Ep. 111: Serena Wolfe - How do CFO's influence ESG?
Serena Wolfe, CFO of Annaly Capital Management, joins Count Me In to talk about ESG and corporate social responsibility. Ms. Wolfe has over 20 years of experience in accounting, of which 13 years were focused solely in real estate practice. Prior to joining Annaly in December 2019, Ms. Wolfe had served as a Partner at Ernst & Young LLP (“E&Y”) since 2011. In this episode, she addresses how businesses can balance the principles of ESG with return objectives and how CFO's truly influence all 3 letters as organizational leaders. Download and listen now!
FULL EPISODE TRANSCRIPT
Hello and welcome back for another episode of Count Me In. Mitch Roshong here with you again and today you'll be hearing my co-host Adam speak with Serena Wolf about CFO role in implementing an ESG agenda. Serena is CFO of Annaly Capital Management and has over 20 years of experience in accounting. In this episode, she addresses the importance of environmental, social, and corporate governance and how CFO is truly influenced each letter of ESG. Keep listening as we head over to the conversation now.
Serena, thanks so much for speaking with us today on the topic of ESG and to provide some background for our listeners who might not be familiar with Annaly Capital Management, it would be great. If you could begin by providing our listeners with an overview of Annaly and your industry and some your specific role within the company.
Adam, I would love to and first I want to say, thanks for having me today. Annaly is a leading diversified capital manager that invests in and finances, residential and commercial assets. We were founded in 1996, and we went public a year later on the New York stock exchange. We are in fact, the largest mortgager REIT, and we have four investment teams. That's our agency, MBS business, which represents approximately 93% of our total assets. We also have a residential credit platform, a commercial real estate division, and a middle-market lending. Currently we have a market cap of over $11 billion and over $100 billion dollars in total assets. And with that market cap of over $11 billion, we have the largest capital base among our peers in the mortgage REIT space. And so let's talk quickly about REIT I guess, just, for your audience as well. REITs are often public companies, but specific to REITs, we are a taxable election. In fact, whereby we have to return 90% of our income to shareholders. So we're quite popular with those folks that want a dividend yielding stock, like pensioners, and things like that ..And broadly speaking REITs can be broken down into two major categories, equity REITs, which typically own and operate income producing real estate and mortgage REITs, which provide financing for purchasing or originating mortgages and MBS. Annaly, as I mentioned before, is a mortgage REIT. Mortgage REITs can be further divided into agency mortgage REITs, which invest in really just agency backed MBS and non-agency mortgage REITs, which invest in a broad variety of mortgage related assets that are not backed by the federal agencies. So for instance, Fannie and Freddie, and while Annaly is primarily an agency mortgage REIT, I mentioned before, we've got 93% of our total assets in agency MBS, our platform is differentiated based on the credit businesses that complement our core strategy and of note, we are the only REIT with a corporate credit investment arm. So, we have capabilities to invest across the capital structure in each of these, which means that not only do we own MBS and mortgages, but we also own income producing real estate assets. We have around about 180 employees. And as an executive officer of the firm, I have a broad set of duties. though as CFO, I have primary responsibility in communicating performance results to our stakeholders, managing our financial and budgeting processes and also oversight of our treasury and IT functions, but in all aspects, to be honest, I collaborate closely with the investment side of the house, as well as ESG, Strategy, and Risk.
I think that's a wonderful overview. So let's turn to our primary topic of today, which is ESG nAnaly just released its first ESG report. Let's set the stage by saying stating what is ESG, what does it mean to you and your company, and then how does ESG factor into running a business?
