Socially responsible investing—investing based on environmental, social and governance (ESG) measures—is hardly a new concept, but it is among the latest issues to enter the culture wars on the political battlefield.
The Biden administration, last November, reversed restrictions imposed under the Trump administration that prevented certain retirement plans from considering ESG factors when selecting investments.
In March, the U.S. House and Senate passed a measure to change the rule back to a model where only financial factors can be considered. Biden followed through with a promised veto and an attempt to override the veto failed.
New Hampshire has joined a 25-state coalition lawsuit over the Department of Labor rule claiming it runs contrary to the laws outlined in the Employee Retirement Income Security Act of 1974. A spokesperson for NH Attorney General John M. Formella says no hearing dates have been set. An organization representing 200 fossil fuel companies is also a party in the lawsuit.
While a handful of conservative groups and some Republican presidential hopefuls have shared plans to use anti-ESG sentiment as a rallying cry, some say attempts to ban an ESG investment strategy are too late.
Joe Keefe, president, North America, of Impax Asset Management in Portsmouth, a firm that says it pioneered investment in the transition to a more sustainable global economy, says a Russell investment study from 2021 found that 82% of U.S.-based asset managers include ESG factors in their financial analysis and that the percentage is closer to 100% in both the United Kingdom and Europe.
“The financial industry is already using ESG information and has systematically incorporated ESG into its analysis,” says Keefe. “The politicians trying to stop it are about a decade behind the times. This is well accepted and embraced in the financial community. Some politicians might want to call it woke. But financial professionals are looking at these issues only because they believe they may be material to how companies perform and how investment portfolios perform.”
Keefe says the global economy is going through massive historic transformation and that includes sustainability challenges, such as climate change, pollution, natural resource depletion and changing social norms. “All of that affects capital markets, and when you combine them with disruptive forces in technology, public policy and consumer preferences, basically you have an economy in transition at a scale that would be comparable to the industrial revolution.”
He says transitions of this scale create opportunities and risks, but trying to restrict what investors can invest in is substituting politics for sound investment decision making.
“Financial professionals who have a fiduciary duty to try to maximize returns for their investors are the ones who should be making decisions about what the best investment is…not politicians.”
No Clear Standard for ESG
Jay Mullins, president of D.L. Carlson Group in Concord, says with ESG in the limelight it creates a healthy dialog. But the quality of ESG data is not as strong as it could be.
According to the Dow Jones survey, more than half of financial professionals (56%) say traditional ways of valuing companies are inadequate for assessing sustainable investments, believing that the quality of ESG data available today is not yet sufficient to make investment decisions (52%).
“ESG means different things to different people; a lot of clients are socially aware and want to do the right thing,” says Mullins. “Investing tends to be quantitative while ESG is qualitative. For example, Exxon Mobil scored higher for its governance with women in key positions, while Tesla is lower because of SEC problems.”
ESG’s Growth Trajectory
The term ESG was first introduced in a 2004 report prepared by the United Nations and 20 financial firms including Goldman Sachs, Morgan Stanley and UBS. James T. McKim Jr., managing partner at Organizational Ignition, says from a “60,000-foot level” ESG means thinking about more than just the bottom line.
“With that as the context, the ESG movement is trying to tweak our capitalist system to be more cognizant of holding up the social contract we’ve had for many years…where corporations are focused on shareholder value but also have that social responsibility to look out for society and produce or do things that are good for society. There are those who push back because they want to focus only on shareholder value and any threat to the focus being all on money is something they fight against.”
Socially responsible investing is expected to double over the next three years, as returns match or exceed traditional investment, and organizations and individuals look for their investments to reflect their values.
According to Dow Jones survey of 200 financial leaders in the fall of 2022, sustainable investing is the No. 1 growth opportunity for investment professionals, with ESG investments projected to make up 15% of all investments by 2025.
Globally, the figures are even higher. PwC’s Asset and Wealth Management Revolution 2022 report shows that asset managers globally are expected to increase their ESG-related assets under management (AuM) to $33.9 trillion by 2026, from $18.4 trillion in 2021. With a projected compound annual growth rate of 12.9%, ESG assets are on pace to constitute 21.5% of total global AuM in less than
five years.
The Dow Jones survey respondents cited the opportunity to make positive change as the primary driver for this growth. As more companies tout their ESG policies as a matter of branding, investment firms are following suit and offering ESG portfolios to meet
investor demand.
Being able to communicate how a business is approaching environment, social and governance issues is critical to a public company in sharing their story and helping people understand how they are improving efforts in those areas, says Michelle Veasey, executive director of NH Businesses for Social Responsibility.
Tom Raffio, president and CEO of Northeast Delta Dental in Concord, says as a nonprofit company known for giving back, the ESG principles are a good over-arching strategy. He says NEDD has 60% of the dental insurance market in the northern New England region—despite never having been the lowest-priced option—because they are known for giving back to
the community.
When the pandemic closed dental practices, NEDD offered premium relief to customers, grant money to dentists and paid out commissions to brokers who weren’t working; efforts that totaled $27 million. As NEDD prepares to take on NH Medicaid patients, Raffio admits it’s not going to be a money maker but will allow 121,000 people to go to the dentist.
“These measures create such goodwill that it’s a good long-term business strategy,” says Raffio. “People want to do business with firms where they know you’re good to the environment, you have excellence in corporate governance and that you care about social matters. We’ve been following this philosophy long before the events of 2020, and it pays off on the investing side. Insurance is highly regulated; 80% of our reserve portfolio has to be in bonds and only 20% equity,” Raffio says. “But our investment firms do include ESG investing.”
Christina Bradbury, associate professor of finance, and Botao An, Ph.D., assistant professor of finance in the School of Business at Plymouth State University, see the growth and long-term attraction of ESG investing.
“A lot of folks within their investment policy statements care more broadly about stakeholders than just the almighty stockholder,” says Bradbury. “The environment, people, employees and community, all of these groups matter. So certainly, the ethical and sustainable aspects to long-term value make a lot of sense and that would be part of what’s driving the ESG proposition.”
Bradbury says, from a theoretical standpoint, a company that places its emphasis on the broader stakeholder group is looking at long-term value as opposed to the short-term gains. “I think the question becomes whether or not there’s any sacrificing of short-term financial return,” she says.
And McKim adds that while a focus on ESG may sacrifice some short-term profitability, it might instill customer loyalty and perhaps employee loyalties as well, attracting people who want to buy from or work for firms that share their values.
“The ESG movement is allowing us to put a focus on people and the environment in which we have to live,” says McKim. “Ironically, even though many of the folks who are against ESG don’t see this, it’s only going to benefit corporations, helping increase shareholder value because [statistically] organizations that are really investing in diversity, equity and inclusion outperform their peers in EBIT [earnings before interest and taxes.]”
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