Environmental, social and governance (ESG) research among institutional investors has historically focused mostly on the “E” and the “G,” leaving social issues as somewhat of a forgotten middle child. Investors have concentrated on quantifiable environmental targets such as carbon emissions, and on best governance practices for compensation and board composition; meanwhile, social investment risks—especially risks related to racism and racial injustice—have often taken a back seat.
There are several factors that may have led institutional investors to deemphasize social issues in their research. Social matters have been viewed as abstract in nature, and they are often broadly intertwined with our societal fabric, which makes it very difficult to develop a quantitative model for understanding how these matters impact corporate performance. Additionally, there is an undeniable disconnect between the demographics of typical institutional investors versus the populations that are most directly impacted by the negative externalities of such investments.
We believe that a company’s positive and negative social attributes are material and salient investment factors. Not only do these attributes represent meaningful risks and opportunities on their own, they are often inextricable from the environmental and governance matters that have captured the lion’s share of attention from ESG investors. We have seen this intersectionality play out very clearly in 2020; the evolution of the Covid-19 pandemic and the powerful reaction of society against police violence have developed in a highly interrelated matter. This has forced international attention on linkages in social and environmental justice that the Black community in the U.S. and other marginalized populations have long understood. It is just one of many examples that demonstrate why we believe that E, S and G issues need to be evaluated in concert with each other, and not in isolation.
Investment And Justice
As humanity’s technological and industrial footprint has expanded, our impact on the world has intensified, and our actions in one place can have meaningful impact in other places. This is the basis of environmental justice, a concept that can play out both globally and locally.
On a global scale, the U.S. is the second-largest carbon-emitter in the world, next to China. The U.S. plays a meaningful role in determining the fate of many low-lying island nations—these countries generally have miniscule carbon footprints, yet their very existence above water is threatened by climate change. We believe an investment approach that seeks to avoid the destruction of nations is wise from a moral perspective, as well as from a financial perspective given the interrelatedness of the global economy. This is one of the reasons we seek to largely avoid investments in the world’s biggest corporate emitters. Simply put, we think there are better investments on the table.
Domestically, we can look at the community of Port Arthur, Texas, for a stark example of environmental injustice. The city is home to the largest oil refinery in the U.S., and the surrounding area has been referred to as “the Cancer Belt” since the 1980s. Serious health conditions, including cancer, respiratory conditions and many other illnesses run rampant in Port Arthur. The communities closest to the refinery are predominantly populated by people of color, and those communities and their health are disproportionately affected. Texas Cancer Registry data from 2017 reported that Black people in Jefferson County, which includes Port Arthur, had cancer rates 15% higher than average Texans, and cancer mortality rates nearly 40% higher than the state average.
Notably, preexisting respiratory conditions are a common result of living near facilities such as refineries or hazardous waste facilities, and those circumstances are also a key indicator of survival rate for those infected with Covid-19. This is all part of a broader mosaic in the U.S. that systemically harms people of color; Black people in the U.S. are 4x more likely to die from Covid-19, 2.5x more likely to die from police brutality and 3x more likely to die from air pollution than white people.
These concepts can come into play in our investment decisions. Our fixed income team recently passed on investing in bonds issued by a large city’s municipal water utility, for example; the reasoning was not just because of concern over water quality, but also because the team was concerned that the people at greatest risk of having contaminated water would be people of color.
Public Opinion Is Shifting, And It Matters
Issues perceived as “too political” can be divisive, and difficult to navigate. Climate change, the Covid-19 pandemic and racially driven police violence—these issues all have highly polarized stakeholders and progress is slow as a result.
As long-term investors, we need to expect that highly divisive issues may evolve into consensus viewpoints in the not-so-distant future. Climate change stands out as an example of this concept. In 2010, the materiality of climate change risk was still widely debated in political and corporate circles; yet today, the corporate world has largely come to agree that climate risk is dangerous and that it is good business to try and mitigate that risk. We believe this was driven at least in part by ESG research practices that consistently looked at climate risks through an investment lens, looked at the cost/benefit of climate resilience measures being considered by companies and governments, and importantly, identified companies poised to expand existing businesses or create entirely new ones based on the growing customer demand for solutions to reduce energy, water and other resource usage. To a meaningful extent, company and issuer action on climate change has become the expectation, not the exception.