rating.
Sometimes In my growing up itwas always tie goes to the
(19:20):
runner.
If everybody's running to first, tie goes to the runner.
If everybody's running to first, tie goes to the runner.
Here, I think tie goes to theperson writing the check and
that doesn't sit well with me.
I want to take that conflictout of it.
So it's a pure mathematicalrating.
Any company wants to pick upthe phone and call me and want
to know why they're somewhataligned on sustainability.
I'll walk them through theirpeers, their numbers, where they
shake out, show them the mathand say do better if you want a
(19:42):
better rating.
Speaker 1 (19:46):
Like don't pay more for your rating, do better.
And so you know there has beenrecent scrutiny on ESG labels,
and you know.
So, coming back to the Reflectplatform, you know how does
Reflect verify the authenticityof ESG claims made by funds.
You?
Speaker 2 (20:01):
have uncovered the $64,000 question in ESG ratings
and in the ESG space in general.
Right Up until September of2023, it never occurred to the
SEC to apply Rule 35d1 toanything in the ESG space.
Now, for our listeners thathave not committed all the 1940
(20:22):
Act to memory, rule 35d1 statesthat most consumers and I'm
paraphrasing have one point ofcontact with a fund, and that
point of contact is its name.
So if you say you are a largecap growth manager, the retail
investing public expects you toown large cap growth stocks.
They give you a little fudgeroom of what they call the 20%
(20:44):
rule.
So 80% of your assets have tobe in the thing you say you are
and you've got a little wiggleroom on the other 20%.
Now, forever.
Esg funds could claimsustainability, water,
carbon-free, gender equality.
They could claim anything theywant, religious faith You've
seen it all.
And there was absolutely norequirement for those portfolio
(21:06):
managers or those manufacturingteams to demonstrate and
actually attest.
Well, why did I pick thesesecurities?
Here's the reasons that I putthem in this particular
portfolio.
So best example I can give isif you look at the five largest
ETFs in the space with the wordssustainable or some kind of
environmental moniker in them.
Almost every single one of themowns oil and gas companies
(21:29):
across the board.
That violates, in my opinionnow I'm not a lawyer and I'm not
a securities lawyer but that,in my opinion, violates that
rule black and white.
If I say I'm sustainable, theretail public expects me to be
sustainable.
They have an understanding ofwhat they think that is and I
don't think that means theythink it's okay for me to own
Exxon.
Rule 35d1, as the commissionjust voted on it in September of
(21:53):
23, to expand that rule toinclude ESG terms.
So now if I say sustainableCatholic faith, gender equity, I
have to sign an attestationform that I submit to the SEC
that shows them dollar andposition.
What I'm saying is aligned withthat 80%.
I think you're going to see anenormous shift in one of two
(22:14):
things the naming and marketingof some of these funds or how
they are constructed.
From a methodology perspectiveand that's right where we sit
best new compliance softwarearound Rule 35d1, where our tool
(22:36):
will allow an auditor, an SECperson, the portfolio manager,
risk and compliance inside ofthe firm to load the holdings,
run it against a benchmark, justa non-ESG benchmark or some
other traditional metric thatthey want to put in there and
see, on a dollar weighted basisand a names weighted basis,
(22:57):
where they are, and they canalso then take that tool and
because we give them the answerswe're all about transparency
we'll let them know which oftheir buckets the name and the
weight is in one, two, three orfour, the quartiles, right.
We define alignment as top halfor better, right.
If you're in the bottom half,you're clearly not aligned
relatively peer group.
(23:17):
There are lots of other choices, so you could then go into the
tool, look at everything that'sin that bottom half and say,
okay, well, if I sold out ofthese folks and either added
different names or reallocatedto the other part of my
portfolio, I could bring myselfin compliance.
It's a powerful tool where theamount of effort and time it
would take you to do that withwhat's currently available in
the marketplace you're talkingabout weeks, not days, and we're
(23:41):
talking about minutes, nothours.
Speaker 1 (23:43):
Well, you know it's funny.
Ever since Sarbanes-Oxley, theSEC likes everybody to sign
something you know.
So it's good to know that theparadigm lives on.
Let's stay on the SEC for asecond.
So the SEC's name ruleamendment.
It stirred a lot of debate.
Where does it go from here?
Speaker 2 (24:04):
So, interestingly enough, I get a lot of questions
around what happens in a Trumppresidency when he fires the
head of the SEC and tries toreplace the governors.
Possible right, I wouldn't putit past him, and the reality is,
though, is that that particularpiece of you know that
amendment, those rules, didn'tpass three to two, like almost
(24:26):
all of the others do.
It was four to one, and it wasfour to one in a unique way,
because some of the moreconservative-leaning members of
the committee wanted those ESGmanagers to have to sort of
self-out right.
They wanted to know who theywere.
They were looking at it from avery different perspective,
where, I believe, theleft-leaning side of the
(24:47):
committee wanted there to betruth and transparency around
what investors were looking forprotecting the retail clients
and essentially, delivering onthe value proposition of what
that regulator is supposed to do, which is to protect the retail
consumer.
I think the Republican side ofthe aisle said we want you to
have to tell us who you are sowe can figure out and boycott
you.
So everybody got to the sameplace by saying, yes, you should
(25:10):
have to identify, but they didit with very different
motivations.
