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Scope of Socially Responsible Investing (SRI) in Emerging Markets like India

Matt Patsky, CFA, Chief Executive Officer, Trillium Asset Management Corporation
Matt Patsky, CFA is the Chief Executive Officer at Trillium Asset Management Corporation. He speaks about Socially Responsible Investing and it's scope in emerging markets like India.




 

 

 

 

 

 

 

 

 

 

 

 

 

 



Matt Patsky, CFA is the CEO of Trillium Asset Management, a pioneer, innovator, and leader in sustainable and responsible investing with a history spanning nearly three decades. Matt is a senior portfolio manager at Trillium, where he is also one of the portfolio managers for the Green Century Balanced Fund, the first US mutual fund to report its carbon impact. Trillium is the Co-Founder of Ceres, the Social Investment Forum, SIRAN (Sustainable Investment Research Analyst Network), and Open MIC (Open Media and Information Companies Initiative). Trillium was one of the very first investment firms to develop a high social impact investing program through the use of direct community investments.

Matt has over 25 years of experience in investment research and investment management, and is widely considered as an expert in socially and environmentally responsible investing. As Director of Equity Research for Adams, Harkness & Hill, he built that firm’s powerful research capabilities in socially and environmentally responsible areas such as renewable energy, resource optimization, and organic and natural products. Matt was most recently at Winslow Management Company in Boston, where he served as director of research, chairman of the investment committee and portfolio manager for the Green Solutions Strategy and the Winslow Green Solutions Fund. He has appeared on “Wall Street Week”, CNBC, ABC Evening News and Fox News, and been featured in Barron’s, the New York Times, the Wall Street Journal, the Associated Press, and other major media.

Matt serves on the Board of Root Capital, which provides financing to sustainable businesses in the developing world, and is a member of the Social Venture Network (SVN). Matt is a Chartered Financial Analyst charterholder and a member of the CFA Institute. He holds a Bachelor of Science in Economics from Rensselaer Polytechnic Institute.

Parveza Rahman speaks to him.


 

 

Some of our readers may not be aware of SRI. Could you please explain the concept of SRI?

 

SRI (Socially Responsible Investing), for Trillium Asset Management, means that we are incorporating environmental, social and governance factors into our investment process. Trillium Asset Management was formed in 1982 with the objective to look at factors that are normally missed by traditional investment managers. These factors are non-financial metrics, which in our view, can have material impact on the "text/javascript">// sustainability and performance of the business over time.]]>

 

 

How is Trillium Asset Management’s investment style different from that of other asset management companies?

 

We tend to have a quality bias and are looking to buy well-managed companies that have good environmental, social and governance scores in addition to looking good from a financial perspective. We are building up a diversified portfolio that is not too far off the benchmarks, in terms of industry or sector allocations.

 

Our sector allocation strategy is usually to do a minor adjustment above and below benchmark depending upon where we are in the economic cycle. But never more than +/-2% from the overall benchmark allocation. If the benchmark is at 12%, we are going to be in the 10%-14% range in that sector. Right now we have our most dramatic variance from benchmark because we believe that we are at risk for a potential double dip. So we are as defensive as possible.

 

 

What skills do you look for in a candidate who's trying for an entry-level role in this field?

 

Most important skills are passion for the SRI concept that the capital can be employed in a way that has positive environmental and social impact. You will need really good accounting skills. We want people who have good financial analysis knowledge. You need to have a passion for what we do and ultimately you just need to have good accounting and financial analysis background. I have noticed that many successful analysts have come out of a solid background. Many of them are CPAs.

 

 

What do you think about courses like CFA?

 

CFA is very important and provides relevant background knowledge. It demonstrates strength in financial analysis. My ideal candidate will be somebody with a passion for environmental and social issues and have a CFA and a CPA. That would be my strongest candidate. That’s the strongest skillset, I can ever ask for in an investment professional.

 

 

How has the SRI index performed against non-SRI indices?

 

The only consistent long-term benchmark that has got environmental, social and governance factors integrated is Domini Social Index 400. The Domini 400, has demonstrated that there is a positive impact by corporations with better performance on environmental, social and governance factors. The returns are above the S&P 500. While there are anomalies in some periods of time, the return over a long time shows better performance by SRI funds. For example, you had a period of time when oil was over $140 a barrel and oil stocks took off. And because there is a bias against extracted industries to incorporate environmental impact, we were under-weighted in oil stocks.

 

Due to these conditions, there was a brief period of under performance. Generally, in a full market cycle you are able to capture the additional alpha by incorporating these factors. So there is evidence contrary to the conventional wisdom that this is costing investors. It actually does not cost investors to integrate environmental, social and governance factors and adds to their investment return.

 

 

How will the SRI funds get affected with the growth in the energy industry?

 

It has got a bias towards the energies of the future as opposed to energies of the past. So if we want to look forward 20 years, I am going to outperform because I am under-weighted oil while I am over-weighted renewables. We have got tremendous increase in energy demand and that’s going to be filled by renewables as we may not have enough oil. Perhaps nuclear energy can help but it’s not going to be fossil fuels. So, I am positioned in faster growing sectors  and companies that have lower environmental footprint.

 

 

Within SRI, community investments are gaining ground. Can you please tell us more about “Community investments”?

 

“Community Investments” are fixed income instruments that are part of our fixed income portfolios. They are targeted to usually to either a specific geography or specific end results. The results should meet the environmental and social objectives of our investors. So, if we have a client who says “I am really interested in job creation in Vermont.” Then we will find a community bank in Vermont and buy a certificate of deposit. This is a way to direct capital to either a specific geography or for a specific purpose. We also have clients that say I want a part of my investments to promote sustainable agriculture. And so we will invest in organizations that are giving loans to promote sustainable agriculture. A good example is Grid Capital which is lending capital for sustainability in agricultural projects around the globe, including Asia.

 

 

What's the future prospect of SRI in an emerging market like India?

 

In order to do more investments in India, we will need greater transparency in social, environmental and governance factors. There are some big companies and banks that are good investments. However we have been very cautious in emerging markets. There are a lot of different database services that are providing us good detail on environmental, governance and social factors in Europe, USA and other developed markets. So we can cross check things as we have 3 different suppliers of information. We need more such database services in emerging markets so that the data can be verified. That will help us to feel comfortable to move more assets to the emerging markets.

 

Currently it is difficult for socially responsible investors to put a significant part of their investment in a developing market because of lack of information. There are a lot of opportunities for someone in India to start these services. We have invested in one Indian bank and it’s part of our portfolio.

 

 

How are the skills required for SRI investment management different from traditional investment management?

 

It’s not really different. There is a view that companies can, in perpetuity, externalize cost even though they do things that are not sustainable and not end up paying a price for that. Suppose we discuss with a traditional investment manager in US whether the working condition, in the company he is investing in, is good or not. He says, “No, I don’t care”. They choose the cheapest source that they can find. Cheapest source doesn’t mean that they should put their employees in unsafe or hazardous environments. Such practices are not sustainable. At any given time, something could go wrong which can suddenly close the factory, due to Government regulations etc. Work conditions matter.

 

The difference between SRI and traditional investment managers is that there are factors that matter that are being ignored by many traditional managers in US. If you ask the question, “Do these factors matter?”, you still get the majority of fund managers saying that environmental impact doesn’t affect their investment decisions. But it should be. That’s the difference. I don’t see this as a difference of what skill is relevant. I see the difference as what skills are being employed and used.

 


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