The Future of Sustainable Investing: ESG, SDGs, and the Role of Data

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In episode 78 the Investing in Impact podcast, I speak with Gavin Smith PhD, Managing Director, Head of Equity Research and Sustainable Investing for PGIM Quantitative Solutions, on his journey into sustainable investing and the evolution of ESG and SDGs.

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About Gavin Smith, PhD

Gavin Smith, PhD, is the Managing Director and Head of Equity Research and Sustainable Investing at PGIM Quantitative Solutions. In this role, he leads the integration of ESG factors into the firm’s investment platform and oversees research and analysis for Quantitative Equity portfolios.

Prior to this, Gavin was a portfolio manager and a key member of PGIM’s Research team, focusing on alpha and implementation strategies.

Before joining PGIM, he led the North American Quantitative Research team at Macquarie Capital and held research roles at Barclays Capital and Plato Investment Management in Sydney, Australia.

Gavin holds a BComm (Honors) in finance from the University of Wollongong and a PhD in finance from the University of New South Wales, Australia.

Takeaways

• Data quality is crucial for effective ESG and SDG investing.
• Engagement with companies is essential for improving data transparency.
• SDGs provide a framework for assessing the impact of investments.
• The future of sustainable investing relies on better data and education.
• Investors are increasingly interested in the financial performance of sustainable companies.
• The integration of ESG and SDGs can lead to more impactful investment strategies.

What is PGIM Quantitative Solutions?

PGIM Quantitative Solutions, part of PGIM—the global investment management business of Prudential Financial—uses sophisticated quantitative models and research to manage equity portfolios.

Their approach blends advanced data analytics and deep research to craft investment strategies that balance risk and return effectively.

The Importance of ESG in Investment Strategy

In recent years, ESG investing has gained significant momentum as investors increasingly recognize the financial and societal benefits of aligning capital with sustainability.

PGIM Quantitative Solutions acknowledges that the incorporation of ESG factors is no longer just about “doing good” but about managing risk and enhancing long-term performance.

By integrating ESG factors into their investment process, PGIM aims to identify opportunities and mitigate risks that may not be fully captured through traditional financial metrics.

Key ESG factors that PGIM Quantitative Solutions focuses on include:

• Environmental: Carbon emissions, water usage, energy efficiency, and waste management.
• Social: Labor practices, diversity and inclusion, community relations, and human rights.
• Governance: Board composition, executive compensation, transparency, and ethical business practices.

By embedding these factors into their models, the firm enhances its ability to evaluate the long-term resilience and profitability of the companies it invests in.

Sustainable Development Goals (SDGs) as a Framework

The United Nations’ Sustainable Development Goals (SDGs) have become a powerful tool for measuring the impact of investments.

These 17 goals serve as a blueprint for addressing global challenges such as poverty, inequality, and climate change. PGIM Quantitative Solutions recognizes the value of SDGs in guiding investment decisions toward positive social and environmental outcomes.

The firm uses the SDGs as a framework to assess the potential impact of investments, ensuring that its portfolios not only seek to generate financial returns but also contribute to solving pressing global issues.

For example, when analyzing a company, PGIM may consider how its operations align with specific SDGs, such as reducing carbon emissions (SDG 13: Climate Action) or promoting gender equality (SDG 5: Gender Equality).

Episode Transcript

[00:01]

Host (Grant):

Welcome to another episode of the Investing in Impact podcast. Today, I’m joined by Gavin Smith, PhD, Head of Equity Research and Sustainable Investing at PGIM Quantitative Solutions. Gavin, I’m excited to talk about your role and how you’re building out your team’s work in ESG (Environmental, Social, Governance) and SDG (Sustainable Development Goals) investing. But before we dive into your current work, can you tell us about your journey into sustainable finance?

[01:05]

Gavin Smith:

Great to be here, Grant! I hold dual roles—Head of Equity Research and Sustainable Investing at PGIM Quantitative Solutions. That might seem unusual, but both roles tie together well. In equity research, we identify stock attributes to explain stock performance and integrate those insights into portfolios. With sustainable investing, we apply those same skills to ESG and SDG data—essentially scoring companies on their ESG and SDG factors and incorporating that into portfolio construction.

As for my journey, I started in the early 2000s with an undergrad in finance. I loved data and quant research, but I was told I needed a PhD to really excel. So, I pursued my PhD, and corporate governance became my focus, especially after events like the Enron and WorldCom scandals. It wasn’t until 2015, with the Paris Climate Accord and the emergence of SDGs, that ESG really took off. Since then, we’ve been building our ESG framework, launching funds, and responding to client demand around sustainable investing.

