“What inspires you that ESG investing can help us make progress on social justice and gender diversification?”

In exploring this question we reached out to leading experts in the ESG investing industry to find out their responses, and this is what we found…

QUESTIONWhat inspires you that ESG investing can help us make progress on social justice and gender diversification?

ANSWERYusuf George Managing Director, Corporate Engagement, JUST CAPITAL

ANSWERJUST Capital’s polling shows that Americans are calling on corporate leaders to create equitable companies, and our data shows that companies that prioritize their workforces outperform industry peers. The companies that prioritize diversity, equity, and inclusion tend to have stronger and more engaged workers, which in turn leads to better performance for shareholders. 

QUESTIONWhat inspires you that ESG investing can help us make progress on social justice and gender diversification?

ANSWERPeter Krull. CEO & Director of Investments. Earth Equity Advisors

ANSWERSocial justice is intimately connected to environmental justice. Every time we make a conscious choice to invest sustainably and with our progressive values, we’re helping to make the world a better place for everyone.

QUESTIONWhat inspires you that ESG investing can help us make progress on social justice and gender diversification?

ANSWEREsther Pan Sloane, Head Partnerships, Policy & Communications, UNCDF

ANSWERInvesting in businesses owned by minorities and women can help previously excluded groups create jobs, build wealth, lift their families out of poverty and build their communities.  There are many currently overlooked opportunities that can deliver both social impact and financial returns that we encourage investors to consider as part of a diversified impact investment portfolio.

QUESTIONWhat inspires you that ESG investing can help us make progress on social justice and gender diversification?

ANSWERMartina Macpherson, SVP ESG Engagement, Moody’s & President, Network for Sustainable Financial Markets

ANSWERSocial justice and equality is an ongoing process. It entails respect, care, and equity; with a consciousness on the impact of race and ethnicity, class, gender, age, sexual orientation, family responsibility or family status, religious or political conviction, pregnancy, and disability. Social justice and equality recognize inclusive behaviours in the construction of institutional, corporate and governance policies and practices, and seeks ownership, accountability and responsibility for these behaviours. By recognizing human rights, and the dignity of each individual as a categorical imperative, investors, corporations and public institutions should seek to establish a global community of respect, resilience and purpose. This approach in turn is a fundamental part of the social agenda in ESG, and its philosophy for long-term value creation.

QUESTIONWhat inspires you that ESG investing can help us make progress on social justice and gender diversification?

ANSWERJed Emerson, Independent Strategic Advisor to Impact Investors, Blended Value Group

ANSWERWhat inspires me regarding ESG’s potential as a vehicle for the advancement of social and gender justice is that ESG is all about the illusion of separation—the idea that it is wrong to think that one can consider economics in the absence of considering social and environmental factors—and social/gender justice is, at its core, a question of our understanding the links between Self and Other, between who we are as individuals and who we are as communities and society. Just as diversity makes for strong eco-systems and viewing the firm as part of the stakeholder whole and commons makes for stronger companies, for each of us to fulfill our own individual potentials all of us must be supported in attaining our individuals possibilities, which at its core is what social and gender justice offers.

QUESTIONWhat inspires you that ESG investing can help us make progress on social justice and gender diversification?

ANSWERChristina Shim, Managing Director, Commercial Innovation Palladium

ANSWERIn this world rife with ramifications – both positive and negative – from COVID and the BLM movement, now is the time for real change – if not simply because it’s the right thing to do, then because people are demanding it. The business world has made statements and committed funds, but their efforts ring hollow in the ears of stakeholders who have become disillusioned by posturing without progress. Same with ESG investing, with many investors considering socially responsible investing tied to the SDGs or ESGs as public relations issues. Investors and the trillions of dollars of available capital can touch every facet of our lives – that amount of deployed capital is too immense not to play a meaningful role. Focusing on investing through an ESG lens – by focusing on impact to communities (as partners rather than beneficiaries) and moving beyond the box-ticking – can have serious catalytic consequences on social justice and gender diversification. It’s inspiring to think that we’ve started to see different worlds coming together to create these catalytic changes, which require a focused assessment of the current state, a targeted outcome of what the investments want to achieve, and a roadmap for realization. Social justice and gender diversification is for all of us to solve – and in particular, those groups, organizations, and investors that have historically enjoyed a position of relative power in society.  

QUESTIONWhat inspires you that ESG investing can help us make progress on social justice and gender diversification?

