Sustainable & Impact Investing

Hot Topics in ESG & Sustainable Investing

Emily Lee:
Thanks so much, first off, for taking the time to join us on this webinar. This is part of our Sustainable Investing Symposium series. So I know myself and the folks from Saturna and Green Century really enjoy doing these webinars and being able to kind of brainstorm and come up with what are really relevant topics that we’re hearing from advisors today and their clients that we can kind of bring to you to help support the education around the sustainable investing space. So we appreciate your feedback on these events and ideas for future topics as well. 

So today we’re going to go over hot topics in ESG and sustainable investing, right? Which one can cover a lot of things. We’re going to focus really today about climate issues, regulatory developments, talk about project practice management and your own books of business. 

So the agenda for today, we’re first going to start off just introducing the hosts, so you get to know us again, if this is your first webinar that you’re joining us on, and then get in to get into the topic. 

So my name is for those of you I don’t know, I’m Emily Lee. I’m based in what continues to be rainy San Francisco, for Impax Asset Management. And Impax is a specialist asset manager. We’re focused on the opportunities arising from the transition to a more sustainable global economy. 

So with that, I will turn it over to our second host from Saturna, Patrick.

Patrick Drum:
Thank you. And so I appreciate the introduction and it’s a delight to be here with you and the group. Saturna, we’re a fit for a few and what we really specialize in is values-aligned investing, and we serve clients and being stewards of their capital, providing a value based investing approach, for the long term horizon. And it’s a delight and honor to be a part of this conversation and collaborate. And I’ll pass off to Erin. 

Erin Gray:
So I’m Erin Gray with Green Century Funds. We are the first family of diversified environmentally screened and fossil fuel free mutual funds in the country. And our mission is to provide positive environmental impact. 

So to start us off, I will just dive right in to our first topic of discussion here today, that climate issues are here to stay. So one of the hottest topics that we’re facing now, pun intended, unfortunately, are the increasing risks and effects of climate change. At this point, we are all familiar by now with the more extreme weather events and the dire headlines of more rain and flooding, more droughts, stronger storm systems, literally, this is the headline of our Seattle Times today. So it is really top line headline news. These weather events are posing significant costs to the economy, to people, to wildlife. Janet Yellen in a recent speech said in the past year there have been 18 weather and climate disasters that have each caused over $1,000,000,000. 

On the positive side, however, we are seeing things like more electric cars on the road, more innovative technologies like capturing carbon emissions within commercial buildings themselves, and then glimmers of hope on the policy side. 11 states have now set 100% renewable energy goals, with Minnesota passing the latest law just last month. There’s also the recent passage of the Inflation Reduction Act, which Emily will touch on later. That brings over or nearly rather, $400 billion in spending for the economy on clean energy projects that are estimated to reduce US greenhouse gas emissions 40% by 2030.

So with this complex mis mix of risks and opportunities, I’ll turn it over to Patrick. You spend a large part of your day evaluating the many facets of how investment worthy debt issuers are. When you consider credit ratings and the impact of climate events, what are some of the themes you’re finding and ideas you think investors and investors should consider?

Patrick Drum:
When we think about climate it as it relates to investments, it’s hard to kind of tie-in to what does that mean materially.  But there’s a tremendous amount of attention, regulatory aspects, that are coming into play. In the credit rating, agencies have really been taking note. And so to help provide some way of thinking I bout it from a risk perspective as a bondholder, because at the the day, a bondholders is only as good as they receive their principal back. And recently Standard and Poor’s came brought some brought some attention to the degree of trends of litigation cases. 

From 2017 to 2020, the amount of litigation as it relates to climate related risks that are being levied against governments as well as corporates is more that is almost doubled as of May of 2021. There had been over 1,800 litigation cases, of which among 40 countries, of which 75% of them occurred in the United States. 

It’s interesting to note from that they did S&P did a bit of a deeper dive and they identified 58% came to some account of one of three outcomes. One, it was requiring that the defendant either improve their policies. Second was making new climate commitments or making an investment towards some level of climate mitigation. 32% of the case outcomes were in the defendant’s favor, with 10% no discernible event. But when you’re finding that kind of a high ratio of impact, it is making a material change in corporate strategy and more importantly, governance of various governments behaviors. 

Just last March, March excuse me, March 8th, Fitch came out with a recent analysis that really caught my eye. They identified by 2035, it doesn’t sound very far, but that’s 12 years off. They identified in their entire universe of companies covered, excuse me, about 20% of them are are expected to have some degree of a credit downgrade of some kind of variation if nothing’s addressed with regard to their climate mitigation policies. And that’s pretty substantial. While noting what S&P and Fitch are saying, there’s this new trend that’s been evolving called greenhushing.

