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Season 4, Episode 14: Anthony Campagna & Kevin Spellman - ESG and Investing

December 09, 2021  |  By Cindy Moehring

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This week’s episode of the BIS sees Cindy conversing with Anthony Campagna, Managing Director at ISS and Kevin Spellman, Senior Advisor to ISS and adjunct professor at IE Business School in Spain. Listen as the three talk about everything from new economic value added by ESG initiatives, the data that backs ESG effectiveness, and the corporate future of ESG.

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Episode Transcript

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0:00:15.7 Cindy Moehring: Hi, everybody, and welcome back to another episode of The BIS: Business Integrity School. And we are in season four, talking about all things ESG. And I am very, very excited today to welcome Anthony from ISS and Kevin, who's an advisor for ISS, and also is a Professor at University of Wisconsin, Milwaukee, and an adjunct professor at IE business school. Hi, to both of you.

0:00:41.5 Anthony Campagna: Thanks for having us, Cindy.

0:00:42.5 Kevin Spellman: Thanks for having us.

0:00:44.1 Cindy Moehring: Yeah. You're very welcome. So, before we jump into this super exciting conversation, let me just tell you a little bit about Anthony and a little bit about Kevin, and a little bit about ISS, and then we will jump right into all of the questions. So now Anthony is the managing director of at ISS ESG, and he heads the Integrated Financial and Impact team. And at ISS, Anthony is responsible for EVA, which some of you may wonder what that is. We're gonna talk a lot about that today. It's a really cool concept called economic value added, and he manages responsibilities for EVA and fixed income ESG ratings, bespoke ESG solutions, and municipal ESG ratings, and global thought leadership. That's a lot, but all in the ESG context. Kevin is a Senior Advisor to ISS. As I mentioned, he's also a Director and Senior Lecturer at the University of Wisconsin in Milwaukee, and an adjunct professor at IE business school. Kevin is sometimes referred to by his students and others as Coach, so if you hear Anthony or I lapse into Coach, we're really talking about Kevin. He has nearly 30 years of experience in investments and nearly 20 years in teaching. So, thank you both for being here today. This is gonna be a great conversation.

0:02:06.2 Anthony Campagna: Yeah, really excited. Thanks, Cindy.

0:02:08.1 Cindy Moehring: You're welcome.

0:02:09.2 Kevin Spellman: I can't wait to share the research.

0:02:11.2 Cindy Moehring: Yeah, some really, really exciting research has come out from your work, Kevin, and is it's just instrumentally beneficial, I think, to ISS and to the whole ESG ecosystem and particularly investors who are trying to figure that out. But... So before we jump into the questions for audience members who may not really know who ISS is, that stands for institutional shareholder services, and they really help clients make informed investment decisions. They have over approximately 3100 clients and it includes many of the world's leading institutional investors, and they rely on ISS's objective and impartial offerings as well as public companies that are focused on ESG and governance risk mitigation. So, you really are viewed as your universe of who you're speaking to with your research and what ISS does, a view toward investors and particularly institutional investors, but also companies who know that they're being evaluated. Is that a fair way to say it?

0:03:14.8 Anthony Campagna: Yeah, totally fair.

0:03:16.2 Cindy Moehring: Yeah, okay. So, let's just spend a minute and let the audience get to know both of you a little bit better. Anthony, why don't we start with you? Can you just tell us how you got into this very interesting sphere, I think, of advising investors and advising them about ESG?

0:03:34.8 Anthony Campagna: Yeah, yeah, I kinda took the indirect route, so my background is actually in engineering, so I have an undergraduate degree in environmental and civil engineering, and prior to joining the world of finance, I was a practicing engineer. So I'm lead certified, I have my EIT, but got into Finance through investment banking, and then took a career path along those lines that started in financial statement analysis and building upon kind of a foundational knowledge of the way the balance sheet income statement and statement of cash flows work, started to apply that to a more practical view of how ESG can be involved in that ESGF mentality. So, EVA, economic value added was acquired. Our company was acquired in 2018 by ISS, and since then it's been kind of jump on the rocket ship that is ESG and continue to build out our capabilities. So, it's been a wonderful journey and really excited, not only on where we came from to where we are now, but where we're going in the future as well.

