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TCW is a leading global asset management firm with over 50 years of investment experience and a broad range of products across fixed income, equities, emerging markets, and alternative investments. In each episode of TCW Investment Perspectives, professionals from the firm share their insights on global trends and events impacting markets and the investment landscape.
Welcome to the TCW Investment Perspective Podcast.
I'm joined by Jamie Franco, our Head of Sustainability here at TCW, for a
conversation that will be far-reaching and specific as we dig into some
of our core beliefs and capabilities as it pertains to sustainability,
both as a firm and from an investment opportunity perspective.
Thanks for joining me.
Thanks so much, Keith.
It's a real pleasure to be here.
We are doing a lot of really interesting things in the space and thought it
was a good opportunity to let all of you know and share our perspectives.
Awesome.
Well, thank you.
So I'm going to start super simple, from a sustainability perspective anyway.
You run sustainability at TCW.
What does that mean?
What does that mean?
Well, that's a combination of two things.
First, what we're doing on the investment teams.
I think one of the things that makes us really unique at TCW is the degree
to which our team is integrated with the investment teams across the firm.
That's a really important feature of how we operate because we
think that a lot of this information is additive to the investment
process and therefore the returns that we can deliver for clients.
And then as a firm, sustainability matters.
Companies that are well-governed, companies that are addressing
their clients and their employees in a really productive,
positive way, I think deliver better long-term results.
And so we care a lot about how we're impacting those around us.
We want to deliver the best results to our clients and we can
really only do that if we're a strong firm that has a good
foundation with our employees and the way we operate.
Thank you.
You said something in there that I think is important to highlight or
pull out, which I might do a couple of times here, but it's delivering
better long-term results for our clients is the end goal here.
You also talked about being integrated into the teams.
We've recently gone through an integration where we acquired Engine No.
1.
They came with a certain set of skills, not quite like Taken
and Liam Neeson, but they have a certain set of skills.
We have a longstanding sustainability infrastructure as well.
How have the two mirrored together or melded together?
Yeah, that's an excellent question.
I think maybe starting a little bit with first principles.
Definitions matter.
So when we are talking about ESG integration, what are we talking about?
We're really talking about things that affect the bottom
line of a company or that affect the pricing of an asset.
We're really talking about good risk management, right?
And to the degree to which we have clients, for instance, who want
to exclude certain issuers or sectors, that is definitely something
that we can implement, and it is very much a client value
that we're implementing, but that's not our approach.
We're an investment firm, not a divestment firm.
So that's a really important point.
And then the other thing that we focus on, on
investments, are what we call sustainable opportunities.
So how are you investing in companies or assets that are contributing
either a product or a service to solving the world's problems?
Whether it's people or the environment, this type of thematic investing is
something that is very much additive to the investment process because you're
taking advantage of opportunities of consumer behavior or better long-term,
stable, well-run companies that are delivering important
products to, say, facilitate the energy transition.
And the nice thing about our partnership with Energon One and the ultimate
acquisition of that ETF platform is that both firms thought about this
in very much the same way, that we were looking at managing risk.
We were looking at trying to capitalize on valuable opportunities in
the market, whether it's the energy transition and understanding which
companies need to transition, who is credibly transitioning, and who
are providing services and products that enable that transition.
That brown to green process is really where you find alpha.
We thought about this in exactly the same way that that investment team did.
And then to add to all of this, engagement is a
really critical part of the investment process.
So what do I mean by that?
I mean actively trying to talk to companies to manage the risks that
you've identified as part of your credit or stock underwriting that
are part and parcel of your analysis of value for that company.
I should be able to talk to that company about how they're
managing these risks, how they're thinking about it.
And that is a function of the team.
And we were very fortunate enough to have two members of the Engine One family
join our team on our engagement and active ownership approach, and they
have been a really, really important contributor to helping us at
TCW scale our efforts because of their expertise in this space.
So you covered a lot there.
Investment firm versus divestment firm, super important.
Taking advantage of things that solve some of the world's problems,
opportunities from a consumer perspective, long-term shifts,
making sure that we're driving alpha, that we can be engaged.
But you started with definitions matter.
And there's these kind of three initials
that we're not ever supposed to talk about.
Everything that you said makes perfect sense from an investment
perspective, yet it has become a challenging conversation.
Why do you think it's a challenging conversation?
Yeah, I think it's a challenging conversation for two reasons.
One, I would say, the first asset manager, movers, or other investors in
this space, there was a bit of marketing that went into the first products.
You had third-party data providers trying to provide
scores, acting like a credit rating agency but not really.
Using a lot of judgment that I think to the outside didn't make a lot of sense.
Companies that maybe weren't really well run but were building an important
product were higher rated than other companies that maybe were really well run.
A lot of things didn't add up, I think, in the rating space.
It became very much packaging, "Well, we've got a better
score than the index," and optimizing on things that I
think were hard for people to get their heads around.
The good news is that, really, it's forced those of us in the
industry who believe in this to be very clear on our terms, and our
methodologies, and our approaches, and make that investment use case.
In terms of using the term ESG or ESG investing, I could ask five
people what that meant, and we'd all have different answers.
That's a problem.
That's not helpful to anyone.
We've tried to really move away from using acronyms
that are potentially interpreted differently by others.