And it’s kind of an interesting counter trend, and it’s beginning gain some traction is greenhushing is a simple term where a company quietly shelves or reduces its climate reduction climate emission reduction strategy. Rio ESG Ltd it’s basically a consulting firm focusing on sustainability issues for corporates, identified that nearly a quarter of their companies that have made a net zero commitment are quietly shelving them.

So what does it mean really from an investment standpoint is what we’re thinking about it from a bond management standpoint. Again, we’re only as good as good and good is means that you get your principal back. And really it’s what we take as a three pronged approach as is a standard kind of model, but it’s really understanding how management is addressing climate related risks as well as mitigating them, and really kind of ensuring is the second part is ensuring that the appropriate disclosures of the entity’s exposures to climate related risks are important.

Well, some ways that you can find is they may report it, they may not. CDP is a good resource. If you look under C2.3a in their long reports, you’ll see how companies respond in their CDP report. And it’s interesting, State Street back in 2020 identified over 71 billion potential impairment, of which the majority of it was loss of the client’s market value of investments due to environmental factors that are affecting the investment portfolios. That’s a big sum. It gives you some way of quantifying it. 

So again, the first is really how management is addressing it. Second, what are the appropriate disclosures? And that gets a bit of the concern of greenwashing because now there’s going to be more of a legislative oversight on that at some point. And understanding, lastly, their contribution to climate risk. In regards to how climate change may affect the company is multifold and it really comes under five categories. But really climate risk, whether it is physical or transition risk, it may inhibit the ability of that issuers to rather it may inhibit the issuers ability to meet their future debt holding obligations. And it can come in a variety of ways. One is an impairment or on or undermining the value of their assets that are used to secure their loans or bonds. Input costs. Their input costs might radically change, particularly if you’re in agricultural, it’s disruption to supply chains. A third is obviously increased regulation, which just sort of, as mentioned. And access to insurance. Insurance might not be quite there or in the market pricing. That’s substantial.

There are some solutions in the bond world that we employ and look to as part of the solutions. And it’s not a catch all, but it’s this offer some venues. One is green bonds. We’re all familiar with their notation and their use, their qualified use proceeds that are designated towards environmental projects, either adaptation mitigation and a few other kind of broader scopes. At the end of 2022, there is about 444 billion that was issued. It was down 26% from 596 billion previous year.

China still ranks as one of the largest issuers and they were last year, followed by the US and Germany. There are some issues with green bonds because they’re bespoke and essentially an insurer can self-identify that this bond is going to be green and there’s no obligations beyond their voluntary commitment. And if it falls out of favor with it being tainting their green commitment becomes a brown bond.

We haven’t really seen a lot of evidence of this occurring, but it could impair the value of that particular bond’s tradeability in the secondary market. The second type of bond are known as sustainably linked bonds, and they came to the market in 2019. It’s a small universe of total outstanding, about 75 billion. But here it offers bondholders the compensation if the company doesn’t meet their specified key performance indicators or sustainable targeted objectives, and it’s either through a higher coupon payment or an enhanced payment above par.

And the third way that we look at how companies are addressing sustainability or finding a solution is whether they’re aligning with the science based targets initiative or how they’re ranking within the CDP report. And by examining these CDP reports, we’re able to sort of get in a deeper understanding how management’s thinking about it, and that’s offers a short context to that approach. I hope that also helps answer your question. 

Erin Gray:
Great. Well, that’s great. Thanks so much for those insights, Patrick. So to wrap up on climate, I’ll add that investors continue to demand environmental protections as well within the context of global recognition of the importance of protecting our wild areas. In December, fairly recently, the U.N. Conference on Biodiversity met in Montreal, and it led to the passing of the global biodiversity framework, which included something called the 30 by 30 initiative, which is to protect 30% of the planet and 30% of degraded ecosystems by 2030.

And that’s really in an effort to slow what we’re seeing as the largest loss of plant and animal species life that we’ve experienced since the dinosaur era. And then just last week, the U.N. also passed what’s being called the High Seas Treaty that brings the world’s oceans into this framework to protect 30% of marine areas by 2030. And following this global trend, investors are weighing in too. We’ve seen it through several issues that Green Century shareholder advocacy program works on, including protecting biodiversity and forests, allowing consumers the right to repair their products, not only to reduce the massive electronic waste stream, but just to keep critical equipment like farm equipment and medical equipment up and running, and also to reduce plastic pollution, which is contributing 18 billion pounds of waste that’s going into our oceans and waterways each year.

So our team urges dozens of companies each year. The past two years we’ve engaged over 80 companies and gotten 35 companies. Last year, 20 companies, sorry, 35 companies, two advocacy seasons ago. 20 companies this past shareholder advocacy season to make concrete, real world measurable commitments within specific time frames to improve their environmental performance. Things mirroring what Patrick mentioned, like setting concrete greenhouse gas emission reduction goals or science based targets, reducing their use of plastic packaging by set amounts, and setting policies to reduce their deforestation in their supply chains.

