A high-profile fraud case and a devastating oil spill directly inspired Maria Elena Drew to focus on environmental, social and governance factors in her investment career.
During her session at the Canadian Investment Review’s 2021 Investment Innovation Conference, the director of research in responsible investing at T. Rowe Price said she began her ESG journey a decade ago as an equity analyst and portfolio manager at Goldman Sachs Group Inc., where she managed investments in BP and Enron Corp. Both Enron’s fraud case and BP’s Deepwater Horizon oil spill in the Gulf of Mexico helped shape her views on sustainable investing.
“Enron was an insightful experience. It taught me to come up with more markers than financial ones to make an investment case. With BP, it was a situation where, if you looked at their track record prior, you could see a long history pointing to operational issues at the company.”
At the same time, Drew’s European investor clients were starting to ask about ESG integration. “I found they were looking for more than we were answering. What I realized was that I was looking in obvious places or when issues were coming up. What I needed was a systematic process to be more proactively looking at ESG.”
While she started out using third-party ESG research, Drew soon developed a framework for her team at Goldman Sachs, allowing it to evaluate the ESG profile of every company in which they invested.
“One of the initial problems we found was that when we started to talk about an environmental or social problem with a company, we’d struggle to baseline the discussion and come up with a concrete view. If you think of the various ESG issues in the investment process, they’re going to be applied differently. For example, you’ve done some research around plastics and find the growth rate is changing due to sustainability factors — that can impact revenue trajectory you’re putting on a chemical company. . . . That’s where building a systematic framework that’s consistent across issues and proactive can help.”
At T. Rowe Price, Drew set up a new framework for her responsible investing team as a way of embedding ESG research across the entire investment platform. The approach can be applied to any portfolio without supplanting fiduciary duty as the team’s top priority.
“Many of our peers started off by launching ESG products like impact funds and creating boutiques within a larger asset manager and working backwards towards embedding ESG into platforms. We started the other way around. ESG doesn’t represent one single investment style — it’s about recognizing each factor within the investment process.”
Drew’s research also touches on responsible investing strategies that allow investors to express their values through portfolios — usually through a series of exclusions. It also covers the creation of impact investing strategies, the first of which was launched this year.
The integration process includes three steps: identification, analysis and integration. “We’ve built a proprietary tool — our responsible investing indicator model — to scan large universes of securities to identify where to do more work. These securities are rated in a traffic light system — green, yellow, red. Our ESG specialist can then go in and identify outliers that need more focus.
“This research is then published for portfolio managers and they start on integrating ESG. . . . If you’re doing ESG well, you want to root out problems first.”