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ESG a 'structural change' to investing, Merrill executive says

➤ Environmental, social and governance investing is not a "trend of the moment."

➤ A rush of ESG-focused data offerings has helped create a "more rich market," said Merrill's head of due diligence for the chief investment office.

➤ To solve the lasting fears that ESG leads to lower returns, the industry needs more time and educational offerings designed to better inform investors.

Anna Snider began helping guide Bank of America Corp. through the swelling sustainable investment market more than five years ago.

As the head of due diligence for the chief investment office of Merrill and Bank of America Private Bank, Snider oversees the analysts who monitor more than 1,000 strategies across passive and active investments covering a host of global asset classes. Today, the chief investment office tracks more than 40 recommended ESG-focused strategies, while assessing a handful of others marketed as ESG.

Within that role, Snider has seen the rise of ESG investing firsthand. The increasing amount of money invested using ESG factors around the globe, estimated to total about $30.7 trillion, has been partly aided by the "proliferation of data" surrounding the ESG ecosystem, according to Snider.

Snider recently spoke with S&P Global Market Intelligence about the growing interest in ESG investing in the U.S., whether concerns about data in the space are warranted and what needs to take place to resolve the lingering doubts about sustainable investing.

The following is a transcript of that conversation edited for length and clarity.

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Anna Snider, head of due diligence for the chief investment office of Merrill and Bank of America Private Bank
Source: Bank of America

S&P Global Market Intelligence: With nearly $12 trillion in U.S. assets tied to ESG criteria, a growing portion of the investment community has been buying into sustainable investing. What is driving ESG to the forefront of investors' minds?

Anna Snider: There's a number of things all happening at once. With social media, globalization and just interconnectivity in general, people are becoming more aware of broader issues, broader risks and how those translate to individual companies or issuers and, therefore, to the investments they make.

There's just a confluence of things that are interconnected, some [of which] are growing out of how the world is moving forward from a transformation in technology standpoint. This is not a trend of the moment, but a structural change in how people are starting to see their investments.

How are retail and institutional investors integrating ESG criteria into their investment strategies and portfolios?

It's evolved from, very simply, where don't I want to put my capital to there are maybe places where I don't want to have exposure to. But really the tilt is: Where do I want to put my capital? What types of companies? What types of issue areas am I interested in focusing my capital on? The trend is toward a best company, best issuer, best practice type of inclusionary investment approach.

Many investors are grappling with the discrepancies between how different data and research providers rate individual companies on an ESG basis. Does the SEC need to step into this conversation to establish a uniform reporting framework? How does Merrill work through the plethora of data available in this space?

I don't know if regulation is going to make everything fall in line.

Having lots of different data and lots of different opinions on things actually creates a more rich market. On any given day, all the sell-side shops in the world can have a different view on a company's stock, and we're all really comfortable with that. We take that and determine which one fits our own investment thesis.

The market will determine what is good and bad data. It will determine what's material in terms of environmental, social and governance risks. But I don't necessarily think that regulation is going to solve for all of that.

While there has been continued interest in the ESG market, a sizable portion of the investment community remains skeptical about the idea of sustainable investing. What do you think are some of the biggest hurdles that have prevented certain investors from using ESG strategies and products?

The hurdles haven't changed in the six years that I've been doing this.

Even for clients and investors who really want to explore or invest this way, there's still a lot of hesitation when it comes to actually allocating money because [they are] unsure about the risk-and-return profile.

[Even with] examples, case studies and white paper after white paper saying, "No, a lot of these strategies are right down the middle; in fact, many of them have really attractive risk-mitigation properties and some even have alpha properties to them," people still behaviorally have this belief that you cannot invest in a way that would make you feel good and actually get the same type of returns.

How do you solve that?

It just requires a constant stream of evidence to the contrary for people to really believe it.

The best way to do that is to take an ESG strategy that you've done some work on, you feel really comfortable with how they invest and put it in your portfolio to see how it does. That's really how we see people getting comfortable with it. It's just a huge amount of learning and training that has to happen for those hurdles to unlock, so we're really committed to education, both for our advisers and our clients.