ANSWERMegan Fielding, Senior Director, Responsible Investing at Nuveen & Head of Strategic Partnerships

ANSWERThere is a clear connection between the integration of ESG issues and financial performance. This includes strong evidence supporting the benefits of gender and racial diversity, and conversely, penalties when these issues are not prioritized. We are now experiencing a cultural and economic alignment that is rapidly driving progress–financial materiality, performance results and investor demand—and this convergence will likely lead to positive change for both investors and society at large.

QUESTIONWhat inspires you that ESG investing can help us make progress on social justice and gender diversification?

ANSWERKesi Gibson CEO/Founder – Club Debut

It is terrific that considerations of environmental, social and governance issues are now being incorporated into institutional investors’ decision calculus. This will go a long way, particularly on the environmental front, where there are tangible metrics to report on. Gender diversification will also continue to be a priority for companies, as investors respond to the demands of the feminist movement and other diversity related campaigns, making women in leadership a prerequisite for investing.  When it comes to social justice, I am honestly in no way inspired that the widespread approach to ESG investing will do much to engender lasting change. I would go as far as to say that it is disingenuous to tie the two together. Definitionally, social justice relates to the  distribution of wealth, opportunities, and privileges within a society. For social justice to be relevant in any discourse on ESG investing, the accepted metrics around ESGs would have to, at a minimum, address access to capital for underserved entrepreneurs, and businesses owned and operated by people of color. That said, I am inspired by the conversations around race, class and privilege that are now happening among the people (particularly the investor class) who truly have the power to make progress on social justice, beyond words. 

In this issue

Every generation leaves behind a legacy. What that legacy will be is determined by the people of that generation. What legacy do you want to leave behind?

― John Lewis, Across That Bridge: A Vision for Change and the Future of America

For this issue we set out to explore the performance of investments that have been filtered for social advocacy and gender diversity, both predictably complex issues. Many in this country are struggling to find ways to advance reforms in these areas and the Socially Inspired Investor supports efforts to level opportunities for everyone. 

When it comes to diversity, we are seeing more and more evidence moving from anecdotal to scientific that companies that embrace diversity in leadership are beginning to differentiate themselves.

Harvard Business Review cites at least two studies that show women score higher than men in most leadership skills 1. So why then does this continue to be a challenge?  These days don’t we need more competent leadership more than ever.

In the SII podcast for this issue you will hear from Eric Glass of AlianceBernstein and Patrick Drum of Saturna Capital, on the topic of Investing for Social Advocacy and Gender Diversification, with some pretty convincing stats for us to consider.

“What inspires you that ESG investing can help us make progress on social justice and gender diversification?”

We posed this question to leaders in the ESG investing community. Their responses were fascinating and enlightening. Check out the responses in our Spotlight On article. Clearly reforms are needed across virtually every segment of our society, including the investing community. 

We learn that businesses are more willing these days to use their capital and governance to contribute to real change. All efforts need be applauded. And in real definable ways, we can see this commitment will pay dividends worthy the efforts. But buyer beware.

The fervor may also cause average investors to let their guard down.  In the zest to support the critically important Black Lives Matter and other diversity goals, we also see instances that perhaps investors may be too willing to overlook the fundamentals of sound investing. Remember all investments must adhere to basic investing principles. So, we have added some more reference material to keep you sharp in our Investing Basics section. Unfortunately, some emerging trends do indicate investors may be allowing their passions to overshadow these rules. Rules are rules regardless of the passion.

Our contributors this month speak to all these questions and begin to frame for us how complex the landscape has become.  Perhaps the timing is finally right for significant change. 

Thank you for being part of the Socially Inspired InvestorSM Digest/Podcast family.  Please share this digest with others who are interested in becoming a more informed Socially Inspired Investor.

1 HBR June 23, 2019, Jack Zenger and Joseph Folkman article  

Why Diversity Matters In The World Of Finance

Originally published: June 15, 2020

When my youngest daughter was quite little, she asked if we could play a game of doctor with her dolls. I quickly agreed and handed her the toy stethoscope. She immediately frowned and returned the instrument. “Boys are the doctors,” she explained, as she picked up the nurse’s hat.

I was shocked. I had never thought of myself as a sexist parent, but I quickly realized that every doctor she had seen was male. Every nurse was female. That was the only world she knew!

Fast forward to the late 1990’s and the medical school where I taught decided to increase the number of underrepresented medical students: African-American, Hispanic, rural, female, and international. Invitations went out to colleges and we held open house events. Attendance was disappointing until the administration started a new internship program. College students from those underrepresented groups spent a summer internship shadowing physicians to see what medicine was all about. During the internship, every student had to wear a lab coat, and every student was referred to with Dr. in front of their last name. That worked! Once students had a taste of being a doctor, they could wrap their heads around becoming doctors. Like my daughter, most of them had never seen a physician like themselves.

