Martin Walsh attended the Allianz Global Investors “ESG University” conference in New York on June 20th. ESG stands for “Environmental, Social and Governance,” an acronym that is a filter for evaluating socially responsible companies. The conference was a detailed update for the investment advisor community on socially responsible investing, including the latest research and trends in the field.
At Brown and Company, we maintain a robust research and investment due diligence process. As socially responsible investing and corporate governance issues continue to emerge as mainstream ideas in the investment world, it remains critical that our research stays current. The Allianz ESG event was an excellent opportunity to expand our thinking and receive research updates on an increasingly common topic. Several key takeaways emerged from the day in New York.
Divestment vs. Active Engagement
In the early stages of socially responsible investing, the major idea was to divest from “bad” companies. In a typical socially responsible fund, the portfolio manager would screen out companies that made profits from certain industries: fossil fuel production, tobacco and gambling were some of the most common companies to be screened out.
One notable evolution in the world of socially responsible investing is the idea of active engagement instead of divestment. The idea is that instead of withdrawing capital from a company that is deemed to be non-socially responsible, it is better to engage actively with corporate boards as a major shareholder in order to actually influence change from within. An example given is the energy industry. Over the past decade, certain boards of fossil fuel companies have moved towards renewable energy and an awareness of carbon emissions. This type of messaging from the energy industry was nearly unheard of ten years ago. Shareholder feedback and engagement, not divestment, has been the driving force. The overarching idea is that engagement from within is much more effective for creating change than external criticism.
Good Corporate Governance
An important theme from the conference is that well-run companies actually outperform over the long run. Good corporate governance leads to more profitable companies. By way of example: executive compensation strategy can have a meaningful impact on corporate health. Public companies with independent boards that hold executives accountable through meaningful performance incentives typically outperform. In contrast, companies with non-independent boards that set low standards for executives will often underperform. Further, good corporate governance can lead to lower borrowing costs. According to research from Oxford University, companies that are rated highly for corporate governance have a significantly lower cost of capital.
A notable insight is that investing according to ESG principles does not mean that investors have to sacrifice investment returns. In the past, socially responsible funds have had the perception of underperforming their investment peers. The majority of this underperformance was driven by higher fees. Today, fees have come down in the ESG fund world, while the quantity and quality of fund offerings has increased. The result is that investors can invest according to their principles, while not giving up on performance. We continue to monitor the changing landscape of ESG investing and welcome the discussion of improved corporate governance within global public companies.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
No strategy assures success or protects against loss.
 “From the Stockholder to the Stakeholder.” Oxford University. Online at https://www.smithschool.ox.ac.uk/publications/reports/SSEE_Arabesque_Paper_16Sept14.pdf