Speaker 1 (25:14):
So you know, just as we're coming to the close of the
podcast, I do want to ask acouple more questions.
Obviously, this is TradingTomorrow, technology trends.
So what role does technologyplay in advancing value-based
investing, and where do you seeit heading?
Speaker 2 (25:30):
So I think technology is probably the single greatest
driver of this growth and itsadoption, for no other reason
than there's a ton of datathat's required and large
language models and.
AI will make the collection andanalysis of that data
instantaneous.
Where now it's a really, reallylaborious process of collecting
(25:56):
this information from companiesor aggregators, it can be
expensive.
I envision a world where thenext iteration of our product is
you're holding your iPhone upor Android Didn't mean to throw
in a shout out for iPhone butholding up your smartphone and,
through the camera lens,literally looking at the world
(26:16):
and it's identifying packaging,products, companies and things.
It's immediately applying yourfilters, the things that it's
learned from you based oninteractions you've had with it
in past decision purchases, andis essentially in real time,
giving you a score.
You're walking down the streetin Manhattan and you walk by a
Dunkin' Donuts, a Starbucks anda Pete's Coffee and it's going
(26:37):
to tell you which of those threethings has the best fair trade,
reasonable price, mostemployees who've got actual
benefits and the best glass doorreview on.
It's a great place to work andthat matters to you, so you're
going to make an informed choice.
I think it's going to make thatkind of stuff instantaneous.
That's what we're working onanyway on figuring out a way to
bring all that stuff together sothat you really can make the
(27:03):
smart decision.
I did that in air quotes forthose of you who can follow
along, but that smart decisionfor you, what's best for you.
Speaker 1 (27:11):
I think you should pull in some Yelp reviews,
because sometimes you just needa good coffee.
Speaker 2 (27:15):
Well, so you mentioned that.
And interestingly enough, whenwe built the product, we sort of
had the overarching idea ofYelp being something you were
kind of thinking about emulating.
But if you talk to anybodywho's under the age of 30, they
will tell you that a Yelp reviewprobably isn't worth the paper
it's printed on because of botsand all the other things that
can discriminate against that.
That's why we're not looking tocrowdsource other people's
(27:41):
judgment.
If there's something that I didlearn in high school, it's that
a collective group of youngpeople have a tremendous ability
to make a very bad decision.
So we want to make it specificto the individual investor and
what you care about, not whatsomeone else thinks you should
care about or what someone elseis telling you to care about.
It's the absolute opposite ofinfluencers.
You become your own influencer.
What matters to you and how doyou figure out how to make those
purchases on your own?
Speaker 1 (28:03):
It would explain all the selfies on my phone then.
So last question, and then I'mgoing to get to the trend drop.
How do you respond to criticswho argue that ESG investing may
sacrifice financial returns forsocial or environmental goals?
Speaker 2 (28:17):
So I shake my head derisively and explain to them
that when you're looking atinvesting this way, it is no
more or less likely tounderperform or outperform than
any other methodology, right?
If you go back and you look andsay, on any given year, 80 of
active managers underperformtheir benchmark, are we willing
to?
Are we willing to throw outactive management as a concept?
(28:40):
No, okay.
So now you're saying that ifI'm not just going to bribe the
entirety of the broad market,I'm going to now make some
decisions on what it was I wantto own thinking about growth
versus value, insider momentumor any of the other factors.
It's just as reasonable to sayhas the company paid any fines
and penalties to OSHA or the EPA?
Has the company had anylawsuits or any other challenges
(29:01):
and things that settled incourt around its human capital
practices, discrimination,racial or gender?
I'm talking about really beingthoughtful and bringing math and
discipline into this.
So if you tell me that feelgood investing is, I don't buy
Philip Morris and I don't buy,you know, alcohol, tobacco,
firearms, etc.
Those happen to be highlyregulated industries that are
(29:23):
also subject to taxation and areally big overhang from again
that consumer brand perspective,right?
Otherwise Walmart doesn't stopselling them If they don't think
that they're you know, if theythink there's more money to be
made.
Cvs doesn't stop distributingcigarettes if they think that
there's.
So the reality is the world isshifting and we're actually
starting to put a little bit ofthe blame for some of the stuff
(29:44):
that's going wrong in the placethat it belongs.
I refer to it as accuratesocial accounting.
If you make a product and thatproduct has a result and that
result causes some other defectsomewhere, like type 2 diabetes
or blindness or whatever it is,you need to account for that
fact.
And as it rolls back throughthe chain, you can't say the
(30:06):
company that you know.
Growing up in the Midwest andbeing a sportsman, you know we
would always joke guns don'tkill people, bullets kill people
, so you don't need to regulateguns, regulate bullets, similar
things here.
Right, when you want to seethings go downstream and you
want to just hold the supplychain accountable, like the
corporate form is unique in thelast 100 plus years.
Right Since the trust bustersand since basically the 14th
(30:31):
Amendment was done with SantaCruz Railroad.
You can't give a company thepower to exercise its political
voice with unlimited capitalthrough a political action
committee.
You can't give it theopportunity to own vast swaths
of land, public and private, andalso not expect it to have any
responsibility.
Speaker 1 (30:50):
Well, we did get to the last question, sadly,
because I have a feeling wecould keep going here, but we
call this question the trenddrop.
