Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Diederik Timmer, Global Director for Sustainalytics.
Hi, Diederik.
Diederik Timmer: Hi.
Wall: So we've heard a little bit about so far at the Morningstar Investment Conference why investors should care about sustainability. But we don’t really understand or at least I don’t understand that much about what makes a good ESG company or a bad ESG company?
Timmer: Yes. So in that sense companies operate in a broader world, right in a whole environment and they have responsibilities to all the stakeholders around the company. So they have responsibility towards their clients, responsibility towards their shareholders, towards their suppliers for instance.
What a good company does is that they manage those relationships really well and it doesn’t really mean that they do everything that they want. But what they try and do is intersect these so called sustainability drivers with their business drivers and they look for opportunities and they look for risk management. So that overall with their strategy they take a long term view and are also therefore able to perform well on both the societal as well as on a business perspective.
Wall: So really it's about aligning interests.
Timmer: Yes, absolutely. And typically that also comes with leadership and that’s the second component of sustainability it relates to, how well a company manages its operations. How the set of responsibilities organised within the firm and also are the objectives also met in that sense. Do people on the work floor relate well to what management is saying. And I think that’s really important that within a corporation there is an environment where they look at their surroundings and perform well towards those in the long term.
Wall: So it's not just looking at those companies which we may traditionally think of as ESG firms. So for example those not involved in the drilling for oil, it's looking at companies across all sectors on these basis.
Timmer: Yeah. I think when people started to invest in funds that were more ethically oriented. They typically had clean hands if you know what I mean. So they stayed away from these industries or these products that they felt were harmful. And I think the industry and the funds have really moved on and they are not just looking at what are the companies doing and what are the harmful effects of some of the products that they create, but also more within their normal operational environment, how do they take this into account.
How do they organise their organisation and it's really moved from just perspective of clean hands and moving away from companies, to really effectively managing this and within a firm also enabling change for instance.
Wall: How do you measure that, because all of that seems like beauties in the eye of the beholder a bit. I mean you can sort of say I quite like that Chief Executive he seems like nice chap, I'll give him a high ESG rating. There's got to be sort of quantitative and qualitative measures to this, don’t they.
Timmer: So what our firm is specialised in is that we look at companies through a sector specific lens. So we compare mining companies to mining companies, industrial companies to industrial companies, and we look at which factors are now most important. And based on those factors we create a set of indicators and these indicators we score for performance based on company reporting. And it means that we can actually score them in the end on an overall ESG performance, but also for instance at a lower level how well they do in terms of environment, in terms of social issues and as well as in corporate governance issues.
So we try and be as objective as possible and we try and translate all the qualitative information we get from a firm and from the outside world into a more quantitative measures. Because scores are really helpful to have a very quick take on a company and then you can drill down and have more insights.
Wall: Those measures, it's that analytics that you are pushing behind the new Morningstar Sustainability Rating, isn’t it?
Timmer: That’s right. So what you really need as objective as possible measures, right on a very broad set of factors. And that’s where it's really important to do this also in very structural, very objective way and as you know sustainability can be quite subjective in that sense. And what we really try and focus on is to try and create a set of criteria that's as specific as possible that measures it and makes it objective in a best way in that sense.
What we are seeing over time is for instance 5, 10 years ago, the metrics with which we could operate because of lack of transparency was very limited. Right now, we're getting far and far better insights on how companies are really doing and it also allows us to provide more insights. I think maybe five or 10 years down the line we'll really have a far better insight in how all companies operate in that sense.
Wall: And how are corporates doing, because presumably as well as getting greater insight into what corporates are doing you are hopefully also seeing that they care more about these things.
Timmer: So it depends of course where companies are located and we analyse companies across all countries. And what we typically see is that there is an increased transparency coming from companies. So they tell the public and they tell their shareholders what they are doing.
I think what we are also seeing is that increasingly companies are developing policies and management systems to implement those policies. Where we do believe there is a real gap is based on performance. So how well is a company now really doing, did they achieve the targets that they set, did they achieve them on time and I think that’s where there is really a whole lot to gain still and I really hope that the quality of reporting on especially those fronts are improving, because in the end you do want to measure performance and not just activity that leads to performance in that sense.
Wall: So people aren’t just paying lip service to these concepts; they actually are living ESG?
Timmer: Yes. So, increasingly, companies, really from a strategic perspective, look at these factors and these aren’t discussed within the board rooms and within the work floor. So, I think, increasingly companies do look at these factors. I think there really are big differences, right? Some companies take it very seriously, others are really not and I think also there is a bond to identify between the leaders and laggards in that sense.
Wall: Diederik, thank you very much.
Timmer: My pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
