Ron Temple is managing director, co-head of multi-asset and head of US equity at Lazard Asset Management. Temple spoke with ESG Clarity in New York to explain how the firm has been incorporating ESG over the past two decades and how its efforts have been ramping up recently.
Tell us about Lazard’s overall approach to ESG.
We started integrating ESG at the firm level more than 20 years ago, starting with our emerging market platform.
At that time, there was much more emphasis on ‘G’, and there was some emphasis on ‘E’ and ‘S’ – but we weren’t calling it ESG. Around 14 years ago, we started integrating ESG on the developed market side, much more formally. But even then, it was kind of more of a checklist approach and “who’s bad?”.
Three and a half years [ago], we brought Nikita Singhal and her co-head of sustainable investment ESG Jenny Anderson into the firm, and the goal from day one was to really ramp up the quality and consistency, and ubiquity … of the integration across strategies.
Now, I will confess to you, I’m not sure that you can ever be 100% ESG-integrated, because some strategies have a high turnover. For example, if you’re running a long-short strategy and you have to basically hedge an exposure, I’m not sure that is ESG integration. The goal [for Lazard] is to get everything ESG integrated … to the extent you possibly can do it in an intellectually honest way.
Part two of how we approach ESG approach is t0 build upon that. It is not a negative selection, it’s not restriction list. It is identifying the ESG considerations that are material to each kind of industry sector company, and then examining those to understand what those material factors mean to the future of profitability. And then ultimately, how does that translate to valuation?
It’s very hard to evidence how you integrate ESG, if you do it right. Because if you do it right, it’s just a more comprehensive approach to fundamental analysis.
Ultimately, what we’re trying to do is maximize the risk-adjusted return for our clients, to generate more excess returns and alpha.
This is not imposing my values on my client’s capital, because frankly, we probably have a lot of different clients with a lot of different value sets.
I know the industry’s excited about ESG. A lot of active managers see this as a godsend, because you can’t do it well passively. You need the context, to understand the materiality and to engage on the right topics with management from a position of expertise. And that will have an effect on getting us toward progress, toward the solutions. But this isn’t just a marketing story, this is real.
How do you engage with companies?
We’re the only asset manager that’s a co-sponsor of the MIT Living Wage Calculator project. We have been working with them on what the living wages are in different parts of the US, and how can we engage with companies – are they paying a living wage?
Your employee turnover goes down if you pay a living wage, the quality of customer service goes up if you pay a living wage, and your reputation in the community serve goes up. Particularly, the stores that in many cases pay the lowest wages serve lower income communities, and you don’t want your employees going out and saying, “what a lousy place to work”.
The work we’ve done is trying to understand how much a company might be overearning by paying a lower wage, and assessing their whole vulnerability to hire minimum wages and encouraging management to rectify that themselves, without waiting to be forced to do it in an overnight basis, by a legislative change at a municipal or state level.
When you do engage a company on something like the wage levels … the timeline and the duration of the engagement is an interesting discussion, because that doesn’t get solved in six months.
The other thing we’re trying to ensure is that people have realistic expectations internally and externally about how the engagement process should work. How long should it take? And then how do you make sure you’re keeping track of whether management’s delivering on what they say they’re going to do in meetings?
I’m part of the management here. I’m probably more sympathetic on how long it takes to turn a ship sometimes. I’d love to turn things on a dime occasionally, but sometimes it’d be harder than it seems.
How do your teams work together on ESG?
We’ve been building out our ESG team by adding people to each of our fundamental investment platforms to ensure we’re constantly improving our materiality mapping. We’ve also hired two climate specialists within that ESG research.
We added a team in Brussels that were formerly with Candriam Asset Management. They had run a climate strategy as well as a circular-economy strategy. We seeded the climate strategy here and are working on appropriate vehicles to offer there. We’re adding to that team, to have a fully resourced team based out of Brussels. That’s part one of our ongoing story where we will be adding strategies.
We’ve also invested in adding to our traditional fundamental research analyst [team] as part of this build in ESG.
We have a lot of career research analysts here, and they know their companies really well. But for the past 20 years, climate change was not a key consideration and … SFDR Article 8 and all these other kind of alphabet soup [standards] have come out. When you start asking the analyst, who’s done it for 20 years, to now start incorporating the net-zero pathway, you can’t just expect them to suddenly know how all of this works and how to think about framing that.
What are your ambitions for Lazard from an ESG perspective?
When people think about sustainability, I want them to think Lazard is one of their first five names.
We’ll invest what it takes to get there, but I don’t think that means a giant ESG team…it means an effective ESG team. And we’ve also been very purposeful to try to make sure we get people from and kind of different backgrounds in the ESG team.
My ultimate goal with DEI is cognitive diversity. I want people who come at it from a different perspective, because we make better decisions.
