On Thursday, ISS Media hosted a series of ESG talks. One of these conferences, entitled “ESG Investing: Political Agenda or Economic Factor? by Amy Resnick, discussed the intersection of ESG and politics.
The expert panel consisted of Michael Kreps, Co-Chair of Groom Law’s Pension Services and Trust Group; Jeff Mindlin, chief investment officer at Arizona State University Enterprise Partners; and Timothy Calkins, co-chief investment officer at Nottingham Advisors.
What is ESG?
The panel largely agreed that ESG is an investment risk strategy that includes ESG (environment, social and governance) factors. This investment lens provides additional data when considering risk and is meant to guide investment decisions rather than dictate them. This is one of many considerations an investor or trustee could use. Calkins explained that “this is additional data to make better investment decisions.”
However, different ESG analyzes may result in different ratings for the same investment.
Mindlin lamented that different reviews for the same product complicate investing and noted that different companies have different access to data on the products they review.
Calkins expanded and said that even with the same data, different analysts would analyze it differently by weighting the same risk factors differently. He doesn’t think ESG ratings will ever be standardized because it’s a value-weighted investment. Due to its more subjective nature, different analysts will produce different conclusions. He recommends that an investor “find the agency where you prefer the process and then use their ratings” rather than comparing multiple ratings from different analysts who use different criteria.
For example, Calkins suggested that ‘governance’ in ‘ESG’ might be the most important of all, as it relates directly to management and corruption, and ignoring it might be a breach of fiduciary duty in itself. . However, not all ESG rating services may share the view that ‘G’ should carry more weight than ‘E’ and ‘S’.
ESG vs divestment
ESG as a risk management philosophy contrasts with what Calkins calls “divestment” or the intentional withdrawal and avoidance of entire sectors of investment for reasons related to an investor’s political and ethical views. Although Calkins sometimes works with “mission-driven” clients who make exclusion and divestment requests, this is not what ESG is strictly speaking, since the ESG strategy would normally invest in fuels companies highly profitable fossil fuels, for example.
Mindlin explains that he tries “to avoid divestment as a strategy”. Considering ESG as additional information, however, can lead to a better understanding of how to capitalize on the climate transition and the growing renewable energy sector. ESG is a method of reducing risk, but not at the expense of reduced returns, which an investor favoring an exclusion strategy may be more tolerant of.
ESG and politics
Panelists acknowledged that political values often influence how ESG strategy is executed.
Mindlin said of ASU that “sustainability is key to who we are,” but the challenge is how “to align with that philosophy from an investment strategy perspective.” He noted that ASU is proud of its sustainability ethic and its carbon neutrality.
Calkins said some Rust Belt customers are skeptical of ESG. If you frame ESG as a political agenda, it can look like an attack on someone’s political identity. When asked if liberal-minded investors were more open to ESG than conservative investors, Calkins replied that it was “definitely an easier conversation” and that there was “no the same potential setback”.
He lamented that “politics tries to get ESG to choose sides,” but making ESG a political issue will only make it more difficult to acquire the data investors need to make decisions. He said you shouldn’t “sacrifice performance for social good, but it’s great if you can have both.”
Kreps noted, however, that political and moral opinions can cloud the judgment of any fiduciary, regardless of the weighting they place on ESG factors or their personal political views. He joked that “if you really hate shoes, you won’t want to invest in shoe stores, no matter how profitable they are.”
He urged trustees to focus on the interests of their clients and to consider the fact that pension benefits are a social good in their own right.