Tag Archives: ESG

Milton Friedman Was Wrong About Everything

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By Susanna Gibbons, CFA
Managing Director, Carlson Funds Enterprise
Carlson School of Management, University of Minnesota

Susanna Gibbons, CFA

In 2013, Paul Krugman wrote an opinion piece titled Milton Friedman, Unperson, in which he suggested that the Nobel Prize-winning economist had essentially vanished from the scene of economic policy-making. He highlighted two key points: First, not only is monetary policy not sufficient for management of an economic crisis, the Fed cannot even control the money supply itself using monetary policy. Second, the link between unemployment and inflation is tenuous at best, rendering it less-than-useful as a policy tool. We are seeing this play out today, as the Federal Government (at least initially) unleashed unprecedented fiscal stimulus in an effort to minimize the downside economic impact of the coronavirus-induced recession.

There is, though, another area where Milton Friedman’s influence continues to be felt. In 1970, he wrote an essay titled A Friedman Doctrine: The Social Responsibility of Business is to Increase its Profits. This piece rested on the same free-market ideology upon which he built his economic theories, and essentially laid the groundwork for the greed-is-good generation. On this point, in spite of the steady march of the country towards incorporating ESG factors into their decision-making framework, policymakers from the Department of Labor continue to rely on the Friedman Doctrine. They have proposed new rules, which would impose burdensome requirements on anyone who dares to mention an ESG-based argument.

These rules display a real fear that this mysterious “ESG” is really a socialist plot intended to saddle pensioners with weak performance while simultaneously forcing corporations to provide chakra-reading reports instead of profits.  The rules require investment managers to prove that there are no non-economic considerations at play, imposing a new burden on those who have developed robust ESG integration policies to prove they don’t benefit personally, while strangely assuming that managers who do not integrate ESG are somehow engaged in a better fiduciary process because they ignore, say, the long-run economic risk of climate change.

The backstory for the proposed DOL rule is the Friedman Doctrine. The theory of shareholder supremacy really came into its own as a result of the initial LBO wave of the late 1980s, when entrenched managers were forced out of power by corporate raiders. I was fortunate to be sitting in Delaware Supreme court to hear the management of Macmillan explain why they could ignore Robert Maxwell’s higher bid for the sale of the company, and found their self-described actions to be such an egregious violation of their duty of loyalty. The Delaware Supreme Court agreed with me 😉 noting in its decision that evolving law required “the most scrupulous adherence to ordinary standards of fairness in the interest of promoting the highest values reasonably attainable for the stockholders’ benefit.” [1] So there it was, shareholder supremacy enshrined in law, and I agreed whole-heartedly with that decision.

That law, so seemingly straightforward, has become increasingly complicated to apply. In its decision, the Court did not say anything about ignoring the long-run consequences of legitimate business choices. It said that the Board and Management could not make decisions for their own benefit instead of the general shareholder. It is specific with respect to timeframe – this was part of an auction process, so there was no trade-off between the time preferences of different owners. This is actually a pretty narrow situation that has become broadly applied.

For a going concern, the concept of maximizing profit is beguilingly simple, but in real life, managers are constantly presented with complex trade-offs between short-term considerations (earnings this quarter) and the long-term health of the corporation (investing in supply chain redundancy to protect against loss of key products in a pandemic). And that’s really what ESG is all about: forcing all of us to think about the complexities of those trade-offs.

The only way to make sense of the Friedman Doctrine is to extend it well beyond the plain text of the original essay. The long-run health of the corporation, and therefore its ability to maximize profits, depends entirely upon the health of the system in which it does business. If it ignores the welfare of its employees, the health and safety of its customers, and the viability of land upon which it rests, its value will deteriorate. The corporation is a creation of the state – it owes its very existence to a political act. To have the little Adam of our labors[2] turn on is, claiming it owes us nothing, is preposterous on its face. If the corporate form does not serve society, then we can get rid of it.

But what the heck do I know? Milton Friedman was a Nobel prize-winning economist, and I’m just a middle-aged Mom sitting in the basement doing laundry.

[1] https://law.justia.com/cases/delaware/supreme-court/1989/559-a-2d-1261-5.html

[2] This is a reference to Mary Shelley’s Frankenstein, in case you never actually slogged your way through it.

