The U.S. sustainable investing industry is poised to calm investors following a firestorm of criticism that erupted with accusations of greenwashing and was recently fueled by former Vice President Mike Pence, who has asserted in a the wall street journal writing that environmental, social and governance investments allow a “cabal” of CEOs, bureaucrats and regulators to promote “leftist values”.
Efforts to reassure investors include emphasizing that business is business as usual and that sustainable approaches are a valuable cornerstone of long-term investing.
Because much of the assertion of critics of sustainable investing rests on confusing terminology, the effort focuses on identifying and clarifying greenwashing as well as explaining the wide range of approaches that sustainable investing encompasses. A popular variant, ESG investing, aims to reduce the risks associated with ESG factors. Many also invest around their values, which sometimes involve burning issues such as abortion rights and gun control, and seek particular results from their investments. For example, they may want their portfolios to contribute to the achievement of the United Nations Sustainable Development Goals. (For a fuller description of the general varieties of sustainable investing, see Morningstar’s Sustainable Investing Framework.) Another source of confusion is the growing popularity of stakeholder capitalism among corporations, in which employees, suppliers , customers, communities and the environment are involved. give equal consideration to shareholders. Although this is related to sustainable investing, it is entirely separate.
In an upcoming message to fund investors from Parnassus Investments, a leading sustainable investment firm, CEO Ben Allen wrote, “You may have seen recent comments in the news questioning the value and authenticity of ESG investing. Allen emphasized Parnassus’ belief that investors can succeed financially while choosing to avoid companies that harm people and the planet. Additionally, Allen wrote that ESG investing is hardly political: “ESG investing certainly has a values component, but it is not a political tool of the left, and Parnassus has no political agenda. We just don’t want to take advantage of certain companies or industries that don’t align with our values.
One criticism focused on the range of sustainability rating providers, such as Morningstar Sustainalytics or MSCI. Many sustainability ratings often do not agree with each other. Still, Allen noted, agencies are creating standards to build consistency and accuracy in ESG assessments for investors. And ESG factors identify the real risks.
In an email Monday, Morningstar CEO Kunal Kapoor said, “Sustainability is redefining the way investors think about risk and reward. This is an investment conversation, not politics. Investors increasingly want both sides of ESG: mitigating risk and making a difference in the world. They’re not the same, and they come with a whole new set of trade-offs investors have to make.
Kapoor went on to say that ESG critics were “missing the opportunity to reframe sustainability as an investability.”
Sustainable investing, according to Kapoor, is an element of what he calls active personalization, which is a growing trend in investing.
This week, BlackRock (BLK), the world’s largest investment firm, and lately a punching bag for critics of sustainable investing, unveiled a advertising campaign to highlight how he’s helping investors prepare for retirement, even as Republicans slam him for pushing a “radical ESG agenda” and some states threaten to limit how much business they do with it. The company and its outspoken CEO Larry Fink have come under scrutiny for their stance on climate change. BlackRock has a dual focus: as a provider of sustainable investment funds, with billions of dollars of clients committed to the strategy; and as a company that has embraced stakeholder capitalism for corporate clients. He sees stakeholder capitalism as essential for the long-term future of companies, so that they can “evolve and grow to generate attractive returns for decades to come,” as Fink wrote earlier. This year.
“Stakeholder capitalism is not about politics. It is not a social or ideological program. It’s not “woke,” Fink wrote. “It is through effective stakeholder capitalism that capital is efficiently allocated, companies achieve sustainable profitability, and value is created and maintained over the long term. Make no mistake about it, the fair pursuit of profit is always what drives the markets; and long-term profitability is the measure by which the markets will ultimately determine the success of your business.
Other defenses of stakeholder capitalism have emerged. JPMorgan Chase (JPM) CEO Jamie Dimon, who has supported stakeholder capitalism as Chairman of the Business Roundtable, told a recent conference that stakeholder capitalism is not “awakened” and describes himself as “a red-blooded free-market capitalist.”
“All we’re saying is, when we wake up in the morning, what we care about is serving customers, earning their respect, earning their loyalty,” Dimon said, according to the FinancialTimes.
Pence’s op-ed “was a repudiation of the whole stakeholder idea,” wrote Martin Whittaker, CEO of Just Capital, a nonprofit that polls consumers about the attributes they want to see from companies and is also a proponent of stakeholder capitalism.
“Paying people fairly, creating good jobs in America, investing in communities, respecting customers, embracing moral leadership, advancing accountability — based on seven years of polling, these are the things that make up good business, not adherence to political dogma,” Whittaker wrote.
Indeed, proponents of ESG investing have said in the past that it is necessary to invest and capitalize. In an interview at the COP26 climate meeting in 2021, Henry Fernandez, CEO of MSCI stated that ESG is “100% a defense of the free enterprise capitalist system and has nothing to do with, you know, socialism or zeal or anything.”
There is a lot of room for misunderstandings because sustainable investing contains a wide range of approaches. The Morningstar framework identifies six key ways investors can practice sustainable investing: apply exclusions, limit ESG risk, seek out ESG opportunities, practice active ownership, target sustainability themes, and assess impact.
One of the reasons people are increasingly concerned about greenwashing is the use of “ESG integration” (what we at Morningstar call ESG risk mitigation), in which companies use ESG factors to invest, but no more than other factors such as earnings growth. Indeed, the SEC proposes to improve and standardize current practices so that these funds describe to investors how central the ESG process is.
At the annual conference of US SIF, the trade organization for the sustainability industry, attendees pledged to redouble efforts to eradicate greenwashing and clarify terms. “If you’re not transparent and accountable about the use of ESG criteria in portfolios, you’re wrong,” CEO Lisa Woll said at the conference on Monday.
Ivy Jack, head of equity research for NorthStar Asset Management, said despite criticism, the firm’s clients remain interested in investing their stocks, especially in the wake of the economic turmoil caused by the pandemic. However, they are more concerned about the market decline. Jack and his colleagues advise them that “it’s time to think more about your values” as long-term investors.
Speaking at Monday’s conference call, Jon Hale, head of US sustainability research at Morningstar, said: “Above all, we have to keep in mind that these attacks are proof of success and not domain failure.
Hale also said that sustainable investing is not a political activity but an investment practice. He further stated that sustainability-focused mutual funds need to be more transparent about what they do. The new SEC disclosure rules will help. But already, funds are beginning to expand their reporting and disclosure to better explain what they do. Today’s reviews will only accelerate this trend.