And institutional investors are agreeing and weighed in with their proxy votes. We continue to generate more majority proxy votes each year on shareholder resolutions that we’re filing. We’ve gotten three recently just on plastic packaging with Jack in the Box. 95% of shareholders agree they should offer more sustainable packaging as well as Sysco and General Mills. And that these votes will hopefully help ensure and give a better opportunity for change to happen.

So we’re very excited to see investors playing a role in this positive change and I will now turn it over to Emily to move on to our second hot topic for today. 

Emily Lee: 
Awesome. Yeah, and I’ll just kind of make some quick comments on a lot of the good stuff both you and Patrick just said. I think the advocacy stories are so important and I think we’ll probably talk more about them at the end. I know we often get questions about that, but for firms like Green Century and Impax and Saturna, I know it’s such an important way to really bring these issues up. And I think as you heard from Patrick, it is a lot about using ESG data to identify risks and be able to either avoid that in the portfolio or really understand how companies are addressing those risks that we can really kind of find those leading companies.

I think on the flip side too, thinking more on the equity side, there’s also the opportunity, right, through through engagement, yes, but also through, you know, identifying some of these themes we’ve been talking about. Climate related themes, biodiversity, you know, what companies are really poised today to be solving for a lot of these issues. So at Impax, we do spend a lot of time really identifying the solutions as well and being able to say we’ve identified companies that are working on water issues, energy efficiency, sustainable agriculture, sustainable infrastructure.

So I think there is a really positive trend too, to be able to use the ESG information we have, the trends, the backdrop of what’s going on to also really use, you know, use sustainable investing as a way to take advantage and create portfolios that are that are really poised for growth in these sort of long term sustainability themes.

So with that to Erin’s point, you know, we wanted also to touch on kind of the broader regulatory environment, which is always changing, keeping us on our toes. I think the big takeaway is we do really see a lot of strong momentum still going on here in the U.S. still. Yes, of course, but also so more so in Europe as well.

You know, we wanted to talk about the DOL rule when we were planning for this webinar. You know, it was you know, it’s kind of gone back and forth through the years, Right? It there had been a recent rule that it would basically now allow kind of open up the door, if you will, for ERISA fiduciaries to be able to consider climate change, consider these ESG factors that we’ve been talking about in investment decision making, in proxy voting. It’s kind of gotten, you know, pulled into the political arena, if you will, in terms of sort of some anti-ESG sentiment and has been overturned in the Senate. But we have been been hearing that that, you know, Biden will will veto it as well.

So I think, you know, the big takeaway here is, is, you know, the support is out there. And we do see these types of initiatives moving on. You know, at Impax, and with the other hosts on this call, you know, this is, you know, kind of an effort to really limit investment choices. And that shouldn’t be a political issue. It should really be a market based decision. And, you know, as we often talk about and you hear us talk about on this call, you know, ESG is about risk mitigation. It’s about opportunity and it’s about investment choice. So we’re confident that’ll get put back into place. You know, we’re still seeing momentum around other areas like the SEC proposal on climate disclosures. Again, really getting back to the fact that the more data we have, the better decisions we can make, the more transparent we can get companies to be, the more information we’ll know. You know, we’re seeing that happening in the U.K. to go into effect later this year, that they’ll have additional ESG reporting. So, you know, we’re certainly as a firm as an industry, very supportive of anything that really has enhanced scrutiny on ESG reporting, as well as sort of that ESG label that we see kind of used in our industry not always meaning quite the same thing. So a lot going on there. But we really, again, feel like the momentum is there. Companies are already factoring these things in. Regulation is in place and will continue. 

Erin mentioned the IRA briefly. You know, again, something we’re really excited about, I think particularly here, you know, obviously affecting that the U.S. market where close to $400 billion is being earmarked to fund a few different sectors that impact about two thirds of the emissions in the U.S. from things like renewable energy to building efficiency, energy efficiency. So kind of thinking again, of that opportunity lens in this space, you know, we’re able to really identify what companies are having tailwinds because of this act. So we really feel like this is going to give a lot of momentum to companies really being able to more easily plan for projects.

We’ve had a lot of our analysts, rather, have had a lot of earnings calls this past quarter, and a lot of our companies that we’re talking to are mentioning the IRA, not quite quantifying exactly how it’s going to factor in, but the fact that they’re sort of talking about it and excited about it and are adding that into sort of their business planning, I think is again, another sort of positive momentum.

So I think there’ll be more to come. But I think, you know, there’s a lot of exciting developments that are continue to to really support the growth of our space from regulatory legislative environment. But Erin, did you have others you wanted to talk about as well? 

Erin Gray:
Yeah, I would just echo a lot of your sentiments on what you’ve shared already.

