From your perspective in the active asset management arena, what key resources or tools are still most needed? What needs to happen to get those resources or tools developed?
Parnassus: One of the most important needs we see as active managers is the need for a “yardstick” to measure ESG performance. Currently, there is not a standardized way to assess how ESG practices contribute to investment performance. There’s been some work by framework providers, but consensus has not yet been reached. Increased regulation, like the policies enacted in Europe, are most likely to help US investors establish an ESG yardstick here. The Security and Exchange Commission’s recent discussions about mandatory climate and workforce disclosure are two examples. As governing bodies and policymakers continue to intervene, universal measurement standards are more likely to become established in the active space.
Pekin Hardy: Standardization: We need better standardization in both company reporting and in ESG analysis. Because there are no specific requirements around what companies must report with respect to ESG factors, it’s difficult for investors to compare ESG performance across companies and industries. Additionally, there is a lack of consistency in how ESG data providers analyze the data that companies provide. Every data provider seems to have its own approach to analyzing ESG data and its own methodology for establishing ESG performance scores for companies. This creates conflicts that can make it difficult for asset managers, and ultimately investors, to really understand how the companies they own are handling ESG risks and opportunities. It also opens the door for “greenwashing.” Without standards that dictate what ESG metrics companies must report and how companies should be judged on those metrics, there will unfortunately be opportunities for investment product providers to market products that purport to be “sustainable”, but which lack rigor from an ESG analysis standpoint. Establishing standards in reporting and ESG analysis will likely require regulatory changes, as well as efforts on the part of SROs and investor groups like US SIF: The Forum for Sustainable and Responsible Investment and the UN’s Principles for Responsible Investment.
More ESG Investment Options in Employer-Sponsored Plans: While there has been a huge increase in the number and variety of ESG and sustainable investment products in the marketplace over the past several years, many employer-sponsored retirement plans still lack these options. Despite a strong appetite for such investment options on the part of plan participants, very few employer plans actually offer ESG or SRI investment options. While we are able to help our clients build customized, values-aligned portfolios outside of their employer plans, the lack of ESG and SRI investment options in their employer plans often means that a material portion of their net worth may be invested in ways that are at odds with their personal values. In order to change this, it will require that plan participants put pressure on their benefits providers to make these options available. Stronger regulatory support from the SEC and DOL for these changes would also help move things forward.
Reynders McVeigh: Organizations such as the ones I have discussed above have taken major steps to bring useful and unbiased research and analysis to the public. To be more effective, they need the support of the financial industry. While our firm supports these organizations, there is certainly more we can all do to get these campaigns and research into the hands of the public at no cost to them.
Silk Invest: Impact of ESG strategies is the main area where more resources and tools are needed. Another area of development is to better assess how investment firms themselves internally align with the stated goals. As an example, a firm which claims a focus on gender equality should at minimum apply this in their own firm.
Zeo Capital: No place is better served by fundamental investing than in ESG. If allocators want their dollars to have true, meaningful impact, how can it be in a passive way? The only way to have an ESG portfolio and to align dollars with priorities, is to start with nothing and add each company intentionally versus starting with everything and throwing out obvious offenders. Change does not happen on its own. If companies are not held accountable, why would they be incentivized to change? The most critical piece needed is standardized ESG reporting so corporations stop the marketing spin and start sharing meaningful transparency.
What do you forsee over the next few years as to the evolution of social investing? What part will innovation need to play in its progress?
Parnassus: ESG investing now focuses on large cap companies that have been the first to more widely adopt ESG practices in their businesses. Over the next few years, I think we can expect to see small and mid-cap companies face the same level of scrutiny as their large cap peers now face. This will lead to more disclosure by smaller companies. As ESG knowledge grows and ESG is more deeply integrated into fundamental analysis, I think we can also expect more emphasis on company engagement. I expect investors will begin pressing companies to improve their ESG practices. We already see fund managers that have not previously considered ESG adjusting their proxy voting policies and engaging companies on basic ESG topics like the SASB standards. As this shift continues, we may also see leading investors engage companies on more complex topics that could impact a stock’s business model.
Pekin Hardy: Increasing Assets: First and foremost, I expect to see a continued increase in the amount of assets that are invested in socially responsible strategies. This growth in assets will lead to greater mainstream acceptance of socially responsible investing, and it will also likely lead to more pronounced market responses to good or bad ESG performance or ESG controversies. I also hope that it will lead to more advisors becoming better informed on the subject of socially responsible investing. Despite the growth in these strategies, many advisors remain on the sidelines with approaches that range from ambivalent to outright antagonistic. I believe this is ripe for change as the socially responsible investing movement gathers steam and assets continue to flow toward these strategies. Innovative approaches to marketing socially responsible investment strategies will be key to driving this growth. And continued innovation in the development and rollout of new advisor education focused on ESG and SRI will be necessary to ensure an informed advisor base that is prepared to help clients align their portfolios with their values.