Transcript 

Ben Smith:

Welcome everybody to the Retirement Success in Maine podcast. My name is Ben Smith. I'm joined with my two cohosts. Curtis Worcester and Abby Doody. The fall and summer to my spring. How are you guys doing today?

Abby Doody:

Good. How are you?

Curtis Worcester:

Good Ben.

Ben Smith:

I'm good. I'm good. We had a really great episode last episode. We talked to Marty Grohman. And we talked about the future of energy use in Maine. And actually we're pretty excited that our topic today kind of dovetails right into that conversation. And one of things that we're talking about in today's day and age, especially with our clients, we're having more and more conversations, especially when we talk financial planning and advisory work that we do with our clients, about their values. And they want to incorporate their values in all aspects of their lives. And with anybody there are hot button items that they want to be impacting wherever possible. Maybe it's climate. Maybe it's social inequality. Maybe it's disclosure of a company's business practices. Could be lots of different things. And obviously 2020 was a really solid reminder of these issues to us. Especially as we saw how COVID impacted the world. And there's lots of urgent calls to address racial injustice after the murder of George Floyd. So according to the report on US sustainable and impact investing trends in 2020 ... And that of course tracked data as of year end 2019. It found that lots of investors are considering ESG factors across $17 trillion of professional management assets. And that increased 42% since 2018.

Ben Smith:

So a lot of the questions we're getting right now is what is ESG and how can someone tie their values to their investments? So that's the premise of today's show. Again, I think that really goes will with that whole energy. Of course, the climate discussion that we had in last episode. But of course because we are going to be referencing investments here a little bit today, and as you know our podcast, we try to take a little bit more of the human side of the retirement discussion and ESG is part of this. We might be referencing investments and investment strategies so we do have to read a little disclosure here for you. So just bear with me as I do that. Registration as an investment advisor does not constitute endorsement of the firm by securities regulators, nor does that indicate that the advisor has attained a particular level of skill or ability. The tax and legal information contained in this podcast is general in nature. Always consult an attorney or tax professional regarding your specific legal or tax situation. The information presented does not involve the rendering of personalized investment advice. Different types of investments involve varying degrees of risk. There can be no assurance that any investment or strategy will be suitable or profitable for your portfolio.

Ben Smith:

All investment strategies have the potential for profit or loss and past performance may not be indicative of future results. Information presented is not an offer to buy or sell or a solicitation of any offer to buy or sell the securities that are mentioned herein. So thank you all for kind of bearing with us in that disclosure but I want to really introduce our guest today. We're really excited to have her. It's really kind of a pleasure that we're all going to be able to interview her today. Our next guest today is the head of fundamental equity client portfolio management team for emerging markets and international equities in the Americas and an emerging market specialist at Goldman Sachs Asset Management or GSAM. She leads the building of the emerging markets and international equities franchise. She drives business expansion, designs new portfolios and communicates fundamental equity strategies to clients in the Americas. In her role as an emerging market specialist she's focused on helping clients gain appropriate access to emerging markets as well as assisting with a strategic asset allocation decision making process. She has 13 years of industry experience joining Goldman Sachs in 2008. She graduated from Lehigh University magna cum laude with a BS in finance in 2008. She was awarded the charter financial analyst designation, the CFA, in 2012. And at this point, like to welcome Katherine Bordlemay to the Retirement Success in Maine podcast. Welcome Katherine.

Katherine Bordlemay:

Thank you. Pleasure to be here.

Ben Smith:

Well, I'm really excited to talk to you. And first of all, I know when we meet in person the next time we'll do the secret CFA handshake because when you do that ... The CFA charters have to do the secret handshake. We can't tell anybody. We're on a podcast this quarter. We can't do it. So we'll do it next time. But Katherine, I really ... Obviously we want to dig into lots of things today. There's lots of things we want to get to. I know when we've even had the conversation with our clients like even mentioning ESG they go, "I don't even know what you're talking about these EGS letters." So we want to dig into all that. But of course with all of our podcasts we want to get to know you a little bit more. So I'd love for you to just start with where did you grow up and if you have any connections to Maine.

Katherine Bordlemay:

Of course. So I grew up in Lansdale, Pennsylvania. So I'm sure you probably haven't heard of it. It's a small town maybe 45 minutes north of Philadelphia. I don't have family in Maine but I've actually traveled to Maine many times. I can't claim myself to be a foodie but my husband is so I know that's a big claim for me. And also actually I know Stephen King I believe, the author, I think he's from Bangor, if that's right.

Curtis Worcester:

He is.

Katherine Bordlemay:

So my husband's favorite movie is The Shawshank Redemption. I know he's had some Stephen King books so that's kind of a fun fact I have about Maine.

Ben Smith:

So I got to time out right now on you Katherine. You made the cardinal sin about talking about Maine. So whenever you reference Bangor it's Bangor.

Katherine Bordlemay:

Bangor.

Ben Smith:

Yep. You always have to go hard G with the Mainers there. All right, so now we got that out of the way. Because again, foodies, of course Portland, especially coast there's lots of great food to experience. And I can't blame you for making the travel up to Maine to do that. But I want to hear a little bit more about your educational and professional career path towards working to Goldman Sachs but then also, I know you've been with Goldman Sachs since 2008, so then once you got into Goldman, what was your career path like as kind of migrating up to the emerging market specialist role?

