Speaker 0:
to discuss the S of ESG. I'm joined Now by Adam Gillett. He is head of sustainable investment at Willis Towers. Watson, Adam, thank you so much for joining us. Tell us a little bit about the role as head of sustainable investment. And how do you define all those S issues in ESG?

Speaker 1:
Sure, Well, my role is pretty grand, uh, sounding entitle. It's it scopes our global activities, and it scopes all the work we do from research through portfolio management and advice and solutions for clients.

Speaker 1:
And really, I'm trying to get sustainability in its fullest sense as impactfully and fully integrated into everything that we do and ultimately into our client portfolios. That's that's the end goal and and the best outcomes for them.

Speaker 1:
And within that topic of sustainability, there's an awful lot within it, and within just the S of the SNG, there's a lot a lot within that one as well. So it's it's got some of the big, big issues of our day, such as inequality, those kind of systemic risks, and then a whole series of other really hot topic issues such as diversity, equity inclusion, human rights workers, rights, a really, really broad subject and and really important and hopefully one that is kind of

Speaker 1:
still earning its place on the on the trustee table, which sometimes can get a bit dominated by climate and other ESG issues at the moment. But but social really deserves its place, and it and it's still there. So who

Speaker 0:
comes up with the the detail on the the the issues, if you will? Is it you as would as Charles Watson? Or is it your clients

Speaker 0:
the push? What's the

Speaker 1:
pull? I think it's got to be a combination of push pull. Often, clients come to us with the experts in the room. We've got a lot of research and effort that goes into thinking about investment, thinking about issues that are important. So we need to bring that to the table and we need to convince people why it's important.

Speaker 1:
But we need to be really sensitive also to our clients context, their beliefs, their stakeholder management as well. So it's got to be that balance. But I think really there's an onus on us as a as a firm. People appoint us and one our advice and so I think we really need to bring, bring the best of that and

Speaker 1:
and really influence the debate and and influence that the S gets a sufficient airing that gets the right kind of airing as well. But we're really lucky to work with some fabulous clients who push us really hard as well and bring their own ideas, bring their own convictions and and have a lot of S in their maybe corporate sphere or in their personal sphere that they that they bring up to us and and make sure that we, um

Speaker 1:
we kind of match match what they need as well when you

Speaker 0:
talk about some of those systemic issues. So if we start there human rights or or or workers' rights? So how do you think about those? Are they absolute or somewhat contingent on? You know what country you're in? What the laws are, the customs, the level of GDP per capita. I mean, presumably, it sounds pretty simple, but it can get very complicated very quickly.

Speaker 1:
I That's probably a good line for the whole of sustainability, isn't it?

Speaker 1:
I think that one of the framing that I really like is the donut economics work of Kate Ray so that talks about social flaws and and human rights and the kind of bare minimums that we need to ensure are in place for a healthy and well functioning society. So whether that's access to food and water, political voice, shelter and so forth. But there is certainly nuanced by different countries by different regions by different population groups, and I think you need to be sensitive to that as an investor

Speaker 1:
and we are global investors. So we deal with the whole world. We look into the whole world and I think that what one of the advantages of that is that we can bring a high level of standards and push for a high level of standards across the board and bring best practises from different areas across to to to different ones and so taking the best practise from everywhere around the world. And I think that's one of the great positions that global investors are in as global allocators

Speaker 1:
and stewards of capital to give that purview across the piece be sensitive to local context. But I think we've got a role and and and a responsibility to drive upward standards throughout

Speaker 0:
and and how do you think about that when it comes to things like supply chains where it's not just whatever's happening is happening on the other side of the world. So you know, it's rather different from the UK. But equally people can say, Well, I've outsourced that. I had no idea what was going on it It was, uh, you know, there's layers of added value till you got to the problem. It had nothing to do with me, Governor.

Speaker 1:
Well, I think people have got to take responsibility across the supply chain. That's like, far easier to say than it is to do. But I think that if you're at the top of that supply chain, then you've definitely got a responsibility to think about to form audit and assurance and comfort over the practises that go on it because at the end of the day it will be your reputation, your risks and opportunities on the line as well.

Speaker 1:
And I think that that's what some of the best companies in the world do, and even some have made their name and their reputation around supply chain transparency and quality, and the provision of really good services and wages and rights through that. And I think on the Converse some companies have got very caught out and exposed through through those issues and not being on top of those risks.

