Can ESG Investors Halt Climate Change?

Ethical investors are no longer just focusing on changing company behaviour, they want to change the world, a Morningstar panel has found

Jon Hale 17 April, 2018 | 2:25PM
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ESG Investing, Wind Farms and Solar Panels

Individual investors, asset managers, pension funds are increasingly seeking information on environmental, social, and governance factors before they make investment decisions. Now they are extending their interest in ESG at the company level to “system-level” investing to effect sustainable social change. System-level investing is informed by the United Nations’ Sustainable Development Goals; including aims to improve health, reduce inequality and tackle climate change.

Morningstar recently hosted a conference with The Investment Integration Project. The experts included Steven Lydenberg, founder and CEO of TIIP and partner at Domini Impact Investments; Robert Eccles, founding chairman of the Sustainability Accounting Standards Board and visiting professor of management practice at Saïd Business School, University of Oxford; and Anna Snider, head of due diligence, global wealth and investment management, CIO office at Bank of America.

Jon Hale: Are we nearing a tipping point for sustainability?

Steven Lydenberg: Over the past three years, we’ve seen a number of indications of fundamental change … that suggest to me that investors are playing a larger, more systematic role in benefiting society.

Hale: Are investors starting to look at what they do with a different lens? Can they expect better performance out of their investments if they do?

Robert Eccles: The investment community is now pretty serious about sustainability. There used to be a prevailing belief that if you integrate ESG issues, you’re going to hurt returns. We’ve found that most people don’t believe that anymore.

Hale: You mentioned that corporations have been ahead of investors on sustainability issues. Was BlackRock chief Larry Fink’s letter to CEOs on responsible capitalism a signal that asset managers are now thinking more at the system level?

Eccles: BlackRock has been an advocate of good governance sustainability with companies for a while. When you start talking about purpose, you change the frame from “companies exist to make money for shareholders” to “companies exist to serve a purpose.” If they do that well, then they’ll make money for shareholders.

Anna Snider: I think this letter marked a change in how corporations see themselves, and I think in how BlackRock also sees itself.

Public and Private Sector Working Together

Lydenberg: There’s a blurring between the responsibility of government and that of investors when working collaboratively on these products. Green bonds are a very good example of that. You have what is essentially a financial product, a fixed-income product, that also has an environmental goal.

Hale: The UN Sustainable Development Goals (SDGs) weren’t developed specifically with investors in mind. Is this the only framework we have that we can embrace right now? Should investors focus on something maybe a little more prosaic?

Snider: They’re not a panacea for investors. There’s still a huge amount of work to be done to define what is actually investable within them.

But while they weren’t formed for investors per se, they were formed by the corporate sector. Investors are investing in the companies that formed these SDGs.

People like clarity and they like concrete, tangible goals … I think the SDGs anchor people. You can align them with your speciality, as a corporation or investor, and create solutions and direct capital to them.

Eccles: That was the glass-is-half-full view.  Let me give the glass-is-half-empty view.  The narrative around the SDGs is that companies … now have all these great opportunities to make money by doing good things for the planet. There’s much less discussion about the SDGs in the corporate community. There’s not nearly the same awareness and excitement.

Lydenberg: The SDGs are very long-term goals.  But they are going to force those in the investment community who say they want to align themselves with those goals to figure out what, in fact, that means. The longest-term investors can align themselves with the SDGs. There will be a cascading effect down from those.

Eccles: You’re going to have to change the nature of the conversation investors are having with companies.  Companies say investors never ask about this stuff. They just want to know about revenue growth, earnings, how’s that acquisition going? 

Hale: I run into a lot of investors who have not embraced the idea of investing for sustainability and impact. How would you sell a disinterested investor on this idea of sustainable investing? Why should they care?

Snider: This is just additional information by which to invest. What investor doesn’t like more information to make an investment decision?

Just forget the terms ESG and sustainability and instead ask investors to think about how the world is transforming and what society or the environment or their daily lives might look like in 10 years, and whether their portfolio is actually geared toward that and what might be at risk in their portfolio. I think a lot of people would want to know the answers to those questions and be surprised when they do find the answers.


The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Jon Hale  Jon Hale is a consultant with Morningstar Institutional Investment Consulting.

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