It's like a desert islandquestion.
If you could only give onepiece of advice to investors or
wealth managers who are justbeginning to integrate ESG or
value-based criteria into theirportfolios, what would it be?
(31:13):
And just as a reminder, pleasekeep this section a little bit
more to general advice,absolutely.
Speaker 2 (31:18):
It couldn't be any more general than this, which is
understand the motivation ofthe organization or person you
are getting that data from thatyou're using to make the
decision.
Are they giving that data toyou to help you and your clients
make better decisions, or arethey providing data to you for
the benefit of corporatemanagers, to make them look and
(31:39):
feel good so that your clientwould consider buying them?
Greenwashing is the number onething that I think is keeping me
up at night around this,because you're essentially, in
my opinion, saying that the ESGmarketplace for data right now
is just a report card on who'sgot the best marketing
department, and I don't thinkthat's what investors want.
(31:59):
They see through that.
So that's what I would sayCaveat emptor, buyer, beware, be
thoughtful around.
If you're going to use adecision tool or a piece of
information to make aninvestment decision, make sure
you understand.
Is that information you'reusing accurate and whose lens
has it been run through beforeit got to you?
Speaker 1 (32:16):
Jason, thank you so much for your time today.
I really appreciate you beingon the podcast.
Speaker 2 (32:21):
Jim, my pleasure.
Thank you so much for your timeand your questions.
Speaker 1 (32:31):
Thanks so much for listening to today's episode and
if you're enjoying TradingTomorrow, navigating trends and
capital markets, be sure to like, subscribe and share, and we'll
see you next time.
Welcome to Trading Tomorrow Navigating Trends in
Capital Markets the podcastwhere we deep dive into
technologies reshaping the worldof capital markets.
I'm your host, jim Jockle, aveteran of the finance industry
with a passion for thecomplexities of financial
technologies and market trends.
In each episode, we'll explorethe cutting-edge trends, tools
and strategies driving today'sfinancial landscapes and paving
(00:29):
the way for the future.
With the finance industry at apivotal point, influenced by
groundbreaking innovations, it'smore crucial than ever to
understand how thesetechnological advancements
interact with market dynamics.
In today's episode, we have afascinating discussion about a
(01:00):
topic that's reshaping theinvestment world ESG investing.
Joining us is Jason Britton,the founder and CEO of
Reflection Analytics, a pioneerin values-based investing and a
developer of Reflect, the wealthmanagement industry's most
rigorous and scalable platformfor ESG and values-driven
analysis.
Jason has been buildingportfolios for ultra-high net
(01:20):
worth clients, foundations andendowments for 25 years using
his proprietary CSEE methodology, which I'll explain a little
bit further.
Today.
We'll delve into how his Capproach aligns with the
evolving regulatory landscape,particularly the SEC's recent
amendments to the Names Rule,which require stricter adherence
(01:43):
to ESG labeling.
We'll also explore Reflect,jason's revolutionary software
platform that not only helpsinvestors uncover what matters
most to them, but also ensurescompliance with these new
regulations.
Whether you're a seasonedinvestor, a wealth manager or
simply interested in the futureof sustainable investing, this
(02:03):
episode is packed with theinsights you won't want to miss,
jason, first of all, thank youso much for joining the podcast
today, jim, it's a pleasure.
Thank you for having me.
So, just to get us started, canyou explain what drew you to
the world of ESG investing?
Speaker 2 (02:17):
Absolutely so.
I got my start in Wall Streetas an equity research analyst at
a firm called Keefe Broiet andWoods in Hartford, connecticut,
covering the insurance sector,and one of the things that
struck me as a research analystwas that four times a year when
companies drop their earningsreports, everyone rushes around
like mad to take the information, synthesize it and get out into
(02:39):
the marketplace with theirrecommendation based on the
information the companydisclosed.
And it occurred to me afterabout the second or third year
in a row of doing that from arat race perspective, everyone
was using the same information.
Esg, to me, was a way tocompile extra financial
information so things thatweren't normally contained in
that earnings report to try touncover value and explore how
(03:02):
corporations were engaging onhuman capital practices,
thinking about governance andthings that I thought really
drove value that weren'tcaptured in financial statements
.
So to me it was about trying touncover an edge.
Speaker 1 (03:13):
I remember KBW back in the day.
So what would you say are themain factors driving the demand
now for ESG and value-basedinvesting today?
Speaker 2 (03:24):
I think you can even make that a singular.
I don't think you need to makeit plural.
I don't know that.
It's factors.
I think it's a factor consumerdemand.
If you look at women asinvestors, regardless of age,
and you look at millennials, genXers and so on and so forth,
those folks really are thinkinglong and hard about where
they're spending their money interms of companies that they're
buying products and services for, and they're also starting to
(03:47):
think about that as they'recoming into the workforce and
employing their 401k and buyingstocks and bonds.
It really matters to them.
They see that their dollars arean extension of their voice and
they care very much about whatthey own.
And that's why it's become amulti-trillion dollar industry.
Not because of regulation, notbecause of government
intervention, but because ofconsumer demand.
That's why BlackRock has aproduct.
Speaker 1 (04:08):
And you use the C methodology.
