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?

So, anything happen while we were gone?

We could write an entire history book just from what has unfolded since the 2019 holiday season. There has been so much to say it has almost been like too many people trying to crowd through the door at the same time (something we don’t do any more…) and nobody gets through. There is a lot to say and it will be said now that we can turn our focus from just sheer absorption and processing and working with our clients to speak in broader terms about where we now find ourselves. Part of this will be unpacking a new understanding of ESG and regenerative systems to share in the very new world in which we now find ourselves.

Before we do that, time to play some catch-up. A few new articles landed which we have added to the Library, discussing everything from the failure of nations at COP25 to reconciling the rising enthusiasm for sustainable investment solutions with the numbers on the ground and in the market. We have also added the latest piece from The Investment Integration Project (TIIP), written in partnership with the Money Management Institute (MMI) and appearing in the Journal of Investment Advisory Solutions, “Sustainable Investment Products and Due Diligence”, which provides an excellent grounding for gatekeepers and other decisionmakers on how to systematically and fairly evaluate the growing multitude of investment options in the marketplace. It also makes a good starting point for investment boutiques who are trying to address the market to understand and meet expectations and constructively engage with teams making hire/fire decisions for asset management mandates.

The Purpose of a Corporation

It will take some time to unpack both the intent and the implications of the Business Roundtable’s redefinition of the purpose of a corporation, but a quick meditation on their announcement on August 19th leads to a very confusing place for a sustainability-minded stakeholder.

On the surface, the “Statement on the Purpose of a Corporation”, co-signed by 181 CEOs, seems like a tectonic shift in the alignment of stakeholder values. At long last, corporations are committing to prioritize something beyond unadulterated capitalism. The points they made and the rhetoric they used could have been taken right off the vision boards of a thousand responsible and sustainable investors. The five central principles they outlined are (direct quote from the Business Roundtable, August 19, 2019):

  • Delivering value to our customers. We will further the tradition of American companies leading the way in meeting or exceeding customer expectations.
  • Investing in our employees. This starts with compensating them fairly and providing important benefits. It also includes supporting them through training and education that help develop new skills for a rapidly changing world. We foster diversity and inclusion, dignity and respect.
  • Dealing fairly and ethically with our suppliers. We are dedicated to serving as good partners to the other companies, large and small, that help us meet our missions.
  • Supporting the communities in which we work. We respect the people in our communities and protect the environment by embracing sustainable practices across our businesses.
  • Generating long-term value for shareholders, who provide the capital that allows companies to invest, grow and innovate. We are committed to transparency and effective engagement with shareholders.

These principles actually vibrate on the same wavelength as the Certified B Corporation “Declaration of Interdependence”:

  • That we must be the change we seek in the world.
  • That all business ought to be conducted as if people and place mattered.
  • That, through their products, practices, and profits, businesses should aspire to do no harm and benefit all.
  • To do so requires that we act with the understanding that we are each dependent upon another and thus responsible for each other and future generations.

So where’s the fly swimming in the punchbowl? The sub-heading for the Roundtable’s press release said the following – “Updated Statement Moves Away from Shareholder Primacy, Includes Commitment to All Stakeholders”. Again, at face value this is a good thing putting aside profit and shareholder value as the priority above all others. But, this announcement lands almost contemporaneously with an announcement that the SEC would be holding meetings to discuss a plan on the table to reign in proxy advisory firms (a prior discussion of this move from Cydney Posner, Cooley LLP on the Harvard Law School Forum on Corporate Governance and Financial Regulation can be found here), and during a period where the SEC has been increasingly lining up with companies to brush back shareholder resolutions and keep them off the proxy ballots. This move to limit the shareholder franchise has taken the form of questioning the materiality of the resolution to the overall business, as well as inching toward requiring a minimum percentage of ownership in order to sponsor a resolution.

The danger here is that the confluence of disenfranchising shareholders with this new announcement from the Business Roundtable could actually mean a net setback if sustainable business behavior is defined almost exclusively by what management says it is without the input from and the natural corrective of the shareholder. That fifth principle is the linchpin to whether this will work or not – being “…committed to transparency and effective engagement with shareholders.” If the SEC defangs the shareholder, what does that actually mean in practice? We have seen repeated examples from aerospace to pharmaceuticals where self-supervision and fast-track regulation lead to bad outcomes for all stakeholders.

The Roundtable is on the right track if these principles are pursued in a regulatory environment that preserves an appropriate level of governance and accountability for shareholders, who are ultimately the only ones that have the ability to hold managements fully responsible in a free market. Employees can quit, customers can boycott and suppliers can freeze their pipelines, but boards and C-suite executives work for the shareholders.

NCA4 — Too much to ignore

It is of no small consequence that an administration predisposed to discounting climate science and dismantling environmental guardrails did not do more to bury the fourth National Climate Assessment. Aside from dropping it over a holiday weekend, not much has stood in the way of its wide release, and it has its own dedicated .gov URL. The science speaks for itself, the number of agencies participating in and validating the science underscores the conclusions, and plenty has been and will be written about the top-line takeaways in case earth, wind and fire have not been sufficient to make the point for the last several years.

Continue reading “NCA4 — Too much to ignore”