The Rise (and Rise) of ESG

“First They Ignore You, Then They Ridicule You. Then They Attack You. Then You Win.”  -Unattributed

It’s been a turbulent week in the world of Environmental, Social and Governance (ESG) investing and disclosure on the Hill. 

On July 10th, the House Financial Services Committee held the first-ever Congressional hearing on new ESG disclosures. According to the Financial Times, Republican members of the committee voiced opposition to the legislation, which would require companies to report more comprehensive ESG information. Representative Bill Huizenga was particularly bellicose:

 “Mandatory ESG disclosures only name and shame companies as well as waste precious company resources. Mandating these disclosures is only doing more harm than good.”

A few weeks earlier, Hester M. Pierce, a Commissioner on the Securities and Exchange commission, delivered a scathing speech attacking ESG investing to the American Enterprise Institute:

“ ...we see labeling based on incomplete information, public shaming, and shunning wrapped in moral rhetoric...we pin scarlet letters on allegedly offending corporations without bothering much about facts and circumstances...after all, naming and shaming corporate villains is fun, trendy, and profitable.”

The remarks were met with fierce condemnation from an ESG investing community that probably thought, as I did, that such views had been left back in the 1990s. Morningstar’s Jon Hale provided a comprehensive rebuke in The ESG Advisor as did Lisa Woll, CEO of US SIF in Marketwatch.

History is not on the side of Commissioner Pierce and Representative Huizenga. ESG investing is one of the fastest growing and most vibrant areas of the global asset management industry. Already this year ESG funds have been on a tear, garnering an additional $8.9 billion in capital, on track to more than double 2018’s entire investment of $5 billion. According to the US SIF Foundation’s 2018 Report on Sustainable, Responsible and Impact Investing Trends, $12 trillion was invested globally in socially responsible funds (up 38% from 2017), which now represents 25% of the $46 trillion of assets in the U.S. under professional management. 

As the space grows, investors and companies are understandably demanding that greater consistency be brought to the whole field of ESG data quality, metrics, and standards. Regular followers of JUST Capital will know that we are not averse to healthy skepticism when it comes to ESG data and disclosure. Robust debate is important in the space because it forces advocates to strengthen their analysis and create better data that’s rooted in legitimate investment theory and empirical evidence. It’s one of the reasons we’ve invested so much in data and transparency in our own processes. 

This week, for example, our data review period has officially opened for the companies we track. Over the next month and a half, we offer full transparency into our process, and companies are able to review, critique, and push back on any of the information we have collected on them over the last year. We’re expecting literally tens of thousands of comments.

With ESG factors becoming increasingly relevant to corporate financial performance it makes sense that investors would push for more standardized disclosure, and that market regulators would step in and provide guidance. We heard this directly ourselves at our Bloomberg Investor Breakfast, for example, where several corporate leaders and CIOs from some of the largest pension funds in the U.S. discussed how important reliable ESG metrics were to their work. Former PepsiCo CEO Indra Nooyi drove the point home especially well when talking about how “Performance with Purpose” was not thought of as a separate “ESG” program, but rather as a new vision for “how to make money a better way, and sustain it.” 

Nooyi explained how the team at PepsiCo rapidly bought into the vision and that tight alignment between metrics, incentives, staffing, and the board is what drove both short- and long-term success. 

The future of ESG investing is not about scarlet letters, or naming and shaming. It’s about charting a new path forward for capitalism that works for more Americans and that is based in part on greater transparency, more meaningful metrics, and yes, better public policy.