In a resource-constrained world, the understanding of the need for, and value of, sustainable business practices has become mainstream. Building profitable companies, and investment portfolios that seek long-term shareholder value, requires ongoing analysis of all major financial risks and opportunities.
There has also been a growing recognition of the significant economic and financial impacts of “ESG” (Environmental, Social and Governance) risks to our economy and investors. The term “ESG Investing” has become an acronym that is frequently used as a stand-in term for all investment strategies that consider long-term sustainability.
ESG is data, not an investment discipline.
Trillium, as a pioneer of ESG investing, has worked tirelessly to grow the industry. Since our founding, we have recognized that ESG information is key to our investment decision process, just as financial data is. ESG information provides insight to investors into how management teams assess, approach, and manage a diverse set of risks and opportunities.
Investment products with an “ESG” label have grown exponentially, with little oversight of ESG claims by managers. Companies are marketing and promoting themselves as incorporating ESG-related factors, while being opaque regarding whether or how they are using ESG considerations or achieving their impacts. As investors consider ESG-related risks and opportunities, there is a growing need for consistent, comparable, and complete ESG information to help protect investors from “greenwashing”, a growing practice of misleading investors about the risk, pricing, and value of investment assets.
This lack of clarity has, understandably, resulted in confusion for investors, with increased scrutiny from regulators throughout the world, including additional regulation from the U.S. Securities and Exchange Commission (SEC), and a proliferation of “anti-ESG” legislation.
Over the past few years, the term ESG has been weaponized, primarily by lawmakers in Republican-led states, who see ESG as part of a “woke” agenda and seem to believe that incorporating sustainability as a driver of long-term success is bad for investors.
In 2023, 14 states passed anti-ESG legislation attempting to deny investors the right to make informed investment decisions, by seeking to prohibit investment managers from considering ESG-related investment risk. These laws generally place limitations on how ESG factors may be considered, with a focus on outdated and confusing “pecuniary/non-pecuniary” terminology.
ESG factors, of course, inform investment decision-making which can provide significant financial benefits to investors. Even in states which have implemented anti-ESG legislation, investment managers can make investments decision based on ESG factors, if the decision is made in pursuit of financial return.
Policymakers who publicly oppose efforts to regulate corporate transparency on ESG issues on the premise that doing so is government overreach, at the same time support regulations that would limit the information that investors can request of the companies that they own.
Restricting investment professionals’ ability to evaluate ESG risks, including climate change impact, human rights, or data privacy, to name a few, severely limits an investor’s ability to consider the financial risks posed by societal and environmental developments.
The SEC has already noted the importance of all investors having equal access to critical, material financial information. ESG data is essential not only to investors, but also to corporate boards and CEOs to ensure that their business is resilient and can deliver long-term growth.
Investors must have access to reliable ESG data and the freedom to use all available information in their investment process to maximize returns and minimize risks. To ignore ESG factors would be to ignore our fiduciary duty to clients.
Matthew W. Patsky, CFA is CEO of Trillium Asset Management, an impact-driven, ESG-focused firm dedicated to aligning values with investment objectives.