Speaker 1:
And it's a case in particular industries and particular sectors, where, as investors, you've got to be very attuned to that supply chain. Risk the complexity of it. So I think fast fashion and retail is is a great one. Metals and mining is a really important one. And and as that flows in so critical to a climate transition,

Speaker 1:
you start to link between the S and the other, uh, elements of of sustainability as

Speaker 0:
well. So how much resource have you got at Willis Towers Watson to essentially audit those figures and assertions that that people are coming up with even a company that's got a great name? Do you ever worry? You know, it's a great brand, but we're taking it on trust. If if something's going wrong under the bonnet, we wouldn't intuitively look there and nobody would want, you know, everybody would want to believe they're great people because we keep holding them up as a paragon of virtue.

Speaker 1:
I think it's um, holding on wherever you are in the investment chain and whatever your points of influence are to to kind of do what you can with what you've got. From our perspective, we invest in our delegated portfolios via third party managers rather than

Speaker 1:
picking stocks directly ourselves. And that would also be the case for the vast majority of our asset owner clients. So the focus of that due diligence is really on the manager, the manager process, the manager's understanding of the company, the attention and the detail that they play to say, supply chain issues and and the work that they do to get assurance around it.

Speaker 1:
And as a as a measure of our commitment to that due diligence at the manager level, We've got a really big manager research team. We spend dozens and dozens of hours researching a manager and underwriting it in the first place and ongoing monitoring. And there's a lot of qualitative research and I think what we would rather be guilty of is errors of omission rather than areas of commission. So we'd rather take more time, do more due diligence, be more thorough,

Speaker 1:
and maybe miss out on an opportunity than go into something without having done the detail and the work. And I think that that probably applies to a lot of investors and those that are really attuned to these sustainability risks, I think recognise the value of that deep due diligence and the the need to take your time and to to kind of just not take

Speaker 1:
things at face value.

Speaker 0:
So I take the point that, uh Will Watson is one step removed. You've got the asset managers, and then you've you've got the companies that they invest in. But But essentially, if you think it's a good fund manager and they've got a good process, you will take what they say on trust because you've researched them in the round. You don't go in and do sort of

Speaker 0:
ESG audits, sort of a little snap checks from once in a while, just to make sure that they are. Everybody's doing what they say

Speaker 1:
they're doing. We we do a lot of that. So we do a lot of ongoing monitoring and due diligence, so not only just rate them and underwrite them to start with, but ongoing monitoring,

Speaker 1:
and I think that it's applicable to us, but it's also really applicable to trustees When they're monitoring and engaging with their managers, the more you can take control of that conversation yourself, the the greater depth and the greater clarity I think you'll get about the managers process. So rather than

Speaker 1:
asking the open ended question, tell me about how you think about supply chain risks. Here you take, say, Tell me about this company that you hold. How are you comfortable over this issue, This issue and this issue? Can you Can you document your process and and evidence that to me? Can you explain and give me comfort over this? And that's what we do with managers. And we've got ability to look into specific companies and have data and metrics to to inform that challenge. And also we try and encourage our asset owner clients to do similarly where they can.

Speaker 1:
And I think that that level of depth and ongoing challenge creates a really positive partnership with an asset manager. And that's the kind of long term relationship that you want over time to make sure you're still on the same sheet. You've still got that alignment. You still got that alignment of interests and beliefs, and that both parties are really comfortable with what's going on and that all the really material risks are are kind of on top of if you if you get what I

Speaker 0:
mean, I do. But you're describing there looking at looking at data showing

Speaker 0:
data sets. Do you ever get to the point where the man or woman from Willis Towers, Watson says, You know I'm off to the Pearl River Delta? I I'm just I'm just gonna go and kick kick the tyres myself, you know? See what happens. Is the factory really where it says it is? Does everyone look as happy as we're told? They look, you know, does the data match the anecdote?

