Although ESG resources are still being developed, existing offerings now are more standardized and provide companies and investors with better frameworks to refine their ESG evaluations. To the extent that investors are interested in using ESG investment vehicles to express their personal values, these new resources will be helpful for alignment as well.
Pekin Hardy: Transparency and Data: There has been an explosion in the amount of publicly available data on ESG metrics over the last few years. The market has put a lot of pressure on companies to disclose more and more information on ESG factors and sustainability performance, and there are new data providers popping up every day that are focused on aggregating this data and providing it to investors. This has made it far easier for investors to inform themselves on these issues. As an advisor focused on sustainable investing, this expansion in ESG data has allowed us to go even deeper in our understanding of ESG risks and opportunities and has enhanced our ability to customize client portfolios and ensure that they align with client values.
Certifications: The growing importance of ESG and SRI issues has led to the creation of new advisor designations designed to educate advisors on these issues. Designation programs such as the Chartered SRI Counselor (CSRIC) certification can help advisors better understand ESG issues and integrate these factors into client portfolios. Certifications like this can also help investors identify advisors who are well-versed in ESG and SRI investing and who may be able to provide guidance on these issues that other advisors may be unable to provide.
Reynders McVeigh: As social investing and ESG have taken a growing share of the investment universe, a number of new resources have become available to help investors navigate this landscape. We think some of the more interesting new developments have arisen out of the non-profit world and not from the for-profit investment sector. Why is this important? There is a mistrust among committed investors that Wall Street will co-opt this movement for their personal financial gain and will not push for systemic change that might not be in their best interest. Non-profit organizations can avoid this conflict as their mission is aligned with that of social investors.
For example, As You Sow, a non-profit originally founded in 1992 that bills itself as the nation’s leading shareholder advocate, has created a number of helpful new tools as well as leading increasingly successful shareholder campaigns. By organizing shareholder campaigns, As You Sow has been able to create unprecedented levels of shareholder unity that we have not seen from competing for-profit investment firms, In the past year, five ‘As You Sow’ shareholder campaigns returned majority votes! (98% support at General Electric on a Climate Change initiative, 82% at Union Pacific for a Diversity and Gender Equality proposal, 81% at DuPont on Plastic Waste, 60% at American Express for Diversity and Gender Equality, and 57% at Booking Holding on Climate Change.) Votes over 50% have been extremely rare historically but it would appear this new model of unifying behind a non-profit is changing the expected outcomes. The campaign with General Electric brought a commitment for the industrial giant to reduce GHG emissions 5% per year for the next decade and achieve net zero emissions by 2050.
As You Sow has also created a number of useful tools for investors to analyze the sustainability of their retirement plans and mutual funds. Through their website there are free and easy to use resources that will screen investments for sustainability, fossil-fuel exposure, gender equality, deforestation, and exposure to guns, weapons, prisons, and tobacco. Individual investors don’t have to be customers of a financial firm to now access information that allows them to be effective social investors.
Similarly, the Croatan Institute has also been successful with this approach. Founded in 2014, the Croatan Institute works collaboratively with 125 organizations to build social equity and ecological resilience by leveraging finance to create pathways to a just economy. As an outsider to this field, they have been able to lend a critical eye to how social investing can be most effective. A recent panel looked at ESG assessments and whether or not they are helpful, harmful or irrelevant. It is rare you get such self-analysis from the corporate for-profit world. Croatan has also put together a number of useful studies and resources helping social investors to build clean portfolios and to direct more capital to women and minority-led firms.
Silk Invest: Social Investing is becoming more mainstream and more tools are available to facilitate this. Data providers like Morningstar and index providers like MSCI are increasingly focused on this area. Regulators are also giving more guidance and among others putting funds in different categories to highlight their credentials in this area. On the flip side, more tools do not necessarily mean higher quality social investing as some investment houses are using this as a base to “tick boxes” or game the system based on pre-defined criteria. A big area of weakness is that most tools are investment criteria-focused and do not track outcomes. A fund that is focusing on, for example, environment can end up favoring established firms in the home market instead of having a more global view that takes into account future outcomes. The same applies for funds that claim certain social positioning but do not invest in big parts of Emerging and Frontier Markets.
Zeo Capital: Many tools have become available but how many are quality tools? Very few. If we have learned nothing else from Morningstar Rankings or Credit Agency Ratings, it’s that a single score does not tell the entire story. These scoring shortcuts, at best, mislead investors and at worst, in ESG investing, misalign capital to companies who are not deserving, making a mockery of the entire investing space. This is especially true in fixed income. The work SASB is doing on sustainable accounting standards is extremely important. The work Wharton is doing to measure true impact of integrating ESG factors into process, not short cutting through passive products, is also meaningful. The effort Truvalue Labs (now a FactSet company) has put into AI to create heat maps around ESG issues is the most telling at revealing company trends over time if an investor is willing to do the work around it.
Of the E, S and G, S is definitely the hardest to measure and hold companies accountable to. E is protecting the earth, G is protecting the internal people, but S is protecting the external people a company may or may not currently serve. The only way to truly determine how socially conscientious a company is being is by asking the questions, doing your own digging into issues through the help of something like Truvalue Labs and then making a fundamental determination if it meets the thresholds necessary for an investment. None of this is something you can get from a simple score or a passive approach.