Matthew Patsky, CEO and Portfolio Manager at Trillium Asset Management, wholly owned by Perpetual Limited, is a veteran of the responsible investment industry. In this interview, we tackle some of the most contentious issues, including the gender pay gap and the decline of fossil fuel demand. We also look at how investors can use shareholder resolutions to raise awareness of issues that are ignored by companies.
In a recent interview with Mike Wyrsch, Chief Investment Officer with Vision Super, he lamented the fact environmental, social and corporate governance (ESG) investing did not incorporate more action in the form of shareholder resolutions.
And it is true, few institutional investors are willing to co-file resolutions, even if they might agree with the content of the filing.
Investors often see shareholder resolutions as somewhat of a hostile action, and participating in such an action might cause relationships with the investee companies to sour.
But Matthew Patsky, Chief Executive Officer and a Portfolio Manager at Trillium Asset Management, believes shareholder resolutions are often simply a tool to raise awareness of issues that are just not given the right level of attention by the company.
“We had 350 engagements with companies last year and most of them are very successful, because most of what we are doing comes across as someone collaborating to improve,” Patsky says.
“For example, we are simply saying: ‘We would like you to look at the fact that you should have a policy in place for employees to take time off to come to the elections this year.’ And they mostly say: ‘yes, that is a good idea’, and they put it in place.
When we fail on engagement, we will take it to a shareholder resolution. What we are trying to do is raise awareness with the media, with the public, with the employees and the customers. But also with the board and senior management, because oftentimes, the senior management doesn’t know that the general counsel is telling us ‘no’
“But when we fail on engagement, we will take it to a shareholder resolution and last year about 48 went to resolution. What we are trying to do is raise awareness with the media, with the public, with the employees and the customers.
“But also with the board and senior management, because oftentimes, the senior management doesn’t know that the general council is telling us ‘no’.”
Patsky gives an example, where they were in conversation with United Natural Foods, a large distributor of organic and other foods that are perceived to be healthier options. Patsky and his team wanted to ensure the company had protections in place in its non-discrimination clause about sexual orientation and identity.
This was important, because it is a requirement of their largest customer Wholefoods Market, which represented over 30 per cent of United Natural Foods’ revenues.
“Wholefoods had a policy that all their suppliers had to have protections in place, based on a series of things, including sexual orientation and gender identity. And here their largest distributor didn’t have it in place,” he says.
“The truth is that people presumed they had it in place, because it was such a progressive company. And so we thought it was there, but discovered that it wasn’t.”
He reached out to the company, which referred him to its general counsel, but the conversation didn’t go as hoped.
“The general counsel explained to us that they had no intention of putting that protection in place, because it would make them susceptible to fraud,” he says.
“We were scratching our heads trying to figure out what he was talking about. We didn’t understand it and so we got to the point where we were going to file a shareholder resolution.
“Finally, I got to the point where I just picked up the phone and called the chair of the board, because I knew him, and said: ‘I don’t understand that you are pushing us into a corner, where we have no other option than to file a shareholder resolution.’ And he said: ‘What are you talking about?’
The chair of United Natural Foods had no idea this discussion was going on and immediately recognised the importance of the request.
“He said: ‘Please, withdraw the resolution and I will have it changed tomorrow.’ And it was changed the next day. So here the mere fact that you are filing it had raised awareness and now the chair was saying: ‘How ridiculous that we didn’t have this in place.’”
The Importance of Non-financial Factors
Patsky was interested in investing from an early age and at age 11 he started reading copies of The Wall Street Journal that companies threw out when they were done with them.
Quite quickly he developed a sense that there was more to investing than analysing financial material and his conviction led him to invest in one of the earliest socially responsible investment funds, The Dreyfus Third Century Fund, which was launched in 1972.
His first investment job was at Lehman Brothers in 1984 as a technology analyst and he continued to develop his thoughts on the materiality of non-financial factors.
“I went into Lehman Brothers thinking: ‘There are a bunch of factors that matter that are oftentimes ignored.’ So I would ask all sorts of questions about recruiting patterns, starting salaries, benefits and how they did on retention and how they were trying to lower turnover,” he says.
“Almost everybody would say: ‘You are the only analyst that asked these questions,’ as though, no one had ever considered that any of that mattered.
There are a whole bunch of factors that are not financial that nobody is looking at. And if you put them in the context of building sustainable business models, they are relevant and material
“And so it got to a point where I was so convinced that all of this mattered that I wrote a business plan. I went to the associate director at Lehman and said: ‘I think we’ve got a real opportunity here, because there are a whole bunch of factors that are not financial that nobody is looking at. And if you put them in the context of building sustainable business models, they are relevant and material.
“The response from Fred Fraenkel, who was the Associate Director of Research at Lehmans, was to lean across the desk and say: ‘Matt, really nice that you care about these things. If you don’t stop it, we will destroy your career.’
“And so for me that was: ‘Oh, I’ve got to get out of Lehmans.’ This was the late 80s and, by the way, this was a great firm back then. That was the other irony, because it was a great place to learn and a great place to work back then.”
The conversation with Fraenkel took place in 1989, but it was some time that Patsky found a new home. “I couldn’t convince anyone that any of this mattered. So I kept going,” he says.
Eventually, Patsky found like minded investors and eventually joined Trillium Asset Management in 2009, which was acquired by Perpetual in January of this year.
