governance side, such as the Dodd-Frank provisions in the US. And
we tried to have some diversity across geography.
CIO: What was your methodology used for assessing compa-
nies as leaders within your report?
Morrow: We thought about themes and then identified a shortlist
of companies with upside exposure to the themes. We took a variety
of different factors into account, not just the indicator score or the
ESG score. We also looked at more conventional factors, like exposure to the market. For example, in the case of blockchain, we ended
up profiling Barclays, because they actually have a lot more going on
with blockchain compared to many of their peers, and this exposure
wasn’t captured in the indicator. So, we tried to balance the results of
our indicators with some real-world market analysis.
CIO: And to get to the shortlist?
Morrow: It was primarily driven by how the companies perform
in our ESG model and, in some cases, on a specific indicator. So,
again, to use the blockchain as an example, our analysts who cover
the banking center built a composite indicator, mixing some of our
metrics that we have in house, and came up with a composite.
CIO: How do plant-based proteins and data security fit into the
future of ESG?
Morrow: They’re definitely both important trends. The metrics
and indicators that we’re using on a day-to-day basis are increasingly overlapping with what a conventional equity analyst might be
looking at, which is another interesting trend.
Data privacy and security go together and fall under ‘social’ in
regard to ESG. We chronicled the recent history of data breaches
and thought about ways that investors could actually benefit from
this trend through companies that offer cybersecurity management
services. And we ended up profiling Symantec because it performed
well in our model. It was the second-highest-performing company,
but it’s actually a pure play, so it’s a crisper investment thesis.
CIO: There are so many factors at play when it comes to data
privacy and security. How did you find a way to rate it?
Morrow: For data privacy and security, we’re looking at the policies companies have in place. The subcomponents include: whether
they have a commitment to implement leading data security safeguards; if they have a commitment to notify data subjects in a timely
manner following a breach; limited collection of essential personal
identifiable information (PII); and commitment to seek consent for
the collection, use, and sharing of non-essential PII.
CIO: How is the market for plant-based proteins changing?
Morrow: Some think it’s one of the most important strategic battle-
grounds for big food in the next 10 years. So, definitely, it’s a broad-
based trend, you know, consumers, but especially millennials, are
increasingly motivated by ingredients, supply chain considerations
and the social and environmental impacts of production. So, I think
those factors are changing. There’s more and more evidence about
the amount of water it takes to support animal proteins, so there’s
that driver as well – although, some plant-based proteins themselves
involve quite a bit of water as well. And we looked at Danone because
it made a strategic acquisition with WhiteWave to get exposure to
this market, as well as the organic and dairy-free markets.
CIO: You also included the hacking risk of automobiles…
Morrow: Which will ultimately become a much more important
focus for regulators as autonomous vehicles (AVs) take off. Indeed, an
important barrier to the mass adoption of AVs is hacking risk. The
risk is out there and it will have to be carefully managed by auto
manufacturers and their suppliers
CIO: But how did you measure a car’s hackability?
Morrow: Obviously it’s difficult to anticipate. But we have an indicator that measures quality management systems from manufacturing companies, and the extent to which they’re certified to third-party standards. And we use this as a proxy. We basically argue that
companies that score well and are ahead of the curve right now will
be better prepared to adapt as regulators move on this, which we do
expect to happen.
How we got to the shortlist is we looked at companies that had
announcements in their financial reports and other types of reports
about how they’re betting on AVs. So, that’s how we got to the shortlist. And then, we cross-referenced those companies with the QMS
[Quality Management Systems] score. So, I cannot say that all of
these companies are talking about hacking risk in their notes to shareholders, but I can tell you that all the companies we profiled in that
shortlist and, certainly BMW, which is who we profiled, are betting
on that part of the race, to develop the first fully autonomous vehicle.
CIO: What gave BMW the edge? What was particularly impres-
sive about it?
Morrow: Well, we like BMW because they score favorably on our
QMS indicator, 100/100. This bodes well, we think, for their ability
to respond to tightening [regulations]. And they were also the top
overall performer on our broader ESG model. And, by virtue of being
in this shortlist, they have upside exposure to AVs. They’re planning
to launch iNEXT, which is their entrant autonomous vehicle, [part-nering with Intel and Mobileye] by 2021. But we will see.
CIO: Which part of your report paid attention to Dodd-Frank?
Morrow: Pay gap. US companies may soon have to start disclosing
their CEO-to-median-worker pay ratio through a provision in the
Dodd-Frank Act. While the ruling may get repealed, we believe
the long-term trend in the US and elsewhere points to improved
pay transparency and disclosure, especially because, irrespective of
regulation, investors are increasingly requesting this type of information. We profiled US companies that, for several years now, have
actually been disclosing this ratio well [in] advance of the Dodd-Frank provision. And we profiled one of those companies: Noble
Energy. They’re an oil and gas producer. They have a [salary ratio
between CEO and median employee] of 52: 1, which, relative to US