ESG investing — which takes environmental, social and corporate governance factors into account — is the fastest-growing slice of the asset management pie. If you’re an investor, you can evaluate companies one by one or you can put your money into ESG funds, which supposedly comprise companies that are ahead of their peers on these issues.
But the ESG label has come under criticism, with allegations of greenwashing and even fraud. In May, German authorities raided the offices of Deutsche Bank and a subsidiary based on suspicions that it exaggerated the ESG profiles of some of its investment products. A few weeks earlier, Tesla was removed from the S&P 500 ESG index, partly due to allegations of racial discrimination, while companies like Exxon Mobil remained in the index — prompting Tesla CEO Elon Musk to call ESG a scam.
With all this in mind, we wanted to look further into the current environment of ESG investing. Marketplace’s David Brancaccio connected with Amy Domini, founder and chair of Domini Impact Investments and a longtime leader in socially responsible investing.
The following is an edited transcript of their conversation.
David Brancaccio: It really is the big time. You have big financial institutions that offer these screens. You have smaller companies. What’s your sense, does it debase your industry when you hear news about possible greenwashing to the point that Deutsche Bank’s offices get raided in Europe by investigators looking for evidence of greenwashing?
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Amy Domini: “Debase” probably is a little bit strong. I do feel as though there are people stumbling as they enter into this field, and they will improve. The regulators do have a role here, both in terms of assuring that the ultimate customer gets the product they’re looking for, but also in assuring that we the asset managers have the information we need to make the calls. I do feel that the greenwashing accusations have a certain justification. You do have a situation where companies have a lot of products, and they’re not consistent with their standards of how to vote their shareholder proxies. If they have green products and are not voting shareholder resolutions in favor of seeking information about the impact on the climate that this company has, that’s a pretty big warning sign to investors. That one probably ticks me off more than just the claims.
Brancaccio: You’ve worked in this space for such a long time. I mean, you for decades really have understood that the label “ESG” or what one used to call socially responsible investment, it had to have meaning, it needed to be more than words.
Domini: Exactly. The whole goal of the industry is to assure that investors work toward a livable planet, inhabited by people who lead lives worth living. Here we have a number of dollars that trade in options, commodities, currency trades, stocks, bonds, insurance swaps, derivatives — that amount of money is more than [gross domestic product]. It’s more than GDP, global GDP, by a factor of, I get to 11 and other people may get much higher. So if you have that much money spinning around the world with perfect information or near-perfect information, instantaneous reaction, working against the goal of a livable planet, we’re doomed. To have the main Wall Street firms join into this initiative, albeit with something of a rocky start, is a tremendous win for my industry. It brings to the table the biggest footprints on this financial system. And as we all begin to operate together to get the data, which will lead to the information, which will lead to the social change necessary, that is going to be the fulfillment of the industry’s purpose.
“This is the big transition”
Brancaccio: Remember back in the old days, when investors and analysts would just try to look at the bottom line? “Let’s take a look at revenue. Let’s look at how much profits last quarter.” And all this ESG stuff seemed like an annoying complication.
Domini: This is the big transition. And I think that every 50 years or so, a big transition in the way portfolio managers look at their job comes along. Now, the understanding that assessing a company’s impact on their stakeholders is another lens, another way of understanding the company. If I were to say to you, here are two companies in the same industry. Company A has three controversies with the community that have led to lawsuits and things, and they have two product safety recalls that, you know, seem to have been asleep at the switch in terms of the early warnings on it, and the CEO is paid the highest in the industry. What are you learning, really? You’re learning information about the quality of management. Are they on the ball? Are they ahead of the curve? You’re learning something that’s of great value to investors. This is why I feel that the ESG has gotten to the point of being mainstream because as the major firms on Wall Street and the City [in London] and around the world discover the value-add that these additional pieces of information, this additional lens, adds to the stock selection, bond selection, whatever business you’re in, process, then they don’t want to give it up. They have their own systems, so refine it their own ways, but they’re not going to give it up.
Brancaccio: The Securities and Exchange Commission is right now considering rules to require more disclosure from companies on the risks to their businesses of climate change, and some businesses are pushing back — hard. Do you think that that rule-making could be a catalyst for opposition to investing according to ESG principles, in general?
Domini: Well, it’s a testament to the newfound strength of the industry that it’s now got stronger enemies. And, yes, I do think that the push for greater disclosure is leading to a certain amount of pushback, but the investor needs to have a greater understanding of risks. And I don’t think it’s all that new. The 10-K [financial disclosure] has mandated since 1972 that you discuss your environmental risks, it’s just very, very poorly reported. It’s just way underreported. And the SEC has not been auditing it and pushing for greater reports. This is a refinement on that earlier theme. The environmental liabilities are going beyond the fact that you spilled some sort of chemicals into some sort of waterway into more climate-oriented. But it is not that big a step away from history.
Brancaccio: I think you were monitoring when the Conservative Political Action Conference earlier this year was meeting in Orlando, Florida, I think it was, and they were talking about “woke capitalism.” They were coming up with a new brand for maybe what you do, and that’s part of the pushback. But you’d have to remind people that investing with your values doesn’t mean Amy Domini’s values. It could be a conservative person’s conservative values.
Domini: You know, we have growth investors, we have value investors, we have small-cap investors, we have growth at a reasonable price investors. They all get the same data from corporations, they all look at a price-to-earnings ratio that’s based on the same numbers. And they come to different conclusions as to whether or not that’s the stock they want to own. In the arena of ESG, I’ve been clear for 35, 40 years now that the goal is to engage investors. Investors represent an enormous amount of money, near-perfect information, near-instantaneous information, global outreach. There is no global government, there is no global infrastructure to do things. And we have this beautiful tool, finance, that can be used to do good. Do you believe that these investors have a role to play? That’s my question. Whether or not this particular company makes your cut is your decision. You have the standards that you’re applying. And if you make a call that’s a little different from mine, fine. But are you applying these standards? Are you actually looking at their environmental impact? Are you actually looking at their supply chain? Are you actually looking at the product they sell their customers and whether or not that product does any good for people?
Brancaccio: Right, personal decision. But just to make a finer point here, screening your portfolio for your values can work for liberals, it can work for conservatives.
Domini: It can. You know, we’ve gotten so politicized. I’m old enough to not think of corporations as having a political bent, particularly. And so this concept that certain corporations are woke and a problem and you have to legislate against them getting too highhanded, this is a whole new idea to me. There are a number of mutual funds that have conservative values in place. They haven’t particularly appealed to the public, there’s not a particular groundswell of interest in those funds. But they do exist and they keep trying, and maybe someday they’ll be bigger.
Brancaccio: A lower-cost way to invest, lower fees, is to have computers run your stock portfolios that tracks, you know, the big one is the S&P 500 index. When you screen for environmental, social, governance issues and matters, that requires a human, an active manager, and that raises the costs of having one of those portfolios. As investors look to cut their costs with this terrible stock market we’re living with these days, are you concerned that hurts your industry?
Domini: Well, there are a number of products out in the world that are run as [exchange-traded funds] or mechanical in the field of ESG. Where the cost argument really does come in is that this is a whole new field of inquiry, with a whole new skill set. So that at some point, in the process of building that ETF or that index or that lower-cost product out there, the producer is having to hire a more sophisticated workforce to put it together. And so there will be some baked in on that. That’s a startup cost. You know, when you’re on Wall Street … look at the hedge funds, 2% [annual management fee] and 20% of profits for what? For trying to do the best job they can. Well, what manager doesn’t? So when all of a sudden the public starts yammering about costs, I just think, you know, it’s a funny argument.