Speaker 1:
So we do that more in private markets, where we

Speaker 1:
where we do do, covets and where we do have a kind of greater specificity about holdings and that they're held for long term. I've got him in picture in mind, uh, a video of a colleague going up to some forestry assets we've got in in Scotland. And so it's one of those tales that lots of people share and and and kind of hear about this forestry investment that we've got within within our portfolios. And then

Speaker 1:
we actually have, you know, gone up and seen it talked to the people looking after the forest really understand what's going on and so forth. And I think that that kind of level of due diligence is is really additive and helpful. And then another event that we actually did with some of our asset owner clients and investors was take them to a site visit. And, um, I'm picturing one down the River Thames here in London, where we took them to, um, Down Unit,

Speaker 1:
which is an energy from waste plant. And so a lot of those people were invested in it, had heard the stories had heard the facts and figures, but actually seeing it in real life, seeing the process, understanding the the care that the people take in terms of the processing, how it works in reality, where the risks and issues might be, I think just gives a whole different dimension to the due diligence process as as well as being quite a fun day out.

Speaker 0:
Quite fair enough. Well, you mentioned the other thing you mentioned right at the start was was D. I, um,

Speaker 0:
tell us a little bit about how you you focus on that and again is Is that looking more at D I within asset managers themselves or their underlying companies? Where are you? Where are you

Speaker 1:
looking? So I again I think a lot of our focus and engagement has been on the asset management industry. We've We've done a few studies on that and published the results, which I think are really interesting. But I think it also can apply to the underlying investments and holdings and companies as well.

Speaker 1:
From from the start, we've got a big conviction that DE I diversity equity inclusion is really critically important. It can help us make better investment decisions more diverse and inclusive. Teams and groups can make better investment decisions, can make for a better place to work more representative of our stakeholders and societies. And so we've got a big recognition that we need to move the dial on where the industry currently is on it. So it's It's a kind of big priority for us, and one of our key leverage points is into the asset management community.

Speaker 1:
So we collect a lot of data on them. It's not totally easy within the diversity world to get really good data. There's lots of legislation about what's possible to disclose. We get pretty good data on gender, pretty good data on ethnicity. And we're working on on getting a fuller set of lenses that we can maybe otherwise get more qualitatively and we look at ownership. We look at the investment professionals, we look at the investment staff.

Speaker 1:
And not only are we trying to encourage them to disclose more, to report more, to monitor it and to measure it to improve themselves. But at the end of our studies, we see some really interesting stats, for example, that those managers within the top quartile and gender diversity are outperforming those in the bottom quartile by 45 basis points, which is just a huge number.

Speaker 1:
And so I think that through that engagement process, not only are we encouraging good behaviours, but we're we're kind of dangling a pretty big carrot to say Look, there's a really, really important reason to engage in this topic. It can be a huge benefit to you as an organisation,

Speaker 0:
but but does that because I was looking. I saw that in the report. I. I just wanted to be slightly sceptical. If I may, does it? Does it actually say that? I mean, you looked at, I think, 543 products over a five year period. So it's

Speaker 0:
the sceptical will say, Well, it's a snapshot in time and maybe what it tells you is that more gender diverse teams, at a certain point, I don't know, took a huge bet on US assets. They got it right then, but over a different period, they got it wrong. II I know the data shows the same thing, not just equity, but also across portfolios. But

Speaker 0:
what if it turned out the most gender diverse team just were buying? I don't know. These were all products that were in shorter dated bonds. So they they've done a lot better in the last couple of years than everybody who was in long bond products that got absolutely hammered. So I mean, it's correlation is not always

Speaker 1:
causation. Absolutely. I think that we can start from the point where you can build a pretty good thesis and belief as to why

Speaker 1:
better diversity and better inclusion should lead to better investment decisions. There's some really good academic research on that subject that we that we look into and reference and also kind of do some of it ourselves. So you've got this thesis that more diverse teams, more perspectives, more angles into the risks and opportunities. A more inclusive environment where those voices are heard and debated should lead to better investment decisions over time.

Speaker 1:
And then you look as best as you can with the data. And yes, it's a shorter period of time, and it's a fewer products than you might ideally want. But we'll build that out over time and and hopefully we'll expand it beyond gender, where we've got enough data on on other aspects of diversity to be able to draw statistically significant conclusions because we're very careful. We don't want to put out a load of short findings that that aren't fully backed up through the data, so it's just a focus on those that are statistically significant.

Speaker 1:
But I think there's enough in there, and I think there's enough conviction in terms of the people who we talk to the managers we engage with on it that they agree that they want to do more on this and and we try and work in partnership and engagement to to try and help them and shape them about how they could improve their their DE. I, um, activities and processes. And I mean, I've got a personal conviction that it's that it's in there.

