Why It’s Hard to Build ESG Consensus

In a recent conversation with PLANADVISER, James Stenstrom, senior manager of asset and liability at CAPTRUST, and Eric Bailey, principal and financial adviser at CAPTRUST, ran through some of the findings that most surprised them from a new survey of endowments and foundations.

One enlightening portion of the survey focused on the perception and use of investments with environmental, social and governance (ESG) themes. While most organizations polled (70%) do not currently leverage ESG investing themes, the survey shows that foundations with less than $100 million in assets are much more likely to use ESG funds (30%) when compared with larger organizations (14%). Of those that do use ESG investing strategies, the most common implementation methods are “mission-aligned investing” and “broad ESG mandates.” Most organizations (76%) indicate “negative screening” as the most common tool, as opposed to positive identification.

“It is very surprising that the majority of organizations in the U.S. nonprofit community are not following any type of concerted ESG strategy,” Bailey says. “Considering the conversations we have with our clients, I suspect that a big part of this dynamic is the fact that everyone’s view on environmental stewardship and social responsibly is different.”

Bailey and Stenstrom say, in their experience, it is not uncommon to get a board of directors or an investment committee together, even in a very unified organization, and find that half the room supports a given cause, while the other half is very much against it.

“Even in these very mission-driven organizations, there is such a diversity of opinion out there,” Bailey says. “It’s also important to consider geography. If you’re dealing with a national entity or board, some people may be coming from a very oil rich community. They are going to look at the issue of fossil fuels and climate change differently than those people in the organization coming from a more progressive region of the country. Building consensus is hard.”

Stenstrom says it was surprising to see that smaller organizations are actually leading the way in terms of ESG use, as it is often the case that larger organizations are the first to establish new and innovative investing strategies.

“With ESG, this is seemingly not the case,” he says. “We think this is because the larger the organization, the more diverse will be the stakeholders that are going to be involved in managing the portfolio. Bigger organizations have bigger boards and investment committees, which opens up more of an opportunity for disagreement. On the other hand, smaller entities generally have fewer stakeholders involved in a given decision.”

Looking forward, CAPTRUST finds only 2% of respondents plan to reduce their allocation to ESG funds. Half of respondents (51%) are undecided when considering ESG funds, while more than a third of respondents plan to maintain their investments and another 9% plan to increase allocation into the funds.

Published last year, the ESG Investor Sentiment Study from Allianz Life Insurance Company of North America found that, in the U.S., social and governance issues are seen to be equally as important or more important than environmental record when consumers decide whether or not to invest in or do business with a company. Furthermore, the study found that a company’s ESG profile plays a significant role in its overall reputation, as a majority of consumers believe companies focused on ESG issues have better long-term prospects.

When asked about the importance of a variety of ESG topics in making a decision to invest in a company, 73% of American consumers noted environmental concerns such as natural resource conservation or a company’s carbon footprint/impact on climate change. However, the same percentage emphasized social issues such as working conditions of employees or racial/gender equality, and 69% highlighted governance topics such as transparency of business practices and finances or level of executive compensation as being significant in their decisions.

Also notable, the Allianz study found a significant gap exists between what people say is important and how they actually invest. More than three-quarters of respondents said the following ESG issues were important in their decision to invest: provides safe working conditions for employees (84%); gives transparency in business practices and finances (81%); provides living wages to employees (80%); provides quality health insurance to employees (78%); and conserves natural resources (76%). Yet less than half said they chose to invest/not invest based on those same business practices.