Do You Know Where Your Asset Manager Is (on climate)?

By Frank Sherman

This article augments an earlier blog by John Mueller of Dana Investment Advisors on Questions to Ask Your Money Manager.

There is a growing recognition within the financial sector of its responsibility, as well as its power, to transition the economy to a low carbon future.  The Glasgow Financial Alliance for Net Zero (GFANZ), representing $70tn in assets, is committed to achieving the objective of the Paris Agreement to limit global temperature increases to 1.5°C. Combined with Net Zero commitments from countries representing approximately 70% of global GDP, it sounds like the world has turned the corner on climate change. However, there is a gap between these long term ambitions and short term actions. The latest round of UN Nationally Determined Contributions (NDC) put the world on track for less than a 1% reduction in emissions by 2030 vs. 45% called for by the Intergovernmental Panel on Climate Change (see Responsible Investor, Aug 17, 2021).

As a small asset owner, what can an SGI member do to ensure they are part of the solution rather than contributing to the problem? One easy strategy is to ask your asset manager about their climate stewardship activities, including proxy voting. The UN-convened Net-Zero Asset Owner Alliance, part of the GFANZ composed of over 40 institutional investors (including some ICCR members), recently released a new resource designed to help asset owners set expectations for, evaluate, and engage with asset managers on their climate-related proxy voting activities. As well, the resource is useful to asset owners who retain the right to vote their shares or to those asset owners with internally managed portfolios by integrating the principles into their own proxy voting and asset manager selection, appointment, and monitoring processes. These foundational guidelines are centered on four themes: governance, interest alignment, merit-based evaluation, and transparency. They help asset owners construct their own expectations of their asset managers’ proxy voting approaches.

Many asset managers have already made the commitment to align their portfolios with net-zero as part of the Net-Zero Asset Manager Initiative (NZAMI), which is also part of the GFANZ. Among the 128 signatories with $43tn in assets under management have already signed on to this Initiative are some of the biggies like Blackrock, Vanguard, and State Street. If you find your asset managers are part of NZAMI, you have the opportunity as a client to ask about how they are actualizing this goal within their management of their portfolio. If your asset managers have not yet signed on to NZAMI, you should ask them “why not?” I suggest you share this resource with your Investment Committee with a recommendation to review your own proxy voting guidelines and your expectations set with your asset management service providers. At the same time, you may want to challenge your Investment Committee to consider signing on to the Net-Zero Asset Owner Alliance themselves. As Blackrock’s Larry Fink has made clear, “climate risk is investment risk.”

Questions to Ask Your Money Manager

By John Mueller of Dana Investment Advisors

For over twenty years, Dana has been managing ESG portfolios for clients. During this time, we’ve participated in countless meetings and been asked a wide array of questions. While the old adage, ”There is no such thing as a dumb question” holds true, there are usually questions that are more effective than others to help you find the right solution for your investment portfolio. Below is a list of questions we’ve faced over the years that we think can help investors determine the appropriate partner in their search.

What does ESG mean to you and your firm? We believe the most important, and perhaps the simplest, question is often the most overlooked. During meetings, many words or terms are generally used, and everyone nods in agreement, assuming they understand the definition of that word or term. However, one of the greatest missteps in these meetings is not asking for clarification or a better understanding. Often, there will be many different answers as to a particular definition, and that can be good. Yet, instead of trying to have the investment manager convince you that their method/approach is the best, simply ask yourself if their definition fits what you and/or your group is trying to achieve.

How long is your history with ESG investing? As time goes on, this question perhaps becomes less relevant, yet with the increase in asset flows and countless new product launches for ESG strategies, this question will perhaps give you clarity on the manger’s intentions. While time alone is not a determinant of qualification, it should provide another check box for you to determine if this investment manager is the right solution.

Does your firm rely on external ESG ratings, internal, or a combination of both? ESG research providers have grown exponentially in recent years. While many managers have internal methods, there are a number of researchers that specialize in ESG data. Neither answer is wrong, but there is such rapid growth of data that finding external sources can help form a more complete picture of a company’s policies or changes in policies. Both internal and external methods can have biases; therefore, understanding and partnering with multiple can help in eliminating some of these biases.

