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Visible Hands: As Easy As ESG ✔️
We spoke with ESG expert Andre Shepley.
Andre Shepley is currently the Director of Environmental, Social, and Governance Research (ESG) at TruValue Labs, an AI technology start-up that provides real-time ESG data and analysis. They launched a Coronavirus ESG Tracker, that is now also spotlighting the importance of Black Lives Matter. We spoke to Andre before George Floyd’s murder, but we recommend reading about his thoughts on how companies are responding here: Black Lives Matter: Can sentiment in corporates change permanently? Our conversation focused on ESG and how ESG will evolve post COVID-19. This interview has been edited and condensed.
VH: Let’s start with the basics, what is ESG and why is it important?
AS: ESG (Environmental, Social, and Governance issues) has always been important. People have realized that no matter what business you operate, there’s impacts -- there’s societal impacts, environmental ones. There’s an enhanced understanding now that companies have a role in shaping the outcomes and fabric of society. And that awareness has grown at the same time as political efficacy has eroded. The growth of ESG investing has been partly driven by a will from owners, such as pension funds. There’s an impetus to use ESG investing to influence societal outcomes because people are seeking a different channel to do so.
Transparency helps too. In the ‘90s, a case like Nike and their supply chain issues took 5-6 years to be seen as a serious business concern. With increasing transparency, an issue that wasn’t obvious two decades ago can now become important instantly via social media.
VH: What’s missing from the conversations around big corporations?
AS: Natural capital costs are often in upstream operations, typically in developing countries, so they aren’t as evident when you buy from Amazon or drink a Coke. But when you analyze the environmental impact and look at Coke’s water usage, for example, you see that a lot of water is used to irrigate the corn in the corn syrup. These are connections that aren’t as easily made from the news headlines.
VH: How do you think of doing good for the sake of doing good vs. for the sake of business?
AS: It took decades for ESG investing to evolve into mainstream discourse. It took evidence of a bottom line impact for that to happen. Until that evidence was clear, the majority of the market didn’t care or wouldn’t care. Advocacy groups, media scrutiny, and general stakeholders have elevated these issues to the level where companies have reputational risk and there’s a clear link to financials. This has turned normative values into constraints on companies.
We need a continued evolution of value constraints. We’re only 100-200 years away from colonialism. The ways that companies existed and created “value” then was drastically different from what’s acceptable now. Even 40-50 years ago...
VH: What’s important for ESG in the post-COVID future?
AS: These issues are all interrelated. Systemic ESG risk is being taken more seriously, especially as it relates to social issues, climate and its social ramifications. Despite there still being more talk than action, the levels of accountability are rising, at least from a certain cohort of the market. Because of the crisis and the transparency mentioned earlier, the impact of companies have come under a microscope, and hopefully this leads to a positive virtuous cycle where companies compete to be the most environmentally friendly or have the most social approval. And hopefully much less greenwashing.
Capital markets also need to evolve, and I hope to see faster convergence. When we compare the assets under management that claim to integrate ESG and the relative size of green bonds, we see a need for innovation and creativity to facilitate more liquidity. In financial research, analysts forecast stock price targets based on quarterly profit and revenue; there needs to be a different framework that can really move stocks.
[VH note: Green bonds totaled to approximately $258 billion in 2019 whereas global bond debt markets were $102.8 trillion, that’s 0.3%. At least $90 trillion in assets under management (from debt and equity investors) claim to be committed to ESG and responsible investing.]
Thanks to Andre for many of these suggestions!
As an investor:
Pick companies that have shown they are forward-looking and have steady cost structures as potential regulation incorporates environment or social issues. From Andre: “I don’t think enough companies are predicting the environmental regulations that are necessary to reaching the important global climate goals.”
Andre explained the misperception that ESG investments perform worse than non-ESG ones. “If you think of hedge fund performance there’s nothing that screams outperformance but people still pay much higher fees than with ESG funds. There’s a misperception around risk.”
Know what you own and vote on the world you want to see. We’ve hammered this a lot but Andre’s here to say it for us: “One underutilized aspect is the shareholder vote. Use that power to shape the world we want to see.”
As a consumer:
In May, TruValue Labs highlighted “top responders” in COVID-19. They scan for what companies are doing and score these companies. Some examples of their top responders: LEGO (they made visors for PPE!) and CampingWorld, a RV company that used unoccupied RV assets to help house people in isolation when they otherwise couldn’t.
As a citizen:
Companies are driven by their costs, and regulation can help correct for mispriced goods. Push for policies like a price on carbon. Andre: “The classic example is the fight against plastic: How do we incentivize companies to move away from plastic products when the market price of plastic is declining because fossil fuels are seemingly cheaper because they don’t price in environmental externalities?”
As an employee:
If you want to learn more about environmental issues and business, Andre recommends reading Cradle to Cradle. And don’t forget about research from TruValue Labs!
Hospitals Got Bailouts and Furloughed Thousands While Paying C.E.O.s Millions: “HCA is among a long list of deep-pocketed health care companies that have received billions of dollars in taxpayer funds but are laying off or cutting the pay of tens of thousands of doctors, nurses and lower-paid workers. Many have continued to pay their top executives millions, although some executives have taken modest pay cuts.”
Individuals Roll the Dice on Stocks as Veterans Fret: “Another reason for the rise: Individual investors, some new to the market, are showing a sudden appetite for risk. If shares keep rising, the newbies and others will be rewarded. However, the recent action reminds some veterans of past speculative frenzies, some of which ended badly, especially for investors who climbed on board late.”
If a Company Is Serious About Racial Pay Equity, What Should it Do?: “And she recommends changing the performance review process so employees are evaluated by multiple colleagues of various ethnic and racial backgrounds when they’re going for a raise or promotion.”
The Coronavirus Is Exposing Wall Street’s Reckless Gamble on Bad Debt: “As investors’ confidence returned, the prices of leveraged loans also partially rebounded. But this doesn’t mean that all highly indebted companies are safe. The Fed extended a lifeline to investment-grade corporations and to companies, such as Ford, that were investment-grade before the pandemic reached the United States and have since seen their debt downgraded. But it held off from offering direct assistance to the most risky and highly leveraged companies, many of which rely on leveraged loans and the C.L.O. market that undergirds it.”
IBM Quits Facial-Recognition Market Over Police Racial-Profiling Concerns: “But some are skeptical of IBM’s move, noting that the company was already in a distant third place in the race to sell facial-recognition technology, and that the company’s statement leaves loopholes. It reserves the right to sell facial recognition technology for specific purposes, for example, as well as to re-sell the same technology from other vendors as part of its large consulting business.”
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