No, not a clever mouth noise for “word”. What Would Ron DeSantis Do?

This was the question posed to me by a client firm. It wasn’t so much a question about Gov. DeSantis specifically, although that has to be on their mind given emerging state-level reverse mandates prohibiting investments in “woke capitalism”. They are earnestly trying to thoughtfully prepare for all angles of pushback against doing anything ESG-integrated that could limit their addressable market or harm their standing in the community of investment managers.

What makes the question interesting is that many firms are just now fielding it for the first time as though this is a novel challenge. It may be new(ish) in the political sphere but this was simply the way it always was in the capital markets. Even the concept of launching an anti-ESG investment firm is day old bread since there has been a “vice’ fund for two decades now.

The “two decks” dilemma

Anyone who has spent a day much less a career on Wall Street knows that banking, brokering, investing, and insuring are about as fiscally and politically conservative as industries get. Even rightward-leaning industries like defense & aerospace and oil rely heavily on a large and heavy-handed government for much of their existence. The people investing or protecting the money have been Friedmanesque in their prioritization of economic interest above all else. And even with those in control of oligarch-levels of family and institutional wealth with heavy progressive dispositions, the rule of thumb has always been maximize economic profit and then go do good with the proceeds through charitable and other pursuits.

For a good chunk of the 40-ish years SRI and ESG have been a tangible presence, there were firms with strong but closely held bona fides in sustainable and responsible investing. They would travel to meetings with clients, or trusted advisors, or gatekeepers with a book or a slide deck discussing in the rawest capitalist terms their process built around business ratios, economic factors, operational risk, credit quality, etc. But, pass the secret handshake under the table and out of sight, and a second book would come out that discussed environmental risk, human dignity, access to basic resources and opportunity, and managing the economic risks and opportunities uncovered by viewing the investment portfolio through an ESG lens. 

In some cases the firms were running two products and two versions of the process — one on the menu and one only if you knew the chef. In other cases it was one product and two versions of the story — one version just conveniently leaving out certain details about how they managed money.

Very often the reason for this duality was because these firms didn’t want to get pigeonholed as one of “those managers”. There was an otherness to ESG that automatically kicked managers into another category even if the root of the investment processes and the risk and return results were competitive with or even better than the non-ESG options. Self-identifying as an ESG manager was effectively self-selecting out of business opportunities because the near-universal assumption was ESG = concessionary, and a good marketing strategy is one built on removing barriers to doing business, not erecting them. Why emphasize something that is just going to trigger objections and pushback?

Today the script has flipped. Some level of ESG involvement or at least conversance has become table stakes for even the most generic and non-ESG of searches. This is a very new phenomenon, and the vast majority of strategies and investment shops addressing these ESG asks weren’t doing so five or ten years ago. The community of investment firms in the SRI/ESG space was small enough that those of us practitioners who were active in that space a decade or more ago could usually list them and their strategies out from memory, including the ones that had the off-menu ESG solutions. They are the ones who are seasoned at addressing this new wave of old-fashioned pushback, so that is a bonanza for the large firms that have swept up many of them to make part of their broader platforms. For the rest who are recent joiners in the ESG discussion, this is the first time they have been on the receiving end of both casual and aggressive attacks on the principles of responsible investing.

Past performance may not be a guarantee of future results in the capital markets, but history is always instructive because things have a way of repeating themselves. This is a great moment to listen to the elders. Maybe the response to WWRDD is WWKLDD — What Would Kinder, Lydenberg and Domini (KLD) Do?

DE&I and the dehumanization of data

Diversity, Equity and Inclusion – that is a lot to pack into one three-letter acronym, and therefore DEI faces a similar uphill battle to ESG for community comprehension. DEI also covers a significant swath of investment considerations that fall broadly under various ESG frameworks. This family of topics had a moment in 2020 when the collective historical trauma expressed in MeToo/Time’s Up, Black Lives Matter, Land Back, and other social movements converged with the newfound trauma of (and free time and free attention created by) COVID. It was at long last the Emperor-has-no-clothes moment for entrenched power structures from companies to governments. Personality-driven takedowns have dominated the news cycle, and probably unhelpfully pulled attention away from the systems-level challenges by casting individuals rather than institutions in the role of villain, but companies have taken heed and are at various stages of attempting to address internal processes and external imaging around the people processes that make up their enterprises. 

ESG and impact investors have been using the flow of capital to improve fairness, access and opportunity for all since long before it became a leading focus of conversation about companies right behind (and in numerous cases right in front of) climate change and the environment. Having been interviewed twice on the topic in the span of a week, and having to articulate what conscious investors are thinking about DEI, some clarifying thoughts were stimulated for me that I thought should be written down for posterity and hopefully action.

We are creating and then not resolving tensions around people in the corporate setting. On one hand we want to blind human resources processes to race, creed, color, religion, orientation, and gender, and let core competencies drive hiring, incentives, promotions, reviews, etc. On the other hand we want to shine the spotlight on these distinctions and celebrate individuality and diversity with the belief that out of a diverse workforce comes greater innovation, productivity, collaboration, and ultimately profit.

