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Breaking News: $12 Trillion in Professionally Managed Sustainable Investment Assets — $1-in-$4 of Total U.S. Assets

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by Hank Boerner – Chair and Chief Strategist – G&A Institute

Call it “sustainable and responsible investing” or “SRI” or “ESG investing” or “impact investing” – whatever your preferred nomenclature, “sustainable investing” in the U.S.A. is making great strides as demonstrated in a new report from US SIF.

The benchmark report issued today – “The Report on US Sustainable, Responsible and Impact Investing Trends 2018” – by the U.S. Forum for Sustainable and Responsible Investment (US SIF) puts things in perspective for investors and corporate managers:

  • At the beginning of 2018, the institutional owners and asset management firms surveyed reported total sustainable investment at US$12 trillion AUM – that is 26% of the total assets under professional management in the U.S.A. — $1-in-$4 of all investable assets!
  • That’s an increase of 38% since the last US SIF report at the start of 2016. The AUM of sustainable investments then was $8.72 trillion. That was $1-in-$5.
  • And that was an increase of 33% since the survey of owners and managers at the start of 2014.
  • Sustainable investing jumped following the 2008 financial crisis, with growth of 240% from 2012 to 2014.

The US SIF bi-annual survey of investors began in 1995, when the total of sustainable investments professionally managed was pegged at $639 billion. There has been an 18-fold increase in sustainable investing assets since then – at a compound rate of 13.6% over the years since that pioneering research was done.

The researchers queried these institutions in 2018:

  • 496 institutional owners (fiduciaries such as public employee pension funds and labor funds – these represented the component of the survey results at $5.6 trillion in ESG assets**).
  • 365 asset/money managers working for institutional and retail owners;
    private equity firms, hedge fund managers, VC funds, REITS, property funds;
    alternative investment or uncategorized money manager assets);
  • 1,145 community investing institutions (such as CDFIs).

What is “sustainable investing”?  There are these approaches adopted by sustainable investors:

  • Negative/exclusionary screening (out) certain assets (tobacco, weapons, gaming);
  • Positive/selection of best-in-class considering ESG performance (peer groups, industry, sector, activities);
  • ESG integration, considering risks and opportunities, ESG assets and liabilities);
    Impact investing (having explicit intention to generate positive social and environmental impact along with financial return);
  • Sustainability-themed products.

The top ESG issues for institutional investors in 2018 included:

  • Conflict Risk (terror attacks, repressive regimes) – $2.97 trillion impact;
  • Tobacco related restrictions – $2.56 trillion
  • Climate Change / Carbon-related issues – $2.24 trillion
  • Board Room issues – $1.73 trillion
  • Executive Pay – $1.69 trillion

Asset managers identified these issues as among the most important of rising concerns:

  • Climate change and Carbon
  • Conflict risk

Prominent concerns for asset owners included:

  • Transparency and Corruption
  • Civilian firearms / weapons
  • a range of diversity and equal employment opportunity issues.

The Proxy Voting Arena

The shareowners and asset managers surveyed regularly engage with corporate executives to express their concerns and advocate for change in corporate strategies, practices and behaviors through presentation of resolutions for the entire shareholder base to vote on in the annual corporate elections.

From 2016 to 2018 proxy seasons these resolutions were focused on:

  • Proxy access for shareowners (business associations have been lobbying to restrict such access by qualified shareowners).
  • Corporate Political Activity (political contributions, lobbying direct expenses and expenses for indirect lobbying by business groups with allocated corporate contributions).
  • A range of environmental and climate change issues.
  • Labor issues / equal employment opportunity.
  • Executive compensation.
  • Human Rights.
  • Call for independent board chair.
  • Board Diversity.
  • Call for sustainability reporting by the company.

Public employee pension systems/funds led the campaigns with 71% of the resolutions filed in 2016, 2017 and 2018.

Labor funds accounted for 13% of filings.

Asset/money management firms accounted for 11.5%.

A total of 165 institutional owners and 54 asset managers filed or co-filed resolutions on ESG issues at the beginning of the 2018 proxy voting season.