Now fast forward a decade, as I began my career as a psychologist working with traders and investors at investment banks, hedge funds, proprietary trading houses, and asset management firms. I quickly learned that there were few females on the trading floors and even fewer money managers of color. When I became involved in recruitment at these firms, I discovered that there were very, very few applicants from underrepresented groups. It dawned on me that these young people had never had a family member, neighbor, or role model who managed financial capital. Like my daughter, like the undergraduates encouraged to think of medicine, they never envisioned themselves in financial careers and thus struggled to make the leap.

Sad to say, things have not changed greatly in recent years. Women hold very few roles in finance, especially leadership roles. According to Oliver Wyman, the percentage of women in leadership roles in finance has doubled since 2003, but the current level is still in the low 20% range. Among the financial firms where I have worked, it is not uncommon to find few if any women on trading floors. Interestingly, research suggests that role models matter to women: when a daughter has a mother who works in a science, technology, engineering, or mathematical (STEM) field, she is 48% more likely to work in finance than a son in the same situation. The chicken-and-egg problem is clear: women are less likely to pursue careers in financial markets if they don’t perceive role models, and the field cannot generate role models without growing a base of women professionals.

Similar challenges lead to a lack of racial diversity on trading floors and broadly across financial firms. Among financial advisors, for example, only 3.5% are African-American or Latino. Janice Gassam, reviewing data from the largest money center banks, reports that boards of directors and corporate leadership are dominantly white and male, with diversity metrics typically not tied to compensation. A report from The U.S. House Committee on Financial Services finds that the proportion of employees of color at top U.S. banks matches the percentage in the overall population, but that most of these employees are entry-level and not part of senior management. William D. Cohan notes progress in the hiring of diverse talent on Wall Street and also observes that there is a long way to go. For example, he reports that the percentage of black talent at senior levels of management at top institutions is in the low single digits. Among the money management firms where I have worked, the percentage of African-American and Latino traders and investors has been in low single digits.

So does all this matter?

The U.S. House Committee on Financial Services report on diversity and inclusion in finance summarizes studies that find:

  • Adding women to the workplace brings different skills and perspectives on such issues as collaboration and risk management, all of which contribute positively to corporate growth and income;
  • Companies with the highest level of diversity in terms of racial/ethnic composition and gender display significantly greater profitability than their counterparts;
  • Non-elite colleges and universities are an important source of talent for undergraduates in STEM careers, including historically black colleges and universities.

We know from research that women and men differ in their cognitive functions and strengths, reflecting differences in brain structure and function. These brain differences impact performance in learning environments, with distinct areas of strength and vulnerability. We also know that improved workplace diversity is associated with improved company performance, greater employee retention, and higher employee engagement. Might this be the case in finance as well?

At the medical school where I was involved in the recruitment of underrepresented student groups, we found that there were distinctive differences of learning strengths among male, female, and racial/ethnic minority students. Male students were most likely to study individually from notes and books; female students were more likely to collaborate in sharing notes; and minority students tended to study actively and interactively in groups. When it came time to work with patients on the various clinical services, these different learning styles brought synergies to the teams, improving treatment planning and reviews.

Similarly, I find that portfolio management teams outperform their peers when the members bring unique backgrounds and perspectives. It is in the combining of these diverse perspectives that “alpha”—unique economic returns—can be generated. Conversely, without differences of view and background, there is a tendency for teams to become stuck in consensus thinking and mediocre outcomes. For example, in successful teams, it is not unusual to find members from different national backgrounds and different specializations in strategies (quantitative vs. discretionary); asset classes (equities, fixed income, currencies); and regions (emerging vs. developed markets). Might we similarly find differences in money management style among women, men, and various ethic and racial groups? Might these differences contribute to improved team performance, as in medicine?

A striking example of strength-in-diversity comes from Maria Konnikova, who broke into the male-dominated world of competitive poker through the help of intensive mentoring and a unique background in psychology. As she explains in her recent book, it wasn’t the desire to make money that brought her to professional gambling, but rather the passion to learn about the role of luck and decision making in life. It was precisely the uniqueness of her background that brought her to the top of the competitive arena.

A similar focus on talent development comes from 100 Women In Finance, which has built a network of mentors and funding sources to help women break into the world of money management. The creation of career pipelines and ongoing efforts at education help women move beyond entry level positions to achieve roles of leadership. Troy Prince, together with Maverick Trading, has developed a program to bring under-served young adults into the financial world through a structured training program. The Wall Street Bound program is designed to identify and mentor talent through the impact of minority role models. The Greenwood Project, operating in the Chicago area, introduces hundreds of minority students to the financial industry each year across dozens of firms. The Project includes a Women of Wall Street group, as well as a summer internship program to introduce students to finance. Those efforts have attracted the participation and donations of a number of financial institutions, including the Fintech In Action initiative.