0:04:25.4 Cindy Moehring: Yeah, I love that engineering background. You're not the first guest in this series, this season of the video podcast series, that have had engineering in their background and then applied it in the ESG space in interesting ways. That's cool. So Kevin, what about you? You're an advisor to ISS, you're an adjunct professor, you do all kinds of research with IE business school. Wow, that's a lot on your plate. Tell us a little bit about how you got into this?

0:04:49.5 Kevin Spellman: But let me comment on the engineering thing. But first of all, I've had a lot of engineers as students, they're problem-solvers, and really, investments is just a problem. So I started as an analyst and then managed portfolios and then managed analysts, and I was always curious about what makes a great investment, what makes a good company? When I got into teaching, I just love making a difference in the world and teaching was a natural extension of that, and then I got interested in ESG because, of course, you're doing good for the world, and when I found there is a link, at least, apparently between ESG and good companies and good investments, that just made me all more excited to do this research.

0:05:34.4 Cindy Moehring: Yeah, and that's what we're gonna really be focusing on today, is this, it's really exciting, and I agree with you. An exciting link that shows not only is ESG good for the world, but it's actually, we can show with some research really good for companies too, right? I mean, it just... It makes sense in terms of an investment, I think that's a really big step forward. And it kinda leads me into my next question for both of you, which is, I think I'm gonna know your answer to this, but I'm gonna ask it anyway. Do you get the sense that ESG is kinda here to stay now for a while, it was kinda over here on the sidelines and it was maybe good for the world, but I'm not so sure that everyone thought it was kinda center stage the way it feels like it is more to me? I mean, Anthony, you just described it as a... Like a rocket ship. Do you guys both really think it's here to stay? Is it not maybe just the flavor of the month?

0:06:24.6 Anthony Campagna: Yeah, it's a great question, and one that our clients talk about often. Is this material, and how does it carry its materiality going forward? And when we think about where our clients sit globally, the answer to that question can be a little bit different. We think about Europe as a very mature and developed ESG market, whereas parts of North America are more kind of fast followers still in startup mode. And then thinking more broadly in Asia-Pacific, you really do have a startup type mentality where there is voting and proxy, but E&S is a little bit less prevalent. Yeah, our view fundamentally is, and as part of ISS ESG, ESG is here to stay, and it should become more and more a part of that front office discussion as it matures in its position in that front office buy, sell, hold decision-making process.

0:07:12.1 Cindy Moehring: Interesting. Kevin?

0:07:14.5 Kevin Spellman: So, I would like to share. To answer this question, I'd like to share my screen and just show you a little bit of research associated with this. So let me do that and let me just skip forward.

0:07:25.1 Cindy Moehring: And I know some of you are just listening so don't worry we will... Kevin's gonna do a great job of describing what is on these slides. So if you're listening to this in the podcast version as opposed to the video, we'll walk you through it. Kevin, go ahead.

0:07:38.7 Kevin Spellman: So, the last few years, interests in E&S have really increased. G, the governance point, and we've had got studies and linkages between good governance and good shareholder returns, this is basically aligning management with shareholders. This has been associated with good returns, good firms for some time. It's really just the last couple of years that E&S have been becoming really important, and there's been huge growth in assets associated with this. Either people adopting the ESG screens or new funds focused on ESG. What I'm showing here on the screen is the correlation between E, S, and G and shareholder returns.

0:08:25.9 Kevin Spellman: And what you can see with the red line, since 2018, it's going up, which means returns become more correlated with the environmental aspect. The blue line, it's been going up since 2019. Now, governance markets are not correlated for every factor, but governance is still kind of a neutral, and with profitability, the metric we're gonna use is EVA margins, being important as well. So this, obviously, this has been impacting returns, but what has happened over the last, let's say couple of years? I think there's really five things, and it's almost like there was a tempting point and then everybody had interested.