The ESG Checklist

The institutions and asset managers queried could answer queries that addressed these ESG, community, product factors in describing their investment analysis, decision-making and portfolio construction activities. This is a good checklist for you when discussing ESG issues and topics with colleagues:

The “E” – Environmental:

  • Clean technology
  • Climate change / carbon (including GhG emissions)
  • Fossil fuel company divestment from portfolio, or exclusion
  • Green building / smart growth solutions
  • Pollution / toxics
  • Sustainable Natural Resources / Agriculture
  • Other E issues

The “S” – Social (or “societal”):

  • Conflict risk (repressive regimes, state sponsors of terrorism)
  • Equal employment opportunity (EEO) / diversity
  • Gender lens (women’s socio-economic progress)
  • Human rights
  • Labor issues
  • Prison-related issues (for-profit prison operators)
  • Other S issues

The “G” – Corporate Governance:

  • Board-related issues (independence, pay, diversity, response to shareowners)
  • Executive pay
  • Political contributions (lobbying, corporate political spending)
  • Transparency and anti-corruption policies

Product / Industry Criteria:

  • Alcohol
  • Animal testing and welfare
  • Faith-based criteria
  • Military / weapons
  • Gambling
  • Nuclear
  • Pornography
  • Product safety
  • Tobacco

Community Criteria:

  • Affordable housing
  • Community relations / philanthropy
  • Community services
  • Fair consumer lending
  • Microenterprise credit
  • Place-based investing
  • Small and medium business credit

The report was funded by the US SIF Foundation to advance the mission of US SIF.

The mission: rapidly shift investment practices towards sustainability, focusing on long-term investment and the generation of positive social and environmental impacts. Both the foundation and US SIF seek to ensure that E, S and G impacts are meaningfully assessed in all investment decisions to result in a more sustainable and equitable society.

The bold name asset owners and asset managers and related firms that are members of US SIF include Bank of America, AFL-CIO Office of Investment, MSCI, Morgan Stanley, TIAA-CREF, BlackRock, UBS Global Asset Management, Rockefeller & Co, Bloomberg, ISS, and Morningstar.

Prominent ESG / sustainable investment players include Walden Asset Management, Boston Common Asset Management, Clearbridge, Cornerstone Capital, Neuberger Berman, As You Sow, Trillium Asset Management, Calvert Investments (a unit of Eaton Vance), Domini Impact Investments, Just Money Advisors, and many others.

The complete list is here: https://www.ussif.org/institutions

Information about the 2018 report is here: https://www.ussif.org/blog_home.asp?display=118

About the US SIF Report:  The report project was coordinated by Meg Voorhees, Director of Research, and Joshua Humphreys, Croatan Institute.  Lisa Woll is CEO of US SIF.  The report was released at Bloomberg LP HQs in New York City; the host was Curtis Ravenel, Global Head of Sustainable Business & Finance at Bloomberg. q1

Governance & Accountability Institute is a long-time member. EVP Louis D. Coppola is the Chair of the US SIF Company Calls Committee (CCC) which serves as a resource to companies by providing a point of contact into the sustainable investment analyst community

** Institutional owners include public employee retirement funds, labor funds, insurance companies, educational institutions, foundations, healthcare organizations, faith-based institutions, not-for-profits, and family offices.

Barron’s Magazine Heralds the Arrival of Sustainable Investing to the Mainstream In Special Issue This Week – Sustainable Investing Version 2.0 Is Here!

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By Hank Boerner – Chair and Chief Strategist, G&A Institute

The influential Barron’s magazine is published on Mondays by Dow Jones & Company with distribution to almost a half-million retail and institutional investors (300,000+ for print version, the rest digital or combination).

Barron’s says it has been “delivering market-beating stock picks and investment advice to wealthy readers since 1921…”

In Fall 2017, the Barron’s editors picked up the pace on coverage of sustainable investing, adoption of ESG approaches and related topics and positioned its expanding coverage with the statement: “Sustainable Investing is a Powerful Force in Today’s Capital Markets.” T

he October 7, 2017 issue was devoted to sustainable investing and the cover story was “The Top Sustainable Funds” for investors.

Editor Beverly Goodman explained: “As a team of seven writers and I began work on Barron’s first special edition devoted entirely to sustainable investing, we realized something – we could not get people to stop talking about it! CEO’s wanted to tout the strides they are making in labor practices and protecting the environment. Fund managers wanted to talk about how adding ESG criteria to stock picking isn’t that much of a stretch from the multitude of decisions they routinely use.”

And so: Barron’s would now cover this burgeoning style of investing on a regular basis. “We are only in Version 1.0 of sustainable investing – 2.0 is where ESG is not a separate category but a natural part of active management.”