It appears that these efforts to broaden finance have taken root at some of the largest financial institutions, as Karen Gilchrist recently observed in a CNBC article. Working from home has encouraged employers to create virtual internships, which reach many students. Gilchrist notes that this trend is helping to diversify employment in finance at such firms as Deutsche Bank and Goldman Sachs create work experiences in different cultures and expand their hiring among Black, Latino, and women students.

These efforts demonstrate that inclusion in finance is more than a politically correct nicety. Diversity is associated with superior performance precisely because it has the potential to bring diverse strengths to the management of capital. Nobel Prize winner Harry Markowitz once described diversification as the only free lunch in investing. Combining positive, independent income streams creates smoother equity curves and better risk-adjusted returns. The same appears to be true in the financial workplace.

Brett Steenbarger Contributor|MARKETS

Power with purpose: How women’s leadership boosts the economy and society

Originally published 7 March 2016

The economic and business case for gender equality is now overwhelming. Evidence is mounting that having more women in the boardroom and senior management positions is positive for the bottom line and for society.

While there has been progress toward increased educational opportunities and greater participation in the labor force for women, they remain underrepresented at the top of companies around the world. And it’s not just in business that women are not rising to the top — the same is true in the nonprofit sector and in politics.

In 2012, most Asian countries had fewer than 10 percent female representation on executive committees and saw women making up fewer than 5 percent of CEOs, losing the majority of women in the mid-to-senior management level. In 2015, 45 percent of entry-level jobs in the United States were occupied by women, but women held only 17 percent of C-suite jobs.

In the nonprofit sector, women hold only 21 percent of leadership roles in organizations with budgets in excess of $25 million despite making up 75 percent of their workforces.

Globally, there are 22 women in ministerial and parliamentary roles for every 100 men. Even in developed economies — and democracies — such as the United Kingdom and the United States, there are only 24 and 34 women to every 100 men, respectively, in these top government roles.

The economic and social benefits of narrowing the gender gaps are clear. If women were to participate in the world of work identically to men, an additional $28 trillion, or 26 percent of incremental global GDP, could be achieved in 2025. That’s roughly the combined size of the economies of the United States and China today.

Gender diversity has been shown to increase an organization’s performance as well as improve morale, recruiting and external image. McKinsey’s Women Matter research has found that companies in the top quartile for gender diversity are 15 percent more likely to have financial returns above the average in their national industry.

The lack of women in positions of political power has a cost for society, too, because women often have different priorities and can be more effective where it matters. For instance, one cross-country study found that greater representation of women in parliaments led to higher expenditure on education as a share of GDP. In India, women’s leadership in local politics has been found to reduce corruption. And in the social sector, research has shown that nonprofits with women in leadership positions are more successful in realizing their mission and reaching their goals.

Deeply-rooted attitudes stand in women’s way. We analyzed data from the World Values Survey and found a strong link between attitudes that limit women’s potential and actual gender equality outcomes in a given region. For instance, the survey asks respondents, both men and women, whether they agree with the following statement, “When a mother works for pay, her children suffer.” We examined the responses against outcomes related to women in leadership positions and found strong negative correlations. This was true not only in developing countries, but in developed countries as well. More than half the respondents in South Asia and the Middle East and North Africa agreed with this statement — but so did 29 percent of respondents in nine developed countries.

A view that it is more difficult for women to balance family life and a top-level career persists. Across countries, the “double burden” of balancing work and domestic life was the barrier cited most often in our Women Matter research — by 45 percent of respondents in Asia-Pacific, 34 percent in Europe and 31 percent in North America. Another oft-cited barrier was the “anytime-anywhere” work model that requires employees to be available at all times and geographically mobile.

Tackling women’s underrepresentation needs to take place on many levels. In companies, the CEO needs to drive change from the top. In France, Renault Nissan’s CEO has made a clear commitment to gender diversity, and the company now publishes annual updates of female advancement.  

Every company should consider policies that do not penalize flexibility and part-time work arrangements and that promote options for telecommuting, provide adequate paternity and maternity family leave, plan for onsite child-care provision for employees, address unconscious biases and revamp the 24/7 culture that especially harms women.