0:09:06.9 Kevin Spellman: Now, first, is the environmental concerns. Is this to stay? Well, I don't think the environmental concerns are going away, and given that there's real economic consequences, where corporations, consumers and governments are taking notice. Second is, is the younger generation. The younger generation kind of grew up post the financial crisis and they de-levered over that period of time, and I think as they de-levered, they stopped focusing as much on goods and they started to focus on experiences, and experiences are things to do with the social well-being and things like that. So that's second.

0:09:49.1 Kevin Spellman: Third is just recent events. We've had all kinds of events associated with either income disparity or racial inequity, gender inequities, and other issues like that happening. This year, we had... That's... Employees is part of the S. This year, we have huge supply chain problems, supplier relations is part of S. The consumer focus is part of the S too, and some of the best-performing stocks are consumer-focused. Apple, Amazon, Netflix, Google. So We've had recent events that have really brought up interest. So Number four, we now have studies. We have data. It wasn't until maybe the last 10 years that we had good ESG data. We had good G data, but we not until the last 10 years did we had have good E&S, and now we see the linkages and it's not showing that it's bad for shareholders being good to the world.

0:10:48.5 Kevin Spellman: And the last, and I think this is actually quite important, is, over the last 20, 30 years, there's been a shift in how... What's important on the assets to corporations. So on this slide, what I'm showing you is intangibles. Intangibles are things like R&D and promotions, and intangibles have been growing as a percent of assets. Gap intangibles, which are on the balance sheet, are about 35% of assets, and as you can see in the chart on the left, it's been growing. EVA intangibles, which is where we capitalize R&D and promotion expenses, are about 8% of capital. So 43% of capital, approximately, is not property plan equipment tangible, and how do you make sure those intangibles have a benefit?

0:11:44.2 Kevin Spellman: Well, when people who are creating intangibles, they're people. And those people are employees and they work with consumers. On the right-hand graphs, I show the correlation between good governance and EVA intangibles as a percent of capital, good social and the correlations with EVA intangibles, and environmental, they generally are correlated across all the different sectors. So, there's something to, at least apparently, good ESG and investments in intangibles, and intangibles are becoming a much larger proportion of assets.

0:12:26.0 Cindy Moehring: ISS has been known for years as sort of weighing in on their view of governance for a company, and so perhaps that is why you see that waning a bit, the environmental, with all the issues we're having lately, with all of the just extreme weather events, is one example of kind of what's happening, and then with the social justice issues that have arisen lately. It does seem like the environmental and social issues are kind of rising in importance in investors minds and consumer minds and employees minds and everybody's minds, right? So when did ISS figure out that they needed to be paying a little more attention to E and the S and bring that into the four, if you will, as much as governance?

0:13:17.3 Anthony Campagna: Yeah, it's a great point. The foundational core of ISS is the G. The governance voting in proxy business is what ISS has been known so well for for the better part of two decades. And recently the ESG part of ISS has continued to grow and grow quite rapidly. We acquired Oekom Research, a Munich based research house in 2018. And with that nearly doubled the size of our ESG staff. And that really positioned ISS ESG as an independent ESG ratings house, and that allows us to stand on that foundational knowledge that goes back well over two decades at Oekom, the key staff and kinda team members that joined ISS through that acquisition to focus on the ES E, S and the G. So we have had this core G competency expertise, now that we've married with the E and S from the Oekom business.

0:14:07.3 Anthony Campagna: As we brought that together, that's been a wonderful process, tons of growth, a lot of the ability to innovate our offerings across all pillars of the E, S and G. And now bringing in the F approach as well, selfishly on the EVA side, has really allowed us to position our research part and parcel with other competitors in the space, and partnering with our clients to understand how ESG has become part of their investment decision-making process. And the types of pieces of information, data and insights that they need to kind of effectively integrate it, have been front of mind for us for the last three years. So it really has been... It was a tipping point then. It seems like every single year we continue to find more and more clients and prospects that are interested in bringing ESG into their process. So it's something that we continue to see strong demand and appetite from the buy side, from asset owners, from asset managers, to integrate ESG as part of their process.