The October 2017 issue’s cover story was about sustainable mutual funds based on data provided by Morningstar using Sustainalytics data – 37% of the 203 funds achieved a “high” or “above average rating” and beat the S&P 500® Index returns. (Only 28% of all large-cap mutual funds managed to do that.)

The Editors Began Steady Coverage of Sustainable Investing

Each of the issues that followed there would be some kind of coverage of sustainable investing. Barron’s followed up with another significant issue in February 2018 naming the sharing the magazine’s first ranking of sustainable companies for investor-readers.

Calvert Research and Management helped with the choices (using data from Sustainalytics, ISS and Thomson Reuters ASSET4) for the “Top 100 Sustainable Companies” rankings.

The top five positions were held by Cisco (#1), salesforce.com, Best Buy, Intuit, and HP (at #5). Said Calvert CEO John Streur: “This list gives people insight into companies addressing future risks and into the quality of management.”

Now – The Mainstream Impact of This Week’s Issue

The editors continued to ramp up coverage in each issue since late-2017. And this week’s issue (dated June 25) positioned Sustainable Investing Version 2.0 for its audience. This week’s content included:

The cover story is about “The New Conscience of Wall Street” – focused on BlackRock CEO Larry Fink and his “Investing With Purpose Theme.” (Subtitle: Larry Fink’s Mission: How the BlackRock CEO is leading a sustainable revolution on Wall Street.”)

One of the articles is a debate between George Serafeim (Harvard B School professor and stalwart advocate for sustainable investment) and Adam Sessel (CEO of Gravity Capital Management): “Does Sustainable Investing Lead to Lower Returns?”

The traditional Barron’s approach to a panel of expert to explore an investing topic is this week’s “ESG Roundtable: Great For the World, Good For Investors” – featuring Erika Karp of Cornerstone Capital; Todd Ahisten, Parnassus Investments; Jon Hale, Morningstar; and Roelfien Kuijpers of DWS Group (the asset management spin off of Deutsche Bank).

There is a “Getting Started in Sustainable Investing” guide for readers, including a Glossary and suggestions for mutual funds “with a purpose”.

The feature about Larry Fink is entitled, “In Defense of Social Purpose” – and his argument for sustainable investing that editors say has “ignited a burning debate about his concept…and him.”

Fink’s words in his CEO letter, says writer Leslie Norton, “…amounted to a Rorschach test for a polarized nation. As the debate rages on over immigration, climate change, guns, income inequality, and other issues, even considering their economic impact on a company looks like a political statement. Yet Corporate America and Wall Street are increasingly doing that…”

To hear CEO Fink tell it, writes Norton, “…short termism is a scourge of corporate thinking and is encouraged by the financial media…” And…ignoring ESG can take a toll…

With this feature there is a neat “Road to Sustainability” chart showing the evolution of SRI from the 1960s to today with many societal issues described along the way to 2018.

Other features include “The Trump Bump: A Silver Lining for ESG Investors” – telling readers that in the month after the November 2016 election results were in, investors’ money flowed into ESG mutual funds and ETFs; the flow into the 275 mutual funds and ETF’s focused on ESG was 10-fold over the prior month!

And, the backlash continues; since November 2016, inflows to ESG-focused mutual funds and ETFs is averaging $700 million per month, which is three times the pace of the prior 12 months. This lifted ESG focused funds to $118 billion to date. 

Looking at fiduciaries, the editors say that $23 trillion is not invested in pension, separately managed accounts and other funds using ESG approaches.

Barron’s editors have selected “The 20 Most Influential People in Sustainable Investing” – the Who’s Who in ESG – you will want to see that list.We are cheered to see our US SIF colleagues Lisa Woll, Tim Smith, Amy Domini, Matt Pasky, and John Streuer in the Top 20!

There is also an interview in the special issue with Jeremy Grantham and how the respected value investor (he’s on the list) is a force in increasing awareness of climate change.

Finally, the Barron’s conference unit scheduled its first “Impact Investing Summit” in San Francisco (last week) and Crystal Kim reports on that event, with focus on the Millennials and their generation’s increasing impact on investing trends.