Can you explain what that isand how it differs from
traditional ESG investingstrategies?
Speaker 2 (04:17):
Absolutely so.
When you say C, I'm going to goahead and spell that for our
listeners it's S-E-E, as invisual C.
We came up with that monikerbecause it stands for
stakeholders, environment andethos, or ethos in our language
is culture or ethics.
And it's different thantraditional ESG, which got its
start around avoiding certainkinds of companies and
(04:40):
industries alcohol, tobacco,firearms, gaming companies and
industries alcohol, tobacco,firearms, gaming, pornography,
sort of the big six, if you will.
C is different.
C is about aligning theinvestor's values.
So the actual investor, believeit or not, we do care about the
actual investor and what it isthat they want in this
particular experience calledinvesting, and it's measuring
(05:00):
and marrying that to their lensof the world.
So C gives us the opportunity,differently than ESG right,
because ESG right now, as itsits, is a business decision
tool where the big ratingagencies are actually providing
their view to corporatemanagement on how they avoid ESG
risk having nothing to do withthe investor.
(05:21):
C is investor-focused, it'sinvestor-centric, it's around
what do you want to own and whynot?
What can companies try to sellyou?
Very nuanced, but different.
Speaker 1 (05:33):
Can you give us a real-world example of where this
methodology significantly hasimpacted investment decisions?
Speaker 2 (05:41):
Absolutely Throughout my career and I'm going to
probably age myself a little bithere, not that, if your
listeners could see, I'm stillin a suit and tie these days,
which is a little bit outlandish.
There are four companies thatimmediately leap to mind and I'm
going to go back to forward.
So take you way back in the dayto WorldCom.
Most people on this podcast maynot have even heard of it A
(06:01):
gentleman named Bernie Ebers whodecided to basically take over
the world, one telecom at a time, using junk debt and funny
accounting.
I never got comfortable withhow all of those vehicles were
set up and all of that specialaccounting and all the one-time
charges.
When you look at C S-E-E andyou look at stakeholders, they
were completely mismanaging thehuman capital side of their
business and it stuck out like asore thumb if you knew what you
(06:23):
were looking for.
So it helped to sidestep thatlandmine Company went to zero.
Enron and all their creativeaccounting and all of the fun
things that happened there withspecial purpose vehicles,
enriching the CEO and the CFOand the C-suite at the expense
of shareholders.
That gets picked up in ourethos and our culture, right?
Is it a culture oftruth-telling and value creation
or is it literally manipulationand sort of financial
(06:45):
engineering?
A little further along the path,we have British Petroleum and
Deepwater Horizon and all ofthat.
If you looked at dollars spenton a market capitalization basis
for fines and penalties, if youlooked at how they had
offloaded risk onto theirpartners Apache and Schlumberger
and the folks downstream whohad really they were on the
(07:06):
ground on the platform but itwas really BP who was driving
the boat you could have avoidedthat company.
It didn't go to zero but itcertainly didn't do well for a
lot of years.
And then a more recent exampleis Boeing.
If you look at how Boeing hascreated its relationships, it's
wildly unfair relationships withits suppliers and the way that
it's forcing them into thesepurchasing contracts and then
really incenting delivery oversafety and quality.
(07:29):
It was just a matter of time.
I mean, you can't take two tonsof aluminum and move it at 800
miles an hour and not do itsafely and expect things to go
well.
So those are just a handful ofthroughout the decades where
just thinking about these kindsof things would have served you
very well.
Speaker 1 (07:44):
Well, the funny thing is three of the four of those.
I was the media spokespersonfor one of the bond rating
agencies during that time, but Iput down the tie and put on the
golf shirt.
Speaker 2 (07:57):
Well, not to riff on that, Jim, but just again to let
a little skeleton out of thecloset.
I used to work at LehmanBrothers, so I worked for that
firm on September 15, 2008, whenthe credit rating agencies had
us on Friday as a single A andwe never opened for business
Monday morning and went to zero.
So I understand what it's liketo be a reformed credit rating
agency person.
(08:17):
You're in good company.
Speaker 1 (08:19):
I think we have some war stories we need to take
offline Absolutely.
Have some war stories we needto take offline Absolutely.
So in what ways does theReflect platform enhance the
value discovery process forinvestors?
And even let's take a step backTell us about the Reflect
platform.
Speaker 2 (08:34):
So the platform is essentially software as a
service, which is a fancy way ofsaying.
It's something you accessdigitally.
It is a platform that allowsinvestors meaning asset owners
and their advisors, orseparately.
You can do it in conjunctionwith a financial advisor, if you
have one, or you can use it onyour own.
That will take you through twodistinctly different steps of
(08:55):
the process.
The first would be what we callyou just mentioned it the
values discovery process.
Believe it or not, a lot ofpeople know how they feel about
things when presented with adirect question, but it's very
difficult for them to articulatefrom a blank sheet of paper
what it is they care about inthe world or how they think
about comparing things that theycare about.
(09:16):
I care about the environment, Icare about gender equality, I
care about access to capital andlow-income communities, but do
I care about all three of thosethings equally?
There's no real mechanism tohave those difficult
conversations and do that mentalmath and that trade-off.
We created a process that isdigital, that allows someone to
(09:36):
get to an answer in a verynon-threatening, non-judgmental
way.
