Wall Street Wakes Up to SRI

Socially responsible investing (SRI) isn’t the quietly progressive corner of the financial industry that it once was. For decades, SRI has been practiced primarily by small, independent boutique investment firms. For better or worse, the old landscape has dramatically changed in recent years with record  inflows of investor cash and large Wall Street firms looking to stake their claim in this rapidly growing space. We at Natural Investments are eyeing these developments with healthy skepticism. Can we still  trust the fund managers we’ve worked with and invested in all these years? What impact will Wall Street’s entry have on our industry?

One of the earliest indications of what was to come arrived in 2017. Calvert Investment Management, the manager of mutual funds that have appeared in Natural Investments’ client portfolios since our  inception, was snapped up by a bigger fish, Eaton Vance. We immediately went to work to understand the potential impact, conducting meetings with Calvert and performing our own internal reviews. Fortunately, they demonstrated and reassured us that they retained their independence and maintained  their standards even with new ownership. Just as we became comfortable with this, earlier this year,  Eaton Vance was suddenly acquired by one of the whales of Wall Street, Morgan Stanley. So, now we  have another new arrangement to get our heads around. And that’s on top of other longtime stalwart SRI managers like Parnassus, which is being purchased by AMG, and Pax World, which was purchased by  Impax, to name a couple.

Unfortunately for Wall Street, there are only so many SRI firms to scoop up, and few independent shops remain. For the firms that haven’t bought their way in, we’ve observed two major trends. One is a  massive rollout of new funds labeled in various ways—sustainable, ESG (Environmental, Social, and Governance), low carbon —you name it. The other is the large-scale rebranding of existing conventional funds, giving them names like “USAA Sustainable World Fund.” According to US SIF, the SRI industry association, the net effect of this has been to add 317 ESG labeled funds between 2016 and 2020, a staggering 61% increase. As investment advisors committed to this space, how are we to keep up?

Thus far, while we have not analyzed every new fund coming to market, our research shows that very few of them are high-quality SRI funds. According to Sylvia Panek, NI advisor and lead Heart Rating researcher, they have problems in all three facets of socially responsible investing:

  1. Their commitment to ESG screening is generally weaker; they often refuse to eliminate harmful  industries such as fossil fuels from their portfolios.
  2. They won’t take a consistent stand on the important issues of the day such as diversity in the boardroom or gender pay parity by voting for shareholder resolutions on those topics, let alone show leadership by introducing such resolutions.
  3. They don’t invest their cash in community development the way we’ve come to expect from our top-rated funds.

All in all, the early evidence points to varying degrees of greenwashing, as new funds attempt to capture assets using ESG branding, but often in little more than name only. However, this has not gone unnoticed by the Securities and Exchange Commission (SEC), which recently announced the creation of a new Climate and ESG task force aimed at rooting out this kind of deception. We applaud this initiative and look forward to seeing the results.

That leaves the longtime SRI firms that have new ownership: How are they measuring up? These managers have already proven that they have high-quality funds featuring written commitments to avoiding harmful companies and industries, longstanding leadership in shareholder advocacy that has resulted in measurable shifts in corporate behavior, and demonstrable community investing. As a result, we are watching carefully for any changes to how they operate. Do they continue to operate  independently of their new corporate ownership, or are they being pushed to take less bold policy positions or water down their screening standards? Thus far, we are generally pleased with what we’ve seen in this regard.

The most challenging part of SRI manager buyouts for us to embrace has been the behavior and branding of the new corporate parent. For example, while Morgan Stanley is undoubtedly enjoying the halo of morality provided by owning Calvert, its businesses are much larger and more far-flung than that. According to the Rainforest Action Network, Morgan Stanley has financed $111 billion worth of fossil fuel projects since the landmark Paris climate agreement, making it the 12th biggest fossil fuel funder of all banks globally over that timeframe. Yet, Morgan Stanley has also demonstrated leadership in our industry through its Institute for Sustainable Investing, which has produced valuable and credible research and advocacy over the years. As with many major corporations, it can be hard to draw sweeping conclusions due to their complexity and massive, multifaceted societal footprints. Nevertheless, we  continue to monitor them and do our best to hold them accountable when necessary.

From our perspective, the influx of assets and attention into our industry has generally been positive. Our longtime managers continue to deliver, and we’ve found a handful of high-quality funds to like among the newcomers. Prominent Wall Street asset managers are coming under increasing public pressure to improve their proxy voting records to match their rhetoric, and we are seeing gradual progress there. While plenty of lower-quality ESG funds are raising billions of dollars under management, the high-quality funds are also growing faster than ever. Most importantly, corporations worldwide are increasingly being held accountable for their policies and behavior by the rising tide of institutions and people investing in a socially and environmentally conscious way. That gives us hope for a better future.

James Frazier

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