How does your firm handle companies with recent controversies or catastrophic events? Missteps and unfortunate events happen, but how the aftermath of such an event was dealt with is generally more telling. While catastrophic events are hard to predict, an investment manager’s response in the following days or weeks is of great importance. If they own shares, do they sell right away on headlines, do they seek to understand more before making a portfolio decision, or do they hold the position? These questions will give you more insights into their process. Controversies are generally more difficult and often have a less clear path to their solution. While investment managers may look at the issue differently from clients, their willingness to listen and discuss, or lack thereof, should be key in your evaluation, as these discussions can be vital in adding to the knowledge base for both the client and investment manager.

How do you approach corporate engagement and proxy voting? This question will help in determining the level of commitment the firm has to this space. While some may not currently be active in engagement, their answers will likely reveal their level of willingness to take on that role at a later date. Recent history has taught us that these actions can be impactful and look to be a greater piece of the puzzle going forward.

While this is only a sampling of questions, there are likely more that will be important to each individual organization. Some of the best questions we’ve been asked over the years don’t pertain to any investment strategy or philosophy. At the end of the day, you are choosing to invest with a person or a team, and asking questions about current events or personal backgrounds can be ways for you to better understand the driving force behind a firm’s ESG investing and other principles and characteristics, which is likely the best way to find a long-lasting partnership that will benefit all involved.

A Legal Framework for Impact

By Frank Sherman

Sustainable investing has not only become mainstream in recent years; it is now recognized as a mark of prudent investment practice. US-SIF reported last year that sustainable investing in the US increased 42% over the previous two years and now represents one in three dollars of the $51 trillion in total assets under professional management. A Morgan Stanley study found that, while the market experienced extreme volatility and recession in 2020, funds focused on “on environmental, social and governance (ESG) factors, across both stocks and bonds, weathered the year better than non-ESG portfolios.” Yet there are still those who challenge the legal basis for and prudence of incorporating ESG investment strategies.

SGI members who are institutional investors, pension fund trustees, asset managers, or      investment advisors must put their clients’ or beneficiaries’ interests before their own. Despite having been debunked many times, the myth that the fiduciary duty to act in the best interest of a client excludes ESG and socially responsible investing still exits. In a 2019 SGI webinar, Frank Coleman of Christian Brothers Investment Services (CBIS), referenced a 2005 study by law firm Freshfields, Bruckhaus, Deringer LLP which found investors could incorporate financially material ESG issues as part of their fiduciary duties. The Freshfields report contributed to the launch of the Principles for Responsible Investment (PRI). Frank also described a 2015 Freshfields report, Fiduciary Duty in the 21st Century, which clarified that ESG integration is not just permissible but required for many fiduciaries. Since its publication, financial regulators in Brazil, France, EU, Ontario, South Africa and UK have clarified ESG requirements in legislation.

However, these studies found that a fiduciary’s duty to account for the sustainability impact of their investment activity is limited to the extent that it impacted the financial performance of the assets. In other words, their fiduciary duty requires consideration of how sustainability issues affect the investment decision, but not how their investment decisions affect sustainability issues. Too many investors still approach ESG investing from a defensive posture, considering risk management alone.

Since the publication of the 2015 Freshfields report, the adoption of the UN Sustainable Development Goals and the Paris Climate Agreement have significantly raised awareness within the investment community of global sustainability challenges. The third generation of responsible investors are beginning to measure, account for, and integrate the real-world sustainability impact of their investment activity. A third Freshfields report issued last week, The Legal Framework for Impact, considers the role of the investor as an active agent in shaping the world around us, rather than as a spectator betting on the side lines. This detailed, global, legal analysis demonstrates that investors should feel empowered to set impact goals and measure progress against them. It also highlights what must change to ensure that the rules that govern our financial system foster a truly sustainable economy.

SGI members have always considered the positive and negative impacts of their investments on people and the planet. We have been exposing tools to our members to help them assess these impacts. Investors, like all business actors, are expected to respect human rights as outlined by UN Guiding Principles on Business in Human Rights. Last year, the Investor Alliance for Human Rights published an Investor Toolkit on Human Rights for asset owners and managers to address risks to people posed by their investments. This spring, Ceres joined a number of other investor coalitions to launch the Paris Aligned Investment Initiative providing recommendations on key actions and methodologies for asset owners and managers to achieve net zero GHG emissions by 2050 across their portfolio.