Track Recap: ESG at Intellisight Part II

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By: Hilary Wiek, CFA, CAIA, Society Volunteer

After the morning breakfast presentation, chronicled in my previous Freezing Assets blog, the Intellisight Conference offered four panel discussions to further explore the current state of investing with an ESG perspective, how to approach with different asset classes, ESG data coming from companies and ratings groups, and issues investors and managers are still facing in this space.

The first panel, called “Risk & Opportunities across Asset Classes,” was moderated by Michael Corelli of Moody’s and included Jodi Neuman of Trillium Asset Management, Mike Pohlen of North Sky Capital, and Emily Robare of Gurtin Municipal Bond Management.  The main message from this group was that ESG investing has moved well beyond the screening of stock universes to remove morally objectionable companies from a portfolio.  The panelists discussed how they have folded ESG thinking into the investment process across all asset classes.    

The rationale for many investors to consider environmental, social, and governance factors boils down largely to risk and opportunity, principles that even those with little interest in saving the world generally find important.  Bond rating agencies and bond purchasers are thrilled to have new metrics to incorporate into their analysis of a bond’s risk.  Equity managers are also looking for companies with positive attributes that will make them more sustainable businesses in the future.  By embracing companies that treat their employees well, have a high-functioning governance structure, and avoid misuse of resources, investors can focus in on a subset of companies more likely to do better in the future than their peers.

One example:  when evaluating insurance companies, ESG factors, particularly climate risks, have become a very important lens that had previously been difficult to assess.  With natural disasters coming more frequently and in greater magnitude (2018 had the 4th most natural disasters ever recorded; 2018 was the 8th consecutive year with 8 or more natural disasters costing more than $1 billion; learn more here, it is important to factor in the likelihood of such events when evaluating the health of an insurance business.  Some insurers are more heavily geared to geographies more likely to face bigger losses, such as in Florida (hurricanes) and California (fires).  In January 2019, Pacific Gas & Electric had a wildfire-related bankruptcy, a loss investors may have avoided if they properly assessed the fire risks facing California. 

Moody’s is continuing to develop work around ESG factors in its ratings methodology.  They assess 84 global industries representing $75 trillion in rated debt.  They have identified 51 sectors with $62 trillion in debt that are considered low risk; some of these may even possibly benefit from emerging environmental trends. An example of the latter is the construction industry benefiting from repair and reconstruction after natural disasters and investments being made into the building of energy efficient systems. 

While some would avoid entire sectors due to them being “dirty” or some other objectionable rationale, many equity investors utilizing ESG principles believe that the magnitude of the risks are specific to each company, so there is potential for a company in a dirty industry to outshine the competition, leading to better stock performance.  In addition, many companies in carbon-heavy sectors are developing technologies to more efficiently use fossil fuels or even to swap out such fuels into cleaner energies, becoming a solutions provider to the energy transition instead of a victim of the trend.   

Even in municipal bond analysis, ESG considerations can play a part.  Climate risks are often very local and what are municipal bonds but plays on the ability of a local economy to continue to pay back investors?  While it is likely that coastal areas around the U.S. will be impacted by heavier rains and coastal erosion, some communities have a broad and wealthy enough population to rebuild while others will lose population to more sustainable areas.  It is likely that residents of Malibu, CA, would have the resources to rebuild after landslides, but New Orleans, LA, could suffer a permanent decline in its tax base.  This translates to a bond issue from Malibu being a better credit than one from New Orleans.  One difficulty, however, can be in modeling the timing.  Even in an area likely to suffer from rising oceans, a five-year credit may encounter no difficulties, but the longer the time frame, the more likely a significant event could hit a locale. 

ESG in the private equity landscape is usually focused on solutions to the environmental risks facing so many locales.  They seek out portfolio companies with clean technologies that can profit from shifts in attitudes toward fossil fuels and climate change.  Even when you find a clean technology, however, ESG risks must be considered.  If a hydro-electric project faces a multi-year drought, how would the project do with decreased output for a sustained period?   

