In Episode 4 of The ESG Update, Founder of Verity Platforms, Jeff Marsh, joins the pod to discuss ESG current events and Verity, a platform for research and shareholder advocacy.

Transcript

Dan Carreno, Change Finance:
Welcome to The ESG Update presented by Change Finance. I'm your host, Dan Carreno. I'm the head of business development at Change Finance. We are an ETF provider dedicated to environmental, social, and governance investing, and our mission is to help investors align their portfolios with their values without sacrificing returns. Joining the pod this week is Jeff Marsh, founder of Verity Platforms. Jeff, welcome. How are you doing today?

Jeff Marsh, Verity:
Doing well, Dan, thank you for having me.

Dan Carreno, Change Finance:
Glad to have you here. Personally, I am a believer that Verity is going to be a very big deal for ESG investors far and wide. We are going to talk all about the platform, but first, Jeff and I are going to briefly discuss the latest developments in the world of ESG investing. Jeff, ready to dive in? Sounds good. The first article this week comes from Funds Europe. It's titled “CFAs Propose Standard Definitions to Deal with ESG confusion.” So the CFA Institute is developing a set of standards for ESG investment products. They're more granular than what I've seen from some others who are trying to do a similar thing. They came up with six ESG categories. I'll list them off quickly. ESG Integration: Those that would consider ESG factors along with traditional financial metrics. Then you have ESG Exclusions: where one might block out certain things due to ESG considerations. Best in Class is the third category: those that aim to invest in securities that perform better than peers on the ESG metrics within various parts of the market. A fourth category would be ESG-Related Thematic-Focus: think about sectors and industries like cleantech and things of that nature. Impact Objective: something that seeks to generate a positive, measurable social or environmental impact. And then finally, the last category is Proxy Voting, Engagement, and Stewardship: those investment managers that would use their rights and agency as shareholders to influence corporate activity. I'll stop here with a quote from Margaret Franklin, President and CEO of the CFA Institute. She says that “in the face of growing interest in ESG investing, we found widespread support from the investment community for the development of a standard to reduce confusion and facilitate better alignment of investor objectives with product intent."

Jeff Marsh, Verity:
Overall, I think this is a welcome step in the right direction. One of the things I get a little concerned about is that there are so many different standards being thrown out there. There's a risk that we have an alphabet soup situation where there's just so many different standards out there. Investors and companies can lose track of what standards they should be looking at. How should they be thinking about their processes and things of that sort. I also don't necessarily think of the CFA Institute as a standard-setting organization. I think they do fantastic work. Overall looking at the classifications, I think they hit a lot of the main strategies. It's usually not like one or the other. I look at these different classifications, and I think a lot of strategies would probably incorporate three, four, five, even all of these different classifications. So, I wonder how it would work in practice.

Dan Carreno, Change Finance:
My understanding was that these are intended to be a sort of checkboxes, where one particular fund could fall into multiple categories. You could be incorporating ESG integration and proxy voting and engagement at the same time. And I agree, it's interesting that it's coming from the CFA Institute. You don't typically think of them as a standard-setting organization, but there is a vacuum out there right now. Somebody has to step into it. I think they're stepping up to the plate, which I appreciate. But sooner or later, somebody at the top, whether it be the SEC or some other organization, is going to have to step in and dictate these standards for the industry as a whole. Otherwise, we have too many standards floating around out there, and it becomes even more confusing than it is now.

Jeff Marsh, Verity:
Exactly. If 25% of the market is looking at the CFA standards and 25% is looking at other standards, then companies and investors are going to start thinking about addressing all those different audiences. That increases the cost of business and would probably discourage any adoption at all. Eventually, it's going to have to come from the top.

Dan Carreno, Change Finance:
Moving on. The next article we're going to cover this week comes from FA Magazine, titled “Dalbar Slams DOLs Proposed ESG Rule Saying It Hurts Plan Participants.” For those that are not following this developing story, the DOL has proposed a rule that more or less discourages advisors from including ESG products in retirement plans. The market research company Dalbar has come along, and they're pushing back on that proposed rule because they say it will hurt plan participation and contribution levels. Dalbar conducted a survey, and they found that 76% of employees are more likely to participate in planning that included ESG investments. The DOL proposed rule states that plan advisors can only consider financial factors in the formulation of investment menus. Dalbar is saying that ESG investments are in demand by participants. Therefore, they're more likely to promote participation and maximize contributions. Ultimately, that leads to better retirement income outcomes, which are certainly financial considerations. I thought it was interesting to see Dalbar, an organization many of us respect in the financial industry, coming out firmly against this proposed rule. What do you think, Jeff?

