Calvert’s Streur on Tesla, Russia, And How Rising Corporate Power May Boost Stocks

You may not know that John Streur, the CEO of Calvert Research & Management, was critical to Walmart's WMT decision to restrict gun and ammunition sales. Or that his investment firm successfully persuaded fellow shareholders to push Tesla TSLA to disclose more data about its diversity efforts, ensuring the electric-vehicle pioneer remains competitive and innovative.

Streur has run Calvert, a prominent sustainable investment firm, since 2014. Since that time, it merged with Eaton Vance and then, last year, with Morgan Stanley. Today, Calvert oversees $39 billion in 36 funds.

Streur is cogent at highlighting the financial relevance of what happens in society and the real world, and at mining environmental, social, and governance information for greater insights. In addition, says Jon Hale, director of sustainability research for the Americas at Morningstar, “He sees how engagement can help move companies to a more sustainable future, and about the need for asset managers to be part of the policy discussion. He sees the big picture.”

We chatted with Streur twice recently to check in about the Ukraine crisis, California’s recent lawsuit against Tesla, the state of sustainable investing, and the implications of the growing increase in corporate power. Read the following edited excerpts for more.

Q: How does a responsible investor respond to the Russia-Ukraine crisis?

Streur: Investors need to understand the potential impact on the agricultural supply chain. Ukraine is a tremendous agricultural producer. The topsoil there is 5 times deeper than Iowa. It's a very fertile area, and the agricultural supply chain goes well beyond Russia and Ukraine.

Further escalation of the conflict would create a series of downstream impacts that responsible investors may absorb differently. We’d expect additional sanctions to be imposed. We’d expect humanitarian concerns [to arise], and responsible investors will examine how the companies they’ve invested in are exposed, and how they’ll handle either new exposure or elevated risk. If the world is becoming less friendly to democracy and more receptive to dictators, this would be a significant turning point in post World War II history. We’ve all been working in Pax Americana, which has informed many people’s views. The responsible investor perspective focuses on transparency in the market, rule of law, security of property rights. Many ESG investors aren’t likely to have direct exposure to Ukraine. We have been very encouraged by the government of Ukraine in terms of reforms. Obviously, that could potentially be jeopardized if the government is changed.

Q: California sued Tesla, accusing the company of a decade of racist behavior. How does the California lawsuit change the landscape for Tesla shareholders?

Streur: Some 56% of shareholders supported our shareholder proposal last year, despite the fact that insiders voted against us. However, these resolutions are nonbinding, and we are further engaging with Tesla at this time.

The California lawsuit is another proof point, that the issue [of allegations of racist behavior] is a very serious one. Our objective is to strengthen Tesla’s capacity for creating a safe and inclusive work environment for all people and to improve its ability to drive value for all stakeholders.

Tesla is in the human capital business. It needs to be able to create a work environment that allows it to continue to innovate, drive the technology of its products forward, and staff and scale globally. That’s essential to its success and long-term value creation. Even auto manufacturers are becoming intellectual capital companies. Cars have hundreds of thousands of chips. The ability to bring in the right people, manage the diverse workforce, continue the innovation are critical to the culture and ongoing success of the organization.

Q: The controversy didn’t seem to affect Tesla’s stock price, until recently.

Streur: We don't know. What might the stock have done otherwise? We're looking for further improvement and longer-term risk management. There are two issues. One is the time frame. Calvert takes a long horizon. We consider ourselves almost a permanent investor in some of these companies. Many investors take a shorter horizon and may be focused on quarterly financial results. Second, [some investors don't know] how to gather the data, analyze it, assess the issue, get focused on a financially material ESG risk factor, and take action. That requires quite a bit of knowledge building, infrastructure building that Calvert has made a 40-year commitment to.

Q: What’s the outlook for sustainable investing? Flows have declined recently.