That seems something they canactually implement and execute
on.
That's good for them.
As the values discovery piece.
Right, I mean, it's almostthink of it as digital financial
therapy, but it also is awonderful tool for the advisor
to use, because it's difficultto navigate these kinds of
conversations with clients.
(09:56):
Right, because, as an advisor,it's my job to provide a high
quality advice to Republicansand Democrats, to Christians and
non-Christians, to the entireswath, but I want to be able to
do it in a way that's authenticto them.
How do I do that at scale?
Well, you can't unless you havetechnology support.
So our entire reason for beingwas to accurate and automate
(10:20):
this discovery process and thengive that tool that result the
ability to be laid over yourexisting portfolio, where we're
essentially looking formisalignment, mismatch, what do
I own?
That doesn't jive with what youtold me mattered to you.
And then, more importantly, onthe investor side and the
advisor side, how do you fix it?
There are lots of things outthere that will tell you
(10:41):
something is broken, but very,very few that will tell you how
to fix it.
We wanted to create that entireecosystem of I know what I want
versus I don't, now that I doknow where am I at.
And if I don't like where I'mat, how do I get someplace
better.
You've got to be that wholepackage or there's no real
reason to do it?
Speaker 1 (11:00):
Are you looking at specific companies, or are you
looking at, you know, equities,or you know, or is it?
You know what is the ecosystemin which you're looking at,
Because ESG impacts almost everyasset class.
Speaker 2 (11:13):
It does impact every asset class, and very astutely,
jim.
You recognize that it doesn'timpact all asset classes equally
, right?
So in the private market spaceit's much more difficult to do
this than it is in the publicmarket space.
It's a little more widelypracticed in equities than it is
in fixed income.
It's got lots more data as itrelates to international
(11:33):
securities because of thedistribution and all of the
reporting requirements, forexample, like SFDR and some of
the other things out of Europewhere we in the States are a
little behind on carbonaccounting and carbon disclosure
, but we're trying to catch up.
The long and the short of it isis that we cover roughly 6,500
companies, so we refer to themas issuers, right?
(11:54):
And whether they're issuingequity or debt, we're really
rating the company on that Cmethodology, that stakeholder
engagement, environmentalengagement and then that ethos
or ethics piece S-E-E, and we'recreating a weighting mechanism
by which an advisor or theirasset owner, investor, client
can come in, engage with thesystem and then be told at the
(12:17):
issuer level whether there'salignment.
So that could be in your equityportfolio.
If that's all you have, itcould be in a balanced portfolio
by issuer.
What's interesting to me is thatit's very difficult to do in
the private markets.
So that's not something that wehave under deep coverage.
But those 6,500 securities thatare publicly traded think of it
as the Russell 3000 plus theMSCI Acquiax US You're talking
(12:40):
about 98% of the global marketcapitalization of everything
that trades.
So it's a pretty big swath ofthe universe that you can get a
pretty good handle on.
So for most investors it willmore than sufficiently get the
job done in terms of being ableto screen in and out things that
they have.
You can look at individualpositions how is Microsoft due
relative to other companies inits peer group?
(13:01):
You can look at it at a fundlevel how is the Fidelity Large
Cap XYZ doing versus theBlackRock, versus the Vanguard?
It's a tool that will allow youto slice and dice and compare
anywhere in the funnel my entireaccount household, my
individual retirement account,one particular sleeve of that,
one asset class within that, oran individual issuer.
(13:21):
It's literally the nesting dollof your financial life that we
put under a microscope, usingyour lens to drive that analysis
.
Speaker 1 (13:30):
At some point do you see ESG investing moving beyond
the choice of what investmentsI'm making and moving beyond to
impact on pricing of securitiesthemselves?
Speaker 2 (13:45):
So I think it does, and I think it does in two
unique ways.
The first is right.
If you want to just put on yourbasic economist hat, right,
supply and demand.
If you are a company that isnot thoughtful around these
issues, or, worse, if you are acompany that is ignoring or
flagrantly violating theseissues, you're going to have a
(14:07):
consumer problem, right, andyou're seeing it with boycotts.
You're seeing it with the whatwe call the brand halo and
people's willingness to pay,like why, why would someone
who's 23 years old spend $60 foran organic t-shirt from
Patagonia versus the alternativeand the equivalent?
Because it's positive,signaling, right and
economically.
We refer to that as I considerthat brand to have something
(14:30):
more impactful or more powerfulabout it that aligns with where
I'm willing to spend my capital.
So you're going to see that onthe demand side.
I also think you're going tosee it on the supply side, where
those companies that are notbeing thoughtful around these
issues are going to not have thesame pools of capital that they
once did.
I mean, best example I can giveyou and despite the fact that
(14:51):
it's a little bit on the nose,how much easier was it for
somebody to get a thermal coalproject financed 50 years ago
than it would be today, thenumber of big banks that are
willing to lend into thatindustry?
Maybe now a handful Firearmsmanufacturers?
Right, when Walmart says we'renot carrying ammunition or guns
anymore, that messes with yourbottom line if it's your single
largest point of distribution.
(15:11):
So you can't isolate thesethings and think of them as
someone else's problem or a niceto have right.
It really is something that'svery real.
