The EPFR Exchange Podcast

ESG investing: expectation vs reality, featuring Trillium's Elizabeth Levy

August 14, 2023 Kirsten Longbottom & Cameron Brandt from EPFR and Elizabeth Levy from Trillium Season 3 Episode 1
The EPFR Exchange Podcast
ESG investing: expectation vs reality, featuring Trillium's Elizabeth Levy
Show Notes Transcript Chapter Markers

To kickoff our relaunch – twice monthly episodes where we feature an expert guest and focus in on specific themes or trends – integral members of our research team, Kirsten Longbottom and Cameron Brandt, invited Domestic Equities Portfolio Manager and the Head of ESG Strategy at Trillium Asset Management, Elizabeth Levy to join us on the EPFR Exchange and talk all things ESG. From a theme often referred to as “pixie dust” for fund flows to a changing dynamic in the last 18 months, from a lack of understanding among investors to a lack of clarity from the investment products themselves, from the environmental aspect to the social side, from energy to clean tech, this episode helps give perspective of the everchanging and overgrowing SRI & ESG equity universe. Listen in and email us at with questions, or if you want a peak in to the Fund Flows & Allocations data we track.

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00:00 Intro

This is the EPFR Exchange Podcast. All opinions expressed by Cam, Kirsten or our podcast guests are solely of their own opinion and do not reflect the opinion of EPFR. This podcast is for informational purposes only and should not be relied upon for investment decisions.

00:18 Kirsten Longbottom

Hello everyone, I'm Kirsten Longbottom from EPFR's research team and I'm joined on today's Exchange Podcast by EPFR Research Director Cameron Brandt and Elizabeth Levy, the Head of ESG Strategy from Trillium Management. Welcome Liz!

Today we will be discussing how the ESG theme is currently playing out in the mutual fund industry and some of the challenges it currently faces.

Environmental, social and governance issues are certainly front and center right now. From flooding in China to wildfires in the US and Europe, there are few corners of the world that aren't dealing with climate extremes. Evidence of social stress is equally widespread, and leaders everywhere are wrestling with the best way to transition to a cleaner, more equitable future. 

Before we dive in, I'd like to welcome Liz to our show and ask her to tell us a little bit about her background and her ties to ESG.

01:20 Elizabeth Levy

Yeah, Kirsten, thanks for having me, I'm glad to be speaking with you all today. 

So, I'm a Domestic Equities Portfolio Manager and the Head of ESG Strategy at Trillium Asset Management. 

Trillium was founded in 1982 as the first dedicated socially responsible investment advisor by Joan Bavaria, who went on to launch several industry organizations such as Ceres (the Coalition for Environmentally Responsible Economies) and US SIF (the US Sustainable Investment Forum). Today we combine our ESG integrated investment approach to help clients achieve impact with their investment portfolios. 

I started my career 20 years ago doing what we would now call the ESG research component. I have a degree in Environmental Management and I was really interested, back then, as an idealistic youth, in ways to involve companies in solving environmental challenges. As I was doing that work, I got my CFA and now I'm a portfolio manager who also has responsibility for our overall ESG integration practices. So, I've lived through a lot of different roles and changes in this field and I'm excited to talk about it. 

02:25 Kirsten Longbottom

That's an impressive background! Thank you. 

Cam, to get the ball rolling, can you give us a quick overview from EPFR's perspective of the SRI/ESG space and what shifts you've been seeing over the past 18 months?

02:41 Cameron Brandt

Sure. Well, back in 2018, there was a spectacular liftoff in flows into the SRI/ESG Equity Funds that we track. In fact, between the beginning of 2019 and February of 2022, we only recorded two weekly outflows. And I, at that point, was starting to refer to the ESG theme as “pixie dust” for fund flows. It was so reliably positive.

That dynamic has changed a bit, really since the first quarter of last year and flows – while still more-often-than-not positive – have become markedly more choppy, and in March we had the first monthly outflow since January of 2016.