0:15:05.8 Cindy Moehring: Yeah, and if I'm not mistaken, you have rated now through this kind of EVA lens over 21,000 companies. Is that right?

0:15:15.1 Anthony Campagna: Yeah, so the EVA coverage universe is a little bit north of 21,000 firms, it's all market caps, all regions, and really over the last three years as a part of ISS, we've expanded that from about 15,000 up to that 21,000 figure, now. A lot of the expansion that we're doing is in frontier and emerging markets as well as kind of small and micro-cap. But that's driven by investor demand, so we continue to work with our clients to understand where they're finding opportunities in the market. And how we can be an additive tool that they use, we being ISS ESG.

0:15:43.1 Cindy Moehring: Yeah, so Kevin, you've got a really interesting slide up now about ISS's ESG approach. Do you wanna walk us through that and explain that a little bit?

0:15:50.8 Kevin Spellman: Well, Anthony did a great job just describing ISS investment and ESG. There's only one thing I'd probably add to what he said is, we're looking at 800 indicators, 90% of them are industry-specific, and we even Weigh ES and G dependent upon the industry, so ISS has a very deep knowledge of these companies they're covering.

0:16:20.0 Cindy Moehring: Yeah, I think that is a key point, and I'm really glad you pulled that out because two things are important about that. One, it's 90% industry-specific, and a lot of these other kind of measurements or rating agencies, it's... I don't think it's nearly that deep and not that specific. And then you also have different... The second thing is they're there's separate and different weights for the E and the S and the G. So you can actually look at that individually and then look at it all together too, so that's... It is a difference as the slide says, it's very holistic.

0:16:50.5 Anthony Campagna: Yeah, so we fashion the ESG business very much as a glass box, not a black box, in that we wanna give complete transparency to our clients to understand how we're getting to these corporate ratings for each individual company. So for every firm that we cover, you get an ESG score. And those scores are absolute. So they bring comparability across different industries, different sectors and different regions so that you can look across your entire portfolio and not worry about some of the greenwashing effect that we've seen in the news recently. It allows us to be very transparent in all of our ratings and all of our indicators as well, so that 90% sector-specific means when you're looking at a consumer staples firm next to a healthcare firm, next to a technology firm. The key indicators for each of those three companies are going to be different, and our analysts and in their qualitative assessment of these firms are using those different indicators across that analysis. So it does separate us from our competition and kind of our peers in this the space, and it's something that we kind of stand on the foundation of our research.

0:17:48.2 Cindy Moehring: Yeah, and I think you've got something like what? Over 400, over 450 analysts that are working on all this now?

0:17:54.9 Anthony Campagna: Yeah, so we have a little over 450 professionals across the ESG business, and that's comprised of 14 different locations in the Americas, and in Asia-Pacific so it's a growing and robust team.

0:18:07.1 Cindy Moehring: Yeah, that's really exciting. Okay, so let's move from that. Sort of talking about ESG and what's measured, into now talking about EVA and EVA margin, and how is that even useful when you're evaluating performance? What is it and how is it useful?

0:18:24.0 Anthony Campagna: Yeah, so EVA, Economic Value Added. What it does is it solves for the distortions that exist inside as reported financial statements. And it allows for investors to make more informed decisions about the true economic earnings of a business as opposed to the accounting profits of the business. So as we define EVA, it's sales, less operating costs, less capital costs. So EVA is fully loaded for all sources and uses of capital. And then again, it allows you the investor to say you're providing the capital to companies, you wanna understand what your fair rate of return is on that capital that you're providing. So it gives us that cleaned up and comparable view of economic profitability.

