Pekin Hardy Strauss: A couple things that immediately come to mind are a stronger focus on board and executive diversity and new incentive structures for management teams that better align management’s incentives with shareholders and other stakeholders.
Silk: Diversity has become increasingly important and should receive more attention going forward. Investment Managers themselves should encourage and pressure portfolio companies to become more diverse at board, management and at the broader employee level. Some progress is being made but unfortunately many investment managers are themselves not very diverse and are not a true representation of the values that they sometimes advocate. Changes may need to start at their level first.
Zeo: In our view, it is much more effective, especially in the debt market, to focus our capital on rewarding companies who are making progress along a spectrum of awareness to action — as long as a company is being intentional and making deliberate decisions to prioritize key ESG factors, even if they are early in their sustainability efforts, we want to use our capital to incentivize them to make progress along that spectrum. So we aren’t as focused on the “next frontier” of corporate actions or a new bar as we are on getting companies to get the fundamentals right in a deep and sincere way across all areas of sustainability that are in focus, old and new. Covid-19 and the recent and long-overdue national focus on equity and inclusion have provided opportunities to engage with companies who may now be linking ESG factors to their company’s financial performance in a way that they may not have before.
Hortz: How does this increased scrutiny on corporate behavior impact employee engagement and morale?
Essex: We think that the increased scrutiny on corporate behavior and its impact on employee engagement and morale is like a flywheel. Once the process gains momentum, there is continued improvement and stability. Employees are more positively engaged and have improved morale in those organizations that have better corporate behavior, which leads to better returns.
Pekin Hardy Strauss: I think the long-term effects are positive because management teams are going to be held to progressively higher standards going forward. Employees, investors, and other stakeholders are less likely to just let management teams run amok like they have done historically. I think this leads to more of a sense of purpose and ownership for employees when they know they are being led by people they can believe in and trust.
Silk: This should be a natural positive where companies achieve a better representation of the society in which they operate.
Cornerstone: In order to attract and retain talent in the world of the future, companies must absolutely show that there is a corporate “Purpose” that aligns with their employees. In this world, where we have tremendous transparency from social media and big data, authenticity by leadership is essential. An organization that does not have a culture of innovation and trust simply cannot thrive.
Hortz: How do you see ESG and impact investing potentially affecting portfolio performance?
Pekin Hardy Strauss: What most jumps out at me is the intense scrutiny many ESG strategies apply regarding corporate governance. Businesses which are led by management teams and boards with a focus on long-term sustainability and whose incentives are aligned with other stakeholders, tend to outperform over time and should fare better in downturns and times of pressure. ESG strategies that focus on identifying such companies ultimately benefit.
Many ESG and impact investing strategies also have a tendency to identify and align their corporate investments with positive and environmental trends before more traditional strategies, which can lead to outperformance over time. And of course, avoiding major legal, regulatory, and reputational controversies by eliminating certain companies and industries from their investment universe can contribute positively to the performance of ESG strategies.
Cornerstone: Given that sustainable investment strategies are often focused on addressing the world’s greatest challenges, they are often long term in nature aa they are building innovation into their strategies. When markets correct, and there may be indiscriminate selling, we often see that high quality strategies which incorporate future innovation can sell off and then rebound more strongly as growth accelerates. Historical empirical evidence (e.g., Morningstar) shows that ESG integrated funds, across asset classes, perform as good or even better than their traditional benchmarks.