Even advisors who admire the socially responsible investment movement are divided about how to define the terms of such strategies, widely referred to as environmental social and governance.
“There is a bit of a divide between hardcore socially responsible investors and those trying to strip down to the value proposition,” says Peter Coffin, who is president of Breckinridge Capital Advisor, based in Boston, which has $22 billion assets under management, largely invested in bonds.
“ESG issues and sustainable investing are burdened with the perception that it is all about social values,” he said. He does not seek “to diminish the value of socially responsible investing and the high regard we have for those who undertake and do it.” Coffin says, “But we would say it’s all about making sure we avoid underpriced risk.”
There is a wider industry recognition that clients do care about ESG. But efforts to measure it, such as Morningstar's decision to begin issuing ESG scores for mutual funds and ETFs in the fourth quarter, raise questions about what should count toward ESG.
In addition to Morningstar, Standard & Poor's, Fitch and Moody's have all looked to bolster and increase the transparency of their existing assessments of companies with ESG measurements to better predict default risks. "We've been stepping up our research efforts around that," Henry Shilling, senior vice president at Moody's Investors Service told Bloomberg in August.
At Calvert Investments, the Bethesda, Md.-based asset management company with a socially responsible focus, spokeswoman Annie Cull argues that a growing pool of investors express no equivocations about having to choose between a greedy or more generous view of the world.
“The role of corporations in society is rapidly evolving. Calvert Investments sees lots of evidence that investors not only don’t buy the argument that there’s an inherent trade-off between ‘doing good’ and ‘doing well’ – but in fact more evidence points to the idea that corporations themselves see positive outcomes by proactively handling environmental and social-related issues in a way that creates value for all stakeholders.”
A recent study of retirement plan participants, which Calvert expects to release in October, Cull said showed 70% of them assume responsible investing funds will be as good as or better than other mutual funds in terms of risk, volatility and performance. The soon-to-be published survey also showed that investors under age 35 are “highly receptive to responsible investing,” Cull wrote.
As ESG gains traction, it's up to the industry now to settle its differences over what goes into the investment category, said Rory Sutherland, the vice chairman of Ogilvy & Mather Group U.K.
Sutherland told an international gathering of asset managers in September that ESG advocates may not exactly have “an image problem” but they share a “definitional one.”
He reached to 18th century economist Adam Smith’s treatise “Wealth of Nations” for an explanation. Smith’s theories, as they have become popularly interpreted, suggest that businesses work best when self-interest reigns supreme, he argued. Therefore, investors suspect alternative motives at work rather than the altruistic ones promoted as being behind the ESG investment movement.
Sutherland expressed his views at an annual conference of the Principles for Responsible Investment, a United Nations–affiliated organization that draws some of the world’s largest institutional investors, including CalPERS, Calvert Group, and TIAACref.
Sutherland cited skepticism about additional ESG-oriented measurements. The problem, he said: “We care about what is done and why it is done,” and, “the human brain is programmed to look for trade offs.”
Well-meaning businesses will more effectively accomplish socially responsible goals if they proceed undetected. “Good by stealth,” Sutherland said. “We judge things very differently according to their perceived intention,” he said. “Our judgment of what is benign isn’t skewed toward equanimity.”
As a result, he said, measurements of steps companies are taking to increase their contributions to the public good will not necessarily succeed in advancing ESG investments. “Any metric that becomes a target loses its value as a metric, and becomes a rubbish metric,” Sutherland said.
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