[05:24]

Host (Grant):

ESG had a big boom, but then we saw some negative press around bad actors. What do you think people get wrong about ESG, and how can we restore confidence in it?

Gavin Smith:

You’re right—there’s been some disillusionment. Traditional ESG often focused on avoiding bad companies, but now investors want to see companies doing proactive good. This shift is leading to more focus on SDGs and impact investing. One major challenge is data. ESG data can be inconsistent, and we’ve seen issues with self-disclosure and greenwashing. But product labeling initiatives, like SFDR, are helping to restore confidence by making sure products do what they claim. There’s also more demand for defensible, objective data, which is driving a shift toward SDGs.

[09:54]

Host (Grant):

You mentioned SDGs being more defensible. Can you talk about how they provide a stronger foundation for investment decisions compared to ESG?

Gavin Smith:

Absolutely. SDGs are easier to quantify because they focus on a company’s products and services and how they address global challenges, like clean water or renewable energy. This makes the data more reliable than ESG, which often relies on self-reported metrics. For example, if a company makes electric vehicles, it’s clear how they contribute to solving environmental problems. This leads to better data confidence.

With ESG, we’ve made progress, but we still struggle with consistency across industries. Companies often don’t disclose the same metrics, making apples-to-apples comparisons difficult. SDGs, on the other hand, allow us to see the real-world impact of a company’s activities more clearly.

[14:32]

Host (Grant):

When it comes to assessing companies, what are the top data points you and your team look for?

Gavin Smith:

If I had to pick three, it would be carbon emissions, water usage, and diversity metrics. These “quantitative metrics” are concrete, showing real actions companies are taking. We prioritize numbers over policies because policies can be misleading—just having a policy doesn’t mean the company is actually making an impact. We want to see the results. It’s about looking at meaningful, comparable metrics within industries and focusing on material issues.

[18:11]

Host (Grant):

Do companies generally comply when you reach out for specific data, or is it a challenge to get them to disclose what you need?

Gavin Smith:

We do engage with companies directly or collaboratively with other investors. Often, it’s not combative—companies want to know what their peers are doing. But it can take time to implement changes, especially for multinationals. It’s a multi-year process to get better data, but these engagements help improve transparency and push companies in the right direction.

[22:42]

Host (Grant):

SDGs are well-known in the philanthropic and international development spaces, but maybe not as much in finance. How can financial institutions better understand and integrate SDGs into their portfolios?

Gavin Smith:

The SDGs are a blueprint for a more prosperous planet, covering 17 dimensions from clean energy to education. They weren’t designed specifically for corporates, but they help us look at how companies’ products and services solve real-world problems. For financial institutions, integrating SDGs helps make impact investing more accessible, especially in liquid markets. It’s not just about ESG anymore—it’s about looking at the external impact companies have. Combining ESG, which looks at internal operations, with SDGs gives a more holistic view of a company’s impact.

[26:24]

Host (Grant):

What needs to happen for impact investing to become more mainstream in public markets?

Gavin Smith:

Education is key. Many investors are still learning about impact investing. We need to show them how linking SDGs to investment strategies can generate both positive impact and solid returns. Research and transparency will build confidence. Once investors see the performance benefits, they’ll be more comfortable allocating capital to impact investments.

[29:39]

Host (Grant):

Greenwashing is a big issue. How do you and your team spot companies that might be guilty of greenwashing?

Gavin Smith:

Greenwashing happens when companies make themselves look better on ESG or SDG factors than they are. We focus on quantitative data—real metrics like emissions and diversity percentages—rather than policies or vague claims. We also don’t give companies that don’t disclose data the benefit of the doubt. Some scoring systems give non-disclosing companies a median score. We penalize them, assuming non-disclosure could indicate poor practices. This helps us avoid greenwashed companies.

[34:21]

Host (Grant):

Looking ahead, what are some of the goals you and your team are working toward in the next three to five years?

Gavin Smith:

Data, data, data—we need more and better data, especially in areas like biodiversity. On the SDG front, we want to shift from backward-looking metrics (based on past revenue) to forward-looking data that predicts future impact. We’re also exploring how to apply our approach across multiple asset classes, making it easier for large investors to use a consistent framework. Finally, we’re working on showing the real-world benefits of impact investing, beyond financial returns. If we can show how these investments create tangible change, it will build even more confidence in the space.

[37:37]

Host (Grant):

Thank you so much, Gavin. This was a fascinating conversation, and I appreciate the incredible work you and your team are doing. Best of luck for the future!

Gavin Smith:

Thanks so much, Grant. It was great to be here!