‘We need an independent way of comparing the true sustainability of asset management firms’: An interview with Trillium’s Matt Patsky and John Quealy

RI speaks to the US SRI specialists about being acquired by a mainstream player, and the state of ESG in 2020

John Quealy (left) and Matt Patsky (right)Matt Patsky and John Quealy have a lot on their mind when it comes to ESG, from the way asset managers are assessed to the broader trend for greenwashing.

And Trillium isn’t shouting from the sidelines. Joan Bavaria, the ‘founding mother’ of responsible investment, started the firm in the 1980s, and it is widely credited for catalysing the movement in the US. 

In June, the $4bn manager officially entered the mainstream when it was acquired by Australian financial giant Perpetual.

Patsky, Trillium’s CEO, says it actively sought out a partnership to capitalise on its existing success: “I can’t tell you how many times people would approach us and tell us they were surprised we were so small given the impact we were having. That’s flattering, but it was also an indication that we didn’t have a robust marketing and sales distribution strategy.”

Trillium “kissed a lot of frogs” over the three years it took to find its ‘prince’. 

“One player had great distribution and we’d gone through several weeks of due diligence. We were in their corporate offices and I got pulled aside for a one-on-one with their CEO as I was leaving. He said: ‘You’re doing a corporate engagement campaign with one of our 401k clients. You would understand if we asked you to back off?’, and I said that wouldn't work.”

Patsky got a call the next day from the CEO, who he says explained that “Trillium’s culture is too strong to integrate into ours”.

Perpetual, says Patsky, takes a very different approach, allowing Trillium to remain a B Corp (it was one of the first finance firms in the US to take B Corp status), introducing a governance structure that guarantees its investment process will remain independent, and allowing it to continue its corporate engagement and shareholder advocacy efforts untouched.

Trillium has seen strong performance: its flagship ESG Global Equity Fund, for example, has outperformed its benchmark consistently over more than 20 years. The $579m fund has had an 8.56% average annual return for the past five years, outperforming 75% of 895 peer Morningstar funds in the World Large Stock category as of August 31, 2020.

“One player had great distribution and we’d gone through several weeks of due diligence. We were in their offices and I got pulled aside for a one-on-one with their CEO. He said: ‘You’re doing a corporate engagement campaign with one of our 401k clients. You would understand if we asked you to back off?’”

ESG’s strong performance has dominated headlines this year, bolstered by the oil slump and the increased interest in social issues brought about by Covid-19. It’s a different world from the one Patsky entered when he first started thinking about sustainability in the 1980s, while at Lehman Brothers. He says he was told by a manager at the time: “It's nice that you care about these issues but if you don't stop it will destroy your career”. 

He moved on to roles at Adams Harkness and Winslow Management Company, where he developed products around healthy living and renewable energy. He was asked to consider the CEO role at Trillium in 2009, a year after Bavaria lost her battle with cancer.

Bavaria, a hugely influential figure in the history of SRI, was the Founder of US sustainability body Ceres. She also ensured Trillium was an early signatory to the UN-backed Principles for Responsible Investment (PRI), which she helped to develop.

But Patsky feels that the PRI’s current methodology could be more effective, explaining that “you can be a large, diversified firm with just one strategy that’s doing something right in terms of sustainable investing, and earn an ‘A’ [the PRI’s top score] – and they ignore all the negative impacts of the rest of your portfolio”.

He says there is a need for an independent means of comparing and ranking the true sustainability of asset management firms, rather than a simple, specific small part of that interest. 

And then there is greenwashing, he continues. “Some [investors] just buy a dataset from MSCI or another provider and do an overlay and then claim they have an ESG portfolio now, but what you end up with is, quite frankly, inadequate in terms of addressing ESG issues.” Others are starting to relabel underperforming strategies as ‘ESG’ to give them a new lease of life and allow them to change tack, he points out. 

On data, Quealy, Trillium’s CIO, explains that the firm doesn’t use third-party ESG ratings, because the providers often don’t speak to companies as frequently as he would like.

“The data is consistently backward looking and we might not agree with their definitions of scope and measurement approaches. Given that there is no standardisation of the data reporting methodologies by issuers, there is too much to assume and accept from third party vendors,” he says. 

Instead, Trillium buys raw ESG data and incorporates it into its in-house models. 

“We constantly partner with MSCI, ISS and others to try to make those datasets more robust for the sake of the industry and to compliment our approach,” says Quealy. 

Those models also include forward-looking information, which it gets from its investment analysts and shareholder advocates, as well as from company-specific data.

But, Quealy observes, the level of ESG analysis in the market is still far behind conventional financial analysis. 

“Corporate ESG information may be self-reported once a year, or maybe once every three years – if at all – depending on the company. Whereas financial information is quarterly or biannually, depending on domicile. So there are still many structural elements that need to develop for this market. That's a wonderful opportunity for us, given our significant head start in responsible investing”.  

But Patsky insists it’s change, not just data, that Trillium will continue to chase. He points to its 11-year campaign to change the name of the US football team, the Redskins – a derogatory term for Native Americans. 

Trillium, which has The Oneida Nation of Wisconsin as one of its largest clients, engaged the team’s sponsor, Fedex, for many years on the topic. It also engaged with big advertisers like Nike and Pepsico. 

This year, on the back of the Black Lives Matter movement, Nike agreed to stop making branded clothes for the team and PepsiCo said it would no longer advertise while the team retained its name. Fedex followed by saying it would pull support if a change wasn’t introduced. 

The team is now called The Washington Football Team. 

“It took way too long,” reflects Patsky. “But there was a recognition that the consumer was no longer willing to tolerate an obviously racist term.”