The biggest issue for analysts hoping to assess ESG risks is the availability of reliable data.  While companies have just recently been getting better at reporting things like carbon usage, other risks are only reported sporadically and there is a danger that some would penalize a company that is being forthcoming in reporting its ESG risks but then not penalizing companies not reporting because there is nothing for analysts to go on.  There is very little ESG data reported to a muni bond investor hoping to assess environmental risks to an area, though some county by county government data can be useful in extrapolating a location’s risks.  Later panels discussed the state of ESG data in the world today.

The next panel, titled “Who’s Who in ESG and Impact,” was moderated by Chris McKnett of Wells Fargo Asset Management and included Mac Ryerse of Columbia Threadneedle Investments and Michael Young of US SIF:  the Forum for Sustainable and Responsible Investment.  Ryerse has done a lot of work for the Sustainability Accounting Standards Board (SASB), who is working to standardize the company reporting of financially material impacts of sustainability on their businesses.  In other words, SASB is working to address the data problem raised by the prior panel.

The topic of ESG and sustainability, and whatever other terminology one might prefer, is fast-moving and still being debated heavily.  That said, there is a lot of talk and the category cannot be ignored, even if the AUM are still modest. 

One news item of note from the session, Young recently worked with the College for Financial Planning to create the first professional designation for sustainable investment. 

US SIF (social investment forum) has long been a resource for understanding the state of play in the sustainable investment space.  They continue to work to drive awareness and adoption of sustainable investment principles.  SASB has taken on the burden of working with industry participants, including public companies themselves, to establish industry-specific frameworks for the reporting of financially material information that would not typically be required by GAAP standards of financial reporting.

In 2018, US SIF published its biennial Report on US Sustainable, Responsible, and Impact Investment Trends.  The report can be found here.  From the website: 

“The 2018 Trends Report presents data from new survey questions on the asset class allocation of survey recipients’ ESG assets, their percentage of ESG assets in passive strategies, and their support for the UN Sustainable Development Goals. The Trends Report also focuses on the extent to which ERISA-governed pension plans added ESG funds after the Department of Labor’s 2015 guidance acknowledging that “environmental, social, and governance issues may have a direct relationship to the economic value of the plan’s investment.””

When it comes to the adoption of ESG principles in investment management, there appears to be a hockey stick upturn starting in 2012.  Readers should be aware of issues with the data, however.  There are very few new mandates in the public equity space these days as money is being pulled from active management and placed into passive ETFs and index funds.  There has, however, been a surge in mandates seeking active managers integrating ESG principles into their investment process.  Investment managers have realized that selecting Yes to questions in databases about ESG will open up their products to searches.  Asset managers may change nothing about their process, but reason that since they’ve always considered corporate governance in their investment process, they can say yes and be considered for a prospective mandate.  This “greenwashing” can inflate the amount of true ESG offerings available and can make it more difficult for asset owners to identify the right partners for these new mandates.” 

Being a signatory to the United Nations Principles for Responsible Investment (UN PRI), is a phrase heard from industry participants as evidence of a commitment to invest with some sort of ethical guidelines.  That said, any mechanisms to hold people’s feet to the fire in showing their commitment to responsible investing are rather toothless. 

UN PRI has championed 17 SDGs or Sustainable Development Goals, which include such areas for global improvement as Zero Hunger, Quality Education, Gender Equality, Decent Work and Economic Growth, and Responsible Consumption and Production.  1,700 asset managers and investment providers are signatories to what the speakers called a framework for a conversation.  The goals do not all neatly map out to easy financial choices, but the idea is that if investment dollars were to target some of these global issues, the world could be improved. 

SASB is connecting businesses and investors on the financial impact of sustainability.  They have brought some shape and focus to the marketplace, helping the area grow and become more robust.  In a world where corporate valuations have become more and more dependent on goodwill and other intangible assets, analysts need to find ways to evaluate the sustainability of those assets.  ESG factors can provide forward-looking insights into a company’s performance and risk. 

There has been an explosion of data.  In 2011, 20% of S&P 500 companies produced a corporate responsibility report.  In 2018, it was 86%.  That said, while companies surveyed think they are doing very well in their responsibility reporting, investors still feel there is a lot of room for improvement.  The reports are inconsistent to each other, making them difficult to compare.  The data points used are not governed by any accounting rules, leaving analysts unsure as to what is being reported and how reliable the metrics are.  Analysts wanted data they can reliably build into models. 