Katherine Bordlemay:

Yeah. So I'm born and bred Goldman. I actually did an internship when I was at Lehigh in college back in 2007. Then I graduated in 2008 as you mentioned and I joined full-time. And by the way, joining the asset management industry during the global financial crisis was for sure an experience to say the least. Learned a lot. Definitely kind of saw a lot of changes over the last several years. But I came into a role within our finance department, worked with a lot of great people. I actually did interim mobility a couple years in to the asset management division which is where I sit now. And I came in at a more junior level on our fundamental equity team which is like bottom up stock pickers. And within that team I worked on ... We call it client portfolio management which is the team of individuals that build a lot of the communication and we help drive kind of business growth for our franchise. And I specifically gravitated towards the non US equity part. And I just always found it so fascinating and interesting to learn about different countries and cultures and how maybe something so boring to us like a grocery store is completely innovative in Poland. Maybe they don't have that yet and this is a great investment opportunity. Like innovation for them is not necessarily innovation for us. So that was just always very, very interesting and appealing to me.

Katherine Bordlemay:

And I've really been in this same role for over 10 years now and have kind of grown up in the role. And it's really been a phenomenal place to work with. And I know everyone ... This is such a cheesy thing to say, but people ... And actually the first day I had at Goldman Sachs out of college, I remember we sat down during an orientation and the woman that sat next to me is one of my best friends today and she was even a bridesmaid in my wedding so it's been great. A great time for me of course professionally and also personally.

Ben Smith:

That's awesome. I know you touched it a little bit there, but what do you love about your job on a day to day basis? What do you find fulfilling?

Katherine Bordlemay:

Yeah. Definitely the constant just learning and growing. No day is the same. Especially with the equity markets. As much as sometimes we want it to be, it will never be boring, especially investing globally. So you're constantly growing, you're constantly being challenged and I think that's a beautiful thing.

Ben Smith:

And I'll say too is especially I think where my personal experience too going into working in the financial markets pre 2008, pre financial crisis is you go through that, you go, "Is it always like this? Because this seems really pretty action packed on a daily basis." So I'm sure you kind of had a little echo of that afterwards like, well when's the next one coming up because it's been a few months? So Katherine, I want to ask you again ... Our show today we're titling Aligning Your Investment Dollars With Your Core Values Through ESG Investments. So I really want to kind of dig into kind of this theme here and really our first question for you here is, when we're tying our values to our investments there's really not a new thing. This isn't something that's just kind of come out in 2020. But it's a concept that has obviously grown more popular and it seems like it's growing pretty rapidly. And over the years we've heard a few terms about this is SRI, ESG. You've heard impact investing, socially responsible investing. Lots of different kind of ways that's it's been called over the years.

Ben Smith:

Can you help us define what these are and then what the acronyms mean and how they're different from each other? So maybe just kind of start with that.

Katherine Bordlemay:

Perfect. So first lets start with SRI because that one's been around the longest. I'll spend the least amount of time here. So SRI. Socially responsible investing. This is very much an outdated term. And the term that's much more commonly used today in the industry is ESG which stands for environmental, social and governance. The goal of ESG is to invest capital with the consideration of all of the ESG factors with the goal of one, outperforming a broad market index and secondarily to align investors' values with their capital. So zoom into that a little bit deeper. So first if we pick on the E, so think of environment. So with environment we're asking ourselves things like, does this company use their resources efficiently and sustainably? Are they looking to lower their carbon footprint? Where I am today I don't have a plastic bottle, I have an aluminum bottle so that would be brownie points for the E for that example.

Katherine Bordlemay:

For the S, think social. Think the betterment of society. Does this company have a diverse workforce by way of gender, diversity, sexual orientation, et cetera? Do they keep their employees? Do they retain their talent? If they don't maybe that signals something to us. Is it a safe environment? Is it an inclusive environment to work? And by the way, we'll talk about this more but diversity is useless if you don't have inclusion which we'll come back on. And then the G which stands for governance. Governance is just a fancy word for management. So good management is what we want to see. So is the management honest? Are they competent? Do they have a strategy for their business that feels very sound? Are they compensated in ESG criteria? Incentives matter a lot so that would be something we'd be very careful of. And what does the ownership structure look like? In some places in the world like emerging markets it might be owned by the government. There might be a family owned business. First generation, second generation, third generation. All those things come to play in terms of our overall assessment of the G.

Katherine Bordlemay:

So that's the E, the S, the G. Another way we kind of slice this is the flavors of ESG. Because there's a lot of different ways you can achieve that. One commonly heard method for this in the industry is alignment. So alignment, just think of you remove the bad stuff. Like we're just screening out the stuff we don't want. So the ESG offenders if you will. Sometimes people call them sin stocks. So think of things like weapons, tobacco, gambling, fossil fuels, adult entertainment, et cetera. And that is ... It can be subjective by the way. Like alcohol. I get questions on that all the time. Some people have very strong views one way or the other of that. So those maybe subjective but that's one way to just kind of remove the stuff you don't want. The second level often is called ESG integration. So that means that ESG is incorporated more holistically as a part or your investment process. So you might be doing those exclusions but typically that means the investment's doing even more than that. So they're actively considering all of these ESG criteria as a part of the more traditional fundamental research. Likely they're engaging with those management teams, giving them real feedback on how we'd like to see change on all of these ESG type of criteria.

Katherine Bordlemay:

And the third flavor, impact you hear a lot. So impact is ... I always think of this like high octane ESG for lack of a better word. So maybe an easy way to distinguish the difference between the impact and the ESG, for ESG I typically think of the strategies as more broad market exposure. So variety of sectors and maybe geographies. You're still getting broad market access and within those sectors and markets you're just finding the ESG leaders. But impact typically is more narrow. It's more thematic. So there's typically one very precise goal. Maybe it's climate, maybe it's social. And the primary objective is really leaning hard into driving a significant change on that theme. So if it's climate, that is primarily the goal. We are owning businesses that are clearly solutions providers in the fight on climate. And then likely there's going to be a high level of active engagement going on within that portfolio as well.

