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Wall Street Bets Bigger on ESG as Sustainability Takes Hold

The greed-is-good ’80s power brokers are long gone, replaced by a generation of investors that at least present themselves as kinder, gentler and more environmentally and socially conscious. 

But the almighty dollar — maybe a little less than omnipotent now — is still the tool of the trade on Wall Street and the big money players are using their influence to steer companies to a better future with a bit of enlightened self-interest. 

The general idea is simple enough — wrecking the planet and being horrible to people is bad business. It’s a growing realization has been reinforced repeatedly, by the Business Roundtable’s 2019 statement declaring that companies have “a fundamental commitment to all of our stakeholders,” by a flood of purpose-driven declarations by companies and more. 

The zeitgeist has clearly shifted.

And while there are many reasons for companies and investors to take strong stands on environmental, social and governance issues — ESG in investor speak — the feedback loop with Wall Street is based on money, shareholder votes and some personal nudging of management. 

The dollars are big time, big enough that companies that don’t rate high enough on ESG measures are missing out on a giant group of investors. 

According to the Forum for Sustainable and Responsible Investment, there was $17.1 trillion guided by sustainable investing strategies in the U.S. at the start of 2020, an increase of 42 percent over two years. 

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That’s one-third of all U.S. assets under professional management. 

“ESG is becoming really hot,” said Herman Bril, former chief investment officer of the United Nations Joint Staff Pension Fund and soon to be CEO of sustainable finance firm Arabesque Asset Management.

“A few years ago it was coming up, primarily in Europe, and now it’s catching a lot of momentum. The whole COVID-19 crisis accelerated the ESG movement. The regulatory landscape is changing in Europe. And it is also being pushed by the change in the U.S. administration,” said Bril, who is also co-author of “Sustainable Investing: A Path to a New Horizon.”

“The world is changing dramatically and I think for the better because there’s much more consciousness about how we have to take into account the planetary boundaries and what actually is the footprint of people — consumer companies have a footprint, governments have a footprint,” he said. “More and more people want to see action, but it is difficult because these things are systemic changes in society, you can’t just flip a switch.”

While not immediate, progress is coming quicker.  

“What is changing now is that sustainability is taken at the heart of the business model and the strategy,” Bril said. “More and more companies do understand that will drive your future fitness. At the end of the day, it’s about evolution. Who’s going to survive and who’s going to die?”

Investors are using range of approaches as they make these Darwinian investment calls. 

The most-basic method used by the large institutional players is to be passive investors in the background, but use filters while putting money to work, ruling out, say, companies with a big carbon footprint.

But even passive investors — who tend to buy into funds that make bets across sectors — can engage with the companies themselves, using their shareholder votes that come with their investments to support sustainability or worker rights.

And then there are investors who are more active, picking winners between companies and they are increasingly engaging directly with CEOs on issues that matter to them.

Wall Street is also speaking out more generally, taking stronger stands on issues and signaling to companies and the broader investment classes where they are headed. 

Among the leaders has been BlackRock’s chairman and CEO Larry Fink, who wrote in his 2021 letter to CEOs: “I believe that the pandemic has presented such an existential crisis — such a stark reminder of our fragility — that it has driven us to confront the global threat of climate change more forcefully and to consider how, like the pandemic, it will alter our lives. It has reminded us how the biggest crises, whether medical or environmental, demand a global and ambitious response.”

Fink leads an investment empire that oversees more than 35 million retirement plans and has more than $9 trillion in assets under management. 

That has BlackRock keeping close watch over its investments across much of the economy and fashion. 

“We represent BlackRock’s clients,” said Ariel Smilowitz, associate in BlackRock’s Investment Stewardship division and lead stewardship analyst for the apparel sector in the Americas. “We vote proxies at annual meetings and we engage with companies throughout the year to advocate for responsible and sustainable business practices. BlackRock’s conviction is that companies that are deliberate about their role in society will be better positioned to succeed over the long term.

“Ultimately, what we’re really evaluating is a company’s ability to oversee and mitigate risk, as well as its ability to capitalize on opportunities,” Smilowitz said. “We want to understand how leadership is assessing the business, how they’re identifying risk, and the processes that they’re putting in place to ensure they are best positioned to address those risks.”

Much of the work now revolves around getting everybody to speak about ESG issues in the same way. 

For fashion companies, Smilowitz said: “What we’re really focused on is making sure that companies disclose their progress in a standard and concise way. We want companies to package sustainability information in a way that aligns with the Task Force on Climate-related Financial Disclosures Framework, which includes four pillars — governance, strategy, risk management and metrics and targets. This gives us the opportunity to assess their progress over time and compare them against their peers.

“Companies have to understand the role they play in society and what it’s going to take to succeed over the next 10, 20 and 30 years,” she said.

And BlackRock is not alone. 

Wall Street is promoting something like a united front, with many of the big investors pushing ESG in their own ways. 

At buyout giant KKR, which has more than $252 billion assets under management, Henry Kravis and George Roberts, co-chairmen and co-CEOs, used their annual letter to address changes both at their own company and the companies they invest in.

“We have kept — and continue to keep — our hearts and minds open while learning from each other and friends of the firm on tough topics like racism and discrimination. As such, we started an internal conversation series to take on important issues in a way that we have never done in 44 years,” Kravis and Roberts said. “Outside of KKR but within our ‘family,’ we also recognized that we could make an equally positive impact at our portfolio companies, in particular on the boards of directors and on how our companies think about D&I. On the first point, we set a goal of having at least two directors with diverse backgrounds on the board of every company we control. We have now met this goal on every board of directors for the companies we control in our Americas [private equity] business. In aggregate, 30 percent of the directors serving on those companies are diverse and we have added over 100 diverse directors to our boards since 2018. We have been examining every single aspect of our business and evaluating how we can be doing more.”

And doing more is the order of the day.

 

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