For years, socially responsible investors have argued that being a bad corporate citizen will cost you dearly in the future—whether it means facing down the expensive burden of regulation, tamping down on the expense of carbon emissions or water use or the inefficiency of your supply chain due to energy mismanagement. Merrill Lynch wrote last year that companies using Thomson Reuters’ environmental and social justice scores would have avoided 90% of the bankruptcies in the S&P since 2005.
'Value, Not Values'
To everyone’s surprise, giant asset managers have started singing the same song. In January, State Street Global Advisors’ president and CEO Cyrus Taraporevala wrote a letter saying that ESG was a matter of “value, not values,” and that shareholders’ stakes were increasingly being affected by companies’ success or failure at addressing climate change, labor practices and consumer product safety.
Last week at Charles Schwab’s IMPACT conference, BlackRock’s Larry Fink made similar comments in a webcast.
“Covid is an existential risk of health, just like climate change is an existential risk of health and property,” Fink said, “and I do believe more and more investors worldwide are starting to see true physical impact on the world from climate change. We are spending a great deal of time building better analytics and data to show that. … And we’re seeing more evidence that climate risk is investment risk.”
Aron Szapiro, the director of policy research at Morningstar, says that the department made a few tweaks to its initial rule, but that the ESG-hostile gravamen has remained. He said the language of the ruling itself now focuses on pecuniary or non-pecuniary factors.
“A plan sponsor can come to a prudent understanding of whether a factor is pecuniary or not pecuniary,” Szapiro said. “That’s the only nice thing I’m going to say about it.”
He points to Morningstar research dispelling the notion that ESG funds underperform funds without environmental-social-governance screens.
“We perceive [ESG] to be an increasingly mainstream way that people invest,” he added. “We don’t see some widespread issue of sustainable funds underperforming conventional funds; we see just the opposite over the last half decade. That’s not to say it will always be so, but it wasn’t an issue that needed immediate solving. … We think [the rule] is out of step. … We don’t think it’s helpful. We don’t think it solves a problem.”