ValueWalk’s Raul Panganiban interviews George Mussalli, Chief Investment Officer and Head of Equity Research at PanAgora Asset Management. In this part, George discusses his portfolio management process, the idea of greenwashing, if ESG regulations will benefit investors and companies, and the changes happening with the transition to President Elect Biden’s administration.
The following is a computer generated transcript and may contain some errors.
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The Idea Of Greenwashing
Right, while the past can be insightful, the future is ultimately what we're concerned about. So for those companies, let's say that you hope will improve their metrics in the future, if, let's say five years from now, they haven't fulfilled your initial expectations, what's even considered top consider dropping them for your portfolio? Sure, you know, I, BB client, you know,
you know, we know how it works, right? You know, we'll have a universe of 1000s of companies. And, you know, what were the the benefit we have is to his breath. Right. So, and I think that's another component that fits well into con ESG. You know, and if you if you think about the difficulty in the process of managing a portfolio, it's doubly hard when you talk about ESG. So, you know, take ESG out of the picture, right? We have a quant manager and fundamental manager, both of us are trying to beat the benchmark, right? So we're trying to add on 1000s of companies, we're trying to find the ones that'll do the best going forward, right.
So, you know, a typical fundamental approach is start with 2000. companies do some screening and dig deep into a couple of 100. Right.
Whereas clients we can rank up to 3000 companies every day, and pick among the best.
Now the thing is with when you when you add on each other dimension, you not only have to pick the companies that are going to do the best, but also our strong ESG performance as well. And I think that just lends itself to the current
framework. And to answer your question, you know, we're going to do great we can become will be one of the best performing managers, if we, you know, if our if our positions, you know, if you know, 50 to 53% of our positions, do well, right. So, because we're looking at a lot, a lot and a law of large numbers. We don't need, you know, a huge hit rate to help perform, so we'll get some wrong. But you know, that doesn't preclude us doing well, orange light.
And coming back to the idea of greenwashing. Many people are worried that companies are engaging in PR stunts, more than making a genuine effort to self improve and be responsible, as you mentioned, can you explain how POM Cora leverages NLP and machine learning to differentiate between these two?
So we see it. And it's very evident in the data that this occurs. I can use the third party data ranking company companies, you know, as an example, right? If we just look at, you know, these scores issued by these third parties that a lot of people use this huge bias in larger companies have better scores? And the question is, are they really better? ESG companies?
Do they really care about their employees and governance more? Or is it that they have stronger PR firms, and better investor relation departments that can publicise their good deeds better? And I think it's the latter. So we need to be wary of that right? Or else, you're just going to get the, you're gonna buy the companies with that, you know, ringtone, quality of that investment aerations, not the quality of their ESG action. So we do a lot of different things to combat that.
One is we have a part of our model that that identifies this using NLP, you know, they, you can be very verbose on adding a lot of ESG you know, a word in your press releases, but not, you know, actually showing that you're doing anything in reality, right. So there's a lot of different ways we can look at this. One is compare a company press releases with third party, text, from regulatory boards, you know, client and customer interactions, things like that, not coming from the amounts of the company that align them up to see how it's going.
And then another piece of the model that looks at kind of companies that fess up and say, you know, we know he did a bad thing, we messed up. And going forward, we're gonna do better. Right? Now, that's a sign of instead of a company, continuously pumping out great press releases company that that that admits fault, and wants to do better, is a good sign. Excellent.
And because of these issues, with ESG, data reporting and inconsistency between ESG ratings, some people are pushing for the Securities and Exchange Commission to require and standardised ESG disclosures. Do you think regulation could could provide benefits for both investors and companies?
Yeah, we believe that a big issue an issue today it's a source of competitive edge because they think we can collect and
clean and process data in ESG kind of better than them and others right today, say it as a that is the yardstick of sophistication in ESG. And we found that in a study that that companies that report, more ESG data, actually do better as well.
So more disclosure leads to better performance, lower cost of capital, things like that. So we're actually working on a project that will try to encourage companies to release more data. But as you said, I think we don't know at what point in the future this will happen. But I'm sure 10 years from now,
just as you can't find, you know, a line item in your financial statements, or else you'll get caught by the SEC. I'm sure there'll be more standardised ways of recording metrics.
In the future.
Do you anticipate any of these changes happening with the transition to President Elect Biden's administration?
I'm sure there'll be a change I think, I think today, you know, the one reason why there's less demand in the us today for ESG is on the on the retail, Private Wealth type platform, right? People are understanding that, you know, they want to have exposure to these companies, they don't want to invest in or ESG companies personally, however, on the on the defined benefit and defined contribution plans, which are regulated by Department of Labour, it's inconsistent, why they came in river, the rulings, say you can't really just look at ESG as a first.
I already in these so so managers of those funds are leery versus other parts of the way it's actually opposite in Europe today, and going forward in the next couple of years, you can't invest in a manager unless he's there unless the managers uses ESG metrics, right. So there's kind of two opposite sides of the spectrum. And I believe there'll be more clarification from the new administration on how to best use ESG in these plans will just increase the demand for more credit in the US.
All this has been very fascinating. And to close our conversation, I'd like to quickly ask you, what areas of expertise what areas of ESG data do you view as one currently the strongest two, currently the weakest and three growing in importance?
Yeah, so we've have a long history in a Gora with within the governance space.
We've known how to collect it, we quantify it, you know, and there's a lot a large body of kind of fundamental and legal research to back it up, and is a very strong part of our model and will continue to be um, I'd say the weakest, as I mentioned, is environmental. But
I think with with more regulation and more disclosure, there's a lot, that's a very exciting area of research.
And I think the growing importance area is that is social with all the issues the country has faced over the last year, we see that growing in importance.
And, you know, we're actually addressing it in our models as well. You know, there's a lot of ways to address this. But your work, we've already found evidence that you know, diversity in the workplace helps the actual final financial outcomes firms. In a word, we're going to spend more time looking at ways for ways to quantify, like, thank you for taking the time for the podcast. And thank you for sharing all your wisdom. Thank you. I appreciate it.
See the full transcript on greenwashing and ESG.