Katherine Bordlemay:

So again, we talked about the SRI, we talked about ESG. We defined the letters and we talked about the flavors within the ESG which is the aligned, the integrated and the impact. And maybe the last thing I'll just touch on is sustainability. So I get questions like what's sustainability, what's ESG, how are they different? In my opinion, I really view sustainability and ESG as really the same. I think where you want to get really precise is when you get into these alignment integrated impact. I think that's where you need to a little bit more defining to understand where we're actually putting our money to work.

Abby Doody:

Interesting. Can you walk us through some of the reasons why someone would want to invest their longterm savings in some of these vehicles?

Katherine Bordlemay:

Yeah. I passionately believe that incorporating ESG is an imperative for investment success. The first reason is if you just want to outperform any broad benchmark, ESG is one of many ways to help you achieve that. Secondly the pandemic has just brought this more to the forefront and finally investors very deeply care about this. So on this first idea of just beating your broad index, I don't actually think ESG is only reserved for this small subset of investors that call themselves ESG. I actually think it's for all investors that as long as you want to beat your benchmark it should be something that you're thinking about. The reason I'm saying that is it's not just a trend. It's very much a revolution. We call it the sustainability revolution. It could have the magnitude of the industrial revolution coupled with the speed of the digital revolution. This could very well be the most tremendous investment opportunity of our generation. So I recognize that sounds maybe very dramatic or really bold, but if you take a step back and you think about it, I mean the entire world is shifting. Governments all around the world have made commitments to going carbon neutral. The US, Europe, Japan, just to name a few.

Katherine Bordlemay:

Corporates now when we speak to them, this is really mandated as a part of their policy and some of them are even really investing in a big way in terms of innovative solutions really geared specifically toward ESG. And consumers of course care a lot more about it, especially the younger millennial generation. And from the investor perspective what's quite interesting is the way you're starting to see it take hold in the market and how you think about it from an investment. So I think the way we see it is it really helps guide us to avoid a lot of these pockets of risk and also the areas of opportunities. So if I go through an example, the energy sectors is probably the easiest. So within the energy the first part is we want to avoid the risks. So think about some of these oil companies that they're not adapting. They're structurally challenged. And some of them might even have governance issues. So we want to avoid that. That's going to help us from an investment perspective.

Katherine Bordlemay:

On the other side we want to identify the good stuff, so the opportunities. And they are innovative solutions. They're solutions providers today that are likely going to help us kind of come out and fight this battle on climate. So an example of one of those businesses is in Europe. They're one of the world leaders in terms of renewable fuel. And over the last 15 years they've developed a technology that takes a bunch of different wastes, they mix that waste together and it creates something that looks like water but it's actually a fuel that reduces carbon by about 90%. And that fuel is used in a variety of vehicles. So it's used in cars, it's used in trucks which matters a lot in this high volume eCommerce world we're living in now. They're even moving into airplanes. So in one year alone this company has saved its customers 10 billion of carbon emissions. That like taking three and a half million cars off the road every single year. So there's clearly an important environmental benefit there. But then if you look on just the pure economics side it's also very compelling. If you looked at energy generation globally about 3% is renewable. So that's on track to go to 35% in the coming decades.

Katherine Bordlemay:

And then if you just looked at broad demand of renewable it's something like one and a half billion tons every single year. But the actual supply that exists is very small. So if you can be a leader or solutions provider delivering a product to that that's clearly very compelling from the economic side along with the E on the environment. So that's kind of this first idea that's going to help us drive better performance. The second, the pandemic has changed everything. It's changed the way we work. We're doing this on Zoom right now, right?

Abby Doody:

Yeah.

Ben Smith:

Yeah.

Katherine Bordlemay:

In person, I would have flown up to you with the renewable fuel by the way in a plane. So it's changed the way we live but it's changed what we prioritize as well. And what you're seeing on corporates is ... I guess the term I like to use for this is like adapt or die. So if you're leaning in and you're shifting your business model in a way that's more ESG friendly, we're finding more capital going to those businesses, we find investors want to partner with them more and they're the ones that also are generating very stock returns. We want to invest on the right side of that.

Katherine Bordlemay:

But for the businesses that are failing to shift their business models to this if they haven't already done so then that's likely a struggle for them. So if you look at actual stock returns by the way since the pandemic, what you've seen that's changed on the back of this is the dispersion of those returns is the widest we've seen since the global financial crisis. So if you're selective and again if you can kind of focus on ESG and identify the winners and avoid the losers it can be quite interesting. And the third and final point I mention is just investors care a lot about this. We no longer just hear our clients ask us to beat their benchmarks but they're also asking us to align their values increasingly with their investments. And you can see industry flows last year alone were then 100 billion dollars went into ESG focused portfolios as opposed to 400 billion dollars outflows coming out of the non ESG focus. And I think that's going to continue especially as we continue to see ESG funds generally structurally outperform the non ESG funds.

Katherine Bordlemay:

So again, just to summarize that because I said a lot, ESG does matter for investment success. One, because it's about beating our benchmarks. Two, the pandemic has accelerated this. And three, investors deeply care about it.

Ben Smith:

Katherine, I heard you answer I just want to phrase it in a way too is using your example of the company that's creating basically a more renewable energy source in Europe. And here's how we can reduce carbon emissions. So say for example they need to go borrow money to expand their plant. And so they would go ... Again, traditional equity markets or these organizations that are that large, they might issue a bond. So they would go borrow money from the public and they would issue a bond and they would say, "Here's what the interest rate is for a company of my risk." But some of this is also dictated by supply and demand so if there's a lot of demand that says, "Hey, I want to support that company to borrow money from me or from the public to then go issue or build new plants and expand their operations," they might get that at a cheaper interest rate because more and more people are looking to buy that bond and support that company. So if they get that at a cheaper interest rate then that's less interest that they have to pay on their income statement. That's more profitability they have. The profitability then translate to the equity investors. The ones that bought the stock of that company. And it feeds itself.

