ESG investing — short for “environmental, social, and governance” — is a once-fringe idea that’s now mainstream on Wall Street.
But when is ESG not really ESG?
Oil and gas companies such as ConocoPhillips and Hess are included in many funds with socially-responsible labels, while McDonald’s and Coca-Cola receive high “scores” despite some investors alleging the companies contribute to obesity.
Why? Short answer: There’s no universal standard.
Companies are graded on a curve — and may receive a good ESG score simply because it’s a bit better than a set of poor ESG companies'. The U.S. Chamber of Commerce pointed out that there’s no satisfactory standard or grading system determining how companies rank high or low.
So, if you’re keen on making sure you invest only in companies with high environmental, social, and governance standards, dig deeper and don’t rely on labels.
Change Finance’s fund is one of the few exchange traded funds with no fossil fuel or fossil fuel reserves, according to Andrew Rodriguez, CEO and chief investment officer.
“Traditional ESG criteria were not serving many values-based investors,” he said. “We see this with the level of fossil-fuel exposure in many ESG products. ESG grades on a curve, comparing companies within an industry against each other. If the industry is bad for people and planet, what’s the point?"
ETF.com has compiled an interesting list of “fossil-free funds that aren’t,” and highlights those that actually are, including Guggenheim Solar ETF (TAN), PowerShares Cleantech Portfolio (PZD), NuShares ESG Mid-Cap Growth (NUMG), iShares MSCI Global Impact ETF (MPTC), and Change Finance Diversified Impact U.S. Large Cap Fossil Fuel Free ETF (CHGX).
Some funds focus specifically on the “G” in ESG.
WisdomTree launched an ETF that screens out state-owned enterprises, which the firm argues don’t perform as well. WisdomTree’s Emerging Markets ex-State-Owned Enterprises Fund (XSOE) invests in companies that are not state-owned enterprises, defined as government ownership of greater than 20 percent.
Last week, an increasingly popular ESG conference known as Total Impact Philadelphia took place in Center City. Such confabs are entirely devoted to “impact investing,” which aims to achieve a double bottom line: doing well and doing good.
Big piles of money are the reason: Total U.S.-domiciled assets under management using “socially responsible” investment strategies grew to $12 trillion in 2018, up 38 percent from $8.7 trillion in 2016.
That’s 26 percent — or $1 of every $4 — of the $46.6 trillion in total U.S. assets under professional management, according to Jackie VanderBrug, head of sustainable and impact investment strategy for Bank of America.
We’re written about Vanguard’s issuing an expanded annual Investment Stewardship report, which outlined engagements with more than 700 portfolio companies, of which 200 are in carbon-intensive industries. BlackRock also issues reports on shareholder commitment and sustainability, including its annual stewardship outlook. BlackRock is now requiring investment teams — not just ESG-specific fund managers — to incorporate ESG as part of their investment process.
Is ESG just a sales pitch to attract assets? Possibly. So look beyond the packaging.
Diversity and Penn Mutual
Local insurance giant Penn Mutual is one of only seven companies in the Fortune 1000 with both a female CEO and CFO.
“We’re the second-longest pairing of CEO and CFO,” said chief executive Eileen McDonnell. “Williams-Sonoma is the longest.”
In 2016, Penn Mutual debuted in the Fortune 1000 at No. 980, and rose to No. 761 in 2018.
“In 2019, we anticipate rising on that list again,” she said, in part because of a focus on recruiting diverse board members and employees.
McDonnell points to data that for every 10 percent increase in racial and ethnic diversity, EBITDA — earnings before interest, taxes, depreciation, and amortization — increases 0.8 percent a year for companies in the United States.
McDonnell pushed for over 40 percent female representation on the board at Penn Mutual.
“Many leaders don’t realize diversity is good business. They need input from people who think differently from them,” she said.
William Goings, former executive vice president and president of TD Insurance, and Carol Johnson, former president and chief operating officer of AlliedBarton Security Services, joined the board in the last year.
Here’s the list of female CEO/CFO duos on the Fortune 1000 list.
General Motors CEO Mary Barra and CFO Dhivya Suryadevara.
Hershey Co. CEO Michele Buck and CFO Patricia Little.
Williams-Sonoma Inc. CEO Laura Alber and CFO Julie Whalen
Commercial Metals Co. CEO Barbara Smith and CFO Mary Lindsey.
American Water Works Inc. CEO Susan Story and CFO Linda Sullivan.
Cracker Barrel Old Country Store Inc. CEO Sandra Cochran and CFO Jill Golder.
Penn Mutual Life Insurance Co. CEO Eileen McDonnell and CFO Susan Deakins.