By Claire Attie, Graduate Student, MBA, and Clean Energy and Sustainability Certificate
Although Environmental, Social, and Governance (ESG) Research was a small industry fifteen years ago, it has seen significant growth. According to Social Investment Forum (SIF) 2020 Industry Report, ESG investing strategies grew from $12.0 trillion at the beginning of 2018 to $17.1 trillion at the beginning of 2020, an increase of 42 percent. Remarkably, 1 in 3 dollars of the United States’ total assets under professional management is managed through ESG criteria.
On December 1, 2020, the Center for Sustainable Enterprise and Regional Competitiveness (SERC) hosted an event on ESG investing and its impact on the public markets. Guest speaker Elizabeth Levy, Portfolio Manager & Research Analyst at Trillium Assets Management, explained how investors access public markets and provided an overview of the different investing strategies. Traditional, responsible, sustainable, thematic, and private market investing.
Traditional is when investors are looking to maximize financial returns only. Responsible investing is where investments are screened out based on values; for instance, companies manufacturing or selling alcohol, tobacco, firearms, nuclear energy, or using animals for testing are avoided. Sustainable investing is where different ESG factors are incorporated when evaluating a company, such as greater management diversity or sustainable supply chain management. Thematic impact investing; is a mutual fund that only invests in alternative energy companies. Lastly, in private market investing, there is impact first investing and traditional philanthropy, which only seeks social and environmental impact.
Ms. Levy highlighted examples of ESG factors that are part of Trillium’s strategy. Within the environmental realm, she evaluates public goals and progress in managing environmental impacts. She views the work environment and supply chain management in the social sphere, including updated human resource policies, diversity analysis, and progressive pay policies. On governance, it is common to examine reporting and disclosure practices and published policies. Trillium Assets Management examines a different array of ESG factors, as the many stakeholders demand such information, e.g., investors, customers, employees, talent acquisition, community, supply chain, and regulators.
Trillium Asset Management believes it is financially beneficial to consider ESG issues for various reasons. On the revenue side, companies that sell energy-efficient products may be expected to have higher revenues than their peers. On the operational costs side, having better relations with the employees may result in lower turnover rates. On the intangible assets side, reputation, institution knowledge, and intellectual property are key attributes for business success. Lastly, a lower cost of capital causes greater financial stability. Ms. Levy mentioned green bonds and that some companies have been finding these less expensive than traditional bonds.
In this case, the theory is true that companies with better ESG management are considered better at managing various risks, thus seen as better long-term investment targets and a safer option for lending capital. In the discussion that followed, Prof. Veleva asked about the type of expertise and talent Trillium Asset Management hires. Then the audience asked about consumer demands pushing down the yields for green bonds, the duties of a starting position at an ESG firm, whether Trillium has faced pushbacks from the fossil fuel industry, and current initiatives to create more streamlined and transparent criteria for ESG investing.