So it is now clear that investors must look beyond the financial returns to understand the ESG impacts of their portfolios have on the real world around them—the world their beneficiaries live in.

Socially Responsible Investing requires effort

Tariq Fancy, BlackRock’s former chief investment officer for sustainable investing, made a startling confession in a recent USA Today editorial:

In essence, Wall Street is greenwashing the economic system and, in the process, creating a deadly distraction. I should know; I was at the heart of it.

Fancy went on: “In truth, sustainable investing boils down to little more than marketing hype, PR spin and disingenuous promises from the investment community.”

It’s quite an indictment from a significant voice in the ESG sector, but, based on my personal experience working for Seventh Generation Interfaith for the past several years, I do not believe that it conveys the whole truth of the matter.

Yes, there are asset management firms that over-hype their ESG product. They slap an ESG label on a fund that screens out certain sectors and perhaps speak to a few companies about their climate actions and sell it at a higher price than non-ESG products. A recent Wall Street Journal article reported 43% higher fees for ESG products in one class of assets. Visit a grocery store, and a higher-priced item with a “Naturally Raised” or “Fresh” label may attract more consumers, even if neither quality is in any measurable sense true. The old Latin adage holds: Caveat Emptor! Buyer beware!

When we look under the hood, so to speak, at many ESG funds, there are reasons to be concerned.

Even as investors demand ESG investments, those funds labeled ESG may not always reflect investor preferences in their proxy voting. Last month, a study from Robeco Asset Management and the Erasmus University of Rotterdam School investigated a decade of proxy voting data, and concluded that large, passive asset managers vote the least in favor of ESG proposals. Further, PRI signatories in the U.S. did not even vote their proxies as well as other U.S. firms that did not describe themselves with an ESG label. Fiona Reynolds, CEO at PRI, recently responded to the report with a commitment to take action. Reynolds went on to give an unusual warning: “being a PRI signatory should not be the only due diligence test for investors.” 

Asset owners who rely on negative screens and “ESG” funds can be misled. Vincent Deluard of StoneX authored a recent report entitled “The ESG Bubble: Saving the Planet and Destroying Societies.” Deluard points to blind spots in customary ESG screens. He notes, “companies with a high ESG rating pay a much lower tax rate than their less virtuous peers.” As well, he observed that “ESG funds are biased against humans: the 15 most highly-rated companies employ just 1.9 million workers, versus 5.1 million for the 15 worst-rated ones.” He concludes: “By channeling more money towards these (already wealthy) companies, ESG funds are unconsciously worsening the social and political crisis associated with automation, inequality, and monopolistic concentration.”

While Deluard’s study can cause suspicion of all ESG products, there are hopeful signs on the horizon. Last week, acting SEC chair Allison Herren Lee spoke to the proxy voting issue, saying, “We know investors are demanding ESG investment strategies and opportunities, but funds may not always reflect those investor preferences in their voting” and suggested that the SEC may need to take action on proxy voting disclosure. Further, Gary Gensler, the nominee to lead the Security and Exchange Commission, has indicated that he favors greater ESG disclosures, and the SEC as a whole is making ESG a priority. Most importantly, there are firms that do the hard work. For an asset owner, asking good questions of an asset manager can help discern if the firm is committed to doing this work. [We will soon have a blog post that examines some good questions to ask.] 

The faith community, with ICCR leading the way, has pioneered socially responsible investing for fifty years. Many asset managers and advisors who are ICCR members are not doing the greenwashing that Mr. Fancy called out. And SGI members recognize their fiduciary responsibility and power of ownership to change the system for the better. SGI members create value by improving the conduct of portfolio companies and, at the same time, create real world impact for people and planet.

Holistic Approach to Socially Responsible Investing Webinar

In recent months, some SGI members have been revisiting their policies for socially responsible investment. Such periodic reviews can be an opportunity see this ministry in a fresh light. We must evaluate the quality, forms, and priorities of our commitments as to how effectively they serve the needs of our institutions’ mission and, in a preferential way, the needs of those most vulnerable and the care for creation. In such moments, we may find the conviction to respond to the signs of the times and to change the course into which habit and convenience have settled us and our institutions. These are privileged opportunities for each member institution to consider anew how to align investments with our deepest values.