And another exciting development we wanted to share was the recent launch of the Congressional Sustainable Investment Caucus, which happened in January by House Representatives Juan Vargas of California and Sean Casten of Illinois in partnership with our industry trade group US SIF, or US SIF. And it’s really a way to provide education, support and expertise to lawmakers on issues in our field and also act as a counterpoint and a resource to the recent backlash and some of the headlines and politicization of ESG.

Other updates. Our industry trade group US SIF releases a Trends report every two years that was released for 2020 in December that shows 8 trillion in sustainable and responsible investing in the U.S. so representing 13% of professionally managed assets in the U.S.. My colleague Leslie Samuelrich is going to be on a webinar tomorrow with Barron’s, and their headline was 17 Trillion in our space.

So you know, a little up in the air about it. But essentially this is following similar data from Bloomberg and Morningstar just showing continued interest and inflows specifically into responsible and sustainable funds, especially during this volatile market when the majority of funds are seeing outflows. So just exciting developments here. And, you know, I think anticipated and welcome some regulatory oversight here.

And I think now we will flow into our third and final topic of practice management around integrating ESG. So back to Emily, just given this regulatory backdrop and what’s going on in the field, what do you see demand like for sustainable investing? 

Emily Lee:
Yeah, it’s a great question, Erin, And I think it’s a great thing to remind folks, right? Because we tend to talk about, you know, some positives, some negatives, but positive momentum. And I think despite whether you’re looking at US SIF or stats from Cerulli or Morgan Stanley or the many others that are out there, we continue to see year over year, despite what goes on in the markets and in the greater macro environment. Demand continues to be very strong from a client perspective.

Recent research I was reading, eight out of ten investors express an interest in sustainable investing. Whether or not that’s education, that’s having options for their portfolio. We also see this really increase when you kind of look at the asset size of the potential clients, right? If you head into that sort of high net worth, ultra high net worth space, that demand grows even more.

And I think the trends also show it’s not just the younger generation, right? It’s sort of spreading out. So obviously that’s important to factor in when you think about the wealth transfer of assets and kind of getting to that next generation of clients, it can be a certainly a good bridge to sort of bring up sustainable investing. But I think also we’re just seeing the trend setter generationally, not only just the demand for sustainable investing, but demand for advice from advisors on the space, wanting customization, wanting transparency, also wanting impact and kind of reporting on that impact, which I think is important.

So all these things, I think, you know, tie back to it, to letting you know, letting us all be reminded that there is extremely strong demand out there. You know, we continue to see a mix, too, you know, we have a lot of obviously supportive advisors who are really focusing their practices around this. But there’s still a big segment of advisors who haven’t quite caught on to the demand that’s out there, haven’t really had, you know, a great process in place, either having an ESG model at the ready or knowing their fund partners that are out there or how to really have the conversation. So I think we’ll talk more about that. But I think the demand continues to be very strong. And as someone who’s, you know, building their practice or adding new clients, you know, we really see the best success is when you are proactive about asking around these issues, prompting clients about it, especially if you’re working with any institutional clients or nonprofits weaving ESG language into an IPS or having it come up, an RFP that can certainly be e a big game changer.

So as Erin said, US SIF has a lot of good data on this as well from not just the size of the space, but from the demand as well. So I think we did want to kind of talk to then also about, you know, how do advisors bridge this gap? Right? You have the client demand and you have maybe, you know, less advisors focused on this, a great competitive advantage.

What are some you know, what are some tools or ways to kind of, you know, bring that together? I don’t know, Erin, if you wanted to address that. 

Erin Gray:
So yeah, advisors can certainly participate in helping effect this type of positive ESG impact and change. And I think a few things that folks can do today to have more impact include just asking the fund companies that you’re working with about things like their proxy voting guidelines on ESG issues.

Most fund companies now have public policies and guidelines and voting records. You know, and just encouraging them to engage with companies on these critical issues if they’re not already doing so. As institutional investors, I think asset managers do have a really strong voice there that we can use in a positive way. As Emily mentioned, you know, you can just introduce these topics to your clients.

You know, they may not raise these issues proactively, but the issues that people care about, they usually care deeply about them. And you can identify clients by ones who are talking about, you know, they’ve donated money or time to certain causes. And then, you know, you can simply just add an ESG product to, or fund, to the core model and portfolios that you’re already using.

This will just give you a regular kind of quarterly, semiannually or annual way to show clients how this fits into a portfolio, how it compares to others. If you’re using kind of any of our hosts on the call here today, we provide you with regular updates in terms of the advocacy work that’s going on, kind of that positive impact piece that are good stories and nuggets to share with clients that can really help resonate and build a deeper connection there.

So Patrick, what are some good ways for advisors to start these conversations with clients and prospects about these issues? 

Patrick Drum:
And that’s a great question, Erin. Having also been an advisor for well over a decade, having these conversations is really the key part. You said a word that really resonated with me. It’s that word connection, because the most challenging thing when you’re a financial advisor is building the business, retaining the clients, and it’s a connection that’s based on trust in making certain that those clients feel like they’re being heard.

