Let’s Not Leave Behind the S & G in ESG

Climate change was the single most important concern cited by asset managers in the US SIF Foundation's 2020 Report on Sustainable and Impact Investing Trends.

While addressing climate risks will undoubtedly remain a significant concern for investors, the COVID-19 pandemic and the national conversation about racial injustice have underscored the urgency of addressing social issues and revealed the interrelated nature of environmental, social, and corporate governance concerns.

As BlackRock CEO Larry Fink pointed out in his recent CEO letter: "It is misguided to draw such stark lines between [ESG] categories. For example, climate change is already having a disproportionate impact on low-income communities around the world--is that an E or an S issue?"

Social Factors Have Never Been More Important to Investors

Social and environmental issues are often intertwined, as evidence is growing that climate change will have a disproportionate impact on low-income communities and developing countries. Reduced reliance on fossil fuels will harm job security and income for workers in fossil-fuel industries unless mitigating policies are put in place.

Many investors, responding to the survey for the Trends report, said they expected the pandemic to reinforce interest in ESG factors beyond climate change, specifically these social factors. These investors held the view that the pandemic has fueled massive economic and social upheaval, exposed weaknesses in the social fabric, and had an outsize impact on communities of color, including among indigenous peoples.

The renewed reckoning over American racism, past and present, prompted in part by George Floyd’s murder, is also driving a deeper company and investor focus on racial justice. In June 2020, 128 investment organizations and individuals signed a public statement in which they pledged to integrate racial justice into their investment decision-making and engagement strategies, and to embed a racial equity and justice lens within their organizations.

Sustainable investors will be pressuring companies to act on these issues this year. According to Michael Passoff, CEO of Proxy Impact and co-author of "Proxy Preview 2021," new shareholder initiatives this year include calls for annual “say on climate” votes, racial justice audits, and a redefinition of corporate purpose to include all stakeholders. Passoff notes that sustainable investors "are also raising questions about how companies should respond to COVID-19, adjust their political spending in the wake of the Capitol attack on Jan. 6, address the Black Lives Matter movement, and plan for transition to a net-zero economy.”

Effective Corporate Governance Practices Are Also Critical

Good corporate governance practices also play a significant role in determining how corporations act on key issues of interest to sustainable investors and society. These include issues such as director independence, diversity of board members, responsiveness to shareholders, executive pay, and anti-corruption.

Sustainable investors have been increasingly concerned about the role of corporate leadership in broader society--particularly their political spending and lobbying activities, based on the number of shareholder proposals filed in advance of U.S. corporations’ annual meetings.

These corporate political contributions have come under even more scrutiny since the Jan. 6 insurrection at the Capitol. Companies such as Amazon.com AMZN, AT&T T, Comcast CMCSA, Goldman Sachs GS, and JP Morgan Chase JPM announced that they are cutting off all contributions to members of Congress who voted against certifying President Joe Biden’s Electoral College win. But for the most part, they have not made commitments to long-term changes in their contributions or lobbying practices.

More recently, corporate CEOs--including, among many others, those from Target TGT, Citigroup C, and Uber UBER--have spoken out opposing laws that restrict voting rights in states like Georgia.

Relevant Policy Should also Have a Broad ESG focus

President Biden's executive order on Tackling the Climate Crisis at Home and Abroad describes his intention to use existing regulatory, procurement, and budgetary powers to make climate change action a priority in domestic and foreign policy. Treasury Secretary Janet Yellen has underscored this commitment to action on climate change, as has the Federal Reserve through rejoining the Network of Central Banks and Supervisors for Greening the Financial System.

And while the SEC has asked for input on climate disclosure, then-Acting Chair Allison Lee also spoke about the need to consider the broader range of ESG disclosure issues. She noted that “human capital, human rights, climate change--these issues are fundamental to our markets, and investors want to and can help drive sustainable solutions on these issues…That’s why climate and ESG are front and center for the SEC. We understand these issues are key to investors--and therefore key to our core mission.”

The broad view articulated by the SEC should be a model for other relevant financial regulators and for the private sector as well. A lens that seeks to address climate as well as social and governance issues with urgency is one that will accelerate our ability to “build back better” and address the interconnected nature of many of our greatest challenges.

Lisa Woll is the chief executive officer of US SIF: The Forum for Sustainable and Responsible Investment.