Ben Smith:

So I just wanted to kind of rephrase what you're saying is when we say beat our benchmarks, I think the premise, what we hear a lot as our team is, hey, these companies that are kind of in that loop and those are being recognized by investors for creating sustainable practices or having more diverse management or promoting more environmentally friendly standards. The more they do that the more investors promote that activity. But it's also putting pressure on companies that aren't promoting those activities. Because now they're getting forced to ... Hey, I'm now paying a higher interest for something that ... That bond that I issued, I want to be like them and I want to get it cheaper. So if they do those other activities. So it almost kind of hase this peer pressure back to high school type thing going on of, I don't want to be the non fashionable one so I got to get with the times. I thought that would be just helpful just to maybe kind of add my little spin there to it.

Katherine Bordlemay:

Exactly.

Ben Smith:

Gotcha.

Curtis Worcester:

Katherine, can you help us understand how asset managers consider and evaluate ESG? I guess what database and data points are used to understand characteristics like race and gender and really kind of everything there? And if there are issues or challenges with that data how is that then changing how it's evaluated?

Katherine Bordlemay:

Yeah. There's many different data providers out there. Just to give you a couple of examples, we have MSCI, Bloomberg, Sustainalytics. The first part with the data is it's flawed. But the second part is there are a lot of opportunities to kind of overcome that. Viz a viz, we can use an experienced investment team and engagement especially. I guess the headline or the punchline to your answer is I think you need to get active to look beyond the data in order to drive real change. So first on the data piece. So the data has been exploding. We have so, so much more data today which is really a great thing. Because what we can do today is nothing like what we could have done 10 years ago. So overall I think that's a positive. But some of the challenges with the data is first it can be inconsistent across the providers. So if you looked at a company and it has an ESG score, the correlation of that score for the same company across the various providers is only about .3 or .4. So one company might say it's an ESG leader and another is saying it's an ESG lagger. So it's gets really hard for us to get comfortable with that.

Katherine Bordlemay:

When we talked about bonds earlier, I feel like that bonds and credit rating agencies ... Moody's and Standard & Poor's, if they rate it at triple B, they probably all rate it at triple B. The correlation of that's about .9 so I have a little more confidence in that. So that low correlation just gives you a sense of just how it's inconsistent so it's really hard to depend on that. It's incomplete in many instances. Especially the S. The social diversity is really hard. If you looked at the Russel 1000 which is a broad market index for large companies in the US equity universe, only about 30 of those 1000 companies, so it's about 4% of them, disclose any data on their workforce diversity. So about race, gender, we don't even know it. So how can you make progress if you can't measure it?

Curtis Worcester:

True.

Katherine Bordlemay:

And certain places like boards, like the boards of a company, actually the data's pretty good. We can get a good sense of what the diversity looks like. But how can you measure inclusiveness? So in Turkey we've seen them make good progress of adding more women to boards but half of those women are family members to the executives. And if you go to the board meeting the women are serving coffee. They're handing out business cards and that's where their role stops. So that's clearly not the spirit so as we said before, diversity is useless if you don't have inclusiveness. That's really hard to get that information from the data. And I think the key solution on the back of that is really experience. I'm sorry, is engagement. And I think having an experienced team on that engagement really helps. So just to give you some examples here of what we've seen, so there's a company in Brazil that we've invested with and that we've worked with. And one of the data providers actually flagged them as having 5% revenue exposure to predatory lending, which is like bad abusive inappropriate lending. That's bad. That's not a good thing.

Katherine Bordlemay:

Was not true. So we flagged that to the bank and we let them know that this incorrectly was being flagged in that data provider. The bank actually went to the data provider. They cleared it up. The data provider kind of fixed the error and the result of it was the company was upgraded on its ESG score from A to AA. So that's one way we can at least help with the data problem. But also engagement where it really matters more is when you can give companies more direct feedback in terms of where you want to see their improvement. So we'll stick on Brazil for an example. So there's another company in Brazil. It's a medical company. They make things like MRIs and ultrasounds, CAT scans, things like that. And they do pretty well in terms of ESG characteristics. For example, 60% of their workforce is diverse. Most of their leadership is actually women and they even have two diverse people on their board as well. One area where we did see an opportunity for improvement with them was related to their executives and how they're paid. We felt it could be more impactful if they were paid based off of ESG metrics. So basically you as the executive or the CEO, you get paid more at the end of the year if you're making positive strides on all these E and S characteristics.

Katherine Bordlemay:

So of course we want to look at the bottom lime but those things too we think also are important. And we actually have an investor based in Brazil who's Brazilian and spoke with he CEO and gave him that feedback. And the CEO said to her, "No one's ever said that to me before. No one's ever asked me for that before." Which I just thought was interesting. But at their next earnings call they talked about the fact that they are now going to start incorporating these ESG, they call them KPIs, key performance indicators, within their compensation. So I think that was something encouraging. So that just gives you a couple of examples of where I think it really is helpful to engage to drive that feedback. And with time you can see a lot of improvement. And to drive more change by the way, I think another way that's helpful is if you have a lot of scale. So as we are investors in that stock, if we are an equity owner, the more scale you have, the more assets that you are voting on or engaging on, you might be able to have a louder voice in the industry. They might listen to you more. So I think that's another area too where the investor communities work and partner together, whether it's in one organization or other organizations, that's another way that you can potentially drive more impact, more positive change going forward.

