ESG, what does it mean? Do companies really espouse anything beyond a “money culture?” Isn’t it always the almighty dollar that is king? Don’t purchasing folks continually drive the price down? Isn’t purchasing rewarded by lowering costs from year to year? Does it mean anything? So many questions. And what is fascinating is that I run into situations weekly that force companies to consider their ultimate goals. Is it money or ESG?
This was all articulated over the last several weeks in Barron’s, a weekly financial tabloid. There were articles and editorials on the amount of money going into “sustainable mutual and exchange-traded funds.” Many investors believe that investments that follow ESG (Environmental, Social, and Governance) principles have a greater return than those that don’t. Obviously, this is arguable. However, for Barron’s to devote an issue on the debate, the pros and cons, says to me that there are benefits to following ESG focus points. In fact, millennials are without question demonstrating strong interest in ESG investments. They are pressuring companies and investment firms to act and fuel the growth of investments, such as the Green Bond Market, according to Pimco, one of the world’s premier fixed income investment companies. Morningstar, the well-known research firm based here in Chicago, has a Sustainable Investment Research department run by John Hale. Their research shows that “Inflows to the 275 ESG mutual funds and exchange-traded funds have averaged $708 million a month since Trump’s election – three times the pace of the prior 12 months according to Morningstar. That has helped lift ESG assets in mutual funds and exchanged traded funds from $95 billion at the end of 2016 to $118 billion.”
Is this a response to Trump and his decision to pull the US out of the Paris Climate Accord? Maybe. I happen to believe it’s more than just a knee jerk reaction to political views. I believe investors are sincerely committed to supporting investments that are trying to do the “right thing.”
BlackRock, one of the world’s largest and most successful investment firms, is run by Larry Fink. Fink is a bit unusual: he puts his investment dollars into companies that support ESG, not just to make a profit over the next quarter. Here is a short sketch of Mr. Funk, as written by Leslie Norton in Barron’s:
Most investors – and virtually all of the industry’s biggest names – emphasize the importance of long-term thinking, without doing much about it. Larry Fink, CEO of BlackRock, is different. For years, he has been urging Wall Street to look toward the next decade instead of the next quarter. He has regularly and publicly attributed many of the economy’s ills – including poor adaption to technological change and the pending retirement crisis – to an obsession with short-term returns. And he has been willing, in most cases, to put his company’s investment dollars – and his own reputation – where his mouth is.
Example A: The Letter
Fink’s annual letter to the companies in which BlackRock (ticker BLK) invests is widely read, but his January 2018 missive took on a life of its own. In tone and substance, it was similar to his previous annual letters. But he fired this salvo into a very different world. “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society,” Fink wrote. “Companies must benefit all of their stake holders, including shareholders, employees, customers, and the communities in which they operate.
So, what exactly is ESG? I’ve already told you it’s the acronym for Environmental, Social, and Governance. The principles are based on the notion that ESG issues, such as climate change and human rights, can affect the performance of a company, of an investment portfolio. Therefore, ESG should be considered alongside more traditional factors if investors are to properly fulfil their fiduciary responsibility.
It was really this concept of responsible investing that created the United Nations supported PRI (Principles for Responsible Investment). PRI is an international network of investors focused on investing based on six principles. The goal is to “understand the implications of sustainability for investors.” In theory, members contribute to the development of a more sustainable global financial system. I won’t list “the principles.” Suffice it to say they are all intertwined ESG initiatives.
As usual, Europe is leading the chase to sustainable investing, and Barron’s shared with its readers a glossary of terms that European investment managers use for sustainable and responsible investment. Here are a few of them:
Best-in-class - Using ESG data to pick companies in each sector or category, even if it is inherently “non-ESG.” For instance, choosing the energy company or weapons maker that has the best environmental, social and governance aspects, rather than excluding them.
Exclusionary – Screening out industries, such as oil and tobacco, and/or avoiding companies with the poorest scores in any given sector.
Standards-based – Stock picking using international standards in regards to environmental protection, human rights, reducing poverty, or other societal aims.
Activist – Money managers that work directly with companies to improve via engagement and voting in annual meetings.
Integrated – Incorporates ESG analysis throughout traditional financial or factor analysis to highlight risks and opportunities, rather than using it simply as a screen at the beginning of a process or a tie-breaker at the end.
Impact – Investments are explicitly tied to generating a measurable social, environmental or financial goal. Usually associated with bonds issued for ESG-oriented projects.
In closing, I’d like to ask if any of you are familiar with Paul Hawken? He’s a bit like Lester Brown, my mentor, but perhaps more practical and not as idealistic. He is an author and activist. He has founded ecologically-conscious businesses and has consulted with heads of state and CEO’s on economic development, industrial ecology, and environmental policy. He has written a number of books and co-authored Natural Capitalism: Creating the next Industrial Revolution with my friend Amory Lovins, the founder of Rocky Mountain Institute. Read what Paul Hawken has to say about the effect of conspicuous consumption:
“Business did not anticipate a time when resources would diminish or run out. It was inconceivable that the vast plains and forests of the New World could be exhausted, or that the abundant new fuels of coal could produce enough waste to foul the air and the seas, or that the use of oil could eventually lead to global climate change. So the system of rewarding the lowest price, impelling companies to exploit the cheapest sources of labor and materials, could not anticipate a time when the lowest price would no longer be the lowest cost, when seeking the cheapest means to get a product to market would end up costing society the most in terms of pollution, loss of habitat, degradation of biological diversity, human sickness, and cultural destruction…”
This echoes Lester Brown, doesn’t it? Although Lester wants consumption to be considered by “total actual cost,” Paul Hawken wants to build an economy that supports the principles of Environmental, Social, and Governance Management.
Indeed, reflect on our industry and our focus: Is it all about money, bottom line profit? Or do we also, like Lanny Fink’s pronouncements, have a deeper moral responsibility to fix practices that offend our employees and community? Shouldn’t we be responsible for what we create? Shouldn’t we make sure that what we build leaves no residual effect on our world, e.g., plastics, non-recyclables such as coated, treated and laminated paper and films? I think you get my message.
Thank you Sally!
Another Letter from the Earth.
Calvin Frost is chairman of Channeled Resources Group, headquartered in Chicago, the parent company of Maratech International and GMC Coating. His email address is