What does impact mean for William Blair?

Impact has numerous connotations that span investment opportunities, community engagement, and corporate behavior. At William Blair, we view impact holistically in our purpose and our engagement with each other, in the industry and in our communities. Our purpose is to drive strong client outcomes, so first and foremost our goal as a thoughtful steward of client capital is to have a positive impact on our ultimate clients. This includes the hundreds of thousands of retirement plan participants who invest in our strategies through their defined benefit or defined contribution plans, as well as our foundation, endowment and non-profit clients who rely on us to generate results to achieve their missions. This purpose informs our culture and permeates our priorities and behavior.

But it is more than just performance. Our culture is founded on the values of ethics, empowerment, and engagement; as a result, our goal is to have a positive impact more broadly. We view impact as the way we engage with company managements on key governance, climate-related and social issues that could materially affect the outlook on corporate profitability and growth. We engage as industry leaders, both in groups such as the CFA Institute and local Societies, but also industry groups that promote a broader opportunity set for all. These engagements in turn benefit William Blair and our teams, by sparking new ideas, improving our peripheral vision, expanding diversity of thought, and improving decision making. While William Blair and our foundation provide financial support to hundreds of charities every year through its grants, sponsorships and employee matching gifts program, importantly we impact our communities where we work and live through our colleagues’ individual board leadership roles and volunteer hours.

Why is ESG integration so important to your investment process?

William Blair is an active investment manager whose heritage is built on rigorous, fundamental analysis. As a result, environmental, social, and governance (ESG) considerations have always informed our investment decisions. Throughout our history, we’ve realized that these factors have a meaningful impact on a company’s ability to create sustainable value, so our core investment philosophies and processes are naturally aligned with ESG integration and sustainable investing principles.

But as the link between off-balance-sheet risk factors and a company’s financial performance has become exceedingly clear over the past decade, we realized that we needed to be even more intentional and systematic in how we integrate ESG factors into our investment process. That’s why we signed the UN Principals of Responsible Investment in 2011 and more explicitly incorporated ESG analysis holistically into our investment processes. These efforts, which are constantly evolving, are being driven by our relentless pursuit of creating a fuller picture of the risks and growth opportunities facing the companies we invest in, as well as our desire to further align our values with our clients’ evolving objectives.

What are some of the biggest challenges investors face when it comes to ESG integration?

There has been a proliferation of ESG ratings and other data attempting to measure corporate sustainability practices over the past decade. Making sense of the data—understanding its value and limitations—and incorporating it into fundamental analysis in a way that’s meaningful is a major challenge for investors.

While third-party ESG ratings frameworks provide valuable high-level data and promote increased transparency, these metrics don’t tell the whole story. Because they are based largely on corporate disclosures, publicly available data, and headlines, these ratings aren’t able to convey the nuance of the factors that are affecting a company’s ESG profile—or assess how material these factors are to financial performance. Furthermore, the quality and availability of ratings data varies significantly by region and market capitalization. In fact, approximately 40% of William Blair’s small cap emerging markets universe isn’t covered by traditional ESG ratings frameworks.

The limitations of third-party ESG ratings create challenges for investors—while also creating tremendous opportunities for active managers like us. Digging deeper to find information that isn’t readily available and scrutinizing that information to determine what it truly means for a company’s prospects is the essence of fundamental, bottom-up research. That’s why we believe that by developing a more thoughtful, nuanced approach to ESG research, we can create significant value for our clients.

Another challenge is the definition of ESG integration itself. For many investors, the primary risk is climate change and the resulting air, water, food supply and health issues, while others are focused on social-oriented goals around education, equality and financial inclusion. Investment managers have jumped on the ESG and impact bandwagon, looking for ways to simultaneously do well and do good. It is paramount that investment firms internalize these concerns, understanding the objectives of clients, ensuring that the firm’s values and ESG integration are in alignment, and validating the true impact on ESG and financial goals.

How are investors’ perceptions about the value of ESG integration shifting?

Historically, the financial benefits for companies of implementing sustainable practices tended to involve mitigating exposure to off-balance-sheet risks or reducing operating costs—at least that was the perception by investors. But increasingly companies and investors realize that sustainability can have powerful implications for the cost of capital and revenue growth.

For example, a global athletic apparel and footwear company recently started commercializing more recyclable materials in its products. This not only improved the company’s risk profile from both an environmental and social perspective, but it also gave the company more pricing power with consumers who value environmentally conscious brands. This type of product innovation and brand positioning is particularly important for millennial consumers, who surveys indicate are willing to pay more for sustainability-oriented products.

Why is materiality central to any discussion about ESG integration?

Not all ESG factors are equal in terms of their influence on a company’s financial performance. In fact, the materiality of specific ESG factors varies significantly from industry to industry. If the goal is truly to assess the true risks and opportunities of ESG factors on corporate growth and ensure that these concerns and opportunities are internalized by the management teams, we must ensure that it is more than a “check the box” exercise. That’s why our approach to ESG integration starts with determining which ESG factors we believe are material for a given industry.

Our investment teams have spent a significant amount of time exploring and implementing industry-specific ESG factors that allow us to make more informed decisions based on our investment philosophy and client objectives. Part of this process involved reviewing the provisional materiality framework developed by the Sustainability Accounting Standards Board and bringing in experts from sustainability-focused research partners to sharpen our analysts’ thinking in terms of materiality assessments.