ESG investment, or when assessing the company’s environmental, social and governance factors, is booming, and a group of investors focusing on sustainability says that this trend will only accelerate from here.
CalSTRS chief investment officer Christopher Ailman (Christopher Ailman) at CNBC’s “Delivery Α” on Wednesday. “If you don’t pay attention to it, it will be a negative alpha and you will be trapped in low beta returns.”
Wendy Cromwell, vice chairman of Wellington, who managed $1.4 trillion in assets as of the end of the second quarter, responded to these comments, saying that climate change “investors need to study it, and companies need to be prepared for it.”
According to Morningstar data, ESG investment is booming. As of the end of June, the global assets of sustainable funds reached US$2.24 trillion. Assets exceeded the $1 trillion mark for the first time in the second quarter of 2020.
But the ESG boom has caused quite a lot of criticism. ESG is subjective in nature. Without standardization across companies and industries, it is difficult to assess whether ESG branded products have truly achieved their set goals.
“There is no doubt that some asset management companies are just using these words because it is a marketing tool,” Elman said, although he doesn’t think ESG has reached a bubble.
Regulators in Washington are currently studying ESG investment and have put forward many proposals. Cromwell first said that all of this has to do with data. With regard to the “E” element, she stated that all companies listed in the United States should be required to disclose Scope 1, 2 and 3 emissions. She added that for scientists and investors who often speak different languages, it is important to jointly assess the company’s long-term physical risks due to climate change (such as wildfire and flood exposure).
Carine Ihenacho, Chief Governance and Compliance Officer of Norges Bank Investment Management, said that eliminating the noise surrounding company commitments and the more general ESG investment boom is critical.
“Finding out what types of issues are important to the company… how the company manages it, and then how does the company report progress,” she said. Norway is the world’s largest sovereign wealth fund, with more than $1.4 trillion in assets under management.
The fund previously announced plans to phase out fossil fuel risks, especially for companies engaged in exploration and production. More funds have followed suit—usually under pressure—including Harvard University, which earlier this month said it would stop investing in the fossil fuel industry.
But Ailman cautioned against taking divestment as a once-and-for-all strategy. He believes that divestment is ESG 1.0, and participation-a more useful and important strategy-is ESG 2.0.
“Withdrawal will not reduce the carbon content in the atmosphere. Participate in the meeting. I can’t emphasize enough,” he said. “Participating in and changing people’s attitudes and turning the company around is absolutely vital now, because climate change is not just the energy industry, there are many other industries, and the whole world must change.”
This attitude became apparent when CalSTRS joined the upstart radical fund Engine No. 1 to fight for representation on the ExxonMobil board of directors.
The fund received support from well-known investors such as CalSTRS, and after a fierce and controversial vote at ExxonMobil’s annual meeting, three of its four nominees were included in Exxon Mobil’s board of directors.
“We took over that board. We changed that board. We really changed the company from top to bottom,” he said, noting that ExxonMobil has scientists, resources, and capital to promote carbon capture and other issues.
“That’s huge,” he said of shaking the board. “When you first came into contact with mountaineering, it was to climb Mount Everest.”