“What are we talking about when we talk about ESG in investment management?” – George Serafeim
As Seraphim, the Charles M. Williams Professor of Business Administration at Harvard Business SchoolIt says that capitalism has created enormous wealth and lifted countless people out of poverty. But today it faces two major challenges: climate change and inequality.
“The wealth created was distributed very, very unequally,” he said. “The result was that many people were left out.”
The ESG challenge is to create economic prosperity and protect the environment while, in Serafeim’s words, “empowering people to participate in the economic value creation process.”
So what’s the state of ESG evaluation and the way can investors each influence and invest with impact?
Serafeim and other panelists Melanie AdamsVice President and Head of Corporate Governance and Responsible Investment at RBC Global Asset Management and CEO of Purview Investments Linda Zhang These and other questions on ESG and sustainable investing were discussed with the moderator Mary Childs of .
Below are some key highlights from their conversation.
The key aspects
Materiality is a robust force and panelists said that specializing in material ESG aspects can boost returns. This means investors should incorporate a materiality perspective into their assessments. But in addition they should be aware that the materiality perspective varies from sector to sector.
“Materiality means that the ESG factor will have an impact on the financial performance of the company,” Adams said. “It depends on the industry. If you look at financial institutions, cybersecurity would obviously be extremely important, but for a food and beverage company, maybe not so much.”
What are the benefits of materiality?
“Increasing the financial materiality of ESG issues is a huge mechanism for change,” Serafeim said. Once something becomes material, it should be measured and C-suites and boards will care about it. Why? Because once it’s measured, executive compensation will likely be tied to it. And that will likely be the case with material ESG metrics. This will help investors higher manage risks and opportunities.
However, ESG data still has a protracted strategy to go. Reliable, actionable ESG metrics require high-quality data, and while progress has been made, we are usually not there yet.
“The data has gotten much better,” said Serafeim. “But at the same time, it is not very comparable and not very up-to-date. In many cases, there is a lot of noise instead of signals.”
According to panelists, socially relevant ESG issues change into business-relevant over time, with different issues having different levels of materiality. For example, the technology sector’s carbon emissions profile is different from that of other industries. Its products don’t generate or use emissions, but its data centers are energy-intensive and its employees may leave a big carbon footprint whenever you add up all their travel.
Disinvestment
And what about divestment? Did panelists think it was a great idea to weed out or move away from firms that don’t meet ESG criteria?
Everyone agreed that engagement is preferable to divestment and may at all times be step one when engaging with firms. By effectively cutting ties, investors not have a voice to influence the corporate. As a start line, panelists encouraged investors to interact with all of their firms on their net zero goals.
“We know that fossil fuels are likely to be part of our energy mix over the next decade,” Adams said. “From our perspective, it’s more valuable for us to sit at the table with companies that are thinking about how to manage the transition to a low-carbon economy.”
Panelists also stressed that commitment doesn’t equal consent. Effective engagement requires grit. Investors need to determine milestones and benchmarks over time that outline what they expect from firms. Greenwashing is simple: Any company can talk big. But in the event that they don’t back it up with concrete actions, investors could also be putting themselves at undue risk and needs to be prepared to back out.
Disclosure standards
When the discussion turned to the state of disclosure standards, participants agreed that there may be currently a movement towards global standards with SASB, IFRSAnd TCFamongst others, are pioneers. However, there aren’t any impact standards yet; these are still within the early stages.
For investors to make a difference, they should align their portfolios with major global challenges for 2 reasons, panelists said: First, ESG strategies are critical in a human capital-intensive economy. Second, we’re “investment consumers.”
“We can align our consumption with our values,” said Serafeim. “This is another megatrend that I think we will see over the next two to three decades.”
With barriers to entry removed, everyone becomes an investor. More than half of the US population currently invests, so there may be ample opportunity to pick out securities with an eye fixed toward the direction we would like to take the world. If we would like to handle climate risk, protect biodiversity, or reduce inequality, that is how we should always invest. ESG is strategically relevant, and to be competitive, firms need to contemplate all three areas. As investors, we might help get that message across.
CO2 compensation
CO2 compensation could be a useful gizmo for curbing climate change.
“Many companies are actively reducing their emissions, reducing their waste, improving usage efficiency and also buying certificates,” Zhang noted. “The first and largest certificate market where you can trade emission certificates is in Europe, right? If you look at the emission price per ton of CO,2At the beginning of the year the price was $36 or $38, now it is over $56.”
But again, the form of data is vital. Companies need to envision the standard of offsets to make sure they’re audited and eliminated. Without each, it’s difficult to attain targets.
What advice did the panelists have for those seeking to get into impact investing?
A key suggestion is to direct your profession where growth is feasible. Climate change and the threat it poses will transform the economy in the approaching a long time. Some sectors will likely be completely disrupted and where disruption occurs there will likely be alpha opportunities. It will likely be an exciting environment but passion alone won’t be enough to succeed. Success requires technical skill.
But these technical skills can take many forms. ESG and sustainable investing are usually not a one-size-fits-all environment.
“One of the biggest things I think about is how broad the ESG space is, how many different metrics there are, and we’re very focused on climate change right now,” Adams noted. “But there are other ESG metrics that we need to focus on as well.”
She identified that cybersecurity is a crucial issue that has only recently received the eye it deserves. And Adams stressed the importance of spelling the third letter appropriately.
“You simply cannot properly manage your environment and security if you don’t have the appropriate governance,” she said.
As a bunch, the panel struck a hopeful, optimistic tone despite the challenges.
“Humanity is currently facing incredible opportunities,” Zhang noted. “We are at the beginning of a new industrial revolution, and it happens to be a green one.”
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Photo credit: © Getty Images / guvendemir