SASB stepped into the gulf as a standards-setting board taking an evidence-based approach to provide standards for issuers (of both stocks and bonds) to use in disclosing their ESG efforts.  In order for something to be considered for a standard, there must be:  1) evidence of investor interest and 2) evidence of financial impact.  This has led to ESG factors reasonably likely to affect the financial condition or operating performance of a company.  2,900 people worked on this standards-setting effort; a third each from: asset managers, asset owners, and academics. 

The full standards (broken out into 77 distinct industries, as not every metric pertains to every company) were released in November 2018 and can be found at the SASB website here.  While these are called standards, adoption is still strictly voluntary.  The hope is that the investment community demanding to have the data will pressure the companies to provide it.  Major accounting firms are starting practices to verify the reports that are published.  Only a couple of dozen companies have implemented the SASB standards thus far; JetBlue was the first. 

The third panel of the ESG track of the Intellisight conference was titled “Clarity from the Chaos?” and was moderated by Eric White of Cogent Consulting.  The panelists were Matt Sheldon, CFA of KBI and James Spidle, CFA of Breckinridge.  For context, Cogent is a Minneapolis-based investment consulting firm working with mission-driven investors on impact investing around the region.  KBI is an Irish-based asset manager and Sheldon is a portfolio manager on the firm’s water strategy.  Breckinridge is an investment grade fixed income manager that fully integrates ESG into its investment process.

The chaos of the panel’s title is largely the confusion clients and other industry participants feel about what everything means.  As a fixed income manager, Breckinridge had to explain that ESG wasn’t just a concept important to equity managers.  They had to make the case that as fixed income has set maturities sometimes far into the future, considering ESG risks is only prudent in evaluating a potential credit investment. 

One point KBI feels is important for investors to know is that having an ESG lens does not mean that they cannot invest in “bad” ESG companies.  If the risks are priced in, the issue may be a good investment.  But they feel the company can get to a more appropriate valuation if they are more inclusive in the risks they consider.  In addition, they want companies to be better and will engage with management teams to share views on how they feel the companies could improve their ESG practices. 

Another issue in the chaos of ESG investing is that not every client prioritizes the same set of values.  So while KBI may look for companies that are solving water problems, an investor might protest that a company is solving the problem of accessing water in order to facilitate fracking.  Breckinridge largely manages customized separate accounts, allowing every client to have its own values overlay.  No companies are pristine, but they have the information to be able to tilt a client’s portfolio to the areas they care about.

Another point of confusion is between investors and companies.  The investors serious about ESG are often attempting to engage with issuers on various ESG topics, but each investor may have a different set of priorities in terms of what they want to see reported.  Overall, everyone wants better disclosure and transparency, but what form that will take is still evolving.

Asset managers have been struggling with how to report their ESG efforts to clients.  They’d love a generic report to supply, but each client has a different set of interests on which they want to see results.  Reporting is definitely still evolving.

The idea that you can do well while doing good is another point that is still not fully accepted among investors.  More and more asset managers believe they can integrate ESG thinking into their investment process without sacrificing returns, but discussions are ongoing with clients as to how realistic it is to invest to a narrow set of principles and still expect market or better returns.  Given that many believe integrating ESG into the investment process will decrease risks, some advocate that at the very least you can achieve better risk-adjusted returns with this approach.

What it means to incorporate ESG into the investment process can vary widely.  There are so many different approaches to integrating ESG and investors must do the work to look under the hood and evaluate the veracity of the ESG claims, given the incidence of “greenwashing” (see above) in the industry.  Just falling back on an ESG rating by a service provider will not give the full picture, particularly as many companies who are rated have never had a conversation with one of the providers.  Differentiated ESG integration will have the asset manager asking its own questions and coming to its own conclusions on a company’s ESG record. 

An interesting point made by Sheldon:  the best rated ESG companies are often trading at high valuations.  The worst are at low valuations.  So a good portfolio from a valuation perspective (perhaps banking on improvement through engagement with the low-rated companies) may have a low score from the ESG service providers like MSCI and Sustainalytics.  

