An expert panel featuring Michael Kreps, a co-chair of Groom Law’s Retirement Services and Fiduciary Group; Jeff Mindlin, the chief investment officer at Arizona State University Enterprise Partners; and Timothy Calkins, a co-chief investment officer at Nottingham Advisors, tried to bring some clarity to the discussion of environmental, social and governance investing principles, and the politics that has engulfed it.
The group spoke on a panel Thursday called Political Agenda or Economic Factor, co-hosted by CIO as part of the Exploring ESG Investing virtual conference.
Investment Strategy or Political Agenda
The panel largely agreed that ESG is an investment risk strategy that includes ESG factors (environmental, social, and governance). This investment lens provides additional data when considering risk and is supposed to guide investment decisions rather than dictate it. It is one of many considerations that an investor or fiduciary might use. Calkins explained that “it’s about additional data to make better investment decisions.”
However, different ESG analyses can result in different ratings for the same investment.
Mindlin lamented that different ratings for the same product makes investing more complicated and noted that different companies have different access to data about the products they rate.
Calkins expanded and said that even with same data, different analysts will analyze it differently by weighting the same risk factors differently. He doesn’t believe ESG ratings will ever be standardized because it is value-weighted investment. Due to its more subjective nature, different analysts will produce different findings. He recommends that an investor should “find the agency where you like the process the best and then use their ratings” rather than compare multiple ratings from different analysts who are using different criteria.
For example, Calkins suggested that the “governance” portion of ESG may be the most important of them all, since it speaks directly to management and corruption, and a failure to consider governance issues when making an investment might be a breach of fiduciary duty in itself. However, not all ESG rating services may share the view that governance should be weighted more than environmental or social factors.
ESG vs. Divestment
ESG as a philosophy of risk management is in contrast to what Calkins calls the divestment approach or intentionally selling out of or avoiding entire market sectors for reasons related to an investor’s political and ethical views. Though Calkins sometimes works with mission-driven clients who make exclusion and divestment requests, this is not what ESG is strictly speaking, since ESG informed investment strategies are not necessarily required to remove all exposures to fossil fuel companies.
Mindlin explains that he tries “to avoid divestment as a strategy.” Viewing ESG principles as providing additional information however can lead to greater insight on how to capitalize on climate transition and the growing renewables sector, for example. ESG investment principles can be used as a method of reducing risk, but not at the expense of reduced returns, which an investor favoring an exclusionary strategy may be more tolerant of, he said.
ESG and Politics
The panelists did acknowledge that political values often inform how ESG strategy is executed.
Mindlin said of ASU that “sustainability is key to our identity,” but the challenge is how to “align with that ethos from an investment strategy perspective.” He noted that ASU prides itself on its sustainability ethic and its carbon neutrality.
Calkins said that some of his clients based in rust belt states have been skeptical of ESG. If you frame ESG as a political agenda, it can seem like an attack on someone’s political identity. When asked if liberally minded investors are more open to ESG than conservative ones, Calkins responded that it is “certainly an easier conversation” and there isn’t the “same potential pushback.”
He lamented that “politics is trying to get ESG to pick a side” but making ESG a political issue will only make it harder to acquire the data investors need to make decisions. He said that investors don’t “want to trade off performance for social good, but it’s terrific if you can have both.”
Kreps noted however that political and moral views can cloud the judgement of any fiduciary, regardless of the weighting they give to ESG factors, or their personal political views. He quipped that “if you really hate shoes you won’t want to invest in shoe shops no matter how profitable they are.”
He urged fiduciaries to focus on their clients or participants’ interests and consider the fact that retirement benefits are a social good in and of themselves.