Speaker 1:
Um, we've got to try and manage those biases and not look for things that aren't there in the data. But I think that that we're building a pretty good data set at the moment. And I'm personally really excited by by some of those initial findings and outcomes, because I think that gives people a real tangible carrot to to pursue this with with with full

Speaker 0:
vigour. And when you mentioned DR, you said diversity, equity and inclusion. A lot of groups have diversity of equality and inclusion. So what's what's the difference? Or is there no difference between equality and equity?

Speaker 1:
There is, There is a bit of difference, and, um, a few people put justice in in the mix as well. Um, some people just inclusion and diversity. I think it's

Speaker 1:
I think it's really a blend of of issues taken together where you are looking for not only, uh, equal opportunities and, uh, equal, um, input to a process and not forcing an equal output. I think that's really important. So it's a quality

Speaker 0:
of opportunity, not a quality of outcome is is crucial,

Speaker 1:
I think. And I think that what people are trying to do here is is ensure that anything that we say and do in this case

Speaker 1:
isn't kind of pushing too harder than what could be accused of. An evangelical lens is very grounded in a in A in a business case in a financial thesis here, very connected to investment decision making. And I think that that makes people much more comfortable in an area where people do get slightly nervous about different definitions or have different slightly angles into it, different personal histories and perspectives into it.

Speaker 1:
And so our our aim is to look at it through as many lenses as we can do through kind of as long a time periods as we can do to look at it from an ownership level, to look at it from an investment decision maker and staff level to think about things like inclusion and belonging, which are really critical to think about culture, and so I think that it's a very important topic, much like the ESG acronym. It gets a lot dissected and within it,

Speaker 1:
Um, but I think that the overall kind of pathway is really clear that better. D I better justice, equity, diversity and inclusion

Speaker 1:
leads to better outcomes. Leads to better representation of our stakeholders, leads to better trust in our industry, which I think is really critical as well. And so it's something that that all of us, as as organisations and individuals have a have a role and responsibility to pursue.

Speaker 0:
Just a final question, if I may around trust going through the news at the moment is the fact that a lot of the water companies see that they've got themselves well, they've got big debt burdens, and now interest rates have gone up. Um, those debt burdens. There is a question as to how sustainable they are.

Speaker 0:
Um,

Speaker 0:
and they're all owned or a lot of them are owned by pension funds. Again, just coming back to the S of ESG. Is there a danger that the industry could find itself in a position where commentators, the public say that there's a real, um, tension here between wanting to generate returns and perhaps even shorter term returns for shareholders and actually what's in the public good. This industry is out there talking a lot about S and social responsibility.

Speaker 0:
But wherever there's you know, here's a great period where we've got, Here's a Here's an area where there's a big problem and they're the people owning it and they're the ones telling us they're doing the good things. This this doesn't

Speaker 1:
work. So I think there's an enormous need to have trust in any industry. And I think there's been a trust deficit across most of financial services for a while at the moment and our long term success, our long term licence to operate depends on having trust. And I think that the way in which you build that trust is by being honest and transparent about what you're doing,

Speaker 1:
reporting really clearly to stakeholders, explaining why you do certain things. So I am integrating and thinking about S issues because they're a source of risk and opportunity, the better. I understand that risk and opportunity, the better investment decision. I'm gonna make the better long term outcomes I'm gonna deliver. I'm not just going to pay attention to that. I'm also going to think about the impact that my investments may have on the wider world and society,

Speaker 1:
the world in which my pensioners are going to retire into. I think that that's a really important connection point that people are starting to make. And I think that the more open and honest and clear people can be in their communication. Then that trust can begin to to build back up again. But I think absolutely when people maybe over claim something or disconnect in their thinking between integration of S issues and

Speaker 1:
and impacts that that happen in people's real life, then trust starts to erode. You know, people's interests misaligned. And it's absolutely critical from a social perspective that as a pension industry, people are investing in their pensions, hopefully engaged in their pensions, save enough into their retirement. That's a really critical social issue and I think one of the key mechanisms to doing that is having an industry that's trustworthy, that generates good outcomes not only for its members, but also plays its role in wider society. So

Speaker 1:
that's got to be on the on the to do list for the long term success of of the pension and savings

Speaker 0:
industry. We have to leave it there. Adam Gillett. Thank you so much for joining us. Pleasure.