This case study examines the challenges and lessons learned during the 10 month development of the Carbon Efficiency Strategy, a joint venture between MCM and the McKnight Foundation, offering carbon-conscious investors a way to invest in companies whose practices could reduce carbon emissions.
In late October 2014, Gabriela “Gabby” Franco Parcella, chairman, president, and CEO of Mellon Capital Management1 (MCM), and Kate Wolford, president of The McKnight Foundation, announced a joint venture called the Carbon Efficiency Strategy (CES). The CES represents a landmark product that offers investors a lower-carbon solution to equity investing while also fulfilling their fiduciary responsibility.
The CES Case Study examines the development of Mellon Capital’s CES and explores the challenges and lessons learned throughout that process — insights other innovators may want to consider when creating new financial products that balance financial returns and social outcomes with the added dimension of a carbon-specific focus.
The study looks at the creation of the CES strategy through the concept of Deliberate Leadership (DL). DL is a framework for leaders to use in tackling problems with no easy or consensus solutions.
“Creating a strategy designed to ‘fill a gap in the universe of investment products’ is no easy task.”Gabby Parcella, Chairman, President, and CEO of Mellon Capital Management
McKnight had set the stage for the CES portfolio through its commitment to impact and responsible investing, which included addressing climate change. Mellon Capital has managed a portion of The McKnight Foundation’s investments since 1987, establishing a deep relationship as the groundwork for this partnership. Mellon Capital is a wholly-owned subsidiary of BNY Mellon, one of the world’s largest and most established financial services corporations. While McKnight was evolving its impact program and refining its focus in the area of climate change, both BNY Mellon and MCM were on their own paths to move beyond innovative investment products to incorporate social responsibility across each firm. BNY Mellon engaged in a redesign of its corporate social responsibility (CSR) strategic framework, which evolved to include Social Finance – any investment activity with a positive social and/or environmental impact. Likewise, Mellon Capital concentrated on providing solutions that tackled its clients’ greatest concerns, often seeking to bridge the gap between market risk and the clients’ objectives.
In addition to McKnight, Mellon Capital, and BNY Mellon, there were two other firms involved in the process of creating the CES. Mercer (also a partner of McKnight since the 1980s) leveraged its ESG research capabilities to meet McKnight’s financial and social needs. Also joining the process was Imprint Capital, an impact investment advisory firm new to the McKnight relationship that works on social investment issues with several large foundations in the U.S.
Creating a strategy designed to “to fill a gap in the universe of investment products” is no easy task. The partners knew from the beginning that this was a unique project that involved multiple partners, divergent interests, strong opinions, conflicting values, confusion about responsibilities, and a context that was both urgent (climate change) and reluctant (the traditional financial sector and the traditional philanthropic sector). Getting to “yes” was an iterative and contentious process, even for partners who wanted the same result and who have built a trusted relationship over the course of several decades. It was no different for McKnight and its three advisors, Mellon Capital, Mercer, and Imprint.
Over a ten-month period, the partners faced numerous challenges, including confusion about roles and responsibilities, incomplete data from third-party providers, and the iterative process of arriving at an executable investment model with a clear thesis. The partners, through persistence and working collaboratively, finalized the Carbon Efficiency strategy that would provide broad equity exposure cost-effectively while assessing, recognizing, and supporting strong climate performance. This would be achieved by using a combination of rewards, penalties, and screening for climate-related behaviors and proxy voting in support of shareholder resolutions and other corporate initiatives related to climate risk, performance, and disclosure.
The Carbon Efficiency Strategy is designed to provide broad, equity exposure while seeking to minimize investments in companies with high carbon emissions. The strategy helps investors manage climate change related risk by focusing on carbon emissions as the key risk indicator. To address the most negative impact, coal companies are excluded from the portfolio. Utilizing a reward and penalty system, the model assesses a company’s environmental performance within its peer sector, seeking to reduce the carbon intensity exposure of the strategy by over 50% while minimizing tracking error to less than 0.50% relative to the benchmark2. Additionally, the strategy incorporates an engagement approach through integrated proxy voting policies, signatory initiatives, and direct conversation. Such a strategy would potentially enable investors to send a strong signal of climate-change-related action and engagement while maintaining a beta investment profile and managing climate-related investment risk.
The Seven Core Characteristics of Deliberate Leaders: All of the partners who created the Carbon Efficiency Strategy consistently displayed the seven core characteristics (the 7 C’s) to be deliberate leaders:
For MCM and BNY Mellon, the CES is a new product placed in a dynamic and expanding market, proof that the Social Finance approach is an actionable strategy. It also means new skills and abilities in ESG and Social Finance for the team and greater depth of experience working with nontraditional partners and communicating with clients about the future of responsible investing. While the final story about the impact of the CES is not yet known, the partners have already begun to benefit from what they have learned about collaboration, managing team conflicts, navigating internal resistance to change, exploring ways to blend financial and social returns, and mapping out a process for taking a new idea and shaping it into a market-ready product. The partners can now begin to ponder “what’s next?”
1 Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds.
2 This strategy can be applied to any broad equity benchmark.
Mellon Capital Management Corporation (“Mellon Capital”) is an investment adviser registered with the Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of 1940. Mellon Capital is a wholly-owned subsidiary of The Bank of New York Mellon Corporation (“BNY Mellon”). The firm is defined as Mellon Capital and includes assets managed as dual officers of The Bank of New York Mellon and as dual employees of The Dreyfus Corporation. Mellon Capital Management and its abbreviated form Mellon Capital are service marks of Mellon Capital Management Corporation.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Past results are not indicative of future performance and are no guarantee that losses will not occur in the future. Future returns are not guaranteed and a loss of principal may occur. Many factors affect performance including changes in market conditions and interest rates and in response to other economic, political, or financial developments.