We at G&A Institute think this is a tipping point moment for investors, as the Barron’s editors position sustainable investing as now a mainstream

# # #

Footnotes:  We prepared a brief about Barron’s coverage in October 2018 on our “G&A Institute’s To the Point!” web platform, and a follow up brief in February 2018.  You can find the in-depth briefs at:

https://ga-institute.com/to-the-point/the-authoritative-barrons-magazine-now-sets-the-pace-sustainable-investing-is-a-powerful-force-in-todays-capital-markets-so-say-the-editors/

https://ga-institute.com/to-the-point/proof-of-concept-for-sustainable-investing-barrons-weighs-in-with-inaugural-list-of-top-100-sustainable-companies/

There is information about Morningstar’s focus on sustainable investing mutual funds and ETFs at:  https://www.morningstar.com/articles/745467/morningstar-sustainability-rating.htm

Be sure to check out the special issue of Barron’s at:https://www.barrons.com/this_week

 

 

Proof of Concept for Sustainable Investing: The Influential Barron’s Names the Inaugural “The Top 100 Sustainable Companies — Big Corporations With The Best ESG Policies Have Been Beating the Stock Market.”

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By Hank Boerner – Chairman and Chief Strategist, G&A Institute

Barron’s 100 Most Sustainable Companies

Barron’s is one of the most influential of investor-focused publications (in print and digital format) and a few months ago (in October), the editors published the first of an ongoing series of articles that will focus on ESG performance and sustainable investing, initially making these points:

  • Barron’s plans to cover this burgeoning style of investing on a more regular basis. A lot of possible content that was developed was left on the cutting room floor, the editors note.
  • Says Barron’s: “We are only in Version 1.0 of sustainable investing. 2.0 is where ESG is not a separate category but a natural part of active management.”
  • And:  “Given the corporate scandals of recent days (Wells Fargo, Equifax, Chipotle, Volkswagen, Valeant Pharmaceuticals), it is clear that focus on companies with good ESG policies is the pathway to greater returns for investors!”

The current issue of Barron’s (Feb 5, 2018) has a feature article and comprehensive charting with this cover description:

“The Top 100 Sustainable Companies – Big Corporations With the Best ESG Policies Have Been Beating the Market.”

Think of this as proof of concept: The S&P 500® Index Companies returned 22% for the year 2017 and the Barron’s Top 100 Sustainable Companies average return was 29%.

The 100 U.S. companies were ranked in five categories considering 300 performance indicators.  Barron’s asked Calvert Research and Management, a unit of Eaton Vance, to develop the list of the Top 100 from the universe of 1,000 largest publicly-held companies by market value, all headquartered in the United States.

Calvert looked at the 300 performance indicators that were provided by three key data and analytic providers that serve a broad base of institutional investors:

  • Sustainalytics,
  • Institutional Shareholder Services (ISS)
  • and Thomson Reuters ASSET4 unit.

Five umbrella categories were considered:

  • Shareholders
  • Employees
  • Customers
  • Planet
  • Community

There were items considered in the “shareholders” category, like accounting policies and board structure; employee workplace diversity and labor relations; customer, business ethics and product safety; planet; community; GHG emissions; human rights and supply chain.

We can say here that “good governance” (the “G” in ESG) is now much more broadly defined by shareholders and includes the “S” and “E” performance indicators (and management thereof), not the formerly-narrow definitions of governance. Senior managers and board, take notice.

Every company was ranked from 1-to-100, including even those firms manufacturing weapons (these firms are usually excluded from other indexes and best-of lists, and a number of third party recognitions).

Materiality is key: the analysts adjusted the weighting of each category for how material it was for each industry. (Example: “planet” is more material for chip makers using water in manufacturing, vs. water for banking institutions – each company is weighted this way.)

The Top 100 list has each company’s weighted score and other information and is organized by sector and categories; the complete list and information about the methodology is found at Barron’s.com.

The Top 5 Companies overall were:

  • Cisco Systems (CSCO)
  • salesforce.com (CRM)
  • Best Buy (BBY)
  • Intuit (INTU)
  • HP (HPQ)

The 100 roster is organized in categories:

  • The Most Sustainable Consumer Discretionary Companies (Best Buy is at #1)
  • The Most Sustainable Financials (Northern Trust is #1) – Barron’s notes that there are few banks in the Top 100. Exceptions: PNC Financial Services Group and State Street.
  • The Most Sustainable Industrials (Oshkosh is ranked #1)
  • The Most Sustainable Tech Outfits (Cisco is at the top)

Familiar companies names in the roster include Adobe Systems, Colgate-Palmolive, PepsiCo, Deer, UPS, Target, Kellogg, Apple, and Henry Schein.