0:19:04.9 Anthony Campagna: So when we bring that into the analysis part of an equation, we say EVA margin is one of the key fundamental measures that we're looking at. The way that we define EVA margin is total dollars of EVA divided by sales. And again, because Eva is fully loaded for all sources and uses of capital, when EVA margin is above zero, it means that a firm is earning above its cost of capital. So all things equal, we wanna see EVA margin above zero and rising through time, developing an economic mode. And by analyzing companies through this consistent and comparable framework, it does allow us to look across, again, all regions, all sectors to say, an apples to apples comparison of a FedEx versus a UPS versus a Johnson & Johnson versus Tata Motors. All of those companies through the EVA lens can be comparable because we're treating every dollar of capital with that same economic profit lens, so it allows you to really look objectively at the true earnings and profitability of a company.

0:20:01.8 Cindy Moehring: Wow, that's pretty cool. That is actually very, very interesting, and I think it's very comprehensive, and to your point, it really exemplifies why it's a glass box, if you will, right? Instead of a black box. It's completely transparent in terms of measuring even across industries, but on a consistent basis. So that's pretty interesting. So Kevin, tell us what you've got up here on the slide.

0:20:26.9 Kevin Spellman: Okay, I'm only gonna add one thing to what Anthony said so well, is EVA is economic, is not accounting, and as a result, if you create EVA basically earning more profits than investors require and that should make them happy, so the value of a business is just the capital that's employed plus the value of the EVA. So this gets to an equation of what creates value and it's probably why... If ESG's associate with EVA, why these companies outperform.

0:21:05.8 Cindy Moehring: Yeah, so it's out-performing on the basis of, is the company truly adding value in an economic sense, right?

0:21:13.4 Kevin Spellman: Absolutely.

0:21:14.6 Cindy Moehring: Which is a very, very different lens. Do you have... Let's talk for a minute, Anthony, about any hurdles in trying to explain this concept to your customers, because that is very different than the way they have certainly looked at and rated, I would say, companies in the past. So how are you getting them warmed up to this new model, and how is that going?

0:21:39.1 Anthony Campagna: Yeah, so EVA, it's not new, it's just maybe fallen a little bit out of favor. So the origin of EVA goes back to Stern Stewart Consulting, which is a management consulting firm founded by Joel Stern and Bennet Stewart back in the late '80s, or early '90s. And when they created and quite literally wrote the book on EVA, it was a wonderfully new metric that was, again, fully loaded for cost of capital, allowing companies to understand where their net new investment was going and if they were earning true returns on those investments. Then the dot-com bubble happened and people stopped caring about profitability and started caring about eyeballs and clicks and subscribers, kind of these non-tangible measures of growth or profitability. And with that, EVA kind of fell out of favor. We certainly believe and have resurrected the brand, so to speak, but yeah, when we talk to clients, we wanna give them the tools to understand what EVA is trying to measure and how they can use it. So when thinking about early stage growth companies, early profitability or pre-profitability, EVA is gonna be a hard measure and it's a hard look. So thinking about how to value those companies is not gonna be cash flow basis, it's not gonna be EVA basis, it's not gonna be an earnings basis, it's gonna be some projected version of what the company can do in the future.

0:22:49.8 Anthony Campagna: And that's something that we acknowledge, we hide in plain sight and say, If you wanna follow EVA blindly, we probably wouldn't recommend that and more using our framework as a discipline, not a dogma. And with that transparency, so I mentioned glass box not black box, we actually have a presentation that we call 10K to EVA that takes a widgeted company and just shows our clients and prospects the adjustments that we make to clean up for the accounting distortions. And we even have a kind of EVA 101 where we go through a lemonade stand. So we just distill it down to a very simple operating model to understand why EVA is different and what distortions exist inside the financial statements that are so material in understanding the value that a firm is creating through time.

0:23:32.4 Cindy Moehring: Wow, that's pretty cool.

0:23:35.7 Kevin Spellman: Cindy, can I add something to this?

0:23:36.9 Cindy Moehring: Yeah, please.

0:23:39.1 Kevin Spellman: I'm guessing that your listeners have heard of a person by name of Warren Buffet, right?