In political life, quotas for the number of women as candidates or in political office have been used by some countries such as Norway — where political parties adopted voluntary quotas for female candidates — and Rwanda, where 24 out of 80 seats in the lower house of parliament are reserved for women. Burkina Faso implemented an increase in public funding to political parties if 30 percent of candidates elected are female. But beyond quotas and financial assistance, women need to build leadership capabilities, and organizations in Ireland have invested in training women for political candidacy and office.

Even as other gender gaps have narrowed, women struggle to close the gap with men on taking the roles that lead and shape the world. Until that gap is closed, women cannot meet their full potential — and the world will be poorer as a result.

We’re Entering the Age of Corporate Social Justice

Originally published June 15, 2020

Research has shown that companies with effective Corporate Social Responsibility (CSR) programs are more profitable than those that aren’t. Over the last 50 years, corporations have relied on these programs, which include social issue marketingphilanthropic efforts, employee volunteer initiatives, and diversity and inclusion work, to build their brands and satisfy customers.

Now, consumers and employees are raising the bar. The killing of George Floyd by a white police officer in Minneapolis has driven one of the largest protest movements in recent memory, and the widespread reactions to the standard CSR playbook suggest that old best practices may no longer work. Consumers and employees are now looking for more than Corporate Social Responsibility — they’re looking for what I call Corporate Social Justice.

Corporate Social Justice is a reframing of CSR that centers the focus of any initiative or program on the measurable, lived experiences of groups harmed and disadvantaged by society. CSR is a self-regulated framework that has no legal or social obligation for corporations to actually create positive impact for the groups they purport to help. Corporate Social Justice is a framework regulated by the trust between a company and its employees, customers, shareholders, and the broader community it touches, with the goal of explicitly doing good by all of them. Where CSR is often realized through a secondary or even vanity program tacked onto a company’s main business, Corporate Social Justice requires deep integration with every aspect of the way a company functions.

The need for this fundamental shift has become more apparent over the last few years. AT&T, which won a perfect score on the Human Rights Campaign’s Corporate Equality Index in 2017, was widely criticized for donating more than $2.5 million to anti-gay politicians that same year. Toms, whose one-for-one giving model won widespread accolades, eventually scrapped its model after it was revealed that its donations had disrupted local economies and producers. Amazon, which recently tweeted a statement expressing solidarity with Black communities, was immediately criticized for its selling of facial-recognition technology to law enforcement agencies and extreme underrepresentation of Black professionals. (Amazon later announced a one-year moratorium on police use of its facial recognition technology.)

Consumers and other stakeholders want companies that see social good as a necessity, not just a marketing strategy. It’s up to companies to respond to this new challenge. Here’s how:

Begin with a goal or vision for a more just society.

When picking a goal or vision, don’t just go with a goal that your CEO likes. Vanity projects aren’t enough. Instead, develop a thoughtful and intentional process that brings together representatives from your various stakeholder groups to determine which issues lie at the intersection of your company’s mission and the unmet needs of its stakeholders.

The objective of this exercise isn’t to arrive at a goal that sounds impressive. It’s to arrive at a vision that your company is best equipped to play a part in creating. The Chicago Community Trust, for example, recently set a goal to close the wealth gap between Latinx, Black, and white households in Chicago.

Thoughtfully situate your company within the broader ecosystem surrounding that goal.

Companies looking to address systemic racism in policing, for example, must work to understand the racial history of policingthe advent of mass incarcerationthe militarization of police departments, and the relationship between community resources and the crime rate.

Don’t try to distance your company from these analyses. Most companies play a role in creating and maintaining inequities through their supply chains, hiring strategies, and the customer bases they serve — or don’t serve. At a bare minimum, any company which counts Black consumers among its audience (that should be all of them) needs to understand the historical context that informs their buying, spending, and engagement.

Build robust and representative working groups that connect the company with its stakeholders.

The goal of these groups is to fully explore the impact of the company’s actions on various stakeholders, and to use this knowledge to proactively inform how the company acts on and reacts to society. For example, if a company is looking to release a public statement on anti-Black racism, its process to develop that message should heavily involve Black entry-level employees, managers, and senior leaders, Black customers, and any other Black communities that interact with the company‘s products or services.

This work is challenging, especially in moments of crisis that place an additional burden on those most marginalized. Ensure that all members are compensated for their participation and can opt out at any time. Done right, these working groups can inform your company’s strategic priorities, help leaders make tough decisions in the public eye, and allow them to respond to pressing current events in ways that resonate with your stakeholders. For employees and stakeholders outside of the company, working groups can empower their voice, represent their perspectives in decision-making, and build trust between them and the company.

Take a stance.