Ben Smith:

And Katherine, a thread you're kind of putting on there is obviously ... Again, I appreciate that you have a lot of expertise here in emerging markets. But it also is just going to be difficult because I'm sure, not just from a data perspective but from a country to country perspective on here's what their value system is as a country with their culture. So here's what they're willing to do and not willing to do. And you're kind of rewarding some of that with, again, the capital part. So that's got to be really tough. But also I know obviously from the data perspective being in its infancy here is that advocating for more data to come to you that's more relevant is making sure that no, we need these things to really evaluate you. And then I can really tell you those KPIs, whether they're improving or not improving and that might reward us more. When you kind of make the point about a revolution, those are the things that are going to have to happen, right? Is that you're going to have to see more data adoption, better reporting capabilities from the companies, feedback loops as you as ... Maybe not just you as Goldman Sachs but us as investors saying, "Hey, we want to reward the companies that are doing well through doing good here and we want to promote that."

Ben Smith:

I think those are really important points just to kind of tie those two things together. Because I think that's ... The data thing is just so critical, especially in this day and age because sometimes we read something in the newspaper, we read and anecdote. It's like, oh I read about this one company. Reporter found this one thing about them and there's two sides of ever story with this. And maybe that's the thing that all of the sudden, maybe the general public would think that they're a bad corporate citizen and it might turn all the other data points away. So I guess my larger point of this is it's important to consider all the data that's available to us in the things that you're doing in terms of the investment things. I really like that.

Ben Smith:

I want to kind of go to about if I'm an investor. So I have my retirement money and I want to invest in ESG. So I guess I want to then know, how can I get confident here that an ESG strategy's really aligning to my personal values with my investments? So I guess that's the question here is, while you're out there, you're kind of communicating to the companies themselves and working on data and really trying to build this, meanwhile there's lots of companies out there building their own strategy. How do these ESG strategies then report back to investors to making sure that those things are aligned?

Katherine Bordlemay:

Exactly. So I think at the very onset the most basic thing to do as an investor is just evaluate the literature on the portfolio and speak with the manager just to learn basic things. Like what are they excluding if they're doing that alignment that we talked about. Are those sin stocks aligned with what you also what to be excluded? And also, what is the objective of the portfolio? Is it narrowly focused on one goal like climate? Is it more broad focused? So ensuring just at the onset what are they excluding? What are they including? What are the objectives? The second thing which is really helpful is ESG reporting. This is I think evolving quite a bit in our industry. In Europe by the way, all things ESG is very much at the helm of this. But ESG reporting is really just a snapshot of a portfolio or an investment and it's looking at a variety of different ESG metrics for that investments and then it can compare it to a broad market index, like maybe the S&P 500. And it can also compare it to a broad peer group as well. It'll be a variety of things.

Katherine Bordlemay:

So some of the metrics could be on carbon intensity. So for that portfolio what are the carbon emission? I know we have some portfolios where we'll say, "Okay, this portfolio produced 90 million tons of carbon this year and that's like taking 20 million cars off the road every year." To make it make sense. So those types of things. It could be what does the diversity look like for the board and for the workforce of all the companies that the portfolio's holding? Are there any fossil fuel exposure? Are there any exposure in the companies that have human rights violations? The list goes on and on, but those are the types of things that can be very helpful for you as the investor if you can review that report and kind of get a sense of what the portfolio's prioritizing if that's aligned with you.

Katherine Bordlemay:

And then the last but not least is also evaluate the investment or the firm's stewardship and engagement efforts. So stewardship is when you own capital. So if you own equity capital in a business, you now can exert influence on that company. And the way you can do that is one, we'll call it proxy voting which is just voting on proposals. So say for example today John Smith is up for election on the board, do you agree or do you not agree? That's a proxy vote. We can vote that. And again, the more capital we have invested in that company, the louder voice we're going to have in that proposal. And then you don't just want to stop at the ... It has to go beyond the proxy voting. So maybe you can send letters. Maybe you can actually engage and speak and give real feedback to the company. And many firms will do reporting on this and it will detail the history and specifics of the proxy voting and it will give real qualitative examples of those engagements.

Katherine Bordlemay:

So if we talked about that medical device company in Brazil, it tells you that. Like in there it goes through that example. What did we do? What did we tell the management? What was the result of that engagement? So those are things too to also help guide investors in terms of making sure that their capital is truly aligned in the way they want it to be.

Ben Smith:

Nice.

Abby Doody:

So we've been talking a lot about ESG and how it can seem like it's a very broad label to address social, climate, or governance issues all at once. So is it too broad to try to create long lasting change in all of these areas?

Katherine Bordlemay:

I don't think there's a right or wrong answer. I think it's in the eye of the beholder, in the eye of the investor. For some investors the broad is the solution and for some the narrow is the solution. So for those investors that just want broad market access across sectors, that's where that ESG, more traditional makes sense. For other investors that are very passionate about a very specific thing, maybe it's climate or maybe it's social, that is going to be the right path for them to take. Another, I guess, parlay on that is so how do you figure that out? So again, we go back to the perspectives, we go back to the literature, we go back and talk to the manager. And this is where a financial advisor is massively helpful by the way because they can guide you through this process, as you know very well, better than I do. And what is the objective?

Katherine Bordlemay:

So for example there's an investment, maybe I really care a lot about climate, I really want to focus in on climate so I want to make sure the objective of that portfolio is to own the solutions provider driving the climate change. And then often within the materials and when you speak with the manager you can understand very specific themes within that. So for example within climate, I know we manage a portfolio. It goes through all the specific flavors of those themes. So we have one within that clean energy, one on resource efficiency, which is like ... Think of smart manufacturing. Sustainable consumption. So like this dress. Is it going to get recycled or what's going to happen to it? Same thing with food. That can be sustainable as well. The circular economy. That's like recycling opportunities. And finally, water sustainability. And then when you look at the investment, look at the holdings and talk to the manager, talk to your financial advisor. What are those holdings? What are those businesses? So to stay on this example, give you some examples of some holdings in this portfolio.