0:23:47.1 Cindy Moehring: Yes. [chuckle]

0:23:48.1 Kevin Spellman: Alright, so if you look at his approach, he buys companies with good return on capital. Those companies will be generating a lot of NOPAT. Those companies that he buys, he owns forever. He buys companies with sustained competitive advantages, which means they have low risk. These companies he buys have EVA. One of the companies he's owned longest is Coca-Cola. And I understand the CEO of Coca-Cola went to a Stern Stewart management presentation in the 1980s, okay? After that presentation, the Coca-Cola's CEO changed kind of their business model. He was the first billionaire CEO, through his compensation. This is something that works. I think, making the comment about Warren Buffet, and a lot of people screen for these companies with good return on capital, this is actually quite in style. And then it's consistent with probably what they're doing.

0:24:49.0 Cindy Moehring: That's really interesting. Yeah, and Warren Buffet is one to watch, right?

0:24:56.2 Anthony Campagna: [laughter] Yeah.

0:24:56.5 Cindy Moehring: He's been amazing, just amazing. So Kevin, let me ask you another question, Why is rising ESG associated with rising profitability?

0:25:07.4 Kevin Spellman: So, great question. Let me show you the data. A rising ESG is associated with rising profitability and growth. On the right-hand side, I have a series of charts. In the left hand column, I divide our companies into high ESG growth, which are the ones, to low ESG growth, which are the fives. The top of that graph is showing you that the companies with a rising ESG tend to have high EVA margin or this economic value added that Anthony was talking about. And the ones that are fives, the low ESG tend to be the ones that are less profitable. Going to that chart down, this shows just all kinds of growth rates.

0:25:53.0 Kevin Spellman: So the ones which are high ESG companies tend to have higher growth in sales, the blue, higher growth in capital, which is the gold, higher growth in EVA, which is the black. So you tend to have higher growth associated with the high ESG versus the fives, the lowest ESG. And do investors take notice? Absolutely. The bottom graph on the left shows you that the valuation multiples or how much we're valuing the businesses as a percent of the sales or earnings, all tend to be higher for the companies with high ESG, the ones and the fives. Now the right hand series of graphs shows the same thing, but this time of ESG level. And what you're seeing on these graphs is generally level of ESG does not seem to be positively related to growth and margins. But these companies still outperform, which kind of left me with a quandary when I was looking at the data, why are they outperforming? So I'll go to the net slide.

0:27:00.8 Cindy Moehring: Right.

0:27:00.9 Kevin Spellman: So, in the net slide, what we see is that these companies with high ESG, the ones, tend to pay more dividend, have a higher dividend yield, invest more in capital to grow, invest more in R and D, which could result in these intangibles. They also tend to be larger companies based on market value and assets and sales. Now, if EVA matters and if ESG matters, then it should make sense that these things are related to shareholder returns. So in a net slide, we'll just look at this top graph. What I did is I sorted companies into high ESG and low ESG and also high EVA margin and low EVA margin. Starting at the beginning of 2014, if we had a dollar and we invested in high ESG companies and high EVA margin companies, that dollar would've grown to about two. Where the low ESG and low EVA margin companies, low profitability companies, a dollar would've grown to $1.42. The returns are almost double over that short period of time by investing in good ESG and good EVA margin companies. This is the data, this is not made up. This is the world.

[laughter]

0:28:25.5 Cindy Moehring: So why do you think that is? The data is fabulous, by the way, it is supported. The business case is there, that's the better investment. What's your sense of why?

0:28:36.8 Kevin Spellman: Well, let's first talk about why this may be just an aberration, and then we'll talk about why I think good ESG may be related to these good things. So, first of all, there's people that just say, the time period's short, it could be just random. Other people would say that, well, and maybe that companies who have really high levels of profitability can invest in ESG initiatives. So it's not really that good ESG is resulting in these good things, it's just that they're larger, they're more profitable, and they're correlator of high ESG because they can invest in it. So those are reasons that people who don't believe in this, their arguments. So let's look at the other arguments. Why could this be sustainable? ESG be sustainable and lasting? Well, if you treat your employees right, which is part of the S in ESG, doesn't it make sense that they're gonna work harder, be more productive? There's gonna be lower turnover? Basically, it's gonna increase their productivity, lower their costs, maybe generate more revenues. Let's look at treating consumers right. If you treat the consumer right, they'll be repeat business.

