Protests broke out across the country following George
Floyd's death in Minnesota, after a police officer there
knelt on his neck for eight minutes and forty-six seconds.
As the Black Lives Matter movement brought thousands upon
thousands into the street, company after company tried to
showed their support on social media.
They blacked out Instagram and condemned police brutality
and racial injustice.
Consumers and activists soon called them out with their own
social media campaigns with hashtags #openyourpurse and
#pullupandshutup. And some companies did.
They announced big initiatives with big price tags.
Bank of America announced a one billion dollar plan to
assist communities of color impacted by the coronavirus
pandemic. Cisco donated five million dollars to a number of
organizations fighting racism.
Millennial makeup company Glossier pledged a one million
dollar donation to organizations and Black-owned beauty
businesses. Nike committed 40 million dollars to the Black
community over the next four years.
Nike, though, soon faced criticism for a lack of diversity
among its executive ranks.
Before the death of George Floyd —and before Covid-19 forced
corporate America into lockdown— companies were being
singled out on the basis of corporate responsibility,
either for a lack of it or for a commitment to progressive
ideals. It's a trend that began to accelerate well before
the current demonstrations and pandemics.
It's just now gone mainstream.
So it's gone from something that is looking at policies and
procedures to something that is looking at real-time
behavior as it plays out in front of us.
This all falls under what's known as ESG investing, which
stands for environmental, social and governance.
It's a catch-all term for socially responsible investing.
Here's how ESG investing could change Wall Street and the
business world.
Environmental, social and governance.
Socially responsible investing.
Impact investing, A lot of terms come up when we think of
ESG investing and it can get confusing.
So we're going to let the experts define it for you.
Well, the way we think about it at Bank of America is, it
basically boils down to environmental, social and
governance considerations that are part of the panoply
of considerations that we as investors consider when buying
and selling securities.
ESG at the level of corporate essentially reflects
companies' attempts to integrate environmental and social
issues into the way they do business, into their business
model and into their strategy.
So a quick recap. E stands for environmental.
S stands for social.
G stands for governance.
ESG investing means taking into consideration how a
company's environmental, social and governance performance
will affect a company's financial performance and in turn,
use that to determine investing in the company.
According to a Morningstar Direct report, a record $45.6
billion went into the global sustainable fund universe in
the first quarter of 2020.
Interest in sustainable investing jumped to 85 percent in
2019, up from 71 percent in 2015.
Bank of America predicts the money in ESG investing could
rise to between 15 and 20 trillion dollars because of
changing demographics.
ESG investing has its origins in a 2004 letter from former
United Nations Secretary-General Kofi Annan.
He wrote to 55 CEOs of the world's leading financial
institutions, inviting them to participate in an initiative
that would bridge the gap between investors and important
environmental, social and governance issues.
The group formed into what is known today as the Principles
for Responsible Investments.
Members are required to report their responsible investment
activities each year.
More than 2,000 money managers like BlackRock, Morgan
Stanley and JPMorgan have signed on.
ESG had made its mark, but it still wasn't widely adopted
by investors. Flash forward 16 years to January 2020.
The CEO of the world's largest money manager, BlackRock,
released a letter to its investors that stunned Wall
Street. BlackRock CEO Larry Fink told other chief
executives that climate change and investment decisions
surrounding it would lead to a fundamental reshaping of
finance. Fink wrote, "As a fiduciary, our responsibility is
to help clients navigate this transition.
Our investment conviction is that— sustainability and
climate-integrated portfolios can provide better
risk-adjusted returns to investors.
And with the impact of sustainability on investment returns
increasing, we believe that sustainable investing is the
strongest foundation for client portfolios going forward.
Suddenly, every Wall Street CEO wanted to discuss how they
were making profit and doing good at the same time.
Sustainable investing can be confusing for some investors.
For example, you can invest in funds or companies that
avoid the tobacco, arms and fossil fuel industries.
You can also target investment toward companies that do
good, like workplace equality or reducing carbon emissions.
Those are just a few ESG strategies.
Investors used to think that socially responsible investing
would eat into a company's profit and competitive
advantage. Now investors see it as an opportunity to
identify potential risks or even disasters before they
happen. The biggest ESG criticism has been that some
companies use it as a marketing ploy.
These are useful statements.
It's great marketing.
But again, it's a lot of sizzle, no steak.
Companies make grand promises to become more inclusive or
environmentally friendly, which opens them up to more ESG
money and improves their public standing.
But some companies don't end up following through on those
promises. One early example?
Volkswagen's emissions scandal.
Volkswagon's Emissions emissions scandal keeps shares in the
red. People were duped into believing they were buying a
green vehicle that was not green.
Fines and settlements that Volkswagen has paid up to 20
billion dollars, one of the most costly corporate scandals
in history. It's essentially about maintaining business as
usual, but trying to tell a story or a narrative
that exaggerates, let's say, your environmental
and social commitments or initiatives.
There's been also a number of of real cases
where a company had accident, if you want,
that, you know, the ESG ratings provider
anticipated in a sense.
And that has helped getting more recognition.
So Equifax is a case where,
you know, that particular company had a fairly major hack
problem with data privacy and security.
And as an example, we downgraded Equifax a year before the
hack to the lowest level of our rating on the basis of
them having already had a relatively bad track record
of managing their data security.
And on the fact that the company in that sector should
actually have fairly robust practices in this area.
The practice of greenwashing has forced Wall Street to
scrutinize companies.
The skepticism around ESG investing is warranted.
There are companies that disclose information just for the
sake of disclosing.