Yeah, so ESG and it is a nomenclature that's a bit out in the ether these days, but what it really means is environmental, social, and governance, and it refers to the three central factors in measuring the sustainability and societal impact of an investment in a company or a business. I know that's very definitive. I pulled it off, Investopedia or something, Adam, I think.. but historically many companies have focused on the G the governance aspect of ESG and less on the E and the S. That's not a new focus for us. I think we've been ahead of the curve in incorporating ESG into our business processes and culture from the start. For example, we are a female founded, company founded by Wellington Denahan, who remains a Vice Chair on our Board. And so diversity has always been a cornerstone of our company. And as you mentioned, Adam, actually on the 23rd anniversary of our IPO, we published our inaugural Corporate Responsibility Report. This provides significant disclosures about our ESG considerations that we've been incorporating implicitly and explicitly into our business for years. It's covered through five main areas; corporate governance, human capital and management, responsible investments, risk management, and the environment. Altogether, we aim to have a positive impact in the communities where we live, work, and invest. A couple of examples here, Adam, just to highlight that in 2019 we reduced our greenhouse gas emissions by 5% and we actually expect to improve that year over year in 2020. We have a social impact joint venture through which we have financed 21 community development projects and underserved communities across the country. Examples of these are things like, elder care residences and affordable housing. As of the third quarter of 2020, we have made $285 million direct investments to support community development and economic opportunity. So we, we find that, I would say that our corporate responsibility report is a great summation of all the work that we've done, but it is something that we've been working on from an ESG front really from inception of the organization.
I think that's amazing all the things that you're, you're doing from a, from that perspective. I think one of the challenging, challenging question that many businesses are thinking about these days is how do you balance the principles of ESG with return objectives with, to which remain a key priority, not only for your shareholders, but also for your employees and other stakeholders. And then how do you answer this question and what experience do you have as the CFO implementing this agenda and balancing these various strategies?
Yeah, it's a great question, Adam. And I think, the word balancing implies and either, or, and, and we don't actually view it as an either, or to be honest. We, we firmly believe that strong ESG principles are aligned with return objectives. And if you just consider a couple of basic ways that it could affect cashflow, all other things equal, you know, you do reduce your operating costs on several fronts. The risk management aspect and the governance aspect of ESG clearly mitigates regulatory and legal interventions. It's just really a great part of risk management. And we have found that it enhances employee productivity, development, and importantly, in this day and age, retention. So take the ongoing unprecedented stress test of our risk management preparation that we went through in 2020. We found that our extensive and sustained business continuity planning and infrastructure investments prepared us really well for this prolonged COVID 19 remote work environment. And had we not had that planning, you know, it would have been a much different situation, I think, and as a result, our trading teams were able to navigate the market volatility earlier this year, extraordinarily well with our support functions in lockstep. But as CFO and as a leader in general, I think it's important to recognize that change begets change. And the smartest course of action is, is to not try to swim upstream or, you know, as I say, in a lot of instances to my people, we don't need to boil the ocean here, right? We have incorporated SASB and GRI disclosures in our inaugural corporate responsibility report. And in taking a first pass at some of these indices and what they ask for, you could have included a lot of information. But the question really is what is material? What is a material piece of information that would provide value to our stakeholders? And we did this, we did these disclosures to provide high quality sustainability information of interest to our shareholders based on that we'd obtained during an outreach initiative. But it is important to be able to distill this material, ESG areas of focus for our company, as well as the industry standards, regulatory bodies and other member organizations that are evaluating disclosures are requiring today. So like I said, there's so much out there that you could do, but don't try to boil the ocean, take a really critical look at it and think about what is material because every day there's more things that are coming out there, requiring and showing that ESG is reporting is becoming expected. For instance, the SEC just recently, issued some rules requiring new human capital management disclosures. The ILPA, The Organization for Limited Partners. They require limited partners now to participate in a set of action plans. The Investment Company Institute, and NASDAQ, just to name a few, these are the types of organizations that are putting things out there that they expect their members to, to comply with. So there's a lot of information, and an example of an ever-changing ESG world. The Federal Reserve announced recently as well, that they plan to join the Network for Greening the Financial System. And this is an important item to highlight because this is the first federal agency to join the group. So I really think as, as a CFO, you need to take a look at all the things that are out there and critically think about what is material, what is useful, and again, like I said, don't try to be all things to all people. Don't try to boil the ocean, focus on what's important.
What additional responsibilities do you have as a CFO in regards to ESG? How do you truly influence all three of those letters? And then, how does your finance and accounting team follow your lead in the midst of all that?