I think some of the anti-ESG legislation we've seen in the United
States has been very focused on managers who are divesting.
Not including fossil fuels or not including other key industries of those
states, I think, has really been the focus of how ESG has been defined.
For us, we've built a client solutions platform.
If you want to exclude industry or an issuer,
we can facilitate that across your portfolio.
But from a house view, we're not going to impose a TCW view on
what we think is a value you should have in your portfolio.
Yeah, value is a funny word, because the way that you just
used it, it's something that is emotionally important to me.
It's a rule that I have, versus value in a portfolio means that
there's an opportunity to make money, or that something is mispriced.
You had mentioned earlier, before we had this conversation, a couple of
things that just stand out as really simple, clear opportunities, where
that kind of paint a really clear picture of what this opportunity is.
Could you maybe talk about a couple of those?
Yeah.
I mean, when you're thinking about looking at, say, the
energy transition, you have one of the, I think, largest
generational shifts in industry happening currently.
The marginal energy add, if you will, in terms of, say, a power
purchase agreement, is going to be cheaper if it includes renewables.
Renewables have gone from being the alternative
energy source to being a part of the energy mix.
That's a huge shift.
Without making claims on where we go in the future and
how this evolves, you're seeing this massive demand for
electrification in a way that we haven't seen before.
You have to think about doing that in a sustainable way.
How do you build the grid?
How do you use the most capacity?
How do you help companies decarbonize because they're either susceptible
to regulation or, more importantly, because by using different
energy sources, they're reducing their operating costs?
That's an important cost savings for a lot of these companies.
It's worth having a focus on those things as you're
underwriting these names in different sectors.
Who can take advantage of it?
Who's contributing to it?
There are a number of service providers to generation companies that have gone
suddenly from being a sleepy investment to now the hottest name out there.
As an investor, you want to get in before someone else recognizes that.
There's a lot of government policy going to this space that
is disrupting and providing R&D, new technology builds.
What is going to be the new technology of the future?
That is something you want to have a view on and be able
to invest in across private credit, across public markets,
and TCW is really well-placed to take advantage of that.
That's definitely a focus of ours.
The other areas are, when it comes to, say, climate
physical risk, I don't have to talk about climate.
Maybe I just point out charts of the increased incidence and intensity
of weather-related events and the fact that in certain zip codes,
you've seen a hundred-year floods maybe twice in a decade.
That's not statistically normal.
Do I own exposure to properties because I have
exposure to a commercial mortgage pool of assets?
Do I own residential mortgage exposure?
Do I have a company who's headquartered or whose main
business processes are happening in that zip code?
How do I think about the policy that that municipality is implementing?
Some people have better building standards than others.
Some buildings are better insured than others, and the topic
of insurance has certainly become a really important one as
we think about flood-related or weather-related incidents,
if you look at what's going on in California and Florida.
But this isn't just limited to California and Florida.
These are risks that we all know are not priced
well, and we all know this trend is changing.
And if you talk to some scientists, they would say changing exponentially.
So as an investment manager who has exposure, how do we help get ahead of that?
How do we price that better so that we don't
have stranded assets in our portfolio?
So to me, this is just about good, as I said, good risk management
and making sure that our portfolio is insulated, or at least
we're paid for this type of risk that could materialize.
I'm going to do my best to summarize all of that with a thank you as well.
So first, there's real risk in portfolios that people
are taking without being intentional about that risk.
And so understanding the risk in your portfolio, no matter how buried in it
might be, is incredibly important, and we have massive expertise in that.
And so it makes us a good partner.
From an opportunity perspective, to be able to take advantage of these long-term
trends to drive alpha in a portfolio, also incredibly important, and a place
that we have expertise, it's important to find a firm like ours that's been
doing this for a really long time, like TCW, that's been doing this for a long
time, where we have the capabilities, as you said in the
beginning, embedded across all of our investment teams,
both from a risk and an opportunity perspective.
And then it's also important to partner
with a firm that can speak openly with you.
And so that's the last piece I'd love for you just to send
us off with like a quick message of why TCW in this space.
Yeah, the client conversation is my favorite part of this, because we built
out our capabilities to really respond to the client demands we were seeing.
And you pointed out value, everybody has
something different that they're looking for.
Clients in Europe have a particular view of what they want from
a sustainable investment, which is different from what are the
conversations going on in Asia and with our Australian clients.
And it's different than what we're hearing from
large pension assets in the United States.
And in order to really build a credible business, you have to build
the ability to manage all of these different criteria across all asset
classes, customer reporting, conversations around carbon accounting.
We're here to be a partner to the clients, and we're very solutions-oriented.
And some of those conversations are really the ones that
build those deep, meaningful relationships with clients.
And they really appreciate it, because this is a fast-moving, newish
market, where terms have been potentially misapplied, where there's
heightened regulatory focus, and you need subject matter expertise.
And so we've spent our time here trying to build out
that expertise so that we can be a client partner.
That is a perfect way to end.
Partnership matters.
And for us at TCW, clients are at the heart of everything that we do.
And so thank you for finishing it up that way.
Jamie, thank you so much for the conversation
and for everybody that's joined us.
Thanks so much for joining us on the TCW Investment Perspective podcast.
Thank you for joining us today on TCW Investment Insights.
For more insights from TCW, please visit tcw.com/insights.
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