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Data & Research November 11, 2022
Expert Panel: The Economic and Political Sides of ESG
Experts caution against including political values in investment strategy, but explain that ESG is not a political agenda.
Reported by Paul Mulholland
On Thursday, ISS Media hosted a series of conferences on ESG. One such conference, entitled “ESG Investing: Political Agenda or Economic Factor?” by Amy Resnick, discussed the intersection of ESG and politics.
The expert panel featured Michael Kreps, to co-chair of Groom Law’s Retirement Services and Fiduciary Group; Jeff Mindlin, the Chief Investment Officer at Arizona State University Enterprise Partners; and Timothy Calkins, a Co-Chief Investment Officer at Nottingham Advisors.
What is ESG?
The panel largely agreed that ESG is an investment risk strategy that includes ESG factors (environment, social, and governance). This investment lens provides additional data when considering risk and is supposed to guide investment decisions rather than dictate it. It is one of many considerations that an investor or fiduciary might use. Calkins explained that “it’s about additional data to make better investment decisions.”
However, different ESG analyses can result in different ratings for the same investment.
Mindlin lamented that different ratings for the same product makes investing more complicated, and noted that different companies have different access to data about the products they rate.
Calkins expanded and said that even with same data, different analysts will analyze it differently by weighting the same risk factors differently. He doesn’t believe ESG ratings will ever be standardized because it is value-weighted investment. Due to its more subjective nature, different analysts will produce different findings. He recommends that an investor should “find the agency where you like the process the best and then use their ratings” rather than compare multiple ratings from different analysts who are using different criteria.
For example, Calkins suggested that the “Governance” in “ESG” may be the most important of them all, since it speaks directly to management and corruption, and a failure to consider it might be a breach of fiduciary duty in itself. However, not all ESG rating services may share the view that “G” should be weighed more than “E” and “S”.
ESG vs. Divestment
ESG as a philosophy of risk management is in contrast to what Calkins calls “divestment” or intentionally pulling out of and avoiding entire sectors of investment for reasons related to an investor’s political and ethical views. Though Calkins sometimes works with “mission driven” clients who make exclusion and divestment requests, this is not what ESG is strictly speaking, since ESG strategy would normally invest in highly profitable fossil fuels businesses, for example.
Mindlin explains that he tries “to avoid divestment as a strategy”. Viewing ESG as additional information however can lead to greater insight on how to capitalize on climate transition and the growing renewables sector. ESG is a method of reducing risk, but not at the expense of reduced returns, which an investor favoring an exclusionary strategy may be more tolerant of.
ESG and Politics
The panelists did acknowledge that political values often inform how ESG strategy is executed.
Mindlin said of ASU that “Sustainability is key to our identity,” but the challenge is how to “align with that ethos from an investment strategy perspective.” He noted that ASU prides itself on its sustainability ethic and its carbon neutrality.
Calkins said that some rust belt clients are skeptical of ESG. If you frame ESG as a political agenda it can seem like an attack on someone’s political identity. When asked if liberally minded investors are more open to ESG than conservative ones, Calkins responded that it is “certainly an easier conversation” and there isn’t the “same potential pushback.”
He lamented that “politics is trying to get ESG to pick a side” but making ESG a political issue will only make it harder to acquire the data investors need to make decisions. He said that one does not “want to trade off performance for social good, but it’s terrific if you can have both.”
Kreps noted however that political and moral views can cloud the judgement of any fiduciary, regardless of the weighting they give to ESG factors, or their personal political views. He quipped that “if you really hate shoes you won’t want to invest in shoe shops no matter how profitable they are.”
He urged fiduciaries to focus on their client’s interests and consider the fact that retirement benefits are a social good in and of themselves.
