End of Week Notes

Attacks on ESG from the Swamp

Jon Hale
Jon Hale
Aug 10, 2018 · 4 min read

The American Council for Capital Formation, a Washington, D.C. policy group financed by the National Association of Manufacturers, the fossil-fuel industry, and various other lobbying organizations, recently released a report critical of company Environmental, Social, and Governance (ESG) ratings, following on the heels of its attacks last year on the embrace of sustainable investing by public pension plans. (See my earlier post, which includes a list of ACCF members.)

The report, written in an ominous “can you believe this?” tone, rehearses several issues with ESG ratings that are known to anyone who practices sustainable investing and that are being addressed as the field evolves — things like subjectivity, inconsistency, and lack of standardization. (I even saw a few “likes” on LinkedIn posts linking to the report from ESG professionals, who really should take a look at what they’re liking before pressing that thumbs-up button.) While the report offers some half-hearted and unoriginal “recommendations” for improvement (a way to bolster its credibility so that reporters will write about it), its clear and tendentious conclusion is that flawed ESG data undermine the entire project of sustainable investing. That was the emphasis of the ACCF’s press release on the report, which didn’t mention any of the report’s recommendations.

Despite the report’s real purpose, which is to discredit sustainable investing, one logical conclusion that could be drawn from it is that because more and more investors, including most of the largest asset managers in the world, want to be able to evaluate and engage with companies they own on the basis of material sustainability issues, the ACCF should use its clout in Washington, D.C. to push for consistent corporate ESG disclosure standards that would improve ratings.

Don’t hold your breath on that happening.

Then there’s the absolute swamp creature — how else could it possibly be described? — recently created by the ACCF called Main Street Investors Coalition, which is run by George Banks, executive vice president of the ACCF and financed by the National Association of Manufacturers (NAM). This “coalition” purports to represent mom-and-pop investors against the institutions that invest money on their behalf — pension funds and mutual fund asset managers — because these elitist institutions are increasingly practicing … sustainable investing.

This swamp thing is especially opposed to shareholder engagement and proxy voting, which it claims are aimed at “political” issues, like climate change, and that the BlackRocks of the world undertake these activities without considering the views of the everyday investors whose assets are financing them.

Where to even begin?

First of all, the BlackRocks of the world are engaging on ESG issues because they want to reduce risk and build long-term shareholder value.

Second, they have begun to recognize that investors should encourage companies to attend to their influence on the broader environmental, social, and economic systems in which they operate because doing so can both reduce long-term systemic risks and encourage a healthier systemic context in which investments can flourish over the long run.

These ideas pose a significant threat to the K Street swamp in Washington, D.C. which is in the business of taking millions of shareholder dollars from corporations and injecting the money into the political system, in this case, to help ensure that companies can avoid broader responsibility for their systemic impacts.

And anyway, third, real-life “Main Street Investors” actually support, not oppose, sustainable investing. Surveys show that large majorities of investors want to incorporate sustainability into their investments. When Morgan Stanley asked individual investors last year how interested they are in sustainable investing, 75% said they were either somewhat or very interested. And more than 70% agreed that having leading ESG practices can lead a company to higher profitability and make it a better long-term investment.

You may have heard about JUST Capital. For the past several years, it has done extensive nationwide polling, partnering with one of the nation’s top survey-research organizations, the University of Chicago’s NORC, to identify what everyday Americans think about corporate behavior. The findings were remarkably consistent regardless of a respondent’s ideology, income, or investor status: companies should treat workers better, be more responsive to customers, make good products, minimize their environmental impact, support communities in which they operate, and commit to ethical leadership. Sustainable investors are pressing these issues with companies as shareholders on behalf of everyday investors because it is the path to long-term value creation and a more sustainable world.

But to a swamp creature, that’s like scratching fingernails on a blackboard.

The Main Street Investor Coalition has nothing to do with everyday investors nor does it even pretend to have actual members. Nor is it a coalition of anything other than the corporate members of NAM. It is being financed by companies that give millions of shareholder dollars to NAM in order to make the argument that sustainable investors are costing them money by forcing them to consider and respond to shareholder resolutions (and quite possibly improve their businesses in the process).

There is nothing more powerful than an idea whose time has come, but in today’s Washington, D.C., dragging an idea down into the swamp can distort its meaning, confuse people about its purpose and delay its effectiveness.

For further reading, here are links to Aaron Ross Sorkin’s take on the Main Street Investors Coalition in The New York Times, several excellent blog posts from corporate-governance consulting firm ValueEdge Advisors (here, here and here), and a post by Julie Gorte of Impax on the shoddy NAM report purporting to show that shareholder resolutions do not benefit shareholders.

The ESG Advisor

Incorporating sustainability and impact into your investments

Jon Hale

Written by

Jon Hale

Global Head, Sustainable Investing Research, Morningstar. Views expressed here may not reflect those of Morningstar Research Services LLC. or its affilliates.

The ESG Advisor

Incorporating sustainability and impact into your investments

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