Jeff Marsh, Verity:
Honestly, I found the whole DOL proposal puzzling. The whole situation doesn't make sense. For example, we have the SASB framework integrated on the Verity platform. It identifies ESG criteria that are financially material to a given industry. Obviously, if it’s financially material, it's something that companies should be reporting. And then, the investors should be looking at that information because it is financially material to the investment process. So I just found the whole thing puzzling altogether. I don't know if you noticed the recent USSIF blog that was a collaboration between them, Morningstar, Ceres… I'm blanking on the other organizations that were part of that article. It was a collaborative study that looked at the comment period, which I believe just ended at the end of July. They found that 95% of the comments oppose the DOL proposal.

Also, one of the things that was so bizarre about the proposal is that they didn't provide a case that inclusion of ESG funds was a problem to begin with. They didn't provide any evidence that ESG issues are not financial material. They put this proposal out there without any evidence for why they were even making the proposal.

Dan Carreno, Change Finance:
My understanding is that many of the opposing comments came financial institutions and the heart of Wall Street. This is something that the investment industry does not want. It’s bizarre. It seems like it was put together in a very haphazard fashion, but hopefully, the pushback coming from Wall Street and organizations like Dalbar will be enough to stop. Moving on to the next article, which comes from Bloomberg, it’s titled “Long-Term Investors Now Hold Sway Over ESG.” I'm just going to read a few lines from the article and then Jeff, I'd like to get your perspective on the other side. So let me start with “in the review of the 2020 proxy season this week, Morgan Stanley analysts found environmental proposals have declined 64% since 2016, as companies have been more inclined to preemptively address shareholder environmental requests rather than risk a proposal. Social proposals, however, have increased steadily over the past four years. Both kinds of proposals saw increasing support with the average up to 26% in 2020 compared with 19% in 2017.” So, Jeff, what do you think?

Jeff Marsh, Verity:
This is a great step. It's a sign of a kind of maturation of ESG. The article spoke a lot about long-term, larger institutions having more influence on the process. From my perspective, ESG and sustainability issues have always been a question of fiduciary responsibility. I don't know if that was necessarily widely agreed upon, but I think the fact that you see long-term, larger financial institutions getting more involved is a sign that there's a growing acceptance that it is, in fact, a fiduciary responsibility to take these issues into consideration and to be active shareholders. From my perspective, that's a great thing.

Dan Carreno, Change Finance:
This made me think a lot about our transition to a more stakeholder centric economy and form of capitalism. I believe that Verity is a really powerful tool and platform that is going to accelerate that transition. I thought this would be an excellent point, Jeff, for you to tell us all about Verity. What is the mission of the organization?

Jeff Marsh, Verity:
I appreciate you saying that, Dan. We've been working hard on developing Verity, and I'm very excited that we're just a few weeks away from properly launching it. The way we think about Verity is a sustainable finance platform that's meant to help support what you just talked about, the transition to a more stakeholder-driven economy. The way we do that is we marry the ability to perform contextual research and analysis around traditional financial figures and extra-financial data. ESG, as well as process and policy data, which I'll talk about in a moment. That's important, and we marry that with the ability to engage companies and investors with stakeholders. Our platform has two parts. You have a research and analytics side of the platform, and we also have a full-blown engagement solution. That engagement solution allows for individual one on one conversations or group conversations. It also allows you to easily start collective engagements or to discover ongoing engagements and then participate in them. Going back to that last article and when I was mentioning this need for long-term relationships, what we love about our engagement platform is that it allows that to take place. You have the ability to create a room that could house engagements. It isn't limited to any particular point of time. If you're an organization or an investor that has a position in a company, you can create that room and have this ongoing transcript that is recorded between you and that other party. Relationships can live within that room. Maybe you engage with somebody over a period of weeks, and then you go six months without engaging with them. You can go back to that room, and you can engage with them via messaging or via conference call. Then you have that transcript that sits in that room that allows you to reference where you are in that relationship. We're trying to marry the ability to conduct research and analysis with the ability to actively engage with companies as well. A lot of the best research that's out there and available on ESG or sustainability issues isn't necessarily being created from traditional sell-side Wall Street firms. A lot of the best research is being created by stakeholder organizations or academics, and that research isn't necessarily being created in a manner that's conducive to financial analysis, even though the research itself contains financial material information. One of the great things we do on the platform is we collaborate with these organizations, like Ranking Digital Rights or Five Gyres. We have a lot of information from the CDP as well. We take that information, and we put it into a framework that is more conducive to financial analysis so that individuals can more easily integrate it into their research process and into their business models. One of the great things about our platform is those collaborators also live and breathe on the platform. If you have a question about the research, you can use that engagement tool to reach out and ask a question. So, it's a full solution for the entire research process.