The main way to avoid the confusion and chaos in the ESG landscape is to start with very basic discussions with clients to ensure everyone is speaking the same language.  Do not assume that when someone uses the word sustainable, for example, that it means the same thing to all parties.  For that word alone, some think about it in terms of energy sustainability, while other think about how sustainable a competitive advantage is for a company; two very different concepts.  So ask questions, form a common foundation, and the end result will be much closer to the vision of what the investor is truly looking for.

The final panel in the Intellisight ESG track on August 13 was called “Demystifying ESG Data, Ratings and Research” and was moderated by Chris Eckhardt of Columbia Threadneedle Investments.  Geeta Aiyer of Boston Common Asset Management, Trevor David, CFA of Sustainalytics, and Jennifer Sireklove, CFA of Parametric were the panelists.

Columbia Threadneedle has a large sum of assets in ESG-related quant strategies.  Boston Common is an ESG boutique incorporating ESG at every stage of what they do.  Sustainalytics is a service provider offering ESG ratings on public securities issuers.  Parametric is a quant manager with no individual securities analysis, but they are providing custom ESG integration for clients upon request.  They have been thinking about active ownership practices with an ESG lens, however – voting proxies and the like.

ESG data allows you to do ESG research at scale.  Columbia trades in 6,500 publicly traded companies and does not have time to trade them all.  They use 3rd party ratings/research as a starting point.  ESG data, now coming from many public companies, can be critical to ensuring a portfolio is meeting client expectations.

Sustainalytics provides company-level risk ratings meant to get at a company’s exposure to ESG risks.  The firm starts with which factors are material at the subindustry level.  They speak with companies and leverage Sustainalytics’ analysts’ expertise for this.  They will make adjustments at the company level related to geography and other company-related idiosyncrasies. 

A question for Sustainalytics was how they account for the fact that companies eagerly report good news, but are hesitant to provide data that will make them look bad.  Sustainalytics will screen news sources daily and pull relevant incidents in that analysts will assess in the context of what they know about the company already. 

Other areas Sustainalytics is developing:  a carbon risk rating; country-level ratings; municipal bond ratings, including looking at the proceeds and how they are used.  They also have product information at the company level – not just identifying “sinful” products, but also if the company is deriving income from things like affordable housing or sustainable transportation systems.

Parametric began having conversations with clients about ESG in 2018, but found that many of the client’s aims do not map well to public equities.  Growth in affordable housing is a good example, as there are few public stocks that will impact this objective.  Things that can work in public equities is controlling the types of companies you own and changing the way companies behave.  Companies will be influenced more by owners of the company, so sometimes you need to own shares of a company whose practices you don’t like in order to effect change. 

How to benchmark custom ESG portfolios?  Most asset managers leave it up to the clients, but will have conversations about tracking error expectations, particularly if the client decides that a standard benchmark is the index of choice.  Too many client-driven restrictions will lead to wide dispersion from a benchmark, but the ESG mandate being fulfilled may be more important than a tight performance profile.

Boston Common has an independent investment team as well as an ESG team.  The output from the ESG team is a source of information to the investment team – a corroborating source from a different vantage point.  Ideas can come from both sides and have to be vetted by the other.  The team feels that it would be irresponsible to throw away any relevant data; more and more is becoming available for ESG factors.  That said, in markets that are less efficient for financial data (emerging markets, small caps), there is less ESG data available, as well. 

In terms of engagement, while some ESG risks are systematic and cannot be diversified away, investors can try to steer companies away from the iceberg.  One needs to look beyond the typical dirty industries to companies that on the surface seem less likely to be impacted by ESG risks.  But if a bank is making loans to oil producers or coastal developers and is not itself asking relevant ESG questions of its customers, it could face losses that could have been avoided.

Reporting is still a work in progress for the industry.  Some are using the UN PRI Sustainable Development Goals, others tailor reports to client objectives, and still others are attempting to come up with standard reports that can meet the needs of most of their clients.  Many asset managers are in continual discussions with clients on how best to meet their needs. 

Are you interested in helping plan the 2020 ESG Track at Intellisight? E-mail Amanda at events@cfamn.org.

