Morningstar - Q4 2022 - 57

Jon Hale: To clarify terms, ESG refers broadly to data
about nonfinancial issues and is widely used in the
investment world. Sustainable investing encompasses
the idea of delivering a competitive return alongside
positive outcomes for people and planet. What should
investors know about these concepts?
Cary Krosinsky: In my classes, we talk about
the " seven tribes of sustainable investing, "
which are seven distinct categories of investment
strategy. These include negative screening,
avoiding companies you don't want to own for an
ethical reason, which is where the field started.
The reverse is positive/best-in-class approaches,
used by firms like Generation Investment
Management, which has beaten benchmarks after
fees over time, and Parnassus Investments
and others that aim to invest in financially viable
companies trying to solve problems.
Impact investing is often focused on services for
the poor, usually through private investment.
Thematic investing encompasses the rise of things
like climate tech venture capital and renewable
energy project finance. There's ESG integration,
and then there's shareholder engagement;
some pension funds do nothing but engage with
companies, for example. Last but not least
is minimum standards, where engagement and
divestment advocates come together. For
example, funds like the New York State Common
Retirement Fund do what New York City does
with restaurants-put a letter on the window so
you know you can trust the food.
Tensie Whelan: There are many different strategies
with different reward/risk profiles depending on
different goals. Some investors are willing to take
lower returns for higher environmental/social
returns, others absolutely not.
Another thing creating confusion is that investors,
and therefore corporates, are focusing on a
check-the-box approach to ESG metrics. Those are
process-based metrics-they have to be, because
these are very broad standards that need to work
for everybody. But if a company manages to
reporting metrics as opposed to having a strategy
to hit performance targets, it won't get there.
While reporting metrics are useful, understanding
the underlying dynamics and how well a
company has identified these material issues
and is executing against them while embedding
sustainability into its corporate strategy is critical
for understanding performance.
Hortense Bioy: All investors have to start with
the question, Why should I look at ESG data? What
motivates me? Cary, you mentioned seven
approaches. I can group some and narrow it down
to three, with this question: What's my primary
objective-is it financial performance, value
alignment, or impact? With each approach there
can be trade-offs in terms of risk, cost, or returns.
One reason this is a complex topic is because it's
difficult to assess the impact of each approach
on the real world. We often say that impactoriented
people surely care more about real-world
outcomes than those who are risk-oriented.
But risk-oriented investors can also have a positive
impact on the world. We also often hear that
value-aligned investors who don't want to invest
in certain companies have zero impact on the
cost of capital of these companies. But if there are
enough investors collectively that divest, surely
that will have an impact. It's much more nuanced
than the arguments that you often hear.
Pushing Back on the
Backlash
Hale: Some of the pushback we've seen from the
political right in the U.S. is predicated on
the assumption that ESG is having an impact.
Whelan: More investors and corporates are
beginning to confront a set of risks and
opportunities that, while they've existed for a long
time, have never been as pressing as they
are today. If a coffee company does not focus on
climate change, they are not going to stay in
business. If a property and casualty company
doesn't have some understanding of the risk of
climate change and the impact it's going
to have on their policyholders, they are going to
have significant financial problems.
One of the challenges we see on the risk side is
that people don't have enough information
to be able to identify the probability and monetize
the risk, they're unwilling to invest in what's
needed to avoid them, and they're not assessing
the cost to them of not making those investments.
In terms of the backlash, if you look at BlackRock
BLK or JPMorgan JPM, they're still investing
in oil and gas companies. They haven't divested.
There's a lot of unwarranted thunder and
lightning, at least from the right. The left is upset
that BlackRock is continuing to invest in oil
and gas. They are caught between a rock and a
hard place!
Krosinsky: I think there's been confusion
in the media about ESG. ESG isn't one thing, it
encompasses a wide variety of specific
environmental, social, and governance issues.
A brief example: Asia is half the world's
economy, and governance is an extremely
important dimension in knowing if you can trust
your investment. Are we supposed to not
invest in Asia because we can't look at ESG
considerations? Are we going to miss the
rise of Asian economies as investors? There are
some basic starting points that get lost in
this political pushback.
We're hosting a happy hour in New York in
November that we're calling The Backlash to the
Backlash. I haven't seen a single asset owner
or a single financial institution slow down its ESG
efforts. We see more students getting hired
into ESG positions, and more job openings that
can't be filled.
Bioy: As part of the backlash, there are people-
I would include Tariq Fancy in that camp-
who think that sustainable investing has no impact
whatsoever on the world. While impact can be
hard to evidence, the situation in Texas and this
whole backlash against ESG in the U.S. are
evidence that sustainable investing has an impact.
Otherwise, why boycott pro-ESG companies
and try to discredit the ESG movement? ESG is a
threat to some people and industries. ESG is
clearly an existential threat for the oil industry.
Whelan: As you know, virtually every day The Wall
Street Journal has been publishing some type
of anti-ESG investing article. But they also feature
anti-ESG funds, like a MAGA fund or a VICE fund.
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Morningstar - Q4 2022

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