And that connection, you know, where obviously as an advisor, you’re going to build the portfolio based on the asset allocation, based on time horizon, risk tolerance, tax, all variety of those factors that come in there. And there’s really, quite frankly, the industry so commoditized that models are used and employed and it becomes sort of a chug and plug approach, you know, lock and load and go.

But really where the differentiating value and having also worked with a variety of clients over the spectrum of net worth and Emily really did highlight it. The higher net worth tend to be a lot more discerning about what it is that they can impart. When one is a financial advisor, it always felt like you know you’re being measured on things you can’t really control and you’re always measured on a quarterly basis and you’re only as good as your last statement.

But the ways that you can make this connection is talking to clients and say, “Hey, look, you know, the markets are going to do what the markets are going to do based on our allocation. There’s not a lot we can do, but the industry has changed a lot and we can start incorporating things that are important to you and things that matter to your heart and to your family’s priorities.”

Whether that has a faith, that kind of exposure, whether that has particularly alignment with values and interests that may be towards their philanthropic interests, certain various views with regards to their activities or social concerns, you can express that under some circumstances we may be able to incorporate investments that that honor and adhere to that and more importantly, be on the radar for things that might be of use.

I wrote some time ago, a workbook as to how kind of how to navigate those conversations because you’re able to basically then impart to the clients that I want more importantly, you know, that I’ve heard you. And then when we review and revisit this portfolio and allocation, that when we can rebalance, we can change things, but we can also find that there might be new opportunities, that it can address the things that are important to your heart.

And it’s that deeper connection that it’s not just numbers and financials, because the reason that they really are connected with you and most clients tend to make decisions on an emotional level, you’re connecting to the emotion in their heart. Clearly, it’s numbers, it’s rationale, it’s metrics, and you’re being a fiduciary providing the stewardship of good investment management. But there’s a lot of tools that are available.

And there’s also another white paper that I created some time ago, how to evaluate the sustainability of sustainable funds. There’s a lot out there and, you know, this is really where form and substance really has weight. And getting to know a few partners out there, understanding that process is key. But really it’s about just having that conversation and just saying, “You know, if you want to have this conversation, I’m available. But I have a lot of clients that are interested in having their investments align with their values. You mention their name and say, I’ve noticed that you’re really active in a certain faith. I also know that you have you tend to have a heightened concern about where things are with regards to the environment. I think I might be able to offer some solutions if you want to have that conversation when you’re ready.”

It’s a soft way of just introducing it in and your hope is they’ll say, “Well, what do you mean?” And then you can start to go from there and the door slowly opens. But really, from a steward standpoint, what we’re doing and do ESG in that broader framework was really about how to mitigate risks and seek for a different mindset of about opportunities.

But here it’s also connection at a private client level aligned on their values. And that’s where I found I was really able to move my practice up when I was with a variety of private net worth groups over my career. So I hope that kind of gives a little bit of an unfolding experience. 

But being a financial advisor is tough. It’s hard to differentiate yourself, and the way you differentiate is you tie their investments and their plans and their legacy to things that are important, that resonate with them.

Emily Lee:
And I’d say to just, you know, in addition to those kind of resources Patrick mentioned right. It’s folks like us, right? It’s firms like ours that that are dedicated that have been doing sustainable investing engagement work for years. So please feel free and lean on us. We’re happy to have conversations about specific topics or let you know if there’s areas we do invest, don’t invest, or you know how our ESG methods are. So I know we all have a lot of great tools, so please know that you can lean on us. And that’s why we have webinars like this. So I knew we wanted to make sure that we left plenty of time f or for questions. Gus, do we see some questions in the in the queue? 

Gus Grefthen:
There have been a couple questions that trickled in and I’m again, thank you, Emily, Erin and Patrick. I think you guys really did a great job touching on things that were top of mind for folks. I thought the practice management section was particularly interesting, so thanks for that. 

The first question that came there was a pretty general one. And you know, what are some good resources where advisors can learn more? And I think you guys touched on a couple of those. You know, Erin, you shared about the US SIF and Patrick, you talked about some of the work that you’ve put together. Maybe if you each have a couple that you could highlight and maybe tell our audience what they might expect to find from those as well, I think would be helpful.

Erin Gray:
Sure. I’m happy to jump in. There’s a bunch here. So the US SIF website is just US S as in Sam, I, F as in Frank dot org. They have good primers for different levels of audiences like retail investors or financial advisors or institutional investors. They’ve got some research reports, a mutual fund chart. They put on annual events for members. There’s going to be a member day in mid-June in DC this year.

They’ve also created something called the ESG Truths with a plural. So an S on the end, dot com, which is a website of ten kind of facts about ESG. Just in this time when we are getting some headlines that are kind of against ESG or trying to have a there’s a bit of a backlash here. So just trying to bring out what are the essential truths of what we’re doing here.