Katherine Bordlemay:

We talked about the renewable, which is the clean energy. Another one we can talk about is the sustainable consumption. So like things we eat. There's a European company that ... It actually used to be a coal business. Really dirty. And talk about the data being bad. Data's also backward looking. So maybe if you look at data it doesn't look too compelling. But they've completely transformed their business over the years and now they make innovative products for nutrition. So one of the things they create, it's cow feed. So the cows will eat them. And fun fact, cows are often more harmful to our environment than even cars. They release a lot of gas, which is methane, and methane's a more harmful gas to our environment than carbon. So by the cows ingesting this food, it improves their methane emissions. It brings them down by up to 30%. And if we use this product globally around the world, that would be like taking 700 million cars off the road every single year.

Katherine Bordlemay:

They make another product which is kind of interesting. Another thing is omega-3. When I was pregnant last year I remember my doctor was like, "Eat fish all the time. Omega-3s. It helps with the baby's brain." All that stuff. So I'm eating salmon all the time. But in order to get that, you have to get it from fish. So we're overfishing and there's not always more fish in the sea. So what this product does is it's actually using an algae to get that omega-3, which is so important for our nutrition and fish's nutrition as well. That's a great way, a more sustainable way, for us to get these really great omega-3s that we want but we don't have to maybe continue to do all the fish farming.

Curtis Worcester:

Katherine, we have several clients in the LGBTQ+ and other minority communities as well. How can they align their values with their investments and really understand if progress is actually being made in these areas?

Katherine Bordlemay:

Yeah. Three ways to do that. Again, from the base, we want to make sure we avoid the laggers. We own the leaders. The best way I can [inaudible 00:39:27] this is just through example. I think we talked about maybe Europe and we talked about Brazil so we'll pick on another country. Let's pick on Japan. In the spirit of diversity and inclusion, Japan has not always been at the helm in terms of diversity and inclusion, but to their credit they have done a good job of making some improvements there. Female labor participation in Japan is around 70%. That's actually even ahead of the US and Europe. And the way they got there was they actually did a good job of improving their daycare capability, in case you're curious. So we still have more progress to go but that's one very notable area of progress. So when we go into Japan and we're thinking about diversity and inclusion, some of the businesses we want to avoid and then I can talk about what you want to own.

Katherine Bordlemay:

So what you want to avoid. We met with this company there, they make consumer products. And one is baby products and infant type of bottles. And our team met with them and there's women on our team and across the table there's not a diverse investment team. And they're telling us, as a bunch of gentlemen, and they're telling us about this product that's a baby bottle that so perfectly mimics breastfeeding and it's this perfect transition for the baby. And as a mother that's gone through that, it's hard for me to have a lot of confidence in that product when I don't see anyone there that has actually ever breastfed a baby and has that experience. So if we want to engineer a product that really is achieving that goal, then having a engineer, having a workforce that is reflective of that consumer base clearly adds a lot of value. So that would be something that we don't like. We want to give that feedback to the company but that's not going to be something that would be included in the portfolio.

Katherine Bordlemay:

On the opposite end, there are great businesses in Japan. One of them is a company ... They do HR type things. And where they've done a good job is on ... They call it a nursery school concierge. So they help working parents find nursery schools and daycares. I live in New York. I'm in the process of trying to get my toddler into preschool, which by the way is the hardest thing to do in New York. I had no idea. It's like getting your 15 month old into Harvard. That's kind of what I feel like right now. So if you have support at your work to help guide you through that process in terms of holding your hand, saving time, that's huge to keeping working parents in the workforce. Just something from my experience. So that's the first step. We want to avoid the challenge ones. We want to own the businesses that are doing the right thing by way of diversity and inclusion in terms of their own workforce.

Katherine Bordlemay:

The second layer, which is even better, is if you can identify the solutions providers tied into diversity and inclusion. There are some good solutions providers even in places emerging markets. Micro lending is a good example of that. So it's like really small loans. They give loans of maybe on $50 to $200, so it's really small. But what these businesses do is they exclusively loan to lower income women. And what's great about this too is they don't just blindly give out the capital but they train them and they assign them a coach and they meet with that coach very frequently and it's a group lending model. And it's really kind of interesting to hear the stories. There was one woman and she had three children. She didn't work. Her husband worked. He made dresses and saris. And he actually hurt his index finger so he basically couldn't work anymore. So she was able to get a loan, was trained up on this and continued her husband's business. Now today the business is more successful than it was before and she's employing other lower income individuals within her community. So it's a beautiful effect in terms of the individual, in terms of their broader economy. But the business itself is really attractive and these businesses have a default rate of basically zero percent.

Curtis Worcester:

Wow.

Katherine Bordlemay:

And then last but not least, always engagement. Where there's opportunity, give that feedback. And companies increasingly are willing to incorporate this change. And that's what we can do as asset management. Just continue to push that forward. And I know within our asset management division, we became one of the first managers in the world to vote against any company on the board without a woman. And we're expanding that this year. We're going to do the same thing but we're also going to vote against any companies that don't have a person of diversity on the board outside of gender. So whether it's like sexual orientation, race, et cetera.

Ben Smith:

So Katherine, it sounds like really from a strategy perspective is, hey, if I have this particular passion of a value or something I really want to see change or making a difference in, is really looking for that strategy as you were saying. There's lots of great stories out there of here's the impact, really get to know the strategy a little bit, figure out where they're making their changes and does that align to your values, is essentially the thought there.