Adam, as a leader of the firm, I try to obviously lead by example, with regards to each of those letters, right? From environmental, social and governance. But as the CFO, I'm an, I'm a numbers person. I'm in charge of the numbers and the process to generate them. And so one aspect of this is evaluating the various indices and ratings and determining which frameworks and measurements are helpful to present our story, to tell our story and what we are doing from an ESG perspective. So what we have found is that some ESG ratings tend to measure companies against industry specific standards. And sometimes that's, that's difficult, right? Because it's trying to put, like, in some instances, a square peg in a round hole, it doesn't fit perfectly. And we try to engage with these rating agencies where we believe that they've classified us incorrectly. So for instance, because we're a REIT we're often grouped in with the equity REITs, and we really don't have the same ESG risks or processes as an equity REIT. A true equity REIT, you know, for example, who owns a significant portion of, hard real estate assets. They've obviously got a lot to focus on with regards to the true environmental aspect of it, Adam, you know. Light bulbs, energy, efficient, light bulbs, and other types of sensors and things like that for us as a financial services related organization, that's less relevant to us though, obviously in, we incorporate those types of measures in our own office use, and so it's important that we make sure that we engage with, these, rating agencies and other types of organizations to make sure that we are appropriately classified. We have found that financial reporting and credit ratings provide a good point of reference though, for what to aim for. So it gives you a bit of a kind of a bar, I suppose, to try to look for and the benefits that it can be resulted in. For instance, you know, again, with the more related to the equity REIT side of things, LEED certification standards and things like that. Between the financial reporting, the indices and the ratings, we're utilizing all of this information to better inform our, our processes and policies and what have you, but also how do we use, what do we expect of our vendors, Adam? So looking outwards, what do we expect of those who work for us. As our investors expected, ESG responsibility from us, we're trying to figure out what should we expect from our vendors. And, in turn, what this should do is contribute to systemic change that better enhances practices across industry. So we're all moving together in the same direction. And broadly speaking, we think this is indicative of a new era of ESG responsibility. As CFO though, I recognize that this is a journey. I just mentioned before five or six different, regulatory bodies and other types of organizations that have come out recently with, new expectations and standards with regards to ESG. So it is a recurring exercise to raise our standards and challenge ourselves. And it's also helpful to see how others are doing this as well. And then with regards to my team, and from a leadership perspective, I guide my team in uncovering all the facts, recognizing parallels, overlaps, and contradictions, and marrying our shareholders' interests with the industry standards. So what really does make sense for us as an organization? And what I have found is that it really ends up being a synergistic outcome. And I've been also very, very impressed at him with the entrepreneurship of my team. So I would say that given the quickly evolving nature of the space, it's been an extra ordinary time to see how employees' entrepreneurship amongst my team has evolved as they explore how best to navigate this iterative process. And, and I'm always impressed with the new ideas that are brought to me from my team.
I think, a great way to round out this conversation would be to kind of focus a little bit on COVID-19.You've mentioned it a little bit, but how do you see COVID-19 impacting the ESG discussion and its future trajectory?
Yeah, it's interesting, right? Cause we, it feels like we're still well in the thick of it, Adam, but I think it will undoubtedly have a long lasting impact. And there's obviously a lot of discussion in the marketplace as to what it means for the work environment for the use of real estate and other types of aspects. But I think it will put a premium on reporting. I think the learning curve on ESG priorities has been vertical for so many years. And so with education comes expectations, and I think that there are just higher expectations these days as to the level of reporting and what should be reported by organizations, on the health and wellness of your employees and human capital and these things that I said, you know, that the SEC is expecting as well. I don't think you can look past risk management to be honest. I think if you reflect, on what companies went through after 9/11 with regards to the business continuity planning that they did, you know, after such an event, I think that, we will see an increased focus on risk management, subsequent to this period, that will be here to stay just like that business continuity planning has been here to stay since 9/11. And I also think that there's going to be a focus on companies being responsible investors and a focus on human capital, like I mentioned before. I think COVID-19, and the, and the murder of George Floyd among other things exposed significant inequalities in the U S and across the globe even. And so these social movements have resulted in, and permeated across class, culture, industry age, and so I think it will affect how and what companies and financial firms decide to invest in going forward because stakeholders will expect it. And when I say stakeholders, I mean, our employees, as well. Our employees do expect us to have a stance and a position on these things. However, I think, you know, I've heard people to use another catch phrase, I guess, Adam, like don't boil the ocean. I think, you know, embracing ESG needs to be a movement, not a moment, and, it is becoming part of our DNA as a society. And I think that it's something that all financial professionals should, should continue to be focused on.
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