0:30:02.5 Kevin Spellman: To attract new consumers takes a lot of money. So you increase revenue treating the consumer right, it'll reduce costs. How about the environment? Well, if you're bad to the environment, first of all, there's a lot of management distractions and regulation, but it could also be demoralizing to employees. And obviously, that can feed through to lower revenues and higher costs. And the last one, the G, aligning shareholders with management for the long term just seems to make a lot of sense. So I think there's a relationship between ESG and these profitability returns, and it makes sense. It could continue, and it could be a little bit of both. If they get... Be higher profits from ESGs, then they have more money to invest in ESG initiatives, and that would be a great world to live in. And it's the one I'm hoping for.

0:30:49.3 Cindy Moehring: Yeah. Well, it seems to me that it is a lot about showing that you've created holistically, trust for all of your stakeholders. They can trust you holistically as a company to bring them a good return, right? But also be doing business and doing it the right way, in a way that, and we talked about earlier in this podcast already, how that matters, particularly to the younger generation. So Anthony, a lot of the approach here is qualitative. You got a number of different data points, I get it, but a lot of it is qualitative information in terms of how it is evaluated. So how do you determine what indicators to really use for your corporation's ratings?

0:31:37.7 Anthony Campagna: Yeah, it's an exhaustive process, yes. And we mentioned before, somewhere between 700 and 800 total indicators that are being called into the individual company analyses. But internally, we have a methodology review board, so we meet on a monthly basis to make sure that as sustainability reporting continues to evolve, we're staying current on the statutory regulatory side, right? As SASBs continue to work on their alignment, as the PRI comes out with new standards and regulatory pressure. We make sure that as companies continue to tell us more about ESG, we're taking that information in and using it as part of our analysis. I think something that's really unique about part of our approach is we actually score companies, we call it a transparency score. So the amount of information that they provide that we then use during our process, so you get a percentage ranking. And it doesn't necessarily mean that if you're more transparent, you get a higher score, it's just a measure of trying to understand how much information companies are giving to the public, to the investment community, on an ongoing basis. And what's really encouraging is that score continues to rise through time, which is just more companies are telling us more things more often.

0:32:47.3 Anthony Campagna: Good or bad, and we hope they're more good than bad, or at least moving in the right direction towards good. But as long as you can measure something, it's Peter Drucker, what gets measured, gets managed. Measure what matters, is I think what's more important. We've started to see E&S metrics creep into executive compensation, so we now know that ESG is coming into the boardroom, and it's being considered as part of, instead of just TSR or earnings growth or other metrics, EBITDA metrics, things like that, you start to see health and safety, health... Staff retention, Corporate Social Responsibility, Diversity and Inclusion as metrics that are now part of executive comp, and that's something that... Incentives dictate behavior, and that's something that we're really encouraged to continue to see going forward.

0:33:30.8 Cindy Moehring: So, what you just described, you mentioned that you've seen it creep into executive comp, would you say that's one of the unique insights and aha moments that came about because of the qualitative type of review that you all do?

0:33:45.2 Anthony Campagna: Yeah, very much so. So core to that governance pillar, we call it the ABCs of corporate governance, we wanted to understand compensation. And one of the things that we have expertise in is analyzing the DEF 14A, so management's proxy and understanding what they're being paid on. So, bringing those core competencies of ISS broadly into our ESG analysis is something that is unique. And you get those eureka moments of seeing how many new E&S metrics have been put into exec comp plans both in short term and long term, what's their weighting, what's the total notional, and just that threshold going higher and higher continues to encourage the alignment of management with the alignment of shareholders, with the alignment of the better good.

0:34:25.8 Cindy Moehring: And once you see it hitting executive comp, I'd say that's a pretty good indicator that something's here to stay, right? [chuckle] So that's a really great insight, very good aha moment. Well, this has been a fascinating conversation, and before I let the two of you go, I wanna ask one last question. Are there any good resources that you can think of, any maybe documentaries you've watched or a great book that you've read, or a great video podcast episode or a series you've listened to that the audience might find instructive if they wanna go a little deeper into this topic of ESG?