Ben Smith:

I want to ask you kind of another question here because, again, I think it's important that we're trying to see changes lots of different ways. But from a place where here's the asset managers out there that are looking at change and reflecting change and trying to lead change, how are asset managers themselves doing on ESG characteristics, including diversity and inclusion? What's the state of that today?

Katherine Bordlemay:

Yeah. The asset management industry needs more diversity. We want to give that feedback to the corporates we're investing, but we also need to look at ourselves and ensure the investment teams are also practicing what they preach. If you look globally, about 14% of managers are women. If you look in the US, only about 11% are women. And that's on gender. If we look at other metrics, unfortunately it's probably worse. So we need to make more progress. We don't just do this, by the way, because it's the right thing to do. We do it because it's a performance imperative. We do have data that shows us that once you get an investment team that's bringing diverse ideas to the table we generate better financial results for our investors. What's also interesting, if you just have one person of diversity on the team, that doesn't really move the needle. So not enough. We need at least one third of our team to be diverse. That's when we start seeing a more measurable impact. And we have data that once we get one third of a team to be women or diverse, we see the one year average returns increase by about 3%. That's a pretty good number, especially if you can compound that over time.

Katherine Bordlemay:

And we also find, as relates to gender diversity anyway, is the risk metrics look better. And I'm not saying women are smarter than men. I like men. I have a son. I have a husband. I think they're really smart. But I think that there's different ideas that we can all bring to the table and when you have diverse perspectives, that's really the key. In terms of the team I sit on, I'm really proud to say that almost half of the 275 billion AUM within the public equity team here in Goldman Sachs asset management is run by women. And by the way, run by women, like they're the leaders, they're not just the junior population. I think that's very inspiring as a female growing up in this industry. And sometimes I get asked by the way, "How do you guys retain your talent or how do you have so many women leadership? What do the young junior people want for diversity?" I don't think it's that complicated. I think you just want to look around you and see people like you, people of diversity, in seats of influence, in seats of authority. And that's just really inspiring.

Katherine Bordlemay:

And I think once you get to this critical mass of diversity, you don't really have to talk about it anymore and the diverse talent just kind of naturally comes to you and that's a really good place to be.

Ben Smith:

Well, I would just say, really just real quick Katherine, is just going through the CFA charter program itself, looking around the testing center either in Boston or in Portland, Maine is just saying, hey, being a female CFA charter holder on a portfolio management team, I think speaks a lot to Goldman Sachs. Is kind of being there and ... Because again, it did not look like a very diverse group when I was testing at that time. So just seeing that from where that's grown, I think that's pretty influential. I want to ask kind of the next question though is looking forward here, as you said, I know what you're seeing your team do and where you're trying to grow and how you're trying to continue to build in diversity amongst your portfolio teams. How much farther do you think the industry has to go here? Because again, I know you gave some statistics there, but where do you think it's going to go?

Katherine Bordlemay:

So where do I want it to go or where do I think it's going to go?

Ben Smith:

Yeah.

Katherine Bordlemay:

I think ideally, you have an investment team that is reflective of the society. As simple as that. So if gender is 50/50, ideally you'd be at 50/50. If the race breakdown is XYZ ... I think that's kind of the goal. And the other goal is just that, as I said before, if you don't need to talk about it anymore because it's been solved, that's when you know you've hit critical mass. If people just feel safe, if they feel included, if they feel supported and all of a sudden it doesn't have to be such a big focus, I think that's when you're starting to achieve some level of success. I think we can get there and I think it's really encouraging to see the progress. I think gender is kind of the first one to go through. We obviously need to do a lot more on things like race, sexual orientation, et cetera. But I do feel really excited at least what I see and what I sit in that you do see leadership very focused and committed on that. So I think it takes time for these things but I do think we're moving in the right direction.

Ben Smith:

Nice.

Abby Doody:

Shifting gears a little bit, let's talk about Maine. We are a rural state with an older population and a lot of our larger employers that are headquartered in the state do have some socially responsible focuses. LL Bean, Idexx, WEX. What are some ways do you think that ESG investing can impact lives in Maine?

Katherine Bordlemay:

I think first of all for the people that work at those organizations, you can just have happier people. That's important. Your everyday livelihood, going to work ever day. So if those businesses can incorporate that, people are happier, and by the way, happy people are more efficient people, more productive people, so happier people equals healthier profits. So that's the first part. And then also, similar is at the economic benefit too. I think as they incorporate that, as we talked about before, we do very much believe that that drives better financial results, better financial performance over time. So obviously if the businesses within their community continues to do well then that's a win for the overall society.

Curtis Worcester:

We have one final question for you Katherine. We've made it to the end. So here we are on the Retirement Success in Maine podcast. One question that we love to ask all of our guests is what is your personal definition of retirement success?

Katherine Bordlemay:

Retired on the beach. Is that the right answer?

Curtis Worcester:

Sure.

Katherine Bordlemay:

Maybe another way to answer this in one word would just be flexibility. Right? Flexibility to travel, to see your grandchildren. I think ... Yeah. Flexibility.

Curtis Worcester:

That's great.

Ben Smith:

Nice. Well Katherine, I got to say, we're just really thrilled and excited that you're able to come on our show today. And I know for our audience out there and for the listeners that tune in to the show and in our client base as well we've just had a ton of questions about ESG and what it means and where it's going and how can I interact with it and just even what it is. So I think you did a fantastic job today really breaking that down for everybody and also representing not only Goldman Sachs really well but the industry. So thank you for everything you're doing. It's really a treat to have you on today.