Singled out for their perspectives to be shared in the Barron’s feature commenting on the ESG trends: John Wilson, Cornerstone Capital; John Streur, Calvert; Calvet Analyst Chris Madden; Paul Smith, CEO of CFA Institute; Jon Hale, Head of Sustainability Research at Morningstar.

Calvert CEO John Streur noted: “This list gives people insight into companies addressing future risks and into the quality of management.”

Top-ranked Cisco is an example of quality of management and management of risk: The company reduced Scope 1 and 2 GHG emissions by 41% since 2007 and gets 80% of its electricity from renewable sources.

This is a feature article by Leslie P. Norton, along with a chart of the Top 100 Companies.

She writes: “…Barron’s offers our first ranking of the most sustainable companies in the U.S. We have always aimed to provide information about what keenly interests investors – and what affects investment risk and performance…” And…”what began as an expression of values (“SRI”) is finding wider currency as good corporate practices…”

The complete list of the top companies is at Barron’s com. (The issue is dated February 5th, 2018)  You will need a password (for subscribers) to access the text and accompanying chart.

For in-depth information: We prepared a comprehensive management brief in October 2017 on Barron’s sustainable coverage for our “G&A Institute’s To the Point!” web platform: https://ga-institute.com/to-the-point/proof-of-concept-for-sustainable-investing-barrons-weighs-in-with-inaugural-list-of-top-100-sustainable-companies/

Musing About the Alphabet Soup of ESG – SRI – CSR … et al!

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Blog post

March 16, 2017

by Hank Boerner and Louis Coppola – G&A Institute

Often in our conversations with managers at companies that are new to corporate sustainability and especially new to publishing corporate sustainability reports, we often move into exploration of the various terms and titles applied to corporate sustainability.

SRI.  ESG.  Sustainability.  Corporate Citizenship.  Corporate Responsibility. 

Or, Corporate Social Responsibility.  Shorthand:  CSR, CR.  What else!

And on the investment side, in our discussions with financial analysts, or asset managers, we’re discussing socially responsible investing, sustainable & responsible investing (both SRI) and more recently, sustainable & responsible & impact investing — the “S&R&I”).

This alphabet soup of titles, characterizations, approach classifications and so on is usually confusing to corporate managers not well versed in matters related to corporate sustainability.

And, to investors new to sustainable investing, sustainable & responsible investing, impact investing, analyzing corporate ESG analytics…those managers also have questions on what all these terms really mean (And ask: is there a substantive difference between terms?).

Each year as the data partners for the Global Reporting Initiative (GRI) in the U.S.A., United Kingdom and Republic of Ireland, we analyze and database more than 1,500 reports each year (most are published by corporations; there are also institutional and public sector reports). Here we see firsthand every day this alphabet soup of terms playing out:

  • Corporate Responsibility / Corporate Social Responsibility (CR/CSR)
  • Corporate Citizenship (an older but still popular titling, especially among large-caps)
  • Corporate Sustainability (more often leaning toward environmental management, growing out of the traditional EHS functions at operating companies)
  • Environmental Update / Progress Report
  • Corporate Ethics

The Investment Community Point-of-View

And for investors:  There is also Faith-based investing and ethical investing, and a few other terms.  (“Green Bonds” are coming on strong!)

Many institutional investor  — asset owners and their managers, and their analysts — are seeming to favor “ESG” because it better captures the entirety of the three main issues buckets (Corporate Environmental, Social and Corporate Governance strategies, performance and issues) that make up what most investors consider to be a pretty good definition of corporate sustainability.

As corporate sustainability consultants and advisors, working closely with managements to help them effectively engage with investors on ESG issues, and so we see the term ESG becoming more and more of a preferred term for these discussions.

Consider, too, the familiar Bloomberg terminal on the desks of many investors is helping to bring volumes of corporate ESG data through the Bloomberg ESG Dashboard.

The Views of the Professional Analyst

The CFA Institute, the global education, training, testing and certification, and professional standards organization for financial analysts (“Charterholders” use the CFA professional designation) addressed this alphabet soup in its recent guide for investment professionals — “Environmental, Social and Governance Issues in Investing” (published in 2016).

The guide authors explain:  “The practice of environmental, social and governance issues in investing has evolved significantly from its origins in the exclusionary screening of listed equities on the basis of moral values. A variety of methods are now being used by both value-motivated and values-motivated investors considering ESG issues across asset classes.”

