My Remarks at EconVue Webinar on Sustainability

posted by Marsha Vande Berg on July 10, 2020 - 12:00am

Asset owners are at the apex of the global investment community and many are focused on and in the vanguard of sustainability investing movement. They are an important part of a reallocation of capital to long-term investments in those companies with a credible vision for mitigating risks associated with the really big megatrends and their potential for undercutting long-term competitiveness and value creation.

They are joined by a phalanx of industry organizations and other non-profits who provide the intellectual infrastructure for advancing the hows, whys and wherefores of the decision-making process and the application of risk as mitigation against the perils of risk. These organizations include organizations like SASB, the TCFD and CDP which are addressing a key gap in the sustainability value chain, namely the lack of a common set of disclosure standards.

(One cornerstone in the effort to make disclosure responsible is the United Nations sponsored Principles for Responsible Investment, an organization that provides the tools and education around sustainability investing. Many if not all of the key institutional investors who are the spear carriers - pushing institutional investing up to $31 trillion as of the end of 2018 - are members of PRI.)

Missing in action however has been government and regulatory policy to promulgate and enforce acceptance of standards for disclosure in the same way that regulation requires public companies follow accounting standards and by extension private companies as well. In the absence of such requirements, investors – seeing themselves as value investors in contrast to values investors who are impact and family office investors putting their money where their values are – have pushed ahead. Their objective is to invest in the long term - taking steps as fiduciaries to mitigate the risk they anticipate will influence the value of their investments tomorrow if left unchecked in the present.

An example of their efforts to date is illustrated in the recent decisions by two oil majors – BP and Shell to seriously reduce their respective carbon footprints by 2050, both in terms of their operations and in the products they sell. Institutional investors who were among their larger shareholders engaged long and hard with corporate executives over carbon-related environmental concerns.

Many also were part of the influential coalition of investors, the Climate 100+ Initiative. They didn’t win on every count, but they made progress in convincing these majors to acknowledge the changes that are afoot in their long-term business strategies.

So we have institutional investors driving the money on the one hand – and the advocacy on behalf of ESG and particularly in the area of climate change and the environment or the E of ESG, on the other.

Enter COVID-19 which has injected a new urgency into ESG-factor investing and corporate management, namely via its emphasis on stakeholder issues including employee health and well-being, the quality of education preparing tomorrow’s workforce and the sustainability within corporate supply chains. As a result, the conversation about the S issues in ESG-factor investing is stepping up to engage responsible corporate managers and boardrooms in virtually every sector.

The challenges still are great - absent strong public policy and political commitment to adopt and then harmonize ESG disclosure requirements for both asset owners/asset managers and corporate sustainability disclosures. But there are changes afoot in regions where policy and regulation may be inclined toward requiring stepped up sustainability commitments.

Meanwhile, the value proposition is becoming clearer. The research and writings of influential academics, including George Serafeim and his colleagues at Harvard University, carry great weight. It also is virtually a given that good governance – the G of ESG-factors and sustainability - translates into more profitable companies, happier employees and better workplaces overall.

More recently Morningstar assembled evidence that sustainable ETFs fared far better their conventional fund counterparts during the spring episode of the pandemic. According to the Morningstar analysts, seven out of 10 sustainable equity funds finished in the top half of their Morningstar Categories – and 24 of 26 ESG- tilted index funds outperformed their closest conventional counterparts.

Clearly, there is more to come on this topic.