I’ve got a few others. ESG for Impact is an annual conference that the group First Affirmative Financial Network puts on. All of our firms attend that in addition to it’s very advisor focused, which is great. It’s going to be in early October just outside of Denver this year. A couple others. There’s a SRIstudies dot org website that has some of the academic research that folks can point to about the long term impacts and positive performance of investing in this space.

There’s a group called As You Sow that does a lot of company engagements. They do a proxy preview webinar each spring that just kind of highlights the advocacy season isn’t over yet, but it ends typically in the spring. So kind of what are the main issues that investors are bringing to companies and how are they playing out so far in this season.

Emily mentioned ESG ratings. Firms like Morningstar incorporate Sustainalytics ratings. MSCI has their own. They’re some smaller firms like Natural Investments that do their own like heart rating system. So, you know, a few different places to get perspectives on both companies and investment products like funds out there as well. And as Emily mentioned, I think, you know, each of us are more than happy to be a resource if you have any questions. We all have newsletters, factsheets, you know, Green Century offer, a short two page pieces with little short paragraphs on each of our advocacy engagements. So trying to present it to you in a digestible way. Client facing. So you all might have some others in addition to this too. 

Emily Lee:
Hey, you covered a lot! Even some new ones for me, even in there. I was jotting them down.

Patrick Drum:
There was. One that I thought of. As You Sow and US SIF, they have a nice template board of to sort of breakdown. As You Sow, it has a lot of constructive resources. There’s one because there’s sort of this tendency to look to ESG rating firms. There is a group that actually has Rate the Raters and they provide a little way of thinking about because the degree that the rating ESG rating firms agree is pretty low, and substantially low, and the what the Rate the Raters will kind of help you get a framework as to how MSCI or Sustainalytics, or a variety these others, because they’re opining a certain degree of sustainability.

It’s probably important if you’re going to be in that … you’re going to adopt that lane is to understand what that lane looks like and more importantly, what kind of vehicle you’re driving in to be making these decisions. But there’s a lot of good nuggets in there. But yeah, Erin, you covered a lot of resources and some that I wasn’t familiar with.

Emily Lee:
Yeah, Yeah. And I would say and I think Erin, did say this and yeah, our own websites, I know we published some really kind of detailed thought leadership. So if you have a client that you know, really wants to hear more about biodiversity, as Erin, mentioned, you know, we have a thought piece on that. We also have a piece about green bonds that Patrick talked about how to really differentiate what it is, what it isn’t.

And so I know everyone’s different in terms of the amount of detail or articles or whatnot they share with their clients. But yeah, I’d say our own websites. And then I think Erin, you probably mention this, but along with the US SIF there is a course that you can take, I think I just got an email about it the other day.

So that’s a nice introduction, you know, that you can get you can take a lot of us have our CSRIC, which is another sort of designation to sort of demonstrate more externally in terms of your expertise in this space. So yeah, a lot of a lot of great resources there, Erin, thank you. 

Gus Grefthen:
Awesome. Thank you, three. Yeah, there’s been a few other questions trickle in here and I’ll let you guys decide to take who wants to take a stab out of here.

First question is, with the Democratic Senate majority, how did the anti ESG law pass? And perhaps Joe Manchin still has too much power was the comment. So I don’t know if who would like to take over that first? Who would like to take that one on or if you have any comments at all? 

Patrick Drum:
I’ll throw a few comments on that. Yeah, it’s there’s a lot of this tug and pull. I mean, so during the Trump era, they it was an explicitly, they amended the ERISA rule to specifically ban employers from an adviser considering other factors than risk return and financial performance indicators when selecting investments. So basically put a cold chill on any inclusion of what may be viewed as external a kind of a broader framework of investments. In November the 22nd of 2022, Biden passed an administrative ruling based on prior work back in May of 2021 that would incorporate the approval of a broader set of conditions, and it would will essentially allow extraneous factors, such a social impact when evaluating investments, and this would be a consideration with regards to climate change. Then it was supposed to be taking place on January 30th. On January the 26th, Republicans attorneys from 25 states led by Texas Attorney General Ken Paxton and Utah General Sean Reyes, filed a motion against them.

It was then subsequently passed in action by the Senate on March 1st with two Republican excuse me, two with all the Republicans in support and two Democrats that being Joe Manchin and the other one, I’m just spacing the name right now, and that led to the support. But this actually followed a date, February 28th where the Congress voted 216 votes to also not permit the DOL to include this broader framework. And so that it really kind of put a shadow on that. As Emily highlighted, the likelihood of Biden providing his very first veto is going to be taking place here, and it leaves in a bit of kind of peril as to the degree what that really means and going forward, because there’s going to be a new levels of iteration.

And the SEC also has some actions that they came out in May of 2022, May of 2022. I won’t go into that right now, but I don’t think really quite clear politically what the next steps will be and what that means from sort of and again, this only affected ERISA-related plans. So government excuse me employers sponsored plans.

