by Peter Jones, CFA
Vice President of Equity Research and Analysis
Adoption of socially responsible, or more commonly referred to as Environmental, Social and Governance (ESG) investing, has gone into a parabolic growth phase. Last year, there was $21 billion in new assets flowing into ESG strategies in the U.S. alone. This compares to $7 billion the previous year. Larry Fink, the CEO of Blackrock, the world’s largest asset manager, recently compelled fellow CEOs to be more transparent about their sustainable practices.
“We believe that all investors, along with regulators, insurers and the public, need a clearer picture of how companies are managing sustainability-related questions. This data should extend beyond climate to questions around how each company serves its full set of stakeholders, such as the diversity of its workforce, the sustainability of its supply chain, or how well it protects customer data.”
Blackrock has tremendous power to influence corporate behavior. Blackrock holds voting power for the shares they custody in their exchange traded fund (ETF) products. At the end of 2018, it was estimated that index managers such as Blackrock, State Street and Vanguard held nearly 20 percent of the aggregate voting power of the S&P 500. Insofar as Blackrock will be pressuring companies to improve their sustainable practices, they have the potential to bring about change. Until now, Blackrock has typically been passive in their voting practices, simply following the recommendations of the executives in the company Blackrock holds shares. Now, their approach is changing.
“We will use these disclosures and our engagements to ascertain whether companies are properly managing and overseeing these risks within their business and adequately planning for the future. In the absence of robust disclosures, investors, including BlackRock, will increasingly conclude that companies are not adequately managing risk. We believe that when a company is not effectively addressing a material issue, its directors should be held accountable. Where we feel companies and boards are not producing effective sustainability disclosures or implementing frameworks for managing these issues, we will hold board members accountable. Given the groundwork we have already laid regarding disclosures and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.”
Whether company executives fear that institutions like Blackrock will vote them out, or if companies are simply improving disclosure and sustainable practices because it creates value for stakeholders, is up for debate. Regardless, multinational corporations are changing their behavior. In 2013, only one out of every five companies in the S&P 500 produced a sustainability report. Today, more than 90 percent have a sustainability report. Verizon recently announced that they plan to be carbon neutral by 2030. Microsoft is committed to becoming carbon negative by 2035. Goldman Sachs announced just yesterday that they will no longer serve as the investment banker for IPOs unless the company has a diverse board. Companies are coming to grips with the fact that a growing portion of their potential investor base will require certain behavior or will otherwise exclude them as a potential investment. As Fink points out, “Companies that champion transparency and demonstrate their responsiveness to stakeholders, by contrast, will attract investment more effectively, including higher-quality, more patient capital.”
Enabled by vastly improved disclosure and transparency, Ferguson Wellman launched Global Sustainable Investing (GSI) in 2018. The strategy was designed to address the evolving needs of clients seeking to align their values with their investments. Our approach overlays traditional financial analysis with an assessment of corporate behavior. As a result, GSI invests in companies that rank highly across environment, social and governance (ESG) factors while at the same time maintaining the risk-return profile of our traditional investment strategies. GSI includes U.S. Large Cap, U.S. Small Cap, International Equities and Fixed Income.
Source: Ferguson Wellman
Week in Review and Our Takeaways:
For the first time this year, stocks declined for the week, down about 1 percent
U.S. interest rates continue to fall, with the 10-year U.S. Treasury at just 1.65 percent
Environmental, Social and Governance adoption has seen tremendous growth, and investor demands are beginning to have an impact on corporate behavior
Ferguson Wellman and West Bearing offer a strategy for investors looking to align their values with their investments