(The guide was authored by Usman Hayet, CFA; Matt Orsagh, CFA, CIPM; with contributions by Kurt N. Schacht, JD, CFA; and Rebecca A. Fender, CFA.)  Consider their views:

E:  Looking at the environmental components (the “E”), CFA Institute, investor concerns include climate change and fossil fuel assets [becoming stranded], water stress…that means that corporate ESG KPIs should be carefully examined.

S:  Looking at the social (“S”), the authors point out that labor relations can have a direct and significant impact on financial performance.

G:  Looking at corporate governance (“G”), the authors note that these were previously seen as a concern for value-motivated investment, and the E and S issues were relevant mainly for values-motivated investors.  Not anymore  — ESG issues are relevant for all long-term investors.

The CFA authors explain that there are various labels for the same issues and ESG common theme underlying the various labels is an emphasis is on ESG issues.

We Are Leaning in the Direction of….

In our work we prefer to use “Sustainability” or “ESG”, which we think best encapsulates the entirety of what we consider to be the issues in focus for institutional and individual investors.  And therefore we advise that the company’s ESG key performance indicators should be a priority concern for the board, C-suite and various level of management and corporate function areas, because of the importance of access to capital, cost of capital, and so on.

The corporate ESG performance and reporting on same might be positioned under an oversight umbrella in the corporate structure. We see these ESG activities being in the province of legal, public affairs, human resources, supply chain management, operations, EHS, investor relations, finance, corporate communications, and so on.

At times, however, we do find that some people in the corporate community hear the term “Sustainability” they automatically think only of environmental-related issues — (“E”) which of course, are just one part of what we consider sustainability to be.

And yes, all of this is still not clear cut, is it?  Varying terms and titles will probably be used for a while.

As explained, we prefer ESG when we are working with our sustainability consulting clients because this term includes the three main issue areas or buckets of issues — and says what it means. Using “ESG” tends to  make sure that it’s clear that our work includes three “bucket” areas – Environmental, Social and Corporate Governance.  (Not just Environmental!)

And the clearer we can be with our terminology, and more specific, the better off we will all be.

But Investors Are Not Asking….

Managers at many companies that we communicate with, especially in our investor relations sustainability consulting, will say, “Why don’t our analysts ask questions about sustainability on our quarterly calls?”

Erika Karp, formerly of UBS and founder of Cornerstone Capital in New York City often responds to this key question during her public presentations (Cornerstone is an ESG-focused investment firm.)

Erika:  “You’re wrong, they are asking!  If you peel back the layers of the “E” (climate, biodiversity, water, energy, waste etc); the “S” (employee retention, training, community engagement, human rights, labor contracts, benefits); and the “G” (executive compensation, proxy resolutions, board makeup, board independence, board skills, board diversity, critical issues management, and oversight of the company’s key functions) — then you can listen to the quarterly calls and you will see that you are in fact getting questions on sustainability (or ESG issues).”

We agree with Erika!  And this line of discussion points even more to the problems with our terminology in this space.

Of course, even though the analyst may not be asking: “Hey, so what about your sustainability?” the analysts and asset managers on your  calls may be or are asking about the individual elements that make up sustainability, and some of these ESG KPI’s are more important than others.  It’s important to recognize that these are Sustainability issues that they are asking you about!

As We Move Ahead…

All of this terminology discussion is our industry’s challenge, and somewhat of an educational problem in that we need to better inform others about the intricacies and the complexities that make up “Corporate Sustainability” so that there is deeper understanding of the full breadth and depth and importance of the ESG performance areas — and of the full impacts on a company’s reputation, valuation and more.

Of course, there are variations in which of these ESG issues is important (or material!), depending on industry and sector, size and geography.

We think that as we move along, “ESG” will continue to be a more preferred term for many analysts looking holistically at a public issuer. ESG will likely to continue to catch on because this approach will more clearly reflect the “completeness and complexity” of the various issue buckets that make up the corporate sustainability journey – ESG represents what it means and says what it is!

The Early Evolvement of SRI – and the Lasting Legacy

Looking back, the emergence of the Socially Responsible Investing approach (SRI #1), starting with screening out the shares of companies from portfolios (tobacco, gaming, etc.) may have a lasting legacy for some in the investment community.  More and more investors are now using the term, Sustainable & Responsible Investing (SRI #2), and even Sustainable & Responsible & Impact Investing (SRI #3 also!). These are gaining currency in the mainstream analyst and asset management communities.