And so far, there hasn't been a lot of accountability in
terms of stated goals versus progress towards the
goals. How do you differentiate as an investor between a
company that's talking the talk and a company that's
walking the walk? And here what we think we need to do is
start tracking companies achievements of the goals that
they're stating in their corporate sustainability reports,
et cetera. And that's one of the critical differentiating
features when it comes to analyzing companies.
In Europe, laws mandate that public companies, asset
managers and pension funds must disclose environmental,
social and governance risks in their investments.
The U.S. doesn't have the same level of transparency.
In the last 10 years, more companies in the U.S.
have begun to self-report their ESG performance along with
their financial statements each year.
Research firms, investors and other stakeholders take the
self-reporting data and other public information to rate
the company based on a range of ESG data.
Criteria can range from how they treat their employees to
how sustainable their corporate culture is or how diverse
their board is. Even if a company receives a high ESG
ranking, it doesn't guarantee that the company will be
profitable in the long term.
We know from research that companies that do genuinely
understand and integrate these issues, not more
box-ticking, not greenwashing, but actually integrating.
In the long run, they are better-performing companies,
especially those that identify and improve on the
financially material issues of their industry.
One of the things that we have found is that depending on
the model that you're using, you might be getting very
different estimates.
So what what do you do if a company, for example, is not
reporting its gender diversity in the employee
workforce or what do you do if a company is not reporting
greenhouse gas emissions?
Or what do you do if a company is not reporting lost time
injury rates in the workforce?
You try to estimate that.
So far there is no single standard in place for ESG tracking
that companies can all follow.
Research firms like MSCI have been trying to help quantify
the data and help investors make informative decisions.
The firm has more than 1,000 MSCI ESG indexes and provides
ESG ratings for around 8,500 companies.
The ESG rating itself we look at different types of issue,
depending on where the company is operating,
so that the nature of their business.
So if you take a mining company issues about, you know, the
environmental footprint, hats and safety would be
consideration that we would look at.
In the technology sector, it would be more examples around
data privacy and security.
If we look at the retailer, we would look at the supply
chain and how this retailer is managing their supply chain.
So there's a range of issues, or roughly 30 of them
that we monitor.
Over the past year, the iShares ESG MSCI USA
ETF, one of the most popular ESG ETFs, has outperformed the
S&P 500 by more than four percent as of June
22,2020.
ESG investing is becoming a bigger concern outside of Wall
Street boardrooms.
87 percent of millennials and 64 percent of women agree
that ESG plays an important role in their investment
decisions. There are three groups that show up as being
most interested in ESG.
It's millennials, women and high net worth individuals.
So essentially, millennials are the folks that are going to
inherit and generate wealth over the next couple of
decades. Women are increasingly heads of households and are
making investment decisions for their households.
And then high net worth individuals are the folks that
control the largest proportion of assets today.
So just millennials alone stand to inherit or create wealth
in the U.S. of about 80 trillion dollars over the next
couple of decades.
You just took that and you took a quarter of it, a fairly
conservative allocation, 20 trillion dollars is effectively
the size of the S&P 500 today.
And that's a proportion of assets that could potentially
flow into ESG and impact investing over the next couple of
decades. The recent calls for further transparency from
companies on their diversity inclusion efforts has
reinvigorated interest from the everyday consumer.
As corporate executives respond to the current crisis
around racial inequality and civil rights,
I think that they are implementing a wide range of
approaches. Some of that involves corporate philanthropy.
But I tend to focus more on what's happening inside the
enterprise as well as what's happening at the board level.
That's really where the rubber meets the road.
And that's really where corporate leaders actually have the
most influence, if you will, within their own
organizations. And so if they can't stand on the policies
and practices of their own organizations, I don't think
they really have the credibility, right, to use
philanthropy as a substitute for getting diversity and
inclusion and human capital management strategies right
within their own organizations.
You've got to do that first. Think about it.
If you have a consumer company that sells primarily to
women, but the board of directors is dominated by men,
there's a disconnect between the management team and the
decisions being made at the top versus who's actually
buying the products.
And this has actually been a very strong signal of weaker
return on equity for companies that have a lack of
diversity in their management and board of directors.
Similarly, for social aspects like employee satisfaction,
if you have a company within a competitive landscape, your
number one asset is your skilled workforce.
If your workforce is dissatisfied and likely to leave and
go to a competitor, that's a risk to your bottom line and
to your existential characteristics in the marketplace.
The disconnect between Wall Street and Main Street has grown
more and more stark, especially with the global pandemic
and demonstrations over racial injustice rocking America.
As millions lost their jobs and thousands took to the
streets in protest, the stock market surged.
But there's one silver lining.
ESG investing is also set to surge in 2020.
While the market was quite volatile, what was very
interesting is that investors were really flocking to
ESG strategies.
As early as six months ago, the focus was squarely on the
'E', right, and specifically on climate change and the
investment implications of climate change.
I think what has happened in the last six months because
of the Covid-19 crisis and because of
the issues around racial inequality in the U.S.
and the ensuing global protests that have evolved,
there's been a big focus on 'S' and social issues as it
relates to labor, as it relates to employee safety,
as it relates to the supply chain.
A whole host of issues that were, I would say, not as much
of a focus are absolutely front and center.
I would expect that ESG would be a standard option as
opposed to one that you need to ask for, you know, if your
clients of a mutual fund or a wealth management
organization. And the second element is full transparency
on the ESG characteristics of funds so that as an
investor, you feel comfortable that you know what you're
buying in terms of ESG characteristics.
In 10 years, this will probably be much more embedded in the
investment process.
ESG investing won't be some carve out of the investment
panoply, but every investor in the world will be armed with
these new tools and these new data sets that will help them
to make more informed investment decisions.