As you would suspect, the number of ESG-related marketing conversations that we have had with managers has increased exponentially over the past few years. And, of course, the range of views on the value of having an ESG-focused message is all over the place – from those “all-in” on one hand, to those still highly skeptical on the other.
When it comes to the more skeptical crowd, our conversations invariably end (or begin) with one of two questions. And it almost always boils down to the same two questions.
1). “Do I need to change my investment strategy in order to incorporate ESG?”
2). “Does any of this “stuff” really matter?” (Yes, that’s exactly how the question is typically phrased.)
For folks that have been in the industry for a long time, these really aren’t unreasonable questions to ask. ESG has come so far, so fast, that it’s easy to understand the hesitation. But – it’s also an evolving topic that requires understanding on all sides.
You do you
The first question is tricky. Look – you are never going to win an argument with the SEC about being ESG-centric if you make your living trading traditional oil and gas or other non-eco-friendly sectors. But the reality is, oil and gas still does need to be traded and many investors still do want or need to invest in the space – at least for the foreseeable future.
So…where does that leave you from an ESG messaging perspective? I am not going to lie to you – if you aren’t truly considering being part of the “solution” (i.e., shifting focus to energy alternatives over time, for instance, as an oil and gas manager), then it’s going to be hard to convince anyone of your sincerity.
That said, does that mean you should just abandon all ESG practices? Of course not. Irrespective of regulation or sentiment, this can’t be a totally binary decision (either continue trading your strategy or implement ESG practices where they make sense for your business).
First off, although the “E” is obviously material, it is not the only consideration. Any investor that cares about ESG but still wants exposure to a non-eco-friendly sector will understand that. They recognize that “S” and “G” factors also impact a company’s long-term prospects and need to be part of the decision process. They may not be at the top of the list of factors you consider, but they are likely to be in there somewhere. As Kevin Walkush, PM and Head of ESG at Jensen Investment Management notes, “we don’t use ESG to make portfolio decisions, but we do use it to help identify risks.”
A good example of this arose earlier this spring when Tesla was removed from the S&P 500 ESG Index. That’s right, Tesla – the eco-friendly automaker – was booted from the ESG index. Most (but interestingly, not all) of the reasons had to do with concerns related to social and governance issues, such as poor working conditions and its handling of an investigation into auto-related injuries.
Now, you might not agree with the S&P scoring system – but you would be hard pressed to suggest that things like long-term employee retention or product-related deaths don’t matter to a company’s long-term outlook.
Which takes us to you and your organization. Even if ESG issues aren’t relevant to your strategy, they are undoubtedly relevant to your business. They almost have to be. And you undoubtedly already practice some. Think about it – just to be considered “institutional” requires very stringent governance standards. My guess is that anyone reading this probably scores very high when it comes to how their company is run.
Consider the other areas of your business. Do you really think a talented candidate would take a job today without the expectation of being well-treated – not just financially, but personally? And…how fast do you think an institutional LP would jump ship if they weren’t convinced you had proper privacy and data security measures in place? You probably wouldn’t even be in the conversation if you didn’t meet a reasonable standard of reporting or demonstrated some level of transparency.
It's more than just repackaging
Which begs the question, is that really “ESG” or just re-labelling of practices that you were doing anyway? I’d say, it’s a little of both. The big difference is that adopting ESG values is done within a structural framework…with a purpose. One that enables progress to be measured and exposes you to other viewpoints.
But ask yourself the question from their perspective. Would investors or regulators have to demand this stuff if the industry were going to do on its own?