And so, this is not necessarily a new discussion about titles and terminologies – it has been going on for quite some time.  In April 2009, when one of us (Hank) was editing the National Investor Relations Institute monthly magazine — IR Update — he offered up a commentary: ” Stay Tuned: More Initials for the IRO — These Could Spell Long-Term Success… Or Market Failure for Corporate Issuers ”

It was about ESG – SRI – CSR – even TARP (remember that?) — in that almost a decade-ago column, we noted that a 2008 survey of asset owners and managers, two terms were emerging as the preferred references:  ESG and Sustainability best summed up their approach.  We think this still rings true today.

It’s still an interesting read:  http://www.hankboerner.com/library/NIRI%20IR%20Update/2009/Boerner2009Apr.pdf

What are you thinking about this?  Do weigh in — please share your thoughts in the comments area below — weigh in on the dialogue!

What are your preferred terms in the daily conversation about…….

 

 

Dodd-Frank Act at 5 Years – Not Quite Done in Rulemaking

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by Hank Boerner – Chairman – G&A Institute

So Here We Are Five Years on With The Dodd-Frank Act

Summer’s wound down/autumn is here  — while you were sunning at the beach or roaming Europe, there was an important anniversary here in the U.S.A. That was the fifth anniversary of “The Dodd-Frank Act,” the comprehensive package of legislation cobbled together by both houses of the U.S. Congress and signed into law by President Barack Obama on July 21, 2010.

The official name of the Federal law is “The Dodd-Frank Reform and Consumer Protection Act,” Public Law 111-203, H.R. 4173. There are 15 “titles” (important sections) in the legislative package addressing a wide range of issues of concern to investors, consumers, regulators, and other stakeholders.

Remember looking at your banking, investment and other financial services statements …in horror…back in the dark days of 2008-2009?

The banking and securities market crisis of 2008 resulted in an estimated losses of about US$7 trillion of shareholder-owned assets, as well as an estimated loss of $3 trillion ore more of housing equity, creating an historic loss of wealth of more than $10 trillion, according to some market observers.

That may be an under-estimation if we consider the wide range of very negative ripple effects worldwide that resulted from [primarily] reckless behavior in some big investment houses and bank holding companies…rating agencies…and then there were regulators dozing off…huge failures in governance by the biggest names in the business…and therefore the ones that investors would presumably place their trust in.

In response to the 2008 market, housing and wealth crash, two senior lawmakers — U.S. Senator Christopher Dodd of Connecticut and Congressman Barney Frank of Massachusetts — went to work to enact sweeping legislation that would “reform” the securities markets, address vexing issues in investment banking practices, and “right wrongs” in commercial banking, and consumer finance services. (Five years on, both are retired from public office. Congressman Frank is still vocal on the issues surrounding Dodd-Frank.)

After more than a year of hearings – and intense lobbying on both sides of the issues — the The Dodd-Frank Act became the Law of the Land — and the next steps for the Federal government agencies that are charged with oversight of the legislation was development of rules to be followed.

So — in July, we observed the fifth anniversary of Dodd-Frank passage. I didn’t hear of many parties to celebrate the occasion. Five years on, many rules-of-the-road have been issued — but a significant amount of rule-making remains unfinished.

Yes, there has been a lot of work done: there are 22,000-plus pages of rules published (after public process), putting about two-thirds of the statutes to work. But as we write this, about one-third of Dodd-Frank statutes are not yet regulatory releases — for Wall Street, banks, regulators and the business sector to follow.

Is The Wind At Our Back – or Front?

What should we be thinking regarding Dodd-Frank half-a-decade on? Are there positive results as rules get cranked out — what are the negatives? What’s missing?

We consulted with Lisa Woll, the CEO of the influential Forum for Sustainable & Responsible Investment (US SIF), the asset management trade association whose members are engaged in sustainable, responsible and impact investing, and advance investment practices that consider environmental, social and governance criteria.

She shared her thoughts on D-F, and progress made/not made to date: “Congress approved the Act following one of the worst financial crises in our country. The 2008 crash impacted the lives of millions of Americans who lost their homes, jobs and retirement savings. The Dodd-Frank Act helped to bring about much-needed accountability and transparency to the financial markets.”

