Artisan Canvas

Thoughtful Evolution in the ESG Era

ESG has been an increasingly hot topic over the past couple years—and if anything, the recent pandemic and accompanying market volatility have accelerated many ESG-related conversations. As a firm without a centralized research function or a CIO, Artisan Partners’ approach to ESG and related topics has necessarily looked different. Our business model is deliberately decentralized: We have nine autonomous teams, each of which approaches investing in its own manner, using its own philosophy and process. But despite their differences, our investment teams share a common feature: They all are dedicated to conducting deep, fundamental research—albeit in their own fashions and according to their own definitions of what is important and what matters. Like our investment teams, the firm is equally grounded in deep, fundamental research. We believe in approaching any complex topic thoughtfully and armed with as much research as we can reasonably conduct—which has been our approach to ESG from the start.

While the individual components of ESG—environmental, social and governance considerations—seem straightforward on their faces, the subject is a highly complex one requiring a considered approach. Not only do the E, S and G live on separate spectrums, but so, too, do the approaches to applying ESG—from integration to inclusion or impact. Though there has been a big push for asset management firms to quickly adapt and adopt, we believe a deliberate approach is a long-term better one—not just for our clients, but for all the stakeholders involved. Our intentionally measured approach to folding ESG considerations into our firm is thus motivated by two primary considerations: First, our business model demands it; second, it’s the right one for our stakeholders. In the remainder of this post, we’ll focus on the some of the investment team-related aspects of ESG integration; in future posts, we will discuss how we think about our stakeholders in the ESG context.

In our view, the consideration of material (or potentially material) environmental, social and governance issues has always been a part of our teams’ investment processes. We would submit that the dichotomy often presented between ESG-based investing and “traditional investing” is a false one. We’re hard-pressed to think of an investor who isn’t in the business to earn a return for clients. By definition, then, investors must weigh any factor which could meaningfully impact companies’ share prices over the long term—for good or ill. As deep, fundamental researchers, our teams seek to understand all material considerations facing companies, including ESG issues.

A byproduct of our autonomous team structure, though, is that each team considers these issues in its own way. As a result, practices vary widely across our teams. Said differently, at Artisan Partners, we have nine distinct approaches to ESG integration: There is no “house view” on how best to integrate ESG—just as there is no “house view” on how best to invest in markets or how best to pick stocks or bonds. Nor will there probably ever be.

As ESG has become an increasingly household term, data and research about ESG issues are rapidly proliferating. Our investment teams are absorbing and integrating this new information into their processes, but it’s worth noting the quality and usefulness of these data and research varies considerably—as does the quality and usefulness of all investment research. As our teams identify emerging ESG resources that may be helpful to their research and investment processes, they are systematizing its use and assessing its contribution to their investment decision-making processes.

It’s also worth noting that it is precisely these complexities which, in our view, make high value-added active investing particularly well-suited to address the nuanced and evolving ESG landscape. ESG issues require multiple layers of analysis by thoughtful people with a deep understanding of the companies, industries, geographies and products in which they are investing. The questions are myriad—from scientific (how are the climate and environment changing, and at what pace?) to political (how will society and policymakers perceive these changes, and in what ways and how quickly will they respond?) to company-specific (how is a given company positioned today relative to these issues, and how will it respond and adapt moving forward?). And then there is the ever-present investing question: How much of all these considerations is already accurately reflected in a given company’s share price? Sifting through these questions (and others) is complicated and requires a dynamic approach. We’re consequently skeptical a passive approach—assigning thousands of companies quantitative ESG scores and constructing a portfolio based on those scores alone—is sufficiently complex and nuanced. Rather, it requires the skill of highly experienced teams of portfolio managers and research analysts who have the requisite knowledge, judgment, experience and flexibility. In other words, it requires value-added active managers.

In our 25 years as a firm, we have rarely, if ever, put ourselves forward as leaders on the next hot trend, whatever it may be—a feature of which we’re proud. Rather than be on the leading edge of change, we would much prefer to take a gradual, data-driven and considered approach to how we think about whatever the latest topic may be. Not only does this give our teams an opportunity to maintain the integrity of their individual investing approaches, but it seeks to help us avoid making what could be costly mistakes for our clients and stakeholders. We look forward to sharing with you in future posts how we have approached this latest evolution.