An often-heard criticism of ESG strategies is that ESG assessment models can vary quite a bit. Patsky acknowledges this has been an issue and expects to see more standardisation as more data becomes available.
“I think we are going to get very serious about the standardisation of what we are asking people to report on and we are getting much stronger on demanding that it has to be reported,” he says.
A good example of this is diversification data in the United States, which is currently being collected by the US Equal Employment Opportunity Commission under its EEO-1 Survey. This survey requires any company that has more than 100 employees to collect data on gender, race and remuneration.
It would be a treasure trove for ESG and responsible investors, if only it were to be made public.
“When we ask for diversity data companies say that it is too expensive for them to compile this. And I’ll say to them: ‘No, actually, you already have it. I’m asking you for data that you already collect, you already compile and already file with the US Federal Government. It is a requirement.’ So what we want is disclosure,” Patsky says.
“For over a decade, we have been asking companies to disclose. We have even gone as far as to file shareholder proposals to ask them to disclose it. But about 95 per cent of them still refuse to disclose it.”
Patsky is hopeful that with the election of Joe Biden as the new US President, regulations will be put in place where the Securities and Exchange Commission will require disclosure of this data.
When you look at it in aggregate, the average woman in HSBC makes less than 50 cents on the dollar of the average man. That tells you something seriously about who got promoted
But when they do, the picture is not going to be pretty, if data from the United Kingdom is anything to go by.
Companies with more than 250 employees have been required to provide information on the gender pay gap for the past three years and in some instances, women earn almost half of what men take home on average.
Although the discrepancy between men and women with similar job responsibilities is much smaller, the large gap between the average male and female employee gives insight into a worrying culture within a firm, Patsky says.
“We got to see the huge pay discrepancy for women at the big banks, such as HSBC, and it was just glaring. So you have been telling us that there is a one per cent pay differential based on the same job.
“But when you look at it in aggregate, the average woman in HSBC makes less than 50 cents on the dollar of the average man. That tells you something seriously about who got promoted. That needs to be looked at,” he says.
In the US, there is also an increasing awareness of the pay differential between people with different ethnic backgrounds.
“The Black Lives Matter movement really shone a light on this. And so people are now asking: ‘Why won’t you release this information? What is in it that is so embarrassing to you that you don’t want to release it?’”
Patsky isn’t looking for the perfect company; he is fully aware gender and race-based pay discrepancies are a work in progress.
“Every company has a problem; that is not the point. Trillium has a problem, Perpetual has a problem, everyone has a problem. What we want to see is that there is acknowledgement and that they are making progress. That is all we are looking for,” he says.
The Energy Transition
Another point of contention in investing is the current energy transition, away from fossil fuels and towards renewable energy sources. For many people this is an emotional issue, as they feel it threatens their way of life and for some their livelihoods.
But ultimately it will simply be a matter of economics, Patsky says.
“Nobody is saying: ‘We will never use fossil fuel as an input for anything again.’ What we are saying is that: ‘Look at the evidence and it is clear that in a period of time, maybe it is a decade, maybe it is two decades, but in a period of time we will no longer use fossil fuels as an input for transportation fuel,’” he says.
“We will have moved to electric engines as the primary source of transportation. That is happening and it is happening at an accelerating pace and it is not going to be stopped. No government is going to throw enough subsidies at it to stop it.
“And so if that is true, then that alone will cause lower demand and puts pressure on prices, and we will end up with stranded assets.
If you are sitting on oil reserves that are significantly difficult to get at, those assets will be stranded. Some of the fracking oil companies, certainly the Tarzans of Canada (a play on words, referring to the large Canadian tar sands oil producers)..., they are just going to be abandoned
“If you are sitting on oil reserves that are significantly difficult to get at, those assets will be stranded. Some of the fracking oil companies, certainly the Tarzans of Canada [a play on words, referring to the large Canadian tar sands oil producers]… they are just going to be abandoned.
“There is no way you can make the economics work when you need US$75 per barrel of oil to break even,” he says.
Oil will still be used in industrial applications, such as the production of plastic or certain chemicals, but the demand will certainly decrease in the years to come.
“I had actually someone ask me 20 years ago what I would think oil would come down to in 40 to 50 years, and I said: ‘I think we will settle at a price just above the cost for the cheapest oil to be produced.’ And so you would end up somewhere between US$10 to $15 a barrel,” Patsky says.
The US demand for coal has already been in decline for years, he says, despite what certain politicians in the US are saying.
“There is a simple economic argument to make for the decline in demand for coal. Continually, renewables are getting cheaper, continually other sources are getting cheaper. Coal is not getting cheaper.”
“In the US, the demand for coal has seen a steady decline over many, many years. And the political effort to pretend that there is a ‘War on Coal’ might be popular in coal country, but there was no war on coal.
“Natural gas and renewables have become so cheap that there was no argument for keeping existing coal fired plants open. You just couldn’t make the economics work,” he says.
This article is paid for by Perpetual. As such, the sponsor may suggest topics for consideration, but the Investment Innovation Institute [i3] will have final control over the content.
This article has been prepared for general information only and is not intended to provide you with financial advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The information is believed to be accurate at the time of compilation and is provided in good faith. Any views expressed in this article are opinions of the author and the people referred to in the article at the time of writing and do not constitute a recommendation to act.
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