On Friday, April 12, we were joined in our webinar by two leaders within the Interfaith Center on Corporate Responsibility (ICCR): Anita Green of Wespath Investment Management and Susan Smith Makos of Mercy Investment Services. Each shared the approach that their organizations utilize for socially responsible investing.

We are very grateful for the presence of both our guests in this webinar, for their commitment to work on this issues, and their generosity in sharing their wisdom with us.

As always, we welcome your feedback via a confidential evaluation found here. Slides from the webinar are found here.

If your institution is reviewing its policy for socially responsible investment, we are happy to help. Please, contact Frank Sherman or Chris Cox. We also recommend US SIF’s free Roadmap For Money Managers and its Roadmap For Financial Advisors. We also provide a number of resources here on our website.

What Story Do We Tell?

For an author and former tech company executive, Seth Godin has a no frills blog that offers pithy insight. In a podcast some years back, he observed the following:

“Once you have enough for beans and rice and taking care of your family and a few other things, money is a story. You can tell yourself any story you want about money, and it’s better to tell yourself a story about money that you can happily live with.”

SGI is an organization for those who want to tell a different kind of story about their money than a simple report on the bottom line. Our members are those who want their investments to tell a story consistent with the values and passions of their lives. Our members have served those on the margins in far-flung missions or just on the other side of town. Our members have run schools to provide a quality education, inspired by faith, to those who might not otherwise be able to obtain it. Our members have built health institutions that have served the ill and injured regardless of their capacity to pay. Our members have worked tirelessly to care for and to protect creation. Would it not make sense that the savings destined for their healthcare and retirement, and those funds entrusted to them by generous donors, be used in ways that reflect what our members believe to be important?

Once upon a time, I used to urge folks to look through the last ten checks they wrote—now, I’d suggest that younger readers look through the credit card statement—what do those expenditures say about our priorities and values? The work of SGI is to tell a story with our funds. It is a story that values the poor so often invisible within the economy, especially vulnerable children and women. It is a story where the Earth, its soil and seas and air, is more valuable than the gold and oil buried underground.

A story that focuses solely on the economic return is a story too thin to heal. Indeed, we need a story rich enough to live by. Our story will not interpret the world to everyone’s satisfaction. But, finally, in our judgement, their stories can’t stand up to our stories.

How Well Are Your Financial Service Companies Incorporating ESG?

by Frank Sherman

Of US institutional investors, 43% incorporate ESG factors into their investment decision-making process, according to the sixth annual ESG survey by Callan. This percentage has almost doubled since the survey was first launched in 2013. Yet many financial service companies only pay lip service to these issues. How well do your financial advisors and money managers incorporate ESG best practices?

The Forum for Sustainable and Responsible Investment (US SIF) is committed to advancing sustainable, responsible and impact (SRI) investing across all asset classes. One of the core deliverables from their strategic plan is to identify and disseminate information about best practices within the field and provide tools for practitioners to undertake a rigorous and comprehensive approach to sustainable and impact investing. They published a Roadmap for financial advisors earlier this year on how to incorporate SRI investing into their practice. US SIF released a second Roadmap this month, this time focused on money managers. This Roadmap describes steps to establish board and senior level oversight; identify sources of ESG data, research and training; develop an ESG incorporation strategy; implement an investor engagement strategy; measure impact; and participate in building the field. Due to come out later this year, the third and final guide in the US SIF series will focus on asset owners.

I recommend that SGI members read and share these guides with their Investment Committees and question them on how well your financial advisors and asset managers have incorporated these best practices into their services.

Seventh Generation Interfaith will continue to support your corporate engagements and public advocacy on your community’s priority social and environmental issues. . . a key part of your SRI investment strategy.

New Vatican Document on Markets and Ethics

While CEOs may have nervously read Larry Finke’s letter, they may find greater guidance in their task reading a new Vatican document, Oeconomicae et pecuniariae quaestiones (Considerations for an Ethical Discernment Regarding Some Aspects of the Present Economic-Financial System). The new document, approved by Pope Francis, running to just over 11,000 words, brings Vatican heft to financial instruments including shareholder risk, subprime mortgages, derivatives, credit default swaps, interbank loans (LIBOR), shadow banking systems (think, cryptocurrency), and offshore tax havens.