Data is a big part of this. For years it has been a maxim that corporate transparency is a proxy for overall good ESG performance, or at least a leading indicator. There is information in the active decision not to disclose that casts a company in a poor light. So, now we have data. A lot of data. We crave even more data. And data can be indicative. It can give a point-in-time view of a company’s DEI performance relative to the population at large. In other words, does the company look like its community, its customers, its partners, and its suppliers? It can give insight into trajectory as well. Is the company improving in terms of diversity, equity and inclusion over time?

The challenge with a data-centric approach to investment decisionmaking in this context is that it dehumanizes the very person-centric considerations wrapped up in DEI. We reduce people to observations that go on a check list. Rather than looking at the richness and complexity of an individual or a team of individuals, we tick boxes – Woman, check. Brown, check. LGBTQ2SIA+, check. I have heard it said in largely unrelated contexts that, as a corporate community, we have created edifices that obscure the humanity of workers, of people, by calling them “human resources” or “human capital”, as though people are nothing more than raw material that goes into the corporate machinery in order to manufacture profit. Now we are reinforcing that tension by being primarily data-driven in our scrutiny of DEI performance.

Data partially answers the question of who is doing better, but without asking whether that was an accidental byproduct or the outcome of a culture and a set of processes that inherently overcome systemic bias. Data can demonstrate correlation – the company’s performance improved as its workforce became more diverse, or the company became more diverse as performance improved – without demonstrating causation. Did the company take its success as an opportunity to make their workforce more diverse, equitable and inclusive? Or did better DEI performance unlock additional value for the company?

Disclosure, and our examination of it, needs to go beyond counting heads, and provide insight into the processes that make a company more person-centric. We also need more insight into what companies are doing to improve their access to a representative workforce, and also improving access of the representative workforce to employment opportunities. Often we hear that “there just aren’t enough qualified X candidates for this specific role or this level of seniority, so we looked at as many diverse candidates as we could but the sample was so small we couldn’t make the diverse hire.” 

Do companies take a long-term view of their workforces and recruit a representative cross section of people and then cultivate and develop them over time, training and rotating and promoting until there is a full pipeline of qualified individuals for all jobs at all levels? Do companies recruit at HBCUs and Indigenous Universities? Do companies collaborate with academia to promote a diverse and representative student body majoring in every needed discipline? Are companies hiring and evaluating only around proven experience, which is skewed by the limited opportunities diverse workers can access, or are they seeking and promoting on skills, aptitudes, and ability and willingness to learn? Are companies looking at their internal cultures, policies, locations, etc. and looking for ways to improve that two-way access, like proximity to diverse communities, flexible work hours and leave policies for parents and caretakers, training and development including tuition assistance, and open hiring?

In other words, are companies treating the lack of representative candidates as an externality that can’t be changed, only managed, or are they taking ownership for changing the system? 

There is another critical factor that does not get enough attention, and that is what the early lifecycle of a company looks like. Evaluate companies for DEI attributes the same as we do individuals – look at the origin stories. The capital markets do an entirely insufficient job of providing access and opportunity to diverse and representative founders and leaders of early-stage companies. It seems reasonable to expect that founders that look like the population at large are more likely to create companies that look like the population at large. Private investors still unabashedly focus on the “bros” because they have historically had the access and therefore the seasoning to go through the mill and get funded. Investors like track records, so we need more people with track records. Many of the most successful and acclaimed companies right now were not even a glint in their founders’ eyes a decade or two ago, and now they are worth billions and hire millions.

Much the same as building more diverse, equitable and inclusive workforces, it will take less than a decade to identify, fund and promote startups where DEI is their DNA, and that will rapidly grow into the next generation of high performing companies. This is well within the time horizon of private and institutional investors, and could catalyze a much deeper, systems-level change that turns the entire market through success, competition, growth and profit.

Quarterly catch-up

A few additions have been posted to the Library of note. First is an article entitled “Got the Message” on systems-level thinking on markets and sustainability. The short version is that we believe it is more capital-efficient to address the root causes of climate change than to discount the capital destruction caused by it. The free market is capable of pricing climate change risk if it is permitted to do so. Failing to recognize the true cost of capital by ignoring the system in which it exists is short-sighted and destined for ruin.

Next up, a fresh look at the investability of emerging markets through an ESG lens in “ESG and EM”. The transparency of emerging markets has improved significantly, making it easier for fundamental managers to examine environmental, social and governance criteria with the same intensity as in developed markets. Some of this improvement is a credit to the governments and home markets that are driven to attract stable, long-term investment capital from the developed world, and some is thanks to data providers and investment firms working harder to capture and catalog the same material information available to developed market investors.

Lastly, a copy of HR 109 of the 116th Congress, aka the Green New Deal, and an accompanying article, “Small Steps & Giant Leaps” where we make the market case for the Deal. The GND is a statement of direction and purpose to pull the country back from the brink in societal and environmental terms, but is not in itself legislation destined for law. If it never finds its way out of the starting gate, it is still an effective roadmap for communities and markets to mitigate risk and create the next several decades of economic opportunity while improving health and wealth for all. And, the greed motive is entirely in line with the objectives of the Green New Deal. There is a great deal of money to be made by investors that recognize the decadal opportunities it describes.