Corporate Social Justice is not a feel-good approach that allows everyone to be heard, and by nature it won’t result in initiatives that will make everyone happy. The first step that many companies have taken by publicly supporting Black Lives Matter through public statements and donations is an example of that: a commitment to taking a stance, even if it alienates certain populations of consumers, employees, and corporate partners. The company must decide that it is okay with losing business from certain groups (say, white supremacists or police departments), since taking money from those groups would run counter to its Corporate Social Justice strategy.

Regularly evaluate progress.

Corporate Social Justice is an ongoing commitment to achieve a vision of justice or equity in partnership with stakeholders. To build accountability into the process, goals and metrics should be set by working groups and translated by senior leaders into directives for the entire company. While companies have no legal obligation to meet these metrics, their relationships with stakeholders — especially their employees and external communities — are regulated by trust. Continued failure to meet goals damages this trust and sours the efficacy of working groups. Meeting goals maintains and grows a company’s reputation for good, the trust stakeholders have in it, and the ability of working groups to continue bringing benefit to all parties.

Corporate Social Justice is a new paradigm that imagines a healthier and mutually beneficial relationship between companies and the communities they interact with. It is driven by the growing desire of socially-aware consumers and employees for companies, especially socially-conscious and forward-thinking companies, to do better. Companies have an opportunity to rise to the occasion and leverage their influence to build a better world for all — including themselves.

Lily Zheng is a diversity, equity & inclusion consultant and executive coach who works with organizations to turn positive intentions into positive impact. She is the co-author of Gender Ambiguity in the Workplace: Transgender and Gender-Diverse Discrimination and The Ethical Sellout: Maintaining Your Integrity in the Age of Compromise.

Environmental, Social, and Governance (ESG) Criteria

Originally published February 25, 2020

What Are Environmental, Social, and Governance (ESG) Criteria?

Environmental, social and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, auditsinternal controls, and shareholder rights.

KEY TAKEAWAYS

  • Environmental, social, and governance (ESG) criteria are an increasingly popular way for investors to evaluate companies in which they might want to invest.
  • Many mutual funds, brokerage firms, and robo-advisors now offer products that employ ESG criteria.
  • ESG criteria can also help investors avoid companies that might pose a greater financial risk due to their environmental or other practices.

In recent years, as younger investors, in particular, have shown an interest in putting their money where their values are, brokerage firms and mutual fund companies have begun to offer exchange-traded funds (ETFs) and other financial products that follow ESG criteria. Robo-advisors such as Betterment and Wealthfront have also used them to appeal to these investors. According to the most recent report from US SIF Foundation, investors held $11.6 trillion in assets chosen according to ESG criteria at the beginning of 2018, up from $8.1 trillion just two years earlier.1

ESG investing is sometimes referred to as sustainable investing, responsible investing, impact investing, or socially responsible investing.

How Environmental, Social, and Governance (ESG) Criteria Work

To assess a company based on environmental, social, and governance (ESG) criteria, investors look at a broad range of behaviors.

Important: Environmental, social, and governance (ESG) criteria help investors find companies with values that match their own.

Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks. For example, are there issues related to its ownership of contaminated land, its disposal of hazardous waste, its management of toxic emissions, or its compliance with government environmental regulations?

Social criteria look at the company’s business relationships. Does it work with suppliers that hold the same values as it claims to hold? Does the company donate a percentage of its profits to the local community or encourage employees to perform volunteer work there? Do the company’s working conditions show high regard for its employees’ health and safety? Are other stakeholders’ interests taken into account?

With regard to governance, investors may want to know that a company uses accurate and transparent accounting methods and that stockholders are given an opportunity to vote on important issues. They may also want assurances that companies avoid conflicts of interest in their choice of board members, don’t use political contributions to obtain unduly favorable treatment and, of course, don’t engage in illegal practices.

No single company may pass every test in every category, of course, so investors need to decide what’s most important to them. On a practical level, investment firms that follow ESG criteria must also set priorities. For example, Boston-based Trillium Asset Management, with $2.8 billion under management as of March 2020, uses a selection of ESG factors to help identify companies positioned for strong long-term performance.2 Determined in part by analysts who identify issues facing different sectors and industries, Trillium’s ESG criteria include avoiding companies with known exposure to coal mining and those a certain percentage of their revenues from nuclear power or weapons. It also avoids investing in companies with major recent or ongoing controversies related to workplace discrimination, corporate governance, and animal welfare, among other issues.3

Pros and Cons of Environmental, Social, and Governance (ESG) Criteria

In years past, socially responsible investments had a reputation for requiring a tradeoff on the investor’s part. Because they limited the universe of companies that were eligible for investment, they also limited the investor’s potential profit. “Bad” companies sometimes performed very well, at least in terms of their stock price.

