Sustainability's virtuous feedback loop

More public companies are stepping forward to address global climate risks, instituting policy changes in the service of social equity and embedding better and bolder governance practices in their businesses. This laudable shift toward corporate responsibility provides a tailwind for ESG investing and reflects the impact of shareholder advocacy efforts to date.

As of the beginning of 2018, about 25% of U.S. assets under management—nearly $12 trillion—was in sustainable investing strategies, marking a 38% increase in two years.¹ It should come as no surprise that environmental, social, and governance (ESG) focused investing is attracting more assets, and we expect 2018 to be a year of redoubled interest. The rapid-fire frequency of destructive climate-related events, the growth of social justice movements such as #MeToo, and the explosion of governance issues around cybersecurity, data privacy, and rogue political interventions on social media platforms are leading investors to demand more of the companies in which they invest.

Investors want to know what climate risks their portfolio companies are exposed to and how they're preparing for the future. Do companies actually care about their employees, think about gender equality in the workplace, and believe in the power of diversity at all levels of their organization? Are they thinking for the long term in how they regulate themselves? This kind of interrogation by everyday investors is a positive step, but it’s not the only force driving positive change in corporate practices: Company management is recognizing the existential threat posed by certain ESG risks—and companies are beginning to embrace change.

Consider the climatological predicament of the United States in 2018. Climate-related events have profoundly affected the lives of tens of millions of people this year—through incredibly destructive hurricanes across the South and mid-Atlantic, as a result of protracted droughts in the Southwest and in farm country across Missouri and Kansas, and because of the calamitous fires in California, which, as of this writing, still linger as an acrid haze across huge swaths of the state.

Add to this the recent dire warnings from the world’s scientific community, widespread media coverage of rapidly shrinking biodiversity, and the perplexingly dismissive stance taken by the White House in response to its own federal government’s ominous climate report. With all of this, we find nothing more or less than a politically charged recipe for more urgent action by states, local communities, corporations, and individuals whose lives and businesses may never be the same again because of climate change.

As ESG investors, we notice that clients care—more and more—about whether the companies in which they invest are addressing ESG-related costs, risks, and opportunities. And companies know that these investors are taking notice, both due to shareholder advocacy efforts such as those engaged in by our firm and because companies hear it directly from their customers and employees. Tellingly, many companies are purchasing renewable energy because they recognize that it’s a smart business decision and because they can use it to promote themselves on the basis of their environmental citizenship. 

Similarly, companies that care about their human capital—that think it’s important to treat employees like valued contributors rather than as a means to an end—understand that a socially responsible business is also a more risk-aware business.

At Trillium, we think the #MeToo movement, for example, underscores a variety of critical issues in workplace safety, sexual harassment, and gender pay equity that corporations are becoming more prepared to consider and work through. The movement itself has helped us frame questions to ask of company management concerning their preparedness for dealing with discrimination and violence in the workplace—and, more important, it’s helped us focus our approach to asking about the steps companies are taking to foster a corporate culture that can reduce these risks.

Over the last few years, we’ve seen an increasing number of company boards adopt better corporate governance practices. Indeed, it’s becoming the norm for companies to recognize—as academic and industry studies have borne out—that better corporate governance translates into stronger financial results. Behind this interest is both a self-motivated will to improve and the force of shareholder advocacy. For our part, Trillium regularly engages with company management to encourage better corporate governance.

An example of our recent advocacy efforts involves Alphabet, parent company of Google, with which we’ve been working on the issue of board diversity. Alphabet’s lack of gender and racial diversity—and the lack of such diversity among tech companies generally—is a fairly well-known topic. But we’ve asked Alphabet to change for the better. Specifically, we asked the company to adopt what’s known as the Rooney Rule—a race-conscious recruitment principle developed in the National Football League—to help ensure that when the board picks new members, it must look at a diverse pool of candidates. In particular, we asked Alphabet to adopt the rule so that any time it has an open board position, it must ensure that at least one member of an underrepresented community of color and at least one woman will be among the pool of candidates. Over time, we believe the adoption of this type of guideline will lead to increasingly diverse boards and, consequently, to better decisions and risk controls.    

As companies adopt sustainable business practices, investors take note. And naturally, investors want to know what those companies they haven’t heard from are doing to promote sustainability. If one company is reducing greenhouse gas emissions, are its peers doing the same? Who’s building a more inclusive corporate culture, and who’s just greenwashing with token recruitment efforts? What does more sustainable corporate governance look like, and what standards can we use to measure it? These types of questions reinforce the efforts of activist investors and of every corporation under scrutiny to aspire to higher benchmarks for sustainability.

1 Forum for Sustainable and Responsible Investment, October 2018, https://www.ussif.org/trends.