Track Recap: ESG at Intellisight

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By: Hilary Wiek, CFA, CAIA, Society Volunteer

J. Drake Hamilton
Science Policy Director, Fresh Energy

The ESG track at the Intellisight Conference on August 13 was a terrific guided tour through the issues and solutions currently in development and practice in the investment community. While it has become a massive topic in some industry circles, some may still be unaware that ESG stands for Environmental, Social, and Governance. It is somewhat related to the SRI (Socially Responsible Investing) methodology that grew to prominence in the 1990s, where individual investment programs applied values (faith-based or otherwise) to screen out certain investments.

ESG has gained more widespread acceptance globally than did SRI because of the risk-avoidance approach it entails for many. While certain “sin stocks” (for example, gambling, alcohol, tobacco) may offend some, there may be nothing inherently wrong with the investments. On the other hand, if a company is polluting, treating its workers poorly, and operating without appropriate board oversight, there are legal, competitive, and agency risks that prudent investors should seek to avoid.

The Intellisight ESG track started at breakfast with a talk by J. Drake Hamilton of Fresh Energy, a non-profit climate and energy think tank based in St. Paul. She is a Science Policy Director, so spoke to us of science-based evidence of damage being done to the planet and the policy work they are doing to combat very real problems. Fresh Energy seeks to shape and drive realistic, visionary energy policies that benefit all.

Some facts Hamilton presented, particularly the ones that hit close to home (I encourage you to go to fresh-energy.org for much more):

  • Even with strong measures by the world’s largest polluters, consulting firm Wood Mackenzie said in its August 2019 Energy Transition Outlook that fossil fuels will still contribute about 85% of the world’s energy supply in 2040, down only 5% from today. Much investment is needed to transition our dependence on fossil fuels to sources of energy that will have a marked impact on global warming.
  • Minnesota has warmed 3-4 degrees in the past 30 years. By 2050, the temperatures are expected to warm an additional 5 degrees Fahrenheit. A warming climate leads to amplified extreme weather. The “100-year events” are now happening much more often. More of the rain will come in intense downfalls, which cause extreme floods and damage agricultural productivity.
  • Wildlife in Minnesota is being impacted. Expect a rapidly declining population of moose (replaced by deer), loons, and Canada lynx (replaced by bobcats). The state’s pines, firs, spruce, and tamaracks are facing issues, as well, as some are being harmed by an increase in pests and too early springs.
  • For humans, Minnesota mosquito season has extended from 74 days a year to 108. Lyme disease is on the rise. Pollen production is increasing. Heat waves are coming with more frequency and more extremity. Children under 5, adults over 64, and people living in poverty are most at risk.
  • Globally, July 2019 was the hottest month ever recorded.

Current policy issues:

  • People will not stay and die where the environment won’t support them – they will migrate. This will lead to places that can support life being inundated with climate immigrants.
  • Both China and India are outperforming their national commitments to the 2015 Paris Agreement. The U.S. is not performing on pace; where the federal government has not taken action, the states have been assuming leadership on the issue, though it is not enough to move the dial as much as is needed.
  • Minnesota’s House of Representatives passed a bill in 2019 to establish a 100% clean energy target for electric utilities with a deadline for completion of 2050. This effort is supported by the largest Minnesota utility, Xcel, companies, citizens and city governments within the state. Nearly half of Minnesota’s electricity production is already free of carbon.
  • All levels of government can help in fighting an increase in global temperature. Beyond mandates and incentives to businesses and homes to convert to electricity, cities and states are working to transition to electric vehicles for their fleet vehicles. In the Twin Cities, all new buses purchased for Metro Transit will be electric starting in 2022. By 2040, the entire fleet will be electric.

What sort of information should investors have?