While some may consider Pope Francis an outlier, the 49 footnotes, grounded in traditional Catholic teaching, illustrate the continuity of St. John Paul II, Pope Benedict, and Pope Francis on papal teaching related to the economy. The document aims to apply those principles to the current context. The document posits:

No profit is in fact legitimate when it falls short of the objective of the integral promotion of the human person, the universal destination of goods, and the preferential option for the poor. (#10)

In other words, profit in the marketplace, in and of itself, is not enough.

Another paragraph reflects the concerns that we raise in our resolutions regardinging executive compensation with the pharmaceutical companies:

In addition, such logic has often pushed managements to establish economic policies aimed not at increasing the economic health of the companies that they serve, but at the mere profits of the shareholders, damaging therefore the legitimate interests of those who are bearing all of the work and service benefiting the same company, as well as the consumers and the various local communities (stakeholders). This is often incentivized by substantial remuneration in proportion to immediate results of management, but not likewise counterbalanced by equivalent penalization, in the case of failure of the objectives, though assuring greater profits to managers and shareholders in a short period, and thus ending up with forcing excessive risk, leaving the companies weak and impoverished of those economic energies that would have assured them adequate expectations for the future. (#23)

Not only does it speak to management and shareholders, the document offers some challenges to consumers as well:

It becomes therefore quite evident how important a critical and responsible exercise of consumption and savings actually is. Shopping, for example, a daily engagement with which we procure the necessities of
living, is also a form of a choice that we exercise among the various products that the market offers. It is a
choice through which we often opt, in an unconscious way, for goods, whose production possibly takes place through supply chains in which the violation of the most elementary human rights is normal or, thanks to the work of the companies, whose ethics in fact do not know any interest other than that of profit of their shareholders at any cost.

It is necessary to train ourselves to make the choice for those goods on whose shoulders lies a journey
worthy from the ethical point of view, because also through the gesture, apparently banal, of consumption, we actually express an ethics and are called to take a stand in front of what is good or bad for the actual human person. Someone spoke of the proposal to “vote with your wallet”. This is in reference to voting daily in the markets in favor of whatever helps the concrete well-being of all of us, and rejecting whatever harms it. (#33)

For those of us who engage in socially responsible investing, the document concludes with some significant encouragement:

In front of the massiveness and pervasiveness of today’s economic-financial systems, we could be tempted to abandon ourselves to cynicism, and to think that with our poor forces we can do very little. In
reality, every one of us can do so much, especially if one does not remain alone.

Numerous associations emerging from civil society represent in this sense a reservoir of consciousness, and social responsibility, of which we cannot do without. Today as never before we are all called, as sentinels, to watch over genuine life and to make ourselves catalysts of a new social behavior, shaping our actions to the search for the common good, and establishing it on the sound principles of solidarity and subsidiarity. (#34)

The most evocative phrase for me from the document is here, that “we are called, as sentinels.” Frank Sherman, when describing our work in corporate social responsibility, likes to say that we are “canaries in the coal mine.” While more and more people are taking up the work of fighting human trafficking, we would be nowhere were it not for the work of so many dedicated religious sisters who have kept a laser-like focus on the issue. Time and again, faith-based socially responsible investors take up a concern, “as sentinels,” long before others take notice. For 45 years, SGI has been a pioneer in socially responsible investing, and we can draw strength from this document that our work is critical for achieving a more just and sustainable economy.

The full text of the document can be found here in a PDF or on the Vatican website here.

Helpful commentary on the new document can be found here:

Less helpful but interesting commentary:

FSPA takes CSR to court

When we saw a recent article (Wisconsin groups to get $12M settlement for natural gas price fixing) from the La Crosse Tribune quoting Sr. Sue Ernster, FSPA, we wanted to bring it to the attention of our SGI members.  Sr. Sue adds:

FSPA participated in the lawsuit of the manipulation of natural gas pricing by multiple utilities as another way of how we live out our social justice activities and our values.  We see this as an effort to help those whose voices are not represented in this and other situations.  We are utilizing the resources we have at our disposal to hold those accountable who were responsible for this price manipulation.

Our hope is that participating in litigation settlements such as these, as well as filing shareholder resolutions with companies, demonstrates that people are paying attention, asking questions and holding them accountable for their actions.