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.

Media updates on human trafficking and other issues

Three new articles are posted to the Library — “Collateral Damage”, exploring corporate externalities, the impact on systems, and how those externalities really create internal damage to company balance sheets when looked at properly; “Pulled in Many Directions”, discussing the alignment of stakeholder requirements in corporation and community; and “Breaking Free”, an all-too-brief look at the presence of modern slavery in Western corporate supply chains.

“Brothers Carrying Stone — Nepal” Lisa Kristine (c) 2019

This photograph, entitled “Brothers Carrying Stone — Nepal“, is part of an achingly beautiful but absolutely devastating series of photographs taken by humanitarian photographer Lisa Kristine. Please visit her website and be a patron of her work but also a vigilant supporter of correcting the profound wrongs she has documented. Regarding this photograph, from Ms. Kristine’s website — “Each day, children make several trips down the mountain, delivering stones from higher up in the Himalayas. They use makeshift harnesses out of ropes and sticks, strapping the stones to their heads and backs. Many of them come from families where everyone is trapped in debt bondage slavery. One of the mothers describes what it was like to be in slavery, ‘Neither can we die, nor can we survive.'”

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.

Tower of Babel keeping us apart

As is frequently the case in the money management industry, we are awash in terminology to address ESG and impact investing, and it all means everything and nothing at the same time. Well-intentioned but not well-considered marketing campaigns have repositioned words like “impact” to mean sustainable investing in the broadest sense, or negated their meanings entirely. Meanwhile, “SRI” has been re-branded as “sustainable and responsible investing” while simultaneously being relegated to the dust-bin as a pejorative for well-meaning but poor performing strategies.

As more people join the discussion we are increasingly talking past one another using language we think means the same things to others as it does to us, only to find out we are speaking different languages, or just plain gibberish. In the securities industry words mean something, and it is probably high time to see some of the discipline and compliance that governs the rest of the language of investing come into play since asset owners, advisors and consultants are making real decisions based on the words we use.

“A Confusion of Tongues” — Citywire USA, June 3, 2019

There is more sustaining gender inequity in business than meets the eye

While it may be appropriate to examine pay discrepancies or the imbalance in gender representation in leadership as a starting point, a much deeper examination is required to understand the systems-level constraints preventing equality in the working economy. The naive approach to investing for diversity and inclusion is to simply measure pay parity and the presence of women in the C suite or on boards. Better performance on these metrics may be an indicator of a more progressive enterprise, but it is by no means clearly causal. It could just as easily be that more inclusive companies perform better as it is better performing companies have the latitude to be more inclusive.

From an investment point of view it is necessary to look at everything from HR policies to recruiting and promoting practices to corporate cultures as well as the operational, competitive and other forces that are shaping them. Inclusiveness and equity start at a deeply fundamental level, and comprehensive ESG analysis can be the mechanism for digging to that level and establishing a platform for understanding and engagement to improve performance.

This month’s Citywire column posted in the Library starts to scratch the surface of this challenge, and looks to UN SDG 5 for guidance on what the foundational principles of gender equality and the empowerment of all women and girls looks like in investment terms.

“Equal Pay for Equal Work” — Citywire USA May 6, 2019

Happy (?) Earth Day

Well, the Earth isn’t particularly happy, and we aren’t so happy about what is happening to the Earth, so perhaps we should rephrase that to be Wishing You a Day of Concerned Observance for the Earth.

Today it seemed appropriate to come back to a recurring theme at RIS, that being the idea of the commons. We have been stuck with this notion that caring for the planet comes at the cost of truly free commerce. Underpinning that notion seems to be the sense that taking from the planet comes at no cost other than the expense of obtaining the license to exploit and the costs of the materials and processes to execute on that taking.

What we all need to recognize is that everything comes at a cost. Even if you subscribe to the notion that humans are the supreme beings on this planet, or even that only certain humans are supreme, that cost is socialized among us. If a factory belches GhGs or heavy metals into the air, we all share in that one atmosphere and the consequent health effects. If an oil well dumps millions of barrels of oil into the ocean, coastal communities and fisheries pay the price. If the water supply is polluted or overused, it is the citizens of Flint, Michigan or Charleston, West Virginia who get poisoned or the farmers of Nebraska or California who can’t grow productive crops. The consequences to access to clean water, breathable air, farmable land, fishable waters, safe and healthy food, clean beaches, and sharable wildernesses are shared by all.

In a free and fair market, people are compensated for taking risk, providing labor or sharing resources. But, the reality is people are not adequately compensated individually or collectively for the use of our commons. Our shared environment within our communities, our countries, and across our planet is being exploited with little concern for what it actually costs. Put aside for the moment you care about oily birds and homeless polar bears. If the market actually priced what it costs just human society for the uncompensated taking of our natural environmental resources in terms of health, welfare and prosperity, it would be far too expensive to sustain.

As long as it is cheap or free to take oil, coal, natural gas, minerals and water from our public lands, or to fill our public waters and public air with garbage and pollutants, this problem will never be rectified. The cost of doing business and the cost of capital need to take into account all of the costs for our people and our planet. What is the price for the use of our commons? Will they pay it? If not, they should lose their licenses to operate. Other businesses will take their places that serve the same needs but better consider the interests of all stakeholders. That is how a truly free market works. 

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.

Standing cheek to cheek

Somehow, even with the dramatic uptick in adoption of sustainable investment practices, the idea of investing in a conscious and purposeful way is still taboo. In the process of working to gain more mainstream acceptance of ESG-focused practices asset managers shifted away from the idea of aligning portfolios to individual or institutional values or missions and rather emphasized an investment-first, or in many cases investment-only approach to ESG. I have even sat through manager presentations where it was stated not just definitively but assertively that what was being shown was strictly about investing and without concern for issue avoidance or positive change for anything other than economic reasons.

What got forgotten is what motivates investors, again both individual and institutional, to want to invest in this way in the first place. Continue reading “Standing cheek to cheek”

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”