  • Investment is needed particularly in batteries – wind and solar are variable, not available every minute of every day, so finding solutions to the storage of power is essential. By moving passenger vehicles from today’s less than one half of one percent to one third of the global fleet in 2040, immense scale will be added to the battery manufacturing sector, which should lead to innovation and cost reduction.
  • Wind and solar are often produced in more rural areas where renewable energy potential is much greater. But electricity does not currently travel long distances without significant losses. Transmission that moves the clean electrons from where they are sourced to population centers is needed. This improvement to our national infrastructure is being called the Power Superhighway.
  • The clean energy transition – taking carbon out of the economy, be it in skyscrapers, transportation, or homes – is being fueled by lower cost technologies replacing fossil fuel uses; this will hurt some and help others from an investment perspective. Investors need to be aware of the risks that this transition may have on investments, be they opportunities or threats.
  • Make the business case: companies, cities, industries, and citizens need to be shown how attractive it is to live in a world where temperatures only rise by 1.5 to 2 degrees C by 2030 rather than 3 degrees C, which is where we are currently trending.
  • 60,000 jobs have been created in Minnesota in clean energy. 40% of those were in rural parts of the state. This field is growing 4-5% faster than other jobs. Energy efficiency is responsible for 46,191 of these jobs, while another 4,917 are in solar. Two Minnesota companies, Blattner and Mortenson, installed 70% of all solar and wind projects in North America in the last 10 years.
  • Wind is our least cost clean energy resource, though solar will soon be in that category. Solar panels, per a VP of Mortenson, have dropped from 47 cents per watt to 35 cents in just 10 months, and the costs keep dropping.
  • Many landowners receive higher profits from renewable energy lease payments than from some farm fields, so installing clean energy generation provides more income diversity for farmers. Improved economics on land increases land values and property taxes for local communities.
  • Aveda was the first Minnesota company to go to 100% wind energy. It is building its own solar array in Blaine, MN. Aveda, General Mills, Target, Tennant, Cargill, Best Buy, and Uponor have all shared their clean energy goals – and economic rationale – with Minnesota legislators.
  • Xcel Energy announced this year that in 2028 and 2030 its last two coal plants will be shuttered. And it will save its customers $200 million by doing it.
  • Goldman Sachs this year formed the Sustainable Finance Group to deliver sustainable growth solutions to clients. They see this as a big growth initiative for its business, not a do-good venture.
  • Shareholder actions and divestment: Typically, you have to own shares of bad actors to get them to listen, but if you find they are not listening and are actively operating in an irresponsible manner, investors may need to divest to get their attention.
  • Increased options to invest: Morningstar says that $8.9 billion in net inflows went to funds with an ESG mandate in the first six months of 2019. Green bonds will have expanded to $250 billion by the end of 2019.

In the next blog, I will report on the highlights of the four ESG-related panels that followed Hamilton’s breakfast presentation.

The Impact of Equity Engagement

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By Timothy Smith, Director of ESG Shareowner Engagement at Walden Asset Management, a division of Boston Trust & Investment Management Company

One of the approaches used by investors to engage companies in which they own shares has been a combination of dialogue and shareholder resolutions. For over 45 years investors have utilized their right as shareowners to file resolutions for a discussion and a vote at a  company’s  annual stockholder meeting . These resolutions have included a wide range of governance , social and environmental issues. Many of them ask for companies to expand their reporting and disclosure on an issue. Others seek a change in company policies or practices.

Companies respond in very different ways to these “ petitions”. Some are defensive and hostile, others are polite but still reserved, others see this as a positive opportunity for dialogue with an investor and seek to find a win/win agreement.

Increasingly companies have responded with constructive discussions with investors.  Often these resolutions are the foundation for discussion and are  withdrawn when an agreement is reached . On other occasions the resolution is included in the proxy and voted on at the annual stockholder meeting.

One of the often asked questions is whether engagements and resolutions have any positive impact or if they are just an example of a Don Quixote shareholder tilting at corporate windmills .

I have had the opportunity to be part of such shareholder engagements for over 45 years so can point to numerous examples of this “ exercise” bearing no fruit while others are very effective and result in long term changes by companies. We believe the record shows that such prodding/persuasion by investors has resulted in significant and specific changes by many companies on a wide range of issues.

The “ impact “ of such engagement is chronicled in a 2014 report by the Croatan Institute in concert with a number of investors including Walden . For those interested in this strategy this report is a very useful resource.

These other materials from Walden help make the point about the effective impact of shareholder engagement.

Hear more from Timothy at our upcoming ESG Impact Investing track on August 23. The track is part of CFA Society Minnesota’s annual investor conference, investMNt. Learn more here & register today!

 

Since 1975, Walden Asset Management has specialized in managing portfolios for institutional and individual clients with a dual investment mandate: competitive financial returns and positive social and environmental impact. Walden is an industry leader in integrating ESG analysis into investment decision-making and company engagement to strengthen ESG performance, transparency and accountability. Walden is a division of Boston Trust & Investment Management Company, a PRI signatory.