And the other dirty littlesecret about it is and I think
we're going to talk about thishere in a minute when you look
at what's going on in the restof the world specifically I mean
even China on the environmentalregulation side.
(15:32):
But pivot away from that andlook at Europe and the
disclosure side.
About 30% of an American'scompany's earnings in the S&P
500 come from Europe, come fromoverseas.
Right, you're going to have toreport that way.
So I find it very difficult tobelieve and have trouble
stomaching the belly aching thatyou're hearing from industry
around, pushback to the SEC andthe commissioner saying, well,
(15:53):
we can't get that, it's tooonerous to compile that
information.
But when the European, you know, when the EU said if you don't,
you can't sell products herethey figured it out.
So capitalism is a marvelousmotivator and the ability to
sell your products into one ofthe first or second largest
market in the world should drive, I think, their willingness to
do those kinds of things, thosewillingness to collect the
(16:14):
information and to report.
Speaker 1 (16:16):
You bring up a really interesting point on, let's
call it.
You know larger systemic issues, right, you know a Target or
Walmart you know being adistributor point for, say,
firearms or something of thatnature, but you know you also
mentioned protests and you knowa lot of protests lately just
(16:37):
seem to maneuver just very shortnews cycles.
You maneuver just very shortnews cycles.
So when you approach theratings, how are you taking kind
of short-term events versuslong-term and do you have
similar movements in thoseratings over time?
Speaker 2 (16:57):
Or what are the triggers?
So that's a great question andI think it's one of the
fundamental differences betweenthe way we use C and rate
companies and the way some ofthe traditional data providers
do.
The traditional data providersoftentimes will take company
self-reported information andscan it about every 18 to 24
months.
I think is sort of theirgeneral rule of thumb.
(17:17):
What's particularly distressingabout that is where the company
doesn't disclose a piece ofinformation.
Oftentimes they will use anindustry average and not
necessarily tell you that that'swhat they're doing, because
they don't want to have holes intheir ratings, because they get
paid based on coverage and theyget paid by the companies
themselves.
Back to your credit ratingconversation.
Earlier we had right.
(17:38):
If I'm asking you as MSCI orsomeone else to rate my company
and I'm paying you to do that,there's a moral hazard, conflict
of interest there.
We don't allow companies toinfluence their rating or to pay
us to have coverage.
We collect the information,break the companies into their
corresponding gig sector.
So healthcare versus healthcare, it versus IT, because
(17:58):
otherwise it's meaningless tocompare a company.
So just pick for random exampleI'm MSCI and I'm putting
ratings out there on the foodand beverage space and I've got
Pepsi and I've got Coke.
I can compare those ratingsbecause they're similar.
I cannot compare an A in theconsumer staples space with an A
in healthcare or financialservices.
(18:18):
The ratings don't translateacross.
Ours do.
Ours are mathematical in a waythat, while we have a quartile
rating that we then translateinto a word not aligned,
somewhat aligned, aligned andcompletely aligned.
All we're really doing thereand my high school algebra
teacher will be very pleasedwe're running min-max functions,
(18:38):
which is not the sexiest mathin the world.
Who's the best, who's the worst?
Find the median, break theminto quartiles, assign them a
score of one to four.
Right, I can explain that to myseven-year-old.
How many quarters are in adollar?
Okay, do you want threequarters or do you want one
quarter?
Very easy conversation to have.
And that's another thing.
I think that's super important.
You can't have a black boxrating.
(19:00):
You can't have a.
Oh well, this is what we'reputting out in our ratings
methodology document, but wereserve the right to alter or
adjust what that looks like.
Okay, well, alter it and adjust.
On whose behalf?
On behalf of the people who arepaying you for the rating.
Sometimes In my growing up itwas always tie goes to the
(19:20):
runner.
If everybody's running to first, tie goes to the runner.
If everybody's running to first, tie goes to the runner.
Here, I think tie goes to theperson writing the check and
that doesn't sit well with me.
I want to take that conflictout of it.
So it's a pure mathematicalrating.
Any company wants to pick upthe phone and call me and want
to know why they're somewhataligned on sustainability.
I'll walk them through theirpeers, their numbers, where they
shake out, show them the mathand say do better if you want a
(19:42):
better rating.
Speaker 1 (19:46):
Like don't pay more for your rating, do better.
And so you know there has beenrecent scrutiny on ESG labels,
and you know.
So, coming back to the Reflectplatform, you know how does
Reflect verify the authenticityof ESG claims made by funds.
You?
Speaker 2 (20:01):
have uncovered the $64,000 question in ESG ratings
and in the ESG space in general.
Right Up until September of2023, it never occurred to the
SEC to apply Rule 35d1 toanything in the ESG space.
Now, for our listeners thathave not committed all the 1940
(20:22):
Act to memory, rule 35d1 statesthat most consumers and I'm
paraphrasing have one point ofcontact with a fund, and that
point of contact is its name.
So if you say you are a largecap growth manager, the retail
investing public expects you toown large cap growth stocks.
They give you a little fudgeroom of what they call the 20%
(20:44):
rule.
So 80% of your assets have tobe in the thing you say you are
and you've got a little wiggleroom on the other 20%.
Now, forever.
Esg funds could claimsustainability, water,
carbon-free, gender equality.
They could claim anything theywant, religious faith You've
seen it all.