Gus Grefthen:
Awesome, thanks Patrick. Erin or Emily, did you have any other comments you wanted to add to that?

Erin Gray:
Not specifically to the passage of or the bill specifically, But I think just to the broader perspective of ESG being caught in the crosshairs of the culture wars. You know, partly I think some of this is like just a terminology issue. You know, I think some of the pushback is actually against things that should be using a different acronym, like corporate social responsibility, CSR.

You know, companies are have been trending more towards progressive benefits and policies, which I think some of this, you know, culture pushback is being targeted but is somehow ESG became the poster child for some of this pushback. 

So you know I think actually you can you can screen on any number of factors you want. Conservative, faith based, progressive. So I don’t think they actually want to take away the screening ability. So it’s just you know, I think it’s everything has been thrown into this bucket here, unfortunately. ESG is popular. I think it’s a bit of a backlash against that. Some of this pushback is being funded by fossil fuel companies. A Goldman analyst stated that last year was the first year that renewables were the largest area of energy investments. So, you know, I think these sectors that have traditionally a lot of power, financial backing, political trends are starting to get concerned or feels scared about this potential, you know, change in direction. And I would also say, you know, it’s I’d say, misleading to say some of these are radical agendas. You know, we’re having institutional investors starting to weigh in more. And I would say probably institutional investors are, you know, would never be considered, you know, radical in their positions. They’re fiduciary first and foremost, just focused on their benefits and investing with a performance mindset. But I think they’re understanding that ESG issues can have material long term impacts and that’s why you’re starting to see some of these things, like majority proxy votes on these ESG issues.

And then, you know, I think there is some legitimacy to some greenwashing critiques. Emily mentioned that, you know, most of us in the space are welcoming some of these regulatory efforts that will help identify those who are kind of walking the talk and those who are doing this more from a marketing perspective. So just some additional thoughts there.

And then also, Janet Yellen had a speech recently and she was mentioning the new climate related Financial Risk Advisory Committee that was set up last October by the Financial Stability Oversight Council. So certainly at a large institutional macroeconomic level, these issues of climate change and, you know, really significant economic impacts are starting to be recognized. And I think studied and addressed and hopefully will lead to some mitigation there.

Gus Grefthen:
The next question that came up was, with the recent CEO change at US SIF, do you anticipate more attention to the food system sustainability in regard to Maria Lettini taking over that role from the FAIRR initiatives?

Erin Gray:
I can hope so. Maria’s background is with heading up the FAIRR Institute. And Tom, you might be able to put in a chat with what that acronym stands for Farm Animal Return and Risk Network. But essentially they are an organization that convenes investors primarily in Europe, but certainly in the U.S. as well, on agricultural and farm related risks and animal welfare, a whole host of numbers.

And they have been a significant force in terms of identifying the risks of deforestation, biodiversity loss, and presenting that to the financial community in a really compelling way. So I certainly hope Maria brings that to her new leadership. Lisa Woll is stepping down after her 16 years leading our industry trade group. So we look forward to welcoming Maria.

And again, I mentioned I think in mid-June the US SIF will be convening a Member Day in DC. They usually do a main conference, but I think they’ll aim for that next summer, probably back in the Midwest, maybe Chicago. And then they do that every spring as well. 

Gus Grefthen:
Great. Anything to add, Patrick or Emily to that?

Emily Lee:
I think that’s exciting. Big, big shoes to fill. But really, I think that’s such an interesting organization. So it’ll be interesting to see how that might impact sort of their, you know, their initiatives going forward. And something I hope she gets I’m sure she’ll be asked about. So.

Patrick Drum:
If anything. Yeah, I personally I quite see them, just the fight for the DOL, providing the legitimacy from a fiduciary standpoint to permit a broader context of what risk is.

I mean the SEC just released here in May of 2022, the three considerations they’re working with and two proposals they’re moving forward with, that’s the name rule and then the ESG disclosure rule. And the third one they’re working on as a climate risk disclosure. In the name rules, a bit different in what it really means. It’s an old rule. It’s been around since 2001, but it says if a fund identifies itself at least a certain way from sort of a style perspective, 80% of those investments in that fund have to reflect that. But now this extends to a strategy. So if you have like say, an ABC Wind Fund or an XYZ ESG Fund or Solar, it has to have those attributes.

So it’s defining. They’re starting to tighten it down because Gary Gensler, back in March, March 4th of 2021, I want to say, started bringing attention and concern. And he basically says, we want to be able to all the different terms that are being used. We want to be able to look under the hood and provide comparability. So under this ESG disclosure, because of these three proposals, again, with the naming rule of ESG disclosure in the climate risk disclosure, under the ESG disclosure, they’re not creating three different categories. One’s an ESG Integrations fund. And that really is for how a fund may incorporate ESG factors and what is being factored. 

