Last fall, NI Managing Partner Michael Kramer gave a 45-minute talk at a conference in his home state of Hawaii that offers an good introduction to socially responsible investing and our variation on the theme, resilient investing. It catches Michael in a relaxed setting, and it’s recently been posted at the conference website (or click through to see it embedded below). Their teaser includes some of their favorite quotes from Michael’s talk:
“We think investors have a right to know. We want to require the disclosure of political contributions. I won’t use Verizon because I know how much money they contribute to the conservative side of the political equation… Imagine if all companies were required to disclose that publicly then you would know that and could make a decision about whether you want to own that company.” (Timecode 21:40).
“We have not fixed hardly any of the problems that caused that financial meltdown eight years ago… It is still going on because the Republicans in congress want to treat the economy like the Wild West.” (Timecode 22:20).
In my role on the national policy committee of the socially responsible investment (SRI) industry’s trade association, USSIF: The Forum for Sustainable and Responsible Investment, we had a wonderful legislative priority document prepared in October for the new President. Like many others, we expected to have the opportunity to build on the many successes of our advocacy with the Obama Administration on a variety of issues to protect the public from systemic abuse by the financial industry, encourage wider adoption of SRI by fiduciaries, and facilitate investment in the green economy. For responsible investors, the Obama years were very encouraging indeed, and we at USSIF had an ambitious agenda ready to share with the Clinton Transition Team to expand on these victories for investors and the public.
Naturally with the election result, everything has changed, and we now find ourselves in a radically different political climate that demands a defensive stance to protect recent laws and regulations from being dissolved. When it comes to issues of importance to sustainable and responsible investors, the Republicans in Congress, long opponents of most regulations—especially relating to business and investing—now have an ally in a President who shares their belief in small and minimally intrusive government. That’s why within the first months of this Administration we’re already seeing efforts to unravel the reforms to the financial system that were established during the Obama Administration. They’ve already removed the Dodd-Frank provision that required companies to disclose payments (i.e., bribes) to foreign governments to extract fossil fuels and minerals from often-oppressive governments.
The Republicans have their pitchforks raised in outrage over a broad array of regulatory protections, and the fight is now on to:
After the election, I left the country. Many people had a similar instinct, but no, my doing so wasn’t out of disgust over the election results. It was planned long before, in response to an invitation to speak in Deauville, France at the annual global Womens Forum for the Economy and Society (also known as “Davos for women”). This was quite an affair: 1200 powerful political, business, media, and NGO women from around the world all focused on economic development and improving the status of women. The theme this year was “The Sharing Economy,” which as you know is an Evolutionary investment strategy in The Resilient Investor, so I fit right in despite being one of the only men in attendance.
The timing was good for my presence at the event—resilience is resonating well with people, not just because of global instability, but also because the current political situation, in particular Brexit and the American presidential election. There was even a “What America’s Choice Means for Women” panel at the event that featured Star Jones of The View and Leah Daughtry, the chair of the Democratic National Convention Committee, discussing the battles on the horizon.
So what does resilience mean in this political environment?
In yet another victory for Wall Street reform that the SRI industry fought hard for, the Securities and Exchange Commission (SEC) last month announced that it has adopted final rules to require companies that develop oil, natural gas, and minerals to disclose any payments they make to governments. These payments, often done in secret, can directly conflict with and hinder U.S. foreign policy interests and may expose shareholders to geopolitical risks that can directly affect share value. From an ethical perspective, the payments can also prop up oppressive regimes and dictatorships, which often use the payments to grow their leaders’ personal coffers while hindering the democratization of those countries.
The rules were one of many elements of corporate financial reform mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010. The following year, President Obama specifically targeted resource extraction as an industry in need of greater international transparency.
Though the rules were initially written in 2012, the SEC was mired in legal challenges by the extraction industry and the U.S. Chamber of Commerce. As a result of a lawsuit, the U.S. District Court for the District of Columbia vacated the rule as originally written, but
In 2008, as President Bush was running for the hills, his Department of Labor issued guidance for pension plan fiduciaries that suggested that they should not consider non-financial factors in the investment selection and management process. The guidance had a chilling effect—mission-oriented fiduciaries managing assets for foundations, universities, and public pensions interpreted the guidance as a serious limitation on their discretion to consider the environmental, social, and governance analyses that are fundamental to an SRI approach.
Thankfully, Secretary of Labor Thomas E. Perez was amenable to our advocacy.
In the wake of the Citizens United decision, which opened the doors even wider to unfettered political contributions by corporations and the well-heeled, we have seen increasing calls for more transparency and accountability in the elections funding system. Justice Anthony Kennedy gave voice to such concerns in his Citizens United dissent, stressing that “prompt disclosure of expenditures can provide shareholders and citizens with the information needed to hold corporations and elected officials accountable for their positions.”
A few weeks ago, former SEC Commissioners Bevis Longstreth, William Donaldson, and Arthur Levitt send a letter to current SEC Chair Mary Jo White demanding that the SEC begin proceedings on political spending rulemaking, which has been stalled for nearly four years since a group of leading law professors submitted a formal petition seeking mandatory disclosure of political spending by public companies. That petition received a record 1.2 million public written comments of support, indicating that citizens, and many shareholders, desire more transparency on this issue.