And there was absolutely norequirement for those portfolio
(21:06):
managers or those manufacturingteams to demonstrate and
actually attest.
Well, why did I pick thesesecurities?
Here's the reasons that I putthem in this particular
portfolio.
So best example I can give isif you look at the five largest
ETFs in the space with the wordssustainable or some kind of
environmental moniker in them.
Almost every single one of themowns oil and gas companies
(21:29):
across the board.
That violates, in my opinionnow I'm not a lawyer and I'm not
a securities lawyer but that,in my opinion, violates that
rule black and white.
If I say I'm sustainable, theretail public expects me to be
sustainable.
They have an understanding ofwhat they think that is and I
don't think that means theythink it's okay for me to own
Exxon.
Rule 35d1, as the commissionjust voted on it in September of
(21:53):
23, to expand that rule toinclude ESG terms.
So now if I say sustainableCatholic faith, gender equity, I
have to sign an attestationform that I submit to the SEC
that shows them dollar andposition.
What I'm saying is aligned withthat 80%.
I think you're going to see anenormous shift in one of two
(22:14):
things the naming and marketingof some of these funds or how
they are constructed.
From a methodology perspectiveand that's right where we sit
best new compliance softwarearound Rule 35d1, where our tool
(22:36):
will allow an auditor, an SECperson, the portfolio manager,
risk and compliance inside ofthe firm to load the holdings,
run it against a benchmark, justa non-ESG benchmark or some
other traditional metric thatthey want to put in there and
see, on a dollar weighted basisand a names weighted basis,
(22:57):
where they are, and they canalso then take that tool and
because we give them the answerswe're all about transparency
we'll let them know which oftheir buckets the name and the
weight is in one, two, three orfour, the quartiles, right.
We define alignment as top halfor better, right.
If you're in the bottom half,you're clearly not aligned
relatively peer group.
(23:17):
There are lots of other choices, so you could then go into the
tool, look at everything that'sin that bottom half and say,
okay, well, if I sold out ofthese folks and either added
different names or reallocatedto the other part of my
portfolio, I could bring myselfin compliance.
It's a powerful tool where theamount of effort and time it
would take you to do that withwhat's currently available in
the marketplace you're talkingabout weeks, not days, and we're
(23:41):
talking about minutes, nothours.
Speaker 1 (23:43):
Well, you know it's funny.
Ever since Sarbanes-Oxley, theSEC likes everybody to sign
something you know.
So it's good to know that theparadigm lives on.
Let's stay on the SEC for asecond.
So the SEC's name ruleamendment.
It stirred a lot of debate.
Where does it go from here?
Speaker 2 (24:04):
So, interestingly enough, I get a lot of questions
around what happens in a Trumppresidency when he fires the
head of the SEC and tries toreplace the governors.
Possible right, I wouldn't putit past him, and the reality is,
though, is that that particularpiece of you know that
amendment, those rules, didn'tpass three to two, like almost
(24:26):
all of the others do.
It was four to one, and it wasfour to one in a unique way,
because some of the moreconservative-leaning members of
the committee wanted those ESGmanagers to have to sort of
self-out right.
They wanted to know who theywere.
They were looking at it from avery different perspective,
where, I believe, theleft-leaning side of the
(24:47):
committee wanted there to betruth and transparency around
what investors were looking forprotecting the retail clients
and essentially, delivering onthe value proposition of what
that regulator is supposed to do, which is to protect the retail
consumer.
I think the Republican side ofthe aisle said we want you to
have to tell us who you are sowe can figure out and boycott
you.
So everybody got to the sameplace by saying, yes, you should
(25:10):
have to identify, but they didit with very different
motivations.
Speaker 1 (25:14):
So you know, just as we're coming to the close of the
podcast, I do want to ask acouple more questions.
Obviously, this is TradingTomorrow, technology trends.
So what role does technologyplay in advancing value-based
investing, and where do you seeit heading?
Speaker 2 (25:30):
So I think technology is probably the single greatest
driver of this growth and itsadoption, for no other reason
than there's a ton of datathat's required and large
language models and.
AI will make the collection andanalysis of that data
instantaneous.
Where now it's a really, reallylaborious process of collecting
(25:56):
this information from companiesor aggregators, it can be
expensive.
I envision a world where thenext iteration of our product is
you're holding your iPhone upor Android Didn't mean to throw
in a shout out for iPhone butholding up your smartphone and,
through the camera lens,literally looking at the world
(26:16):
and it's identifying packaging,products, companies and things.
It's immediately applying yourfilters, the things that it's
learned from you based oninteractions you've had with it
in past decision purchases, andis essentially in real time,
giving you a score.
You're walking down the streetin Manhattan and you walk by a
Dunkin' Donuts, a Starbucks anda Pete's Coffee and it's going
(26:37):
to tell you which of those threethings has the best fair trade,
reasonable price, mostemployees who've got actual
benefits and the best glass doorreview on.
It's a great place to work andthat matters to you, so you're
going to make an informed choice.
I think it's going to make thatkind of stuff instantaneous.
That's what we're working onanyway on figuring out a way to
bring all that stuff together sothat you really can make the
(27:03):
smart decision.
I did that in air quotes forthose of you who can follow
along, but that smart decisionfor you, what's best for you.