ESG focused fund, which much more is a delve into what narrative and how with what tools and methodologies are applying. And the third is an impact. The climate risk disclosure is facing a lot of challenges because, you know, how do you take in consideration scope three? It’s getting mired. 

And there was a recent Supreme Court justice case that dealt with Virginia. The environmental EPA, you know, was struck down limiting EPA’s powers because essentially saying, an organization such as EPA can only provide clear guidance on this type of direction if it has support from Congress in its in as part of its authorization, and it doesn’t. 

And so it kind of put a pause to that particular section of the SEC’s ambitions, but we’ll find out more. So where this leads us to a deeper fight into what qualifies as climate and expanding in supporting Biden’s potential veto of expanding DOL permission. 

Gus Grefthen:
This one’s from Cliff. Thank you for the question. Any insights on Biden approving the Willow Oil Project in Alaska? 

Erin Gray:
I can start with this one. Thanks for the question, Cliff. And you know, as a fossil fuel free mutual fund company, we were certainly disappointed to see that. For certain issues and what certain companies we’ll hold a small percentage solely for the purpose of advocacy and engagement, and we’ll hold that privately in an account for Green Century Capital Management so that there’s no investor exposure to this sector. But we do that where we see compelling cases, and it’s important enough on an environmental issue to try to make change there.

So, you know, it was very disappointing to see. I think it’ll cause a lot of backlash from environmental, the environmental community and activists. So we’ll see how it plays out. But we were certainly disappointed to see them. 

Emily Lee:
Yeah, I would certainly echo that. Nothing we’ve done from an engagement standpoint, you know, like Green Century, we are, excuse me, we are fossil fuel free. So no holdings in any energy and oil companies. And you know, again, we’re fossil fuel free because we don’t see the, you know, long term growth and opportunity in that space. Right. We just see risks. And I think it’s shortsighted. And yeah, I think I think we will see, like Erin said, some more uproar from investors, from climate activists. So it’ll be watching how it how it plays out for sure. 

Gus Grefthen:
Next question here from the audience. Thank you, Bradford. Do you see neurodiversity becoming a bigger factor in the S part of ESG in the future and starting to see some investing themes becoming available? I don’t know if either three of you have come across that before. I haven’t myself. But does anyone want to take a stab at that one? 

Erin Gray:
I haven’t seen it either, but I anticipate that it could be a big part of diversity efforts as well. I know that investors look to make sure that boards and companies throughout all levels have diversity in terms of racial gender orientation aspects, identification aspects. And I can see neurodiversity being a part of that in terms of asking companies to report, looking at promotions, retention, those sorts of efforts. That’s a great new issue to keep on the radar. 

Emily Lee:
Yeah, Bradford always asks the good, good questions. Yeah, I mean, our firm does a lot of work on diversity. You know, we originally it was a lot of data around gender diversity. That’s the type of information we could gather. That’s what companies were reporting on. That’s where the, you know, the research ties between performance really lay.

But where we found is those conversations with companies, you know, the ones that really are on the forefront of gender diversity are also really making big strides in racial and ethnic diversity, hiring, you know, thinking about candidates of all types of. So really sort of proving that case that all diversity is really good diversity. So I haven’t seen us really come out with anything yet.

Although Julie Gorte, our sustainability analyst always knows something about everything. So I’m going to I’m going to throw this one to her and get back to you, see what she says. But yeah, you know, we want to be able to obviously report on things. So we’ve the most success we’ve seen is companies that really not only think about the diversity in terms of the boardroom and the C-suite, but they’re thinking about how are they hiring and retaining people, What sort of affinity groups do they have? You know, how are they making sure they they’re creating a culture of inclusivity. So I think that’s maybe not directly answering your question, but I think it’s it’s interesting because I think we’re seeing the conversation really continue to flow and expand. And, you know, getting companies to be more transparent around those issues will probably have to come on that.

Patrick Drum:
No, there really isn’t. There isn’t a standardized process of which metrics for diversity within the scope of our international investing. There is, it’s more of a cultural areas that I am seeing some trends of inclusion. Japan, in the Middle East, such as Dubai, now require at least one female on the board. Regions of the world that typically don’t have that mandate. Regions of the world that typically are not on the usual US sort of US centric framework. There’s quite a bit of growth and adaptation. Some might say, well, it’s not enough, but there are there are, they are making quite cultural big changes to address a lot of the attention that’s being asked by the Western developed world.

Gus Grefthen:
I think we’re kind of getting to the end of the program here. So thanks everyone for coming and we really appreciate your participation and we hope you found it helpful and looking forward to seeing you all at future events and in your cities and where we’re coming to visit. So thank you, everybody.

Patrick Drum:
Thank you. 

Emily Lee:
Thanks, everyone. Take care. 

Erin Gray:
Bye bye.

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