Katherine Bordlemay:

Thank you. It's been such a pleasure to be here with you.

Ben Smith:

All right. Take care.

Katherine Bordlemay:

Thanks.

Ben Smith:

I thought Katherine did a really great job today. It was, again, kind of running through ESG. What is it, but also kind of the core values discussion. Kind of an interesting way to approach not only just retirement but also investment. So as always, like to wrap up our show and get into a little bit of lessons or things that we take away from the day. Maybe Curtis, do you want to just start us off with something you took away from Katherine's episode with us today?

Curtis Worcester:

Yeah. I think something that we kept coming back to, or that Katherine kept coming back to is how important it is to really look into what you're investing in, specifically with this ESG stuff. We talked about the data for a little while and she did a really good job laying out how ... I don't want to say ... I guess, how inconsistent, I think is the word she used, the data can be. And she brought up the example of, I think the country was Turkey, and they're being more inclusive in their boards on paper and if you were to sit in a board meeting the women aren't really doing anything in the board meetings. So I think the global conversation, or kind of the point I want to get to is it's really important to still do your due diligence with this stuff and there are various ESG scores out there. But with anything you're investing in, you really want to look into it, you want to know what you're investing in, and be realistic in the impact that you're going to have by investing in these ESG funds. It's a step in the right direction or in a better direction, but it's not an end all be all solution.

Ben Smith:

And I'll add to that too is I remember back probably about a decade or so ago social media was beginning to be the next big thing and looking into a social media ETF. And you're like, "Okay. Social media ETF. This is the thing we're going to buy and it's the next big thing." And you look at the holdings and Microsoft was like 60% of the fund. Because they had Bing and Bing had a social media component to it. And then Google was like another 20%. And then it's like well, I was thinking Facebook and Twitter and Google with YouTube. I was thinking that's what I was going to get, but I ended up getting basically a phantom Microsoft stock. Again, not saying Microsoft is good or bad, but it wasn't really the thought leader of what you thought social media was going to be when you were buying it.

Curtis Worcester:

Exactly.

Ben Smith:

So Curtis, what you're saying, I think that's spot on, is sometimes what you read on the label of some of these investments might not really actually be ... Or maybe it's just a little bit different than what you thought it was going to be. So really understanding strategy, what it's holding, why it's holding it, all of that. I think that's actually how we got introduced to Katherine initially was doing due diligence on various funds and Goldman Sachs is a ... We do due diligence on their funds for some of our clients. So that's the sort of thing of really understanding it and I think that's what our clients pay us to do as their advisor is be on top of what's happening in certain strategies, why they buying what they do, what are sound strategies, what are not, all of that. So I think that's really important.

Ben Smith:

Abby, from your end, what was something you took away from today?

Abby Doody:

Yeah. I thought it was just a really helpful discussion because we often get asked as advisors about ESG investing. It's a buzzword that people hear about a lot and they want to know is it appropriate to integrate that into their financial plan or how does that maybe fit into their financial plan? Or even what it is. Just kind of some foundational explanations of what it is and what it entails. So I think Katherine did a really great job of explaining that and it may be appropriate for some people, it may not be, but at least having an understanding so that you can then have a conversation with your financial advisor about it I think is really helpful.

Ben Smith:

Yeah. And I'll add too is I think one of the things we want everybody to take away from today is obviously here are some things to learn so that we're all using the same terms and definitions, but also I think the thing to impress in on is Katherine was saying ... She used the word revolution. Maybe it's this is just a ... It's a pocket of the investment arena right now that's becoming bigger and bigger. So I think the point of this is it's growing and changing. Curtis, as you said about the data, the data's still in its infancy in different areas. But don't discount here is a lot of the world's asset managers are in Europe and the United States. And here the work that they have to do is go to each one of these countries and do not only just cultural translations but language translations and figure out the data after translation. So tremendously difficult job is really important there. The other part is obviously Goldman Sachs sells products like a lot of different investment companies out there, but what we're finding from an investment product side ... And I know Abby, when we get that question from clients, and Curtis as well, when you've had those questions from clients is, what do we think at Guidance Point or what are we seeing?

Ben Smith:

And I think that one of the things we're seeing, not only just from a data and a trend is also the products are evolving now. And I think the products are evolving more to the client needs and how we as advisors use and diversify for our clients. So I think you're seeing ... And I can't really get into a whole lot more detail in terms of products and really how they're evolving here, but I think that's what we're seeing here is we're seeing that we can maybe use them to fit into our clients' portfolios a little bit better. I think the costs are coming down over time, which I think is also important. And I think third here is I think it's really important that you're seeing that the impact that these funds or these investments are making are getting reported back to us as the advisor and ultimately you as the investor. Is you're seeing, okay, if I put X number of dollars in this fund, Katherine pointed out, well, the carbon emission reduction is ... Hey, maybe that's taking one car off the road for 365 days. So it's almost like you driving your car, if you invest in a certain way, might really counteract that carbon footprint.

Ben Smith:

And I know some of this whole mindset is being carbon neutral. Is I want to not leave the world any worse off than what I started with. And maybe that's an effort that aligns people's philosophies to how they invest and that might be enough for people to feel good about what they're making as an impact in the world. So again, that's really the premise of today's show was really get that philosophy, really explore it, really get a little definitional. And I know it can get a little heavy at times here so appreciate everybody listening in. We will put a little bit more information on our website of course. If you go to blog.guidancepointllc.com/47. We're episode 47. We're in our late 40s at this point. But we really appreciate everybody tuning in. Again, ESG's kind of a fun thing to dig through and learn a little bit about. But we always appreciate your listenership. If you have any feedback or want to drop us a line, we'd love to hear from you. But until then, we'll catch you next time.