Dan Carreno, Change Finance:
I'm really glad that you mentioned the value of the data that is coming from non-traditional financial sources. At Change finance, we reference organizations like Carbon Tracker or the Rainforest Action Network. They are doing some amazing work in terms of the research that they're putting together, and that can be lost on investors sometimes. So Jeff, let's say I'm an investor or an asset manager or a stakeholder organization, and I log into the platform, and I go to the page of a random company, what type of information would I expect to find there?

Jeff Marsh, Verity:
If you were to click on the company's profile page within the search results, you'd be presented with a nice landing page that highlights key financial, extra financial and governance information for the company. You'll see any active engagements that they're a part of on the platform. You’ll have the ability to join that engagement. You can join that engagement as a participant or as an observer. One of the things that we're hoping to do is make engagements a more common part of the research process. So if I'm researching a company and I see they're part of that engagement on GHG emissions and that's a topic that I want to learn more about, maybe I'll join that engagement as an observer. I can be a fly on the wall. Maybe I won't be able to participate or add any thoughts to the engagement itself, but I'll be able to be that fly on the wall and sit back and learn from people that are participating and know more about it than I do. We're really excited about that. There's nothing wrong with the way engagements are structured right now, but we think it would be great if they became a little bit more commonplace and more of the everyday research process. We want to make that possible. We view our engagement tool as a full engagement management solution.

Dan Carreno, Change Finance:
Promoting the collaborative aspect of engagements is really important because, I can say from experience that at Change Finance, we belong to some investor coalitions that are focused on social justice, and other investor coalitions that are focused on environmental issues or climate change. They all live in different areas. I think it's wonderful to centralize all this and to have one platform where organizations like Change Finance can work together consistently on many different issues, spanning environmental and social issues, and build stronger relationships amongst ourselves. Hopefully, our engagements are then that much more effective. Speaking from personal experience, I can say that at Changed Finance we engaged with a variety of different companies requesting median racial and gender pay gap data. We have begun a collective engagement on Verity. And we are going to have this area where this engagement will live on, and we will consistently be communicating with these companies over long periods of time and continually building the case as to why this type of data is important, not just for promoting social equity, but also important for us as investors in order to make the right decisions on behalf of our clients. We are big proponents and really appreciate your efforts.

Jeff Marsh, Verity:
One more thing I wanted to add to what you noted about your engagement and it living on Verity. There's two things. One is that having an engagement on Verity also provides evidence to your shareholders, or if you're a stakeholder organization, evidence to your donors, that you are engaging. There's a unique URL that's available for every engagement. If you want to provide a link, you actually have evidence of that engagement available for third parties. It doesn't necessarily mean that everything within the engagement is available to those users. Users will be able to click on the link and get taken to at least an overview. The moderator of the engagement has the ability to change these settings, but you'll be able to click through and actually see the evidence.

Dan Carreno, Change Finance:
I see that being very useful for advisors and asset allocators that are trying to cut through the greenwashing that is somewhat prolific in the industry right now. You would be able to at a high level, go in and see if a company that claims to be engaging in shareholder advocacy, is actually doing it. I could see that being very useful. We're going to wrap it up there. I want to remind all the listeners that if they want to find the articles and resources that were discussed during the pod, you can always go change-finance.com. You can find our podcast library under the INSIGHTS tab, and links are provided within the podcast transcript. And if you have questions or feedback for us, you can always get in touch with us through the website. And Jeff, if listeners want to learn more about Verity, where should they go?

Jeff Marsh, Verity:
So you can go to two places. They can go to https://www.verityplatforms.com/, or they can go to https://www.verity.app/#/, that is the platform itself. We are looking to launch the next two weeks, so look out for that. We encourage everyone to come check it out.

Dan Carreno, Change Finance:
I really appreciate you being on today, Jeff, and sharing your insights. Thank you to those that tuned in, and we will be back soon with another episode of The ESG Update.