ESG

Quality over quantity when it comes to climate change-related disclosures

According to Pensions & Investments, we are seeing a greater number of climate change-related disclosures by companies across sectors, as recommended by the FSB Task Force. Companies continue to take disparate approaches to the content and scope of disclosure. Importantly, the article notes: “While many companies describe climate-related risks and opportunities, few disclose the financial impacts of climate change on their firms.” Clarity on the effect of climate change on firm performance will be essential to a fiduciary’s determination that climate change has a material effect on investment performance for purposes of its duties of prudence and loyalty under ERISA. The DOL’s recent guidance on ESG investing confirms the need to have this clear link in mind and the supporting documentation in hand. Connecting the dots will be imperative.

George Michael Gerstein to discuss ESG compliance considerations at upcoming ACA Compliance Group conference

I am happy to be speaking once again at the ACA Compliance Group Fall Conference in Scottsdale, Arizona on Oct. 5 to address ESG issues. Here is a description of the panel:

Navigating the Demand for Environmental, Social, and Governance (ESG) Policies
Client and investor focus on environmental, social, and governance issues has grown. As this demand continues, investment advisers seek to apply ESG standards to the investment process. Panelists will discuss how compliance intersects with ESG, and the roles compliance officers can expect to play when developing and maintaining an ESG program.

George Michael Gerstein to speak on ESG compliance issues in Phoenix

I am thrilled to be speaking at the upcoming ACA Compliance Group’s Fall 2018 Compliance Conference in Phoenix October 3-5. I will be on the following panel:

Navigating the Demand for Environmental, Social, and Governance (ESG) Policies
Client and investor focus on environmental, social, and governance issues has grown. As this demand continues, investment advisers seek to apply ESG standards to the investment process. Panelists will discuss how compliance intersects with ESG, and the roles compliance officers can expect to play when developing and maintaining an ESG program.

Here is a link to register.

George Michael Gerstein to discuss ESG with a panel from Wellington and Brown Advisory

Join Boston BASIC (Building A Sustainable Investment Community), a consortium of Boston area SRI professionals, on Thursday, October 11th for a practical discussion of the considerations fiduciaries should take into account when incorporating environmental, social and governance factors into their investment process. The event will take place in Boston.

The discussion is hosted by George Michael Gerstein, Co-Chair Fiduciary Governance at Stradley Ronon, and joined by:

Hillary Flynn, ESG Analyst at Wellington Management

Mary Gregory, Sustainable Investing Specialist at Brown Advisory

The event is closed to the press.

Register here.

ESG risk management is becoming more common

Who is this “ETF iconoclast” in pursuit of socially responsible investing?

Ethan Powell
President, ImpactShares

Bloomberg Law recently profiled Ethan Powell of ImpactShares. As described by Bloomberg, “he’s setting up funds that eschew popular one-size-fits-all environmental, social and governance (ESG) models for ones that not only are built hand-in-hand with specific charities, but also fork over the bulk of their fees to those organizations.” These are values funds, that, while very niche, have yet to attract sizeable inflows. How niche? The article adds: “Impact Shares and a handful of others want to keep the focus on social responsibility while remaining commercially viable. Issuers are starting targeted funds that fit the zeitgeist; think gay rights in the workplace, help for veterans, women on corporate boards, and so on. UBS Group AG is donating 5 percent of the fee from its InsightShares ETFs, with a minimum floor donation if the funds are slow to catch on.” This strategy sharply contrasts with other strategies that incorporate ESG factors as a hedge against investment risks. Confusion over terminology persists.

Morningstar examines how ESG scores affect investor decisions

Ignites recently reported on a recent Morningstar paper regarding the influence of its ESG scoring system on investor decision-making. Evidently, investors are avoiding funds with low ESG scores but are not automatically seeking out funds with high ESG scores. According to the article, “A one-globe rating corresponded to a 3.7% lower growth rate over the tested period, the paper finds. Funds with better globe ratings did see higher growth rates, but the impact was much smaller — four-globe funds had a 1.5% higher growth rate while five-globe funds had a 1.4% higher rate.”

Board composition and compensation dominate proxy voting

ESG Update for Asset Managers

I was particularly excited when I learned that Callan had published its 2018 ESG survey.  I encourage all ESG managers to review the survey in its entirety, not only to see the trajectory of adoption rates among retirement plans (governmental and ERISA), but trends of other important institutional investors, such as endowments and foundations. In terms of take-aways, incorporation of ESG factors increased by 95% since 2013 (22% then vs. 43% today) by respondents. This is great news, but ERISA plans (both DB and DC) lag other institutional investors in terms of growth rates and overall adoption. Interestingly, Callan found that DB plans were more than 3x more likely to incorporate ESG factors into investment decisions than DC plans. 13% of DC plans have an ESG fund in its lineup (we’ll have to wait until next year to see how the recent DOL guidance will affect this). Inflows into ESG options in DC plans continue to be less than desired.

The survey also found that one of the top ways institutional investors are implementing ESG is by conveying its importance to investment managers (though many fewer asset owners reported using actual metrics to score managers on using ESG). These showings are consistent with what I have been hearing, both from the asset owner and manager standpoint. A struggle to standardize a cross-manager analysis based on ESG metrics has proved challenging. I know that investment managers are fielding more and more questions on their ESG credentials.

There seems to be different reactions by institutional investors to the data that is coming out on the link between ESG and investment performance. The top reason cited by those who incorporated ESG was an expectation that it would improve their risk profile, followed by fiduciary responsibility. Yet, the principal reason why some institutional investors are holding back on ESG incorporation is the perceived paucity of data linking one or more ESG factors to investment performance. This also showed up in a recent NEPC survey.

I would urge fiduciaries to review the governing documents of the institutional investor regarding ESG and make sure that the implementation process squares with the stated objectives of the investor. This could be a higher risk when investors pursue E, S and G factors discretely.

PRI is probably happy to see more and more interest from managers and asset owners on becoming signatories. Managers should be mindful that PRI will want to see some concrete steps taken and not a “set-it-and-forget-it” approach.

The asset management community may wish to consider whether the DOL should be pressed to issue additional guidance in this area. The GAO has already indicated that the DOL is open to that possibility.

SEC ends probe into climate change disclosures by ExxonMobil