More recently, however, some investors have come to believe that environmental, social, and governance criteria have a practical purpose beyond any ethical concerns. By following ESG criteria they may be able to avoid companies whose practices could signal a risk factor—as evidenced by BP’s 2010 oil spill and Volkswagen’s emissions scandal, both of which rocked the companies’ stock prices and resulted in billions of dollars in associated losses.

As ESG-minded business practices gain more traction, investment firms are increasingly tracking their performance. Financial services companies such as JPMorgan Chase, Wells Fargo, and Goldman Sachs have published annual reports that extensively review their ESG approaches and the bottom-line results.4 5 6

4 Reasons To Take Another Look At Sustainable Investing In 2020

Originally published July 28, 2020

If you thought sustainable investing was just a do-gooder approach, it’s time to take another look.

With all that’s changed in 2020 so far, you may not have realized that sustainable investing is emerging as a way forward. Sustainable funds are seeing a surge in assets, and some of the world’s largest asset managers see growing opportunities in sustainable investing. 

If sustainable investing hasn’t been on your radar, here are four reasons why it’s worth paying attention to it now.

1. Major investment firms see sustainable investing as the future.

I’m a longtime proponent of sustainable investing, but you don’t have to take my word for it. These days, some of the largest investment managers see a bright future for sustainable investing.

“We are on the front end of a profound, long-term structural shift in global investor preferences toward sustainability that is not fully priced into the market today and may therefore drive outperformance during a long transition period,” BlackRock, the world’s largest asset manager, wrote in a May 2020 outlook.

“We do believe a substantial shift is under way: stakeholders are increasingly pricing in sustainability preferences, which should lead to a reconciliation of ‘sustainable’ and ‘financial’ materiality over the long-term,” said J.P. Morgan’s co-heads of ESG & Sustainability said.

Current market conditions also could contribute to a rise in sustainable investing. “A low-growth and low-bond-yield environment should drive the adoption of [sustainable investing] SI philosophies,” UBS wrote.

2. Fund companies are launching sustainable funds at a record pace.

Fund companies are also getting into the sustainable game. Top fund companies like Vanguard and Fidelity now have sustainable or ESG (environmental, social and governance) funds. There are many new funds coming to market every year.

Morningstar reported that 23 new sustainable funds were launched in the first half of 2020 with more to come. “We will likely see a record number of new sustainable fund launches in the U.S. this year. It would mark the sixth year in a row with more than 20 new launches,” Morningstar wrote.

iShares expected to introduce roughly 50 more ESG ETFs in the next two years, Salim Ramji, the global head of iShares, told Barron’s, noting iShares also wants to “make available all traditional market-cap weighted indexes in ESG form.”

Additionally, hundreds of funds have begun adding ESG issues to their investment process. “Nearly 500 funds added ESG criteria to their prospectuses” in 2019, Morningstar found.

3. Sustainable investing is being used to help manage risk in uncertain times.

In a year like 2020, risk management is essential and sustainable investing has long been used as a risk-management tool. Well-managed companies tend to be less likely to suffer a public relations problem, boycotts or labor problems that affect bottomline earnings. An environmental catastrophe can have a devastating impact on a company’s stock value.

“Companies that manage sustainable risks better tend to also manage [other] risks better and tend to be better-managed. From a factor lens, they have a greater quality bent; [they] are more profitable and resilient through periods of turmoil,” Salim Ramji, the global head of iShares, told Barron’s.

A majority of advisors (70%) in Nuveen’s 5th annual responsible investing survey “say superior risk management is the top reason why their high-net-worth clients invest in RI [responsible investments].”

4. Performance has become a top reason to invest sustainably.

Sustainable investing has shown that it can perform well. “Year-to-date, S&P 500 constituents in the top-quintile of social sustainability have outperformed the bottom-quintile social laggards,” CNBC noted.

In the volatile first half of 2020, “an impressive 72% of sustainable equity funds rank in the top halves of their Morningstar Categories and all 26 ESG (environmental, social, and governance) index funds have outperformed their conventional index-fund counterparts,” Morningstar reported.

In Nuveen’s survey, 53% of investors cited better performance as the top reason for investing in sustainable responsible investments.

For years, studies from Morgan Stanley, Nuveen TIAA, Barclays, Deutsche Bank, Oxford University and the United Nations have shown that sustainable investing performs as well, if not better, than conventional investing. (The U.S. Forum for Sustainable and Responsible Investment (USSIF) maintains a list of key studies here.) Now investors are seeing this firsthand.