Examples? Lisa Woll thinks one of the most important achievement was creation of the Consumer Financial Protection Bureau (CFPB), “which is up and running and now one of the most important agencies providing relief to consumers facing abuse from creditors.” She points out that CFPB has handled more than 677,000 complaints since it opened its doors four years ago.

Put this in the “be careful what you wish for” category: You may recall that the buzz in Washington power circles was that Harvard Law School professor Elizabeth Warren was slated to head the new bureau – -which was a concept championed by her. Fierce financial service industry opposition and Republican stonewalling prevented that appointment. Elected Senator from Massachusetts on November 6, 2012, she is now mentioned frequently in the context of the 2016 presidential race.

Continuing the discussion on Dodd-Frank, US SIF’s Lisa Woll points to a recently released regulatory rule that addresses CEO-to-work pay-ration disclosure. This is a “Section” of the voluminous Dodd-Frank package requiring publicly-traded companies (beginning in 2017) to disclose the median of annual total compensation of all employees except the CEO, the total of the CEO compensation, and the ratio of the two amounts.

Says Lisa Woll: “Disclosure of the CEO-to-worker pay ratio is a key measure to ensure sound corporate governance.”

She says in general US SIF members are pleased that the Securities & Exchange Commission (SEC) rule applies to U.S. and non-U.S. employees, as well as full-time, part-time, seasonal and temporary workers employed by the company or any consolidated subsidiaries, with some exceptions: “The rule will provide important information about companies’ compensation strategies and whether CEO pay is out of balance in comparison to what the company pays its workers. Those will be measurable results.”

What Doesn’t Work/ or May be Missing in D-F?

CEO Woll says investors were disappointed that the pay ratio provision (CEO-to-worker) did not include smaller companies and that up to five percent of non-U.S. employees may be excluded from reporting. Her view: “High pay disparities within companies can damage employee morale and productivity and threaten a company’s long-term performance. In a global economy, with increased outsourcing, comprehensive information about a company’s pay and employment practices is material to investors.”

The Conflict Minerals Rule

Another positive example offered by Lisa Woll: The Dodd-Frank Act requirement that companies report on origin of certain minerals that are used, and that originate in conflict zones such as the Democratic Republic of the Congo. (Section 1502 of Dodd-Frank instructed SEC to issue rules to companies to disclose company use of conflict minerals if those minerals are “necessary to the functionality or production of a product manufactured by the company”. This includes tantalum, tin, gold or tungsten.)

Lisa Woll observes: The submission of these reports exposes operational risks that are material to investors. Last year 1,315 companies submitted disclosures, according to Responsible Sourcing Network. We continue to urge more corporate transparency in conflict minerals reporting.”

Dodd-Frank Rule Making Scorecard

The US SIF CEO notes that of 390 rules required to be enacted, 60 rules have yet to be finalized and another 83 have not even been proposed, according to law firm Davis Polk & Wardell LP.

Woll: “One example is the Cardin-Lugar Amendment, requiring any U.S. or foreign company trading on a U.S. stock exchange to publicly disclose resource extraction payment made to governments on a project basis. We are still waiting for SEC to complete the rule.”

CEO Woll sees the ongoing effort by some members of the U.S. Congress to undermine or weaken The Dodd-Frank Act as “very concerning,” and putting investors at risk. “In my own work with our asset management members, I am seeing positive effects in that they have greater access to information in order to make an investment decision in companies. The examples are rules around transparency and disclosure. At the same time, asset managers lack access to information in a number of areas where rules are still pending, such as payment disclosures to companies by extractive companies.”

Of rules not yet adopted (or addressed), Lisa Woll urges continued work by SEC: “We hope to see more of the rules finalized so that we can move toward more transparent financial markets and a more sustainable economy.”

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Notes: The Forum for Sustainable & Responsible Investment (US SIF) is an asset management trade association based in Washington, D.C. Member institutions include Bank of America, UBS Global Asset Management, Bloomberg, Calvert Investments, Legg Mason, Domini Social Investments, Cornerstone Capital, Walden Asset Management, and many other familiar names.

Members are engaged in sustainable, responsible and impact investing, and advance investment practices that consider environmental, social and governance criteria. Lisa Woll has been CEO since 2006.

Disclosure: G&A Institute is a member organization of US SIF and team members participate in SIRAN, the organization’s “Sustainable & Responsible Research Analyst Network.”) Other SIF entities include The International Working Group; Indigenous Peoples Working Group; and Community Investing Working Group. Information is at: http://www.ussif.org/