Climate Action Pursuit: Sustainability Investing, the Obstacles, and the Opportunities

Market experts gathered virtually at Climate Action Pursuit late last month to address the current investment landscape related to sustainability. Hosted by the Intentional Endowments Network (IEN) and Second Nature, Pursuit participants discussed focal areas within environmental, social, and governance (ESG) investing and the related challenges and opportunities.

One of the Pursuit’s central themes was highlighting the value of racial equity and diversity for company boards and the broader investment industry. Experts noted that racial justice could not be separated from other ESG factors, but must be central to any response to climate and other risks.

One panel discussion focused on best practices in developing policies on racial equity, including how a fund may even define “diversity.”

During that panel, Gerry Watson, executive vice president of finance and operations for the Rockefeller Brothers Fund, said the fund sought to assess the diversity of its managers and identify biases within its investment process. Ultimately, the fund’s board formally announced its commitment to diversity and equity last year and set a new goal to invest 25% of its endowment holdings with firms majority-owned by women and/or people of color.

Market participants also discussed how universities and colleges are aligning their campus operations and endowments’ carbon neutrality goals, ultimately leading to capital preservation for the broader institution. For example, the University of California System reduced its carbon footprint both on campus and within its investment portfolio by integrating sustainable practices and investing in green technology.

Jagdeep Bachher, CIO and vice president of investments at the UC System, and Michael V. Drake, president of the system, said they have collaborated across the university ecosystem, including with its researchers, to confront the risks and explore the opportunities presented by climate change.

Finally, a number of panels discussed defined contribution (DC) plans and the limited sustainable investment options available to them, as well as the Department of Labor (DOL)’s ruling last year related to ESG investments and whether the consideration of sustainable factors should be included within investment frameworks.

A number of market stakeholders stressed that using an ESG lens allows investors to make better-informed decisions, particularly as changes in regulation and policy unfold. Others noted that publicly traded companies have increasingly disclosed ESG risks in their filings with the US Securities and Exchange Commission (SEC), indicating the value of understanding and considering sustainable investment strategies.

Here are some excerpts from the days’ discussions:

“As we see in corporations and our own nonprofits, diversity of thought only makes us better and the same holds true with the investment process.”

— Gerry Watson, executive vice president of finance and operations, Rockefeller Brothers Fund, on the value of racial equity investing

“The journey to get to the diversity commitment by the board for investing last March didn’t happen rapidly. We’ve taken our time, done a lot of research, and educated the board in incremental steps. The cultivation, education, partnership, and transparency with the board [led to the commitment to] gender [and] racial equity lens investing.”

— Watson on the foundation’s approach and timeline to get the board to commit to invest 25% of its endowment holdings with firms majority-owned by women and/or people of color

“The shareholder resolution process can be cookie cutter once you know it, but knowing the shape of those cookies is essential. … Last year we co-filed a number of resolutions, which is a nice first step before authoring resolutions.”

— Benjamin Linthicum, chair of the ESG Advisory Committee, Warren Wilson College on how the college took new steps as an active owner in assessing climate social equity risks

“It was surprisingly difficult to find co-filing opportunities. There’s not a public database that can show current resolutions being filed and who is leading a filing.”

— Linthicum on the decentralized nature of shareholder resolutions

“I firmly believe that our students, faculty, and staff are an early warning detection system for our office. They let us know what’s going on in the world. They inform us on the things we should be paying attention to and, clearly, climate change is one of those issues.”

— Jagdeep Bachher, chief investment officer and vice president of investments, University of California System

“We don’t invest in isolation. Investing is about making choices; it’s a judgment. From a financial perspective, we are looking for the best choices we can make to grow our portfolio financially to meet the future needs of the university. Oil and gas is not financially attractive both from a return perspective, but also from a risk perspective because you’re making a long-term bet on a sector that could have a lot of headwinds to it, especially if you think about climate change as a global systemic issue.”

— Bachher on climate risk as an investment risk

“All of us contributed to the challenges of climate change and interacted with our world that led to these changes. We all have to join hands and work in ways that we can mitigate the impact of human life on the planet.”

— Michael V. Drake, president, University of California System

“McKinsey & Company [a consulting firm] has estimated that by the start of 2022 the defined contribution space in the US will be $11.5 trillion. As of today, less than 1% of the asset in US defined contribution space is invested in ESG.”

— Jim Roach senior vice president, retirement strategies, Natixis Investment Managers

“We gave an ESG option to not only help outperform the market but to challenge companies and demand positive change in the world, because it’s showing up in the stock price. Diverse boards, treating your people better, and policies around the environment are proven to help a company outperform.”

— Roach on the benefits of having ESG options in defined contribution plans

“If you believe we are going to meet the targets of the Paris Agreement, that means we are going to have a massive shift in business and industry and in companies. There will be winners and losers, so we need to start looking at who has not been investing early on and who needs to play catch-up.”

— Maureen Kline, vice president, public affairs and sustainability at Pirelli Tire North America, on the value of looking at DC plans with an ESG lens

“The weak point is the advisers, that’s what we need.”

— Kline as it relates to ESG advice concerning DC plans

“We have long taken a view that climate change is one of the largest structural shifts that our economy will face in the coming years. … We can be in for a dramatic hockey stick-like shift in the very near future of a complete market repricing of many names due to climate risk.”

— Sarah Bratton Hughes, head of sustainability – North America, Schroders

“Sixty percent of the world’s GDP [gross domestic product] is generated in geographies that have made net-zero commitments by 2050.”

— Bratton Hughes in reference to how climate-related policies could affect the capital markets going forward

“Pecuniary was defined as having a financial impact on risk and return. Anything that enhances a risk return profile is allowed. The use of ESG factors for pecuniary purposes is prudent—that is when they are used to evaluate investments to improve returns or reduce risk.”

— Mary Green, vice president, client portfolio manager, Federated Hermes, on the DOL’s 2020 rule

“In 1975, 85% of the S&P 500’s valuation was based on core financial metrics and when we look at it today, as of 2015, that’s completely flipped and 85% of the S&P 500 market value is based on non-financial metrics and disclosure items.”

— Jeff Gitterman, co-founding partner, Gitterman Wealth Management

“Most of the comments supporting this [DOL] rule were looking at ESG as a values conversation and ESG is really a value conversation. … ESG products are not exclusionary by nature; therefore it really doesn’t negatively affect the pecuniary rule.”

— Gitterman on the comments concerning the DOL rule published last year