It’s not too late to get started

Talk with your advisor about how he or she manages sustainable portfolios and how you might add sustainable investing to your portfolio. If you’re working as your own advisor, sustainable funds can be a great starting point. (Full disclosure: My firm manages a sustainable fund.) Funds give you the ability to own a portfolio of sustainably screened stocks for a small minimum investment.

Janet Brown

Racial Equity Fund Backed by NAACP Bridges Capital to Cause

Originally published: July 27,2020

The recent nationwide protests for racial justice are one powerful way to shine a light on systemic racism. But over on Wall Street, bridging capital to the cause is the aim of the market’s only racial equity product: the Impact Shares NAACP Minority Empowerment ETF, or NACP,which recently celebrated its second anniversary. Backed by the NAACP, the country’s leading civil rights organization, the fund is giving investors a lens for evaluating companies with strong racial and ethnic diversity policies.

NACP was launched in 2018 through a collaboration between the NAACP, the Rockefeller Foundation and Impact Shares. It began trading in July 2018, and it remains the only racial equity product in the marketplace. NACP tracks the Morningstar Minority Empowerment Index, designed to provide exposure to companies meeting NAACP criteria. It has also given the NAACP an effective new tool for its economic advocacy in the fight to eliminate racial discrimination.

“Too little attention has been paid to historically marginalized communities,” Ethan Powell, CEO of Impact Shares, told TriplePundit. “Gender funds have become popular in recent years. However, the way in which the private sector can engage communities of color differ from gender-oriented initiatives including digital divide programs and community engagement programs.”

The fund launched at a time when the private sector is facing increasing pressure from investors and other stakeholders to create and implement policies and practices that support racial diversity. Since then, NACP has proven that a socially focused financial instrument can perform well with an annualized two-year return of 11.9 percent. This places it in the top fourth percentile in its Morningstar Category over that period. 

“The goal is for investors to achieve an equity market rate of return while leveraging capital and the NAACP’s corporate engagement to make meaningful changes in the private sector,” Powell said. “Annually, we reevaluate the screens used to identify companies that are considered leaders in empowering communities of color and we rescore the universe. The goal is to have the solution evolve as data availability, goals of the NAACP and the issues impacting communities of color evolve.”

The NACP’s screens are divided into 10 categories. They include board diversity, discrimination policies and freedom of association, the scope of supplier social programs, and a minority focus in supplier monitoring. Screens also look for initiatives to address the digital divide, a diversity program, a community development program, and a minority-focused health and safety system. Each company is evaluated relative to their direct competitors. The goal is to identify 200 corporate leaders across all sectors.

The NACP’s current holdings list includes a range of Fortune 500 companies, such as tech giants Alphabet Inc, the holding company for Google, along with Apple and Intel. The list also includes leaders within the finance sector like Bank of America and JPMorgan Chase. In addition, the pharmaceutical, automotive, food and retail sectors have representation with companies such as Abbott, Ford, Kellogg, Merck, McDonald’s and Starbucks. “Inclusion represents a company’s leadership position in their sector,” Powell explains. “Position sizing has more to do with minimizing tracking error to the broader equity market.”

Since the Black Lives Matter movement has gathered steam across the nation, Powell said he has seen a resurgence in interest in the NACP. In fact, as 3p has reported, investing through an environmental, social and governance (ESG) lens has been on the upswing, appearing to be pandemic-proof. “Investors, the public sector and general population are reevaluating their role in racial empowerment and recognizing the efficacy of the NACP solution — not least, because, among some 600 ESG funds, it is the only one solely focused on issues impacting communities of color.”

For the NAACP, the fund has been an important part of its strategy for corporate engagement, Marvin Owen, senior director of the NAACP’s economic department, told 3p. “NACP has provided the NAACP with important advocacy, as social change is being driven by capital markets, and specifically investor sentiment,” he said. “Examples of impact include the numbers of firms that have sought out engagement with the NAACP with the expectation of identifying best practices in recruiting African-Americans for C-suite and board opportunities, as well as best practices in establishing impactful supplier diversity programs.”

Based in southwest Florida, Amy has written about sustainability and the Triple Bottom Line for over 20 years, specializing in sustainability reporting, policy papers and research reports for multinational clients in pharmaceuticals, consumer goods, ICT, tourism and other sectors. She also writes for Ethical Corporation and is a contributor to Creating a Culture of Integrity: Business Ethics for the 21st Century. Connect with Amy on LinkedIn.

Image credit: Taylor Grote/Unsplash