CSR Investment Summit Explores ESG-Driven Markets

 

The 4th annual CSR Investing Summit, “Summer in the City,” took place over the summer in New York City. Produced by S-Network Global Indexes and co-sponsored by The SRI Conference, the full-day conference featured expert practitioners and thought leaders who shared their experiences and viewpoints on how to define, manage, and measure responsible investing. Additionally, the Summit featured eight panels addressing a wide range of topics related to CSR investing including ESG as a risk mitigation tool, the state of ESG data in 2016, reputation risk, making ESG data investor grade, and the revenue impact of controversies.  

Kevin Parker, CEO of Insight Capital Management, kicked off the conference by highlighting the oil industry and how companies were following the example of the demise of the coal industry. Parker made the observation that oil was the next group to fall after coal and pointed out the precipitous decline in the stock prices of oil companies. He further highlighted similarities in the oil industry to financial firms during the 2008 crisis and how they shared the attributes of increasing cost of capital, lack of confidence in management and businesses, increasing difficulty in accessing debt markets, and the lack of corporate governance. The final point made was how CSR is showing up in the markets as evidenced by companies' stock and bond prices. 

ESG and risk-adjusted returns were a topic of particular interest, especially in relation to the stock performance.  Currently, there are divergent views in the market: positive correlation between firms that incorporate ESG practices and stock performance, a negative impact focusing on how ESG narrows the universe and leads to adverse selection, and inconclusive results based on outstanding data. Panel members discussed how they assessed their investments in companies incorporating ESG. 

One manager stated that over 60 ESG screening categories are used for selection and company reputation, brand, and investment risk—key criteria in evaluations. Another panelist who actively manages an equity portfolio conveyed the importance of screening companies (which helps avoid what not to buy) and integrating views on how a company approaches ESG into the investment process. Given institutions with similar cash flow profiles, the investor stated that he would invest in the firm with a higher ESG score, as it could be a more sustainable business. Panelists felt that the largest risks in stock selection were investing in ESG at any cost as opposed to looking at all data points and "rushing" new products to market (such as ETFs) without investors having a full understanding of the companies and products. 

Current opportunities for investment include small and mid-capitalization stocks that incorporate ESG practices, but currently, many don't have robust infrastructure due to size constraints. Other investment themes presented during the conference involved technology driven growth firms (companies that reduce water usage, improve inputs such as fertilizer, etc.), packaging and treatment companies (75% of revenue from the food and beverage industry is covered by these costs), and handling and logistics companies which provide better efficiencies in cost and delivery times.

Investors were updated on the quantity and quality of ESG data in the current environment. Three panelists highlighted how data is disseminated, including technology that provides information from corporate filings to Fortune 500 companies, systems that allow corporations access to data and further links them to investors, and financial indices which allow investors to benchmark their performance. The increase in access to data and the firms that provide it allow for robust analytical models that have the ability to view specific industries, portfolio risk, and the ability to assess materiality that traditionally would only be available through corporate disclosure. 

Making ESG data investor grade was another topic that was addressed. Morningstar publishes a sustainability rating and has seen a dramatic increase in company coverage over the last few years.  Additionally, there are ESG ratings on mutual funds which help investors in the decision process.

Sarah Newcomb, author of the book Loaded, was the first of two special guest speakers. Newcomb discussed how women and Millennials are driving ESG investing in portfolios.  Demographics are the first reason, as women currently control more than half of the wealth in the United States and Millennials are an ever-increasing investor group; by 2025 they will make up 75% of the workforce.  Newcomb also pointed out that women are two times more likely than men to consider ESG factors when choosing investments (within the investing universe) and Millennials are two times more likely than the general population. These dynamics should support ESG investing and increase awareness and opportunities for the foreseeable future.  

Thomas Croft, Managing Director of Heartland Strategies and co-author of The Responsible Investing Handbook, made a special presentation in the afternoon session. As Croft's book chronicles how a new generation of investors focused on responsible investing is fueling investment in everything from hybrid buses to smart buildings and solar projects, he pointed out key drivers that were challenging irresponsible short-termism. Among them are:  growth of PRI, U.S. Department of Labor pension guidance which advances ESG investing, responsible investment and financial performance (positive impact of ESG on investment portfolios and corporate value), the 2008 financial crisis, the Paris Accord in 2015 in which 195 countries are addressing climate change, income inequality, and endorsements by the U.S. Labor Movement.

Being a 20-plus year veteran of fixed income markets but a CSR outsider, I came away with the view that CSR investing is in its early stages, and that increased knowledge, awareness, and acceptance by the investor community will have a positive impact on growth going forward, not only for companies and bottom-lines but also on the financial products available in the marketplace. Investors’ engaging companies in terms of increased disclosures, monitoring risk management mitigation, and board/management initiatives will prove to be paramount to increased transparency and the ability to better judge current and future financial performance. As companies integrate CSR into business practices, management strategy, and boardroom discussions, this shift should lead to further efficiencies, better risk management, and innovative products and solutions, ultimately improving balance sheets and positively impacting valuations in the equity and debt markets.

Jason Howell is a 20-plus year veteran of the fixed income markets having held senior positions at Bear Stearns, JP Morgan, Vertical Capital, Barclays, and Credit Suisse. Serving global financial institutions, Howell has advised on asset-liability, portfolio and relative value strategy, hedging, and regulatory/accounting solutions and has presented at industry conferences.