BNY Mellon Investment Management is an investment management organization, encompassing BNY Mellon’s affiliated investment management firms, wealth management organization and global distribution companies. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may also be used as a generic term to reference the Corporation as a whole or its various subsidiaries generally.
This information is not investment advice, though may be deemed a financial promotion in non-U.S. jurisdictions.
Any statements and opinions expressed are as at the date of publication, are subject to change as economic and market conditions dictate, and do not necessarily represent the views of BNY Mellon or any of its affiliates. The information has been provided as a general market commentary only and does not constitute legal, tax, accounting, other professional counsel or investment advice, is not predictive of future performance, and should not be construed as an offer to sell or a solicitation to buy any security or make an offer where otherwise unlawful. The information has been provided without taking into account the investment objective, financial situation or needs of any particular person. BNY Mellon and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. This is not investment research or a research recommendation for regulatory purposes as it does not constitute substantive research or analysis. To the extent that these materials contain statements about future performance, such statements are forward looking and are subject to a number of risks and uncertainties. Information and opinions presented have been obtained or derived from sources which BNY Mellon believed to be reliable, but BNY Mellon makes no representation to its accuracy and completeness. BNY Mellon accepts no liability for loss arising from use of this material. If nothing is indicated to the contrary, all figures are unaudited.
Any indication of past performance is not a guide to future performance. The value of investments can fall as well as rise, so investors may get back less than originally invested.
Not for distribution to, or use by, any person or entity in any jurisdiction or country in which such distribution or use would be contrary to local law or regulation. This information may not be distributed or used for the purpose of offers or solicitations in any jurisdiction or in any circumstances in which such offers or solicitations are unlawful or not authorized, or where there would be, by virtue of such distribution, new or additional registration requirements. Persons into whose possession this information comes are required to inform themselves about and to observe any restrictions that apply to the distribution of this information in their jurisdiction. The investment products and services mentioned here are not insured by the FDIC (or any other state or federal agency), are not deposits of or guaranteed by any bank, and may lose value.
This information should not be published in hard copy, electronic form, via the web or in any other medium accessible to the public, unless authorized by BNY Mellon Investment Management.
This information is approved for Global distribution and is issued in the following jurisdictions by the named local entities or divisions: Europe, Middle East, Africa and Latin America (excluding Germany, Brazil, Dubai): BNY Mellon Investment Management EMEA Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. • Switzerland: Issued by BNY Mellon Investments Switzerland GmbH, Talacker 29, CH-8001 Zürich, Switzerland. Authorised and regulated by the FINMA.• Dubai, United Arab Emirates: Dubai branch of The Bank of New York Mellon, which is regulated by the Dubai Financial Services Authority.• Singapore: BNY Mellon Investment Management Singapore Pte. Limited Co. Reg. 201230427E. Regulated by the Monetary Authority of Singapore. • Hong Kong: BNY Mellon Investment Management Hong Kong Limited. Regulated by the Hong Kong Securities and Futures Commission. • Japan: BNY Mellon Asset Management Japan Limited. BNY Mellon Asset Management Japan Limited is a Financial Instruments Business Operator with license no 406 (Kinsho) at the Commissioner of Kanto Local Finance Bureau and is a Member of the
Investment Trusts Association, Japan and Japan Securities Investment Advisers Association. • Australia: BNY Mellon Investment Management Australia Ltd (ABN 56 102 482 815, AFS License No. 227865). Authorized and regulated by the Australian Securities & Investments Commission. • United States: BNY Mellon Investment Management. • Canada: Securities are offered through BNY Mellon Asset Management Canada Ltd. registered as a Portfolio Manager and Exempt Market Dealer in all provinces and territories of Canada, and as an Investment Fund Manager and Commodity Trading Manager in Ontario. • Brazil: this document is issued by ARX Investimentos Ltda., Av. Borges de Medeiros, 633, 4th floor, Rio de Janeiro, RJ, Brazil, CEP 22430-041. Authorized and regulated by the Brazilian Securities and Exchange Commission (CVM).
The issuing entities above are BNY Mellon entities ultimately owned by The Bank of New York Mellon Corporation
BNY Mellon Company information
Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA or the BNY Mellon funds.
BNY Mellon Cash Investment Strategies is a division of The Dreyfus Corporation. • Investment advisory services in North America are provided through four different SEC-registered investment advisers using the brand Insight Investment: Cutwater Asset Management Corp, Cutwater Investor Services Corp, Pareto New York LLC and Pareto Investment Management Limited. The Insight Investment Group includes Insight Investment Management (Global) Limited, Pareto Investment Management Limited, Insight Investment Funds Management Limited, Cutwater Asset Management Corp and Cutwater Investor Services Corp. This information does not constitute an offer to sell, or a solicitation of an offer to purchase, any of the firms’ services or funds to any U.S. investor, or where otherwise unlawful. • The Newton Group (“Newton”) is comprised of the following affiliated companies: Newton Investment Management Limited, Newton Capital Management Limited (NCM Ltd), Newton Capital Management LLC (NCM LLC), Newton International Investment Management Limited and Newton Fund Managers (C.I.) Limited. NCM LLC personnel are supervised persons of NCM Ltd and NCM LLC does not provide investment advice, all of which is conducted by NCM Ltd. Only NCM LLC and NCM Ltd offer services in the U.S.• BNY Mellon owns a 20% interest in Siguler Guff & Company, LP and certain related entities (including Siguler Guff Advisers LLC).