In their letter, the three former SEC Commissioners assert that “the Commission’s inaction is inexplicable, . . .
This is a local tale, but it is just such close-to-home decisions, multiplied across the country and around the world, that will shape the future resiliency of our societies; therein lies a lesson for us all.
A sign of evolutionary times, Hawaii County Mayor Billy Kenoi recently cancelled the $100 million waste-to-energy incinerator project that would have replaced the island’s nearing-capacity landfill in Hilo. While three bids had been accepted as finalists for the project, the Mayor indicated that the recent 50% drop in oil prices made the project financially untenable, given the price the utility was willing to pay for power and the cost of producing the electricity (yes, strangely, the power purchase contracts were tied to the price of oil).
But the problems with the idea run deeper than this. The financial formula for corporate-scale incinerators relies on a high volume of waste to burn; meanwhile, the stated goal of local and state sustainability plans is to reduce waste to zero through reduction, recycling, and reuse strategies.. While making energy from our waste is perhaps a half-step in the right direction, to many residents, the incineration facility, which would be the largest infrastructure facility in Hawaii County history, is clearly a remnant of old-style thinking about waste, one that presumes we’ll always have a huge pile of it to dispose of.
The recently released biennial Report on US Sustainable, Responsible and Impact Investing Trends 2014 by the US SIF Foundation indicates that sustainable, responsible, and impact investing (SRI) assets have expanded 76 percent in two years from $3.74 trillion at the start of 2012 to $6.57 trillion at the start of 2014. This is the largest two-year increase in the amount of SRI investments in the Trends Report’s 20-year history. At this new level, investment strategies that integrate some form of environmental, social, and governance (ESG) criteria now account for more than one out of every six professionally managed investment dollars in the United States.
“The findings released today clearly demonstrate that investment decisions using sustainable, responsible, and impact investing strategies are on the rise,” said Lisa Woll, CEO of US SIF and the US SIF Foundation. “Sustainable investment strategies are being applied across asset classes to promote corporate social responsibility, build long-term value for companies and their stakeholders, and foster businesses that will yield community and environmental benefits.”
Note: See this recent commentary by NI’s Andy Loving, offering a more cautionary take on this recent growth in ESG investing.
According to the 480 institutional investors, 308 money managers and 880 community investment institutions participating in the research survey, the top reason for offering ESG products remains client demand, followed closely by interest in fulfilling a particular mission, improving returns, and effectively managing risk.
The Securities and Exchange Commission is currently reviewing disclosure rules for U.S. public companies, and will make recommendations to Congress about ways to “update them to facilitate timely, material disclosure by companies and shareholders’ access to that information.”
This provides an opportunity for sustainable shareholders, who recognize the proven correlation between social and environmental performance and financial viability, to advocate for an expansion of the current parameters of disclosure rules. It is time for the SEC to acknowledge that environmental, social and governance (ESG) practices can and do belong on the table alongside financial records as information of material value to investors. In this context, material means “important, essential, or relevant,” and indeed, research has repeatedly shown that company performance is connected to and affected by ESG issues.
In addition, there is a public interest case to be made for ESG reporting. Companies that cut corners on international labor standards or damage communities or environment weaken the global economy and increase societal ills. If responsible behavior is not embraced voluntarily by management, it must be required by law. Disclosure requirements are part of the essential process of mitigating risks to both companies and society, and deserve to be made stronger, not weaker. Doing so is a clear benefit for shareholders, who deserve to understand how the companies in which they invest make and spend their money.
As such, sustainable shareholders believe there are significant gaps in current disclosure practices, including a general lack of ESG reporting.
Around the country, contested zoning reclassification hearings are a common occurrence. In Kona, Hawaii, where I live, owners of a large coastal open space property that was zoned for conservation recently sought to rezone within the urban boundary and develop it as a luxury resort and marina. The developers made an outstanding effort to make the development “green,” which was encouraging. While most of the testimony covered the usual “jobs vs. environment” and overburdened infrastructure arguments, I suggested that no new coastal development should be approved in Hawaii due to the real threat of rising sea levels.
My argument wasn’t merely about protecting human life; it was also about making a potentially catastrophic investment decision. The response to my testimony was silence; it was not an argument the Land Use Commission, nor the audience, had likely ever heard. But I was not trying to be Chicken Little; I was asking people to think about an emerging future and plan responsibly, not only from a survival perspective but from a financial one as well. It would make little sense if the human response to climate change was not only a biological catastrophe, but also bankrupted us. But as history shows, the failure to invest one’s resources wisely can disrupt and even extinguish civilizations. Some say we’re well on our way.
With Hurricane Sandy illustrating the peril faced by low-lying communities, and with several Pacific Island nations facing relocation of their entire populace, it’s clear that climate change is proceeding rapidly and that the consequences are both real and severe. How do we allocate our human, tangible, and financial assets and resources in a manner that might minimize further disruptions? History will judge us on our ability to make choices that foster resiliency in the face of the ongoing changes, and everyone knows that preventative measures are far more effective than crisis intervention.