Impact Investing Tipping Point – After a decade in the trenches, signs of progress

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Adam Seitchik, CFA

Adam Seitchik, CFA, CIO of Arjuna Capital

I went to Minneapolis this winter and something remarkable didn’t happen.

I had accepted an offer to speak at a conference on impact investing for local investment professionals. The sponsor was the CFA (Chartered Financial Analysts) Society of Minnesota. The event was sold out and the room was full despite a high temperature of 0o F on the day. We convened at the Minneapolis Club, which feels more like a place to drink brandy and clip bond coupons than discuss innovations in sustainable investing.

Just a few years ago a group of wonky CFAs like this (it takes one to know one) would mostly be asking skeptical questions about the dangers of mixing social purpose with wealth building. But somehow we seemed to have reached a tipping point and that tired old elephant was nowhere to be found in the room.

Instead, to my delight and amazement, one of the keynote presentations was from Wellington Management, a former employer of mine. Wellington is one of the largest institutional global money managers in the world, with almost $1 trillion (!) in assets under management. Their clients include pension plans, insurance companies and giant pools of state-owned assets from around the world. And at least when I was there, the client list included sultans, kings and princes.

I left the world of institutional money management over a decade ago precisely because places like Wellington were completely uninterested in, and indeed often hostile to, the idea of impact investing. Yet we heard in Minneapolis that Wellington now has a dedicated team of analysts helping portfolio managers understand the Environmental, Social and Governance (ESG) risks and opportunities that are embedded in their portfolios.

I was asked to speak because many of the investment advisors in the area are getting inquiries from their clients about socially and environmentally impactful approaches to their investments. The money managers are scrambling for solutions.

We sometimes refer to what we do at Arjuna as “total portfolio activation,” and I described how we empower client impact across asset classes. Like Wellington, we integrate ESG analysis into our equity investment strategy, but more consistently and comprehensively. As innovators focused solely on sustainable investing, we have created multiple avenues for our clients’ money to have real, tangible impact in the world. The arrows in our quiver range from shareholder engagement with publicly traded companies, to investing in a host of financially promising private enterprises with demonstrated social and environmental impact. We don’t have the conflicts of interest inherent in the big firms, whose clients often include the very companies in which they invest. We work for the enlightened shareowners of corporations, not corporate managements themselves.

When it was my turn to speak I noted how struck I was that Wellington was there in the first place. I spoke of the impact investing field in generational terms. Gen 1 were the pioneers, emanating mostly from Boston in the early 1980s, who built the foundational infrastructure measuring and monitoring corporate environmental and social performance. I am part of Gen 2. My bias as an institutional investor coming into the field of sustainable investing was that the Gen 1 firms combined an admirable idealism with a fairly rudimentary approach to investing. The niche was small and underdeveloped.

Gen 2 worked to create a performance-oriented approach to impact investing. We were learning about sustainable investing while modernizing it with state-of-the-art tools and practices. The field began to mature and to grow. Perhaps a broader perspective on investing would enhance shareholder value, not put it at greater risk.

Gen 3, which represents established institutional money managers exploring sustainable investing, was for years largely reactive and inauthentic. With strong encouragement from important, mostly European clients who were signatories to the UN Principles for Responsible Investment (www.unpri.org), the big players have been pressured over the last few years to report on their ESG investment strategies. Eventually, what gets measured gets managed, and now we are seeing some nascent attempts by mainstream managers to do this work seriously, properly and comprehensively. Mainline firms for the most part haven’t fundamentally re-engineered themselves, but for the first time I’m seeing the early shoots of something real.

What nearly brought me to tears at the Minneapolis Club on a winter’s day was imagining Gen 4: the millennials who, as study after study reveals, want meaningful work within humane organizations that positively impact our world. Unlike all those who came before them, Gen 4 investment professionals, even in places like Wellington Management, will not know of anything other than ESG-integrated investment approaches. These young men and women whom I work with and teach give me hope. Soon they will be in charge.

For baby boomers like me, they are a defense against critiques that we’re nothing but greedy, selfish narcissists. If the most important test of a generation is the quality of its offspring, then maybe we aren’t so bad after all.