03:42 Kirsten Longbottom

What do we think this drawdown has been caused by?

03:46 Cameron Brandt 

Well, I would be lying if I said it was, to me, entirely unexpected. There’ been almost evangelical enthusiasm from investors about the theme and at the same time, the financial industry is never one to point out issues that might impede flows into vehicles they're managing. So, a number of important issues and contradictions really didn't get examined until we got into the more economically challenging times we've seen, with major central banks pivoting from goosing the economy with cheap money to raising interest rates to try and keep a lid on inflation.

I think the biggest issue is a lack of understanding among users of these vehicles as to what they're buying into and what are reasonable expectations for the ESG benefits they can deliver. Financial vehicles and environmental themes, certainly in terms of timescale, can be an awkward match. The people who manage those funds are judged, if they're lucky, on an annual basis, but more often or not its quarter to quarter, while the issues that people hope that their money will contribute to solving often take decades if not more to play out a positive way.

05:30 Kirsten Longbottom

And Liz, did you have any thoughts about what Cam was saying there? Do you agree or disagree?

05:38 Elizabeth Levy

Yes, I agree that there is somewhat of a mismatch. In addition, Cam was just referring to people that think their money is going to solve environmental challenges like climate change. But that's not always the case, right? And I think that the lack of clarity of purpose is evident from both the perspective of the investors and the money managers. Investors aren’t clear about what they’re trying to accomplish with this particular investment, and there’s a lack of clarity from the investment products themselves. What are they trying to do or why are they doing what they're trying to do in seeking which ends? That has led to a lot of frustration and concertation.

So, untangling thematic investing from value-based investing, from investing that uses ESG information for investment decisions, is really important. When there's a mismatch between people’s expectations and the actions of their investments, then you end up with frustration. 

For example, clients could, very reasonably, be frustrated to find an oil company in a quote ESG fund, with no other context because that oil company was determined by someone – and they are not quite sure who – to have good ESG practices. But the client thought they were getting a thematic fund or values aligned fund and would be upset and not understand what it was they got.

So, I think there needs to be that clarity of purpose, as well as something else that Cam sort of touched on: the need to be upfront about the financial design of a product too. A clean tech fund, for example, will not perform the same as an S&P 500 index fund. Sometimes it can perform better, sometimes it can perform worse, but it's very narrow. And when folks don't understand the products they're invested in, that's when you end up with the potential for these outflows from upset clients.

07:47 Cameron Brandt

Can I jump in here and ask how you get a generation – especially its younger members – that is very used to passive investing, utilizing ETF's and just seeing the money go out automatically from their paycheck. How do you get them to engage with the sometimes fairly impenetrable, fine print in the prospectuses, which I think are a key to heading this frustration off at the pass?

08:16 Elizabeth Levy

Yeah, and that's a great question. As an active manager, I think that's one reason why you hire an active manager. But if that's not an option that's always available or preferable. 

Nobody wants to read a prospectus. I've read and contributed to plenty of these documents, and I don't want to read them, so I understand why a younger person, or somebody who didn't work in financial services, for example, might be overwhelmed by one of these documents.

I would say that even in marketing documents, being clear is really important. While somebody might be tempted to use vague language in a marketing document, I do think that regulators have a role here to play -- and it’s one that they are increasingly playing – to make sure those messages are clear. 

Because the worst outcome is somebody that thinks, say, that they're investing in a clean tech fund when they're really investing in a screened S&P 500 ETF. You know they're not accomplishing what they want and what they hoped. Is it their responsibility to find out what they're investing in? Yeah, but it's the providers responsibility also to make sure that they're clearly describing what they're doing.

09:26 Kirsten Longbottom

Has there been a tendency for investors to focus on the E part of ESG rather than ESG as a whole? Should the three elements be treated separately?

