Calvert: What’s ahead for responsible investing?

Calvert Research and Management has been a pioneer in responsible investing since its founding in 1976. After winning back-to-back Fund Family awards, it’s hard to argue that the firm’s adherence to environmental, social and governance principles isn’t working. To understand more about Calvert’s success, its investment outlook and the potential future of ESG investing, InvestmentNews Content Strategy Studio spoke with Anthony Eames, vice president and director of responsible investment strategy. Edited excerpts of the interview follow.

IN Content Strategy Studio: 2020 was a pivotal year for ESG investing, both in terms of asset flows and relative outperformance for many ESG strategies. Speaking broadly, what drove that success?

Anthony Eames: In 2020, we saw a real separation in how companies managed the COVID-19 pandemic. We found a number of companies that were able to prioritize the health and safety of their employees and provide flexibility, guaranteed income in some cases or other benefits for employees. We also saw some companies that were able to pivot to curbside pickup or finding other ways to ensure their customers were taken care of from a health and safety perspective. 

By and large, 2020 was a year where companies with better management of their material ESG factors performed better than companies with more risks in their business as it relates to ESG factors. Looking specifically at Calvert, I think our approach to doing ESG analysis was really strong. Our suite of indices did really well last year. We also had a number of actively managed funds that did well.

IN Content Strategy Studio: What differentiates the firm’s research and process from other ESG managers?

Anthony Eames: First, we do our own research. We’re not simply relying on ESG ratings or scores from data providers and then applying them to our portfolios. We’ll use their raw ESG data to begin our process, but we know there’s a lot of variability in the data that comes from those providers so we use multiple data providers. Beyond that, we’ve had to create some custom indicators where we think there are holes in the data. The end result is proprietary research and a proprietary view.

Another difference is that we don’t start from a set of screens or exclusions. We begin with the Calvert Principles to evaluate companies’ management of material ESG risks. Our goal is to score, compare and rank companies. We also do quite a bit of shareholder engagement to push companies to be better … to disclose more or improve in areas that are financially material to their business with the goal of making these firms better companies and strengthening our position as an investor.

I think another item that differentiates us is the level of detail in which we rate and prioritize ESG characteristics that are specific to companies in different industries. The Sustainability Accounting Standards Board (SASB) has given guidance to issuers on the ESG factors they want them to disclose based on what the board believes are material for businesses in that industry. They do that for about 75 industries. We do it for about 200 industries. We create 200 distinct performance evaluation models in our system. With each of these models we create an investment thesis that articulates which E, S and G factors matter most for the business they are in. 

For example, for a consumer finance company, their data security, product suitability process and corporate governance are critical. If we’re looking at an industrial machinery company, their energy use is more material, as is their workplace safety. With each of the models, we put a different weighting of importance on the E, S and G factors that matter most to that business. 

IN Content Strategy Studio: Give us a broad outlook for equity and fixed-income markets for the rest of the year.

Anthony Eames: It’s hard to imagine some of the high-momentum, higher-beta stocks will experience the same kind of returns they did in 2020. We anticipate that higher-quality companies — which we would define as those with higher profitability, low debt and other superior financial metrics — will be more attractive.

In fixed-income markets, rates are still low from a long-term perspective, but have gone up this year. A bond manager’s ability to be diversified and look for other opportunities for yield outside government debt will benefit. Duration management and having a more diversified portfolio will be key. 

IN Content Strategy Studio: In terms of ESG issues, what’s in store for 2021?

Anthony Eames: It’s going to be an interesting year. We have a more supportive administration as it relates to ESG. There is already a movement to get companies to consistently disclose their ESG performance. We don’t have a compulsory system where companies have to disclose information. Investors have to work harder to make sense of the data and compare the data across issuers. We would anticipate the SEC providing more guidance around companies disclosing their performance on ESG factors. 

I think you’ll also see work on the front of better identifications and descriptions of different managers’ ESG products, so that investors and advisers can better understand what they’re actually doing. Managers who claim they do ESG investing will have to really prove it. They’ll have to be able to prove they have a process and their portfolios, at the end of the day, achieve some progress on ESG issues.  

To read more about this year's winners, click here.