Streur: That's not Calvert's experience. Our business continues to be extremely strong. Calvert's business continues to accelerate globally. We wouldn't share the experience of a decline in growth. There's increasing interest in ESG from corporations, from large asset owners and large investors. Corporations have significantly evolved in their implementation and execution of improvements in financially material ESG. The kind of the knowledge that asset owners, asset managers, heads of the supply chain of information, have built over the past five years led Calvert to a quest for stronger information, deeper analysis, more depth, more expertise, more rigor, across every aspect of ESG and sustainable investing. I see interest actually accelerating from large companies and from asset owners.

Q: How else have companies changed over the past five years?

Streur: Companies are being pressed to adopt things like net-zero emissions targets. Engineers, operations people, and financial people have been tasked with very serious assignments, of reducing their carbon footprint in a way that actually strengthens their financial results. And some companies have come to understand how this creates trust with their consumers, their customers. Those who are conveying the message to the marketplace properly are getting brand recognition for it. We can see this through social-media analysis, data analysis. It's not just on climate. There's been great progress on diversity, equity, and inclusion, though it's nowhere close to what we want. Calvert [in 2020] asked 100 largest U.S. companies to disclose EEO-1 data (that they report to the Equal Employment Opportunity Commission). Fifteen companies were disclosing. Now, 77 additional companies have agreed to disclose. It's a great and meaningful first step, getting companies to build their skills, build their capacity, improve their diversity. There's lots of room to go.

Q: Corporate power also seems to be increasing. What does that mean for investors?

Streur: The Edelman Trust Barometer 2022 chronicles the fact that our capitalist society globally shows a consistent trend of diminishing trust and confidence in governments and other traditional governing institutions but increasing trust to certain corporations. Society has placed greater trust in companies. There are many evidence points.

As companies gain more power, they become more-valuable entities. Companies are having a big impact on individuals’ outcomes, their employment, their health insurance--all aspects of people's lives are more and more influenced by corporate decisions and corporate behaviors. It becomes very important for investors to effectively discharge their responsibilities in voting proxies, engaging with companies, maintaining that trust, and pushing forward on the critical ESG value drivers.

Q: What supports that greater valuation? Are you referring to increased influence over regulators?

Streur: With regulators, with markets, with consumers. It gives a company more optionality. Companies have enjoyed greater power over political outcomes, over social outcomes, over environmental outcomes. One can argue whether this is what we want as a society, but that's something we could debate, but the trend that we've seen has occurred, that happened.

Q: Let’s talk about the regulatory landscape for sustainable investing.

Streur: It's solidifying. The SEC has an appetite for some disclosure requirements, which aren't yet known. The European Union is clearly on the move with its taxonomy [the EU taxonomy is a list of environmentally sustainable economic activities] and with its Sustainable Finance Disclosure Regulation [making ESG disclosures mandatory for asset managers and other financial markets participants]. In the U.S., the disclosures aren't yet known. This creation of disclosure requirements for corporations and investors will go on for some period. It could be years before it's fully formed. During this time, the information we get from companies will improve and strengthen.

Q: What does that mean? Will it create some surprises?

Streur: It's going to create some news. It isn't certain that what a company says in a regulatory filing will be exactly the same as what investors thought. Say Company A has been voluntarily providing information about their carbon emissions, in a corporate sustainability report. In their regulatory filing, will the number be the same? Or will it be calculated differently? Or perhaps the company wasn't disclosing anything, and a data vendor was estimating the carbon emissions. It's possible that the company's number will differ from the data vendor's estimate.

Before the Securities Act of 1933, not all companies disclosed their earnings. When they did, they weren't necessarily what everybody thought they would say. I think this same thing is going to happen with ESG information.

Q: Recently, the International Integrated Reporting Council and the Sustainability Accounting Standards Board merged. Why is this so important?

Streur: We need a set of standards, right? We need somebody to say: "These are the metrics, and this is the way to calculate the metrics." Standards, whether in financial accounting or in ESG data, are essential to creating high-quality, comparable information. In the United States, GAAP accounting is the financial standard. At the end of the day, investors want high-quality information about a company's environmental or social impact. So we can say one company is better than the other, and that requires standards.