09:42 Elizabeth Levy

Those are two good, and different, questions. So historically, the “E” has been the easiest to measure because companies have been willing and/or required to disclose a lot of environmental information on topics like air emissions or water use or waste production. In addition, climate change is the elephant in almost every room, and it's a singular topic that many people care about for great reasons, as you referred to in the beginning. And there are publicly traded companies with products and services that directly address it, such as solar panel manufacturers, which isn’t really the case for the social and governance parts of ESG.

Social issues, for instance, lack both reliable sources of information and dedicated investment options. Many investors care deeply about those social issues, but the data has been much harder to come by. For example, companies in the US have been reporting demographic information about their workforces to the government for a long time. But until quite recently, they were very hesitant to disclose that to investors. That's changing, but that change has only really taken off in the last two to three years.

The SEC is supposed to come out with a proposed rule later this year that will require companies to report on Human Capital Management. It will help a lot on the data side if a rule like that is enacted. But the other thing that some of these social issues or challenges is missing are products and services that address them. Many of the social issues are very broad. They involve or affect people in the supply chain, people within the workforce, the labor force and even the consumers for a company. So it's not the same as with the E component, where you can say I'm going to invest in a solar panel manufacturer, and I'm going to feel good about climate change. It's really hard to find something comparable on the social side.

I think it doesn't mean that investors care any less about those issues. And I think if anything, in the last two years they have shown that they care more. It's just more challenging. And so, as practitioners, folks have tried to provide what they easily can, and that means a bias towards environmental plays. But I think that that is changing with the increased attention from investors as more information becomes available and comparable.

12:10 Kirsten Longbottom

Cam or Liz, I'm curious if we have any good examples, either in our EPFR data or maybe in your research as well, Liz, of a company or a stock that is a great example of an environmental or the “E” side of ESG and one that shows off that social side?

12:30 Cameron Brandt

Well, the one that always comes to mind is actually the antithesis of that. When I first started to really field a lot of calls about our ESG coverage, a pretty common one was outrage that Caterpillar, the maker of heavy earth moving machinery, showed up in a number of the Large Cap ESG Funds that we track. And I would always have to point out that, certainly at the time, while Caterpillar is nobody’s idea of a particularly green play, it is a company that treated its workforce very well and was well run. And I think that that's an important part of this mix too.

There's definitely a tendency, I think, on the part of ESG investors to believe that the issues are static, that the bad companies are always bad, that the issues and technologies are pretty much the same. When in fact it's a very rapidly moving environment -- another argument for both active management and much better communication from the providers. The pace at which countries have been deploying solar energy and putting up wind farms is truly breathtaking. And even less heralded moves are making significant contributions, which people tend to ignore or downplay.

14:22 Kirsten Longbottom

The largest of the EPFR-tracked Sector Fund groups with SRI/ESG mandates are Energy Sector Funds, their total net assets account for 30% of the overall SRI/ESG equity universe. Energy Sector Funds as a whole have been in the red for quite some time: they’ve recorded only six inflows in the past 37 weeks. But then looking at the SRI/ESG side of energy, flows have been generally positive in the first quarter of this year but have since been choppy. But the preference for renewable energies is clear and still present. Liz, you kind of touched on this a little bit early but what would you say investors’ top three priorities are when they're looking at SRI/ESG funds within the energy universe? 

15:35 Elizabeth Levy

Sure, for investors that care about climate change, which is many ESG and SRI investors, there's a variety of approaches that they can choose when it comes to investing in energy. 

Some firms and asset owners choose to engage with traditional energy companies directly, asking them to change policies or practices, which is an approach my firm took for many years. Other firms might choose divestment, which is not investing in fossil fuel energy companies at all. Some might choose to selectively invest in fossil fuel companies based on specific criteria, which could include the businesses balance between high greenhouse gas emission companies and low greenhouse gas companies. 

Regardless of which approaches asset owners take towards historic energy sources, they can also, as you indicated, allocate capital to new energies and that all gets folded under that same umbrella. So, really the approach selected depends on an investor’s time horizon which is something Cam alluded to earlier, right, is that climate change and switching out energy systems is a really long dated problem whereas investments are managed on much shorter timeframes. 