Speaker 1 (27:11):
I think you should pull in some Yelp reviews,
because sometimes you just needa good coffee.
Speaker 2 (27:15):
Well, so you mentioned that.
And interestingly enough, whenwe built the product, we sort of
had the overarching idea ofYelp being something you were
kind of thinking about emulating.
But if you talk to anybodywho's under the age of 30, they
will tell you that a Yelp reviewprobably isn't worth the paper
it's printed on because of botsand all the other things that
can discriminate against that.
That's why we're not looking tocrowdsource other people's
(27:41):
judgment.
If there's something that I didlearn in high school, it's that
a collective group of youngpeople have a tremendous ability
to make a very bad decision.
So we want to make it specificto the individual investor and
what you care about, not whatsomeone else thinks you should
care about or what someone elseis telling you to care about.
It's the absolute opposite ofinfluencers.
You become your own influencer.
What matters to you and how doyou figure out how to make those
purchases on your own?
Speaker 1 (28:03):
It would explain all the selfies on my phone then.
So last question, and then I'mgoing to get to the trend drop.
How do you respond to criticswho argue that ESG investing may
sacrifice financial returns forsocial or environmental goals?
Speaker 2 (28:17):
So I shake my head derisively and explain to them
that when you're looking atinvesting this way, it is no
more or less likely tounderperform or outperform than
any other methodology, right?
If you go back and you look andsay, on any given year, 80 of
active managers underperformtheir benchmark, are we willing
to?
Are we willing to throw outactive management as a concept?
(28:40):
No, okay.
So now you're saying that ifI'm not just going to bribe the
entirety of the broad market,I'm going to now make some
decisions on what it was I wantto own thinking about growth
versus value, insider momentumor any of the other factors.
It's just as reasonable to sayhas the company paid any fines
and penalties to OSHA or the EPA?
Has the company had anylawsuits or any other challenges
(29:01):
and things that settled incourt around its human capital
practices, discrimination,racial or gender?
I'm talking about really beingthoughtful and bringing math and
discipline into this.
So if you tell me that feelgood investing is, I don't buy
Philip Morris and I don't buy,you know, alcohol, tobacco,
firearms, etc.
Those happen to be highlyregulated industries that are
(29:23):
also subject to taxation and areally big overhang from again
that consumer brand perspective,right?
Otherwise Walmart doesn't stopselling them If they don't think
that they're you know, if theythink there's more money to be
made.
Cvs doesn't stop distributingcigarettes if they think that
there's.
So the reality is the world isshifting and we're actually
starting to put a little bit ofthe blame for some of the stuff
(29:44):
that's going wrong in the placethat it belongs.
I refer to it as accuratesocial accounting.
If you make a product and thatproduct has a result and that
result causes some other defectsomewhere, like type 2 diabetes
or blindness or whatever it is,you need to account for that
fact.
And as it rolls back throughthe chain, you can't say the
(30:06):
company that you know.
Growing up in the Midwest andbeing a sportsman, you know we
would always joke guns don'tkill people, bullets kill people
, so you don't need to regulateguns, regulate bullets, similar
things here.
Right, when you want to seethings go downstream and you
want to just hold the supplychain accountable, like the
corporate form is unique in thelast 100 plus years.
Right Since the trust bustersand since basically the 14th
(30:31):
Amendment was done with SantaCruz Railroad.
You can't give a company thepower to exercise its political
voice with unlimited capitalthrough a political action
committee.
You can't give it theopportunity to own vast swaths
of land, public and private, andalso not expect it to have any
responsibility.
Speaker 1 (30:50):
Well, we did get to the last question, sadly,
because I have a feeling wecould keep going here, but we
call this question the trenddrop.
It's like a desert islandquestion.
If you could only give onepiece of advice to investors or
wealth managers who are justbeginning to integrate ESG or
value-based criteria into theirportfolios, what would it be?
(31:13):
And just as a reminder, pleasekeep this section a little bit
more to general advice,absolutely.
Speaker 2 (31:18):
It couldn't be any more general than this, which is
understand the motivation ofthe organization or person you
are getting that data from thatyou're using to make the
decision.
Are they giving that data toyou to help you and your clients
make better decisions, or arethey providing data to you for
the benefit of corporatemanagers, to make them look and
(31:39):
feel good so that your clientwould consider buying them?
Greenwashing is the number onething that I think is keeping me
up at night around this,because you're essentially, in
my opinion, saying that the ESGmarketplace for data right now
is just a report card on who'sgot the best marketing
department, and I don't thinkthat's what investors want.
(31:59):
They see through that.
So that's what I would sayCaveat emptor, buyer, beware, be
thoughtful around.
If you're going to use adecision tool or a piece of
information to make aninvestment decision, make sure
you understand.
Is that information you'reusing accurate and whose lens
has it been run through beforeit got to you?
Speaker 1 (32:16):
Jason, thank you so much for your time today.
I really appreciate you beingon the podcast.
Speaker 2 (32:21):
Jim, my pleasure.
Thank you so much for your timeand your questions.
Speaker 1 (32:31):
Thanks so much for listening to today's episode and
if you're enjoying TradingTomorrow, navigating trends and
capital markets, be sure to like, subscribe and share, and we'll
see you next time.
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