0:35:04.9 Kevin Spellman: Alright, so I'll take this first. First of all, I read constantly, so it's hard sometimes to remember the resources, and I think constantly, I have long... I've been quite interested in the S in ESG. Part of the reason is social unrest and various other things that have been happening. But also, my doctorate degree is in behavioral finance, so it's understanding why people make the decisions they make. And how that goes with the S is that, part of the S is diversity, diverse ideas. If you have more diverse ideas, you may identify your risks earlier. Now, my history is as a portfolio manager, and I thought one of the key aspects of being successful as a fund manager is to understand risk. Diversity could also result in better choices of investments for a corporation. As far as one thing that I have been reading, and I said at the start of this, I'm really interested in what makes a good investment good companies.

0:36:14.4 Kevin Spellman: There is a blog, it's by a friend of mine in Australia by the name of John Garrett. It's called the Investment Masters Blog. And all he does on this blog, and you get maybe a publication once a month, maybe a little bit more, he writes on the absolute best companies. And something I've seen when he writes on the companies, they all focus on employees, their customers. He also looks at the best investment managers, and these investment managers often invest in intangibles. So it kinda takes me back to where I started, what was my interest in ESG, is basically learning what makes a great investment in a great business, and it seems to be ESG and investments are somehow linked.

0:37:02.0 Cindy Moehring: Yeah, well, that is a great resource. Thank you, I will add that to my list. Anthony, what about you?

0:37:06.5 Anthony Campagna: I'd have to say... Yeah, one of the earliest books that really sparked my interest was Conscious Capitalism, just a great... And that was kind of before the ESG wave, a great holistic look at the way being a good and conscious capitalist can improve returns through time, and just kind of what coach said, that great companies can be great stewards of capital and great stewards to our planet and to our peers. In terms of academic resources, there is so much out there, it's kind of drinking from a fire hose, but Professor George Serafeim does wonderful work through Harvard, Professor Aaron Yoon through Northwestern, and both of them have published a few papers recently around financial materiality, around SASB materiality, so those are great resources to just build a foundational knowledge on the ESG side. And then you see it more and more often above the fold in the Wall Street Journal, in The Financial Times, in The Economist, so it's creeping into the lexicon of the financial journalist world as well. So it's something that you'll be able to see more and more often to keep your knowledge up.

0:38:12.3 Cindy Moehring: Yeah, I think you're right. How heart-warming it must be, and purposeful it must feel to have read a book that kind of sparked your interest, conscious capitalism, and then to see it play out before your eyes, complemented by this incredibly great research that Kevin's been able to add to the whole portfolio of available resources that proves the point. So this has been a fabulous conversation, very instructive, very informative, lots of wisdom, lots of advice, lots of just really great information. Thank you both so very, very much for your time. I really, really appreciate it.

0:38:48.7 Anthony Campagna: No, thank you so much for having us, Cindy. Part of our goal as ISS ESG is to spread the word of our work and hopefully inform more and more investors, whether they be early stage students who are thinking about getting into a career in finance, we're happy to answer questions, so please feel free to reach out to coach and I via LinkedIn, our direct emails, we're really happy to follow up with any questions.

0:39:09.4 Cindy Moehring: That's great. Well, thank you.

0:39:11.2 Kevin Spellman: This was much fun. Thank you very much for inviting us.

0:39:14.5 Cindy Moehring: You're very welcome. Alright, talk to you soon. Bye-bye.

0:39:17.2 Anthony Campagna: Bye-bye. Thanks, Cindy.

Matt WallerCindy Moehring is the founder and executive chair of the Business Integrity Leadership Initiative at the Sam M. Walton College of Business at the University of Arkansas. She recently retired from Walmart after 20 years, where she served as senior vice president, Global Chief Ethics Officer, and senior vice president, U.S. Chief Ethics and Compliance Officer.


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