There are also expectations around how the energy transition will unfold. And that has both economic implications as well as sustainability implications. You could be somebody that thinks that the status quo in terms of our energy system is likely to continue on for a while. But when you look at what has happened to coal and coal fire power in this country, for example, over the last few decades, it's really decreased because people prefer other kinds of power for multiple reasons. One would be greenhouse gas emissions, two would be local air quality impacts and health impacts, three could be impacts on employee use such as coal miners. 

You then have to add in the economic dimension. There have been other energy sources that are cheaper than coal for a while now. Natural gas has been cheaper for much of the past few decades, and solar power is getting there -- the IEA describes it as cheaper than coal for almost all applications. So, you need to layer on both your own expectations in terms of the length of your investment but also, what do you think is going to happen policy wise as well as economic wise, commodity price wise, regulation wise? There's just a lot of different dimensions there.

18:17 Kirsten Longbottom

Technology companies also feature in many SRI/ESG portfolios. Recent EPFR data shows that funds with ESG mandates remain significantly overweight Technology stocks. ESG funds on average allocate 2.8% more to IT than non-ESG funds and active ESG funds allocate 9.5% more to IT than their non-ESG counterparts. Liz, do you think the partnership technology deserves this overweighting from ESG funds? 

19:09 Elizabeth Levy

I alluded earlier to the idea that solar panels in particular are a tangible thing you can invest in, solar panel manufacturers, for example. And solar panel manufacturing companies are classified as semiconductor companies, so they're within tech. When you're thinking about ESG allocations to clean tech, that shows up in tech, not where you might think in industrials or utilities, so that might account for a percent or two of that technology overweight. 

That said, many ESG funds do also have significant tech overweight for several reasons. Many tech companies offer products and solutions that increase efficiency. Technology that allows computers to operate more energy efficiently, or that allows people to do their job more efficiently, have wide-ranging benefits that can arguably provide environmental benefits to other companies which make them more attractive to ESG investors. 

Technology companies also tend to operate in environmentally responsible manners themselves, particularly software companies, which might not have themselves a huge environmental footprint while relying on highly skilled, highly compensated labor forces. So putting all that together, you can see-- and the performance and the strength and the size and the benchmark which the tech sector has had over the last few years-- you can see why it might be attractive to these investors. 

I would say that as companies, broadly speaking, not just tech, recognize their own attractiveness to ESG investors, there's a bit of a virtuous cycle that comes about because as they recognize like hey, this might be a pool of investors that we'd want to attract. So companies both increase their disclosure as well as increase or improve their ESG practices and performance to attract those investors, and then those investors then recognize and reward those companies with their investment and their incentive to keep doing so. That's not unique to tech.

21:42 Kirsten Longbottom

Very insightful. Thank you. Thank you both for your insight.

I think we've covered quite a bit of ground in the ESG universe, but there's always more to build on and more data to reflect on. So Liz, thank you and we hope to have you back on the show again soon.

22:00 Elizabeth Levy

Thank you very much.

22:02 Kirsten Longbottom

We invite EPFR and industry experts to discuss timely trends driving financial markets, aimed at arming global investors with a deeper understanding of where money is moving and why. If you have a topic you would like to discuss or are interested in joining for another episode, don’t hesitate to reach out to Cam or myself! Thank you all.

22:23 Cameron Brandt

Thank you

22:25 Outro 

Thanks for listening to the EPFR Exchange podcast. For more information, visit or Interested in joining Cam and Kirsten to talk Fund Flows & Allocations data? Or have a suggestion for the topic of a future podcast? Email us directly at

Opening Remarks
Background of Elizabeth Levy, Trillium's Head of ESG Strategy
ESG Equity Fund Flow trends in EPFR data
Issues with ESG universe
Lack of clarity from investors and investment products
Passive investing & a younger generation
"E" part of ESG
Technology & Clean Tech
Closing Remarks