Reflecting on the ESG Industry’s Strong Foundation and Bright Future

(Above:  Jesse Jackson, Tim Smith and Donna Katzin at a demonstration in the 1980’s calling on Citibank to end lending to the apartheid government in front of the bank’s headquarters in NYC.)

(First published Sept. 2022) In light of my forthcoming retirement in December 2022, I am especially pleased to be included in this 30^th anniversary issue of GreenMoney. It has been a tremendous privilege to be embedded in the evolution of ESG Investing for 50 years, first at ICCR and then at Boston Trust Walden.

This is an occasion to look ahead at the ESG industry’s future. But that is best done by reflecting on the foundation laid by investors over the last plus 50 years. In 1971, the Episcopal Church filed the first shareholder resolution calling on General Motors to leave South Africa because of its racist system of apartheid, a historic moment. That resolution ushered in a new era of shareowner engagement, including two decades of work on South Africa. Global economic pressure from investors and governments played an important catalytic role in making the apartheid regime negotiate, leading to a peaceful transition to power sharing and the election of Nelson Mandela as President.

Also, the ESG industry’s history is marked by major long-term campaigns, like the infant formula campaign leading to a global code of conduct, saving the lives of hundreds of thousands of infants. And early work on issues of diversity, human rights, climate, and the environment – both in direct operations and throughout global supply chains – were essential stepping stones for future work.

Building on that past, let’s look at some encouraging signs that promise a bright future for the industry’s ESG work. At the same time, let’s also look pragmatically at the challenges for the next quarter century. Obviously, this is a best guess on my part, but that is the nature of crystal ball gazing, isn’t it?

Clearly there has been an explosion of interest and involvement in ESG or Sustainable and Responsible Impact Investing (SRI), especially in the last two decades. For example, US SIF’s 2020 Report on US Sustainable and Impact Investing Trends points to a total of over $17 Trillion in US AUM in ESG, an increase of 42% since 2018. And the Principles for Responsible Investing has 3750 global investor members with over $110 Trillion of AUM (depending on market swings, of course). These asset managers and asset owners pledge to integrate ESG into their investment practices believing these issues have a distinct impact on the bottom line. Many also commit to active ownership, urging transparency from the companies in which they invest. Of course, we could all debate the actual figures and how legitimate these ESG practices are, but it is undeniable that ESG investing is expanding in the marketplace. This “genie is not going back in the bottle.”

Simultaneously, the growth of sustainability within the business community has increasingly been accompanied by specific measurable goals and objectives. Certainly, many companies embrace the belief that sustainability protects and advances shareholder value. Such statements are a concrete and welcome validation of the ESG work of investors. A considerable majority of large global corporations now produce sustainability reports to publicize their commitments and progress. I could go on for pages regarding specific decisions and changes by corporations in response to shareholder engagement on issues spanning climate change, board and workforce diversity, governance reforms, consumer protection, etc. (www.iccr.org and www.ceres.org have extensive catalogs of shareowner impact over the years). I believe such reporting and transparency is going to expand in depth and breadth going forward.

Another significant change is the influence and power of proxy voting on ESG issues by asset owners and managers. There has been a huge shift in recent years on votes in support of shareholder proposals (35 resolutions received majority votes in both 2021 and 2022, as well as scores of votes in the 35%-49% range) demonstrating broad investor support on specific issues like racial justice, climate change, plastic pollution, and board diversity. These voting changes are described in updated proxy voting policies, or Stewardship Reports, and of course in NPX reports displaying every vote. And this voting power is held by some of the largest asset managers in the world, such as State Street Global Advisors, BlackRock, T. Rowe Price, and Vanguard. While it is hard to imagine these firms filing resolutions, their engagements with companies in support of ESG issues sends a powerful message that is hard for a business to ignore.

In addition, even though the final vote has not yet occurred, the dramatic Securities and Exchange Commission’s (SEC) proposed rule calling for specific corporate climate disclosures signals federal government support for a new and necessary level of ESG disclosure by companies, further affirming the importance of investors’ work seeking improved disclosure.

Larry Fink, BlackRock’s CEO, has said, “the tectonic shift towards sustainable investing is still accelerating.” I agree the future is bright for ESG investing. And we are likely to see more investment managers be prodded and held accountable by their clients to embrace continuous improvement in ESG practices. Many large asset owners now hold their investment managers accountable on ESG. This accountability is also likely to grow because when the “markets speak,” managers listen.

But despite such promise, I fear the next quarter century is not likely to be smooth sailing. What I refer to as “the old opposition” is attempting to rebrand and attack ESG to reverse the tides. Former Vice President Mike Pence has described ESG as a “new trend of woke capitalism” and the enemy of the free enterprise system.

Such attacks have grown in 2022 as ideological opponents argue that ESG is a violation of fiduciary duty and will result in poorer portfolio performance. For example, the state of Texas recently passed legislation threatening to end business relations with investment firms that “boycott fossil fuel companies.” Such threats can certainly impede ESG expansion and sadly may well become part of the political polarization growing in the U.S.

Finally, I expect the future, as in the past, will include investors with a range of ESG motives and mandates. Pension funds may emphasize that ESG incorporation is a prudent move that protects long-term shareowner value. Foundations may stress alignment with their missions. Some individuals may strive to ensure their investments are consistent with their values, while others may seek tangible environmental and social impact from their investments. The Sustainable Investing umbrella can certainly comfortably include investors led by different North Stars, especially when they so often have similar messages on vital issues like climate, diversity, and governance, to name but a few.

In summary, while investor motives and constraints may differ, the larger umbrella of SRI/ESG Investing is likely to expand in size and grow in its real-world impact. While there is inevitably more work to be done, I am deeply proud to have contributed to this enormous economic shift in partnership with so many of you.

 

Article by Tim Smith, who has been part of the ESG industry since 1971. After earning a BA from the University of Toronto and Master of Divinity degree from Union Theological Seminary in New York, he joined the Interfaith Center on Corporate Responsibility (ICCR). He spent thirty years at ICCR, including 24 years as its Executive Director. He joined Boston Trust Walden Company in 2000, where he advanced the firm’s shareholder engagement efforts related to a variety of issues including climate lobbying and governance. He also frequently represented Boston Trust Walden at public events and helped to foster long-term client relationships.

In 2007, 2012, and 2013, Tim was named as one of the “Top 100 Most Influential People in Business Ethics” by Ethisphere Institute. In 2010, he received the Bavaria Award for Impact at the third annual Joan Bavaria Awards for Building Sustainability into the Capital Markets. In 2011 and 2012, he was named one of the most influential people in corporate governance by the National Association of Corporate Directors.

Tim has served on multiple boards and chaired advisory councils for several different institutions. He was the former Chair of US SIF and currently serves as chair of Shared Interest, which mobilizes economic resources for communities in Southern Africa. He also serves on the Principles Committee of Wespath, the United Methodist Pension Board, which leads the Board’s ESG and shareholder advocacy work. Finally, he served as Chair of the Sustainability Advisory Board of Kimberly-Clark.

Tim currently serves as Senior ESG Advisor at Boston Trust Walden. His retirement commences at the end of 2022. As for the next chapter, he looks forward to continuing to work on many key sustainability issues and continue to cause “good trouble,” in the words of Congressman John Lewis.

 

This commentary solely reflects the views of the author, Timothy Smith, and is subject to change without notice. This commentary is provided for informational or educational purposes only and is not an endorsement of any security and should not be relied upon for any investment decision. These views do not necessarily reflect the opinions or views of Boston Trust Walden Company or its affiliates.