Investment strategies that peer into the corporate soul — or at least what’s reflected in a company’s behavior — continue to draw a growing number of investors, both individuals and organizations.
Tim Smith of the Interfaith Center on Corporate Responsibility says popularity remains at an all-time high for investment guidance that can help people who want to make money without contributing to bad outcomes for the planet or society.
“Fifty years ago the religious community was sort of voices outside the gates, if you will,” seeking to bring moral suasion to the corporate boardroom, Smith says. “Now we’re working in a cooperative effort with many other investors.”
Today this approach to making investment choices and addressing corporate behavior is often summed up by the term “ESG,” standing for environmental care, social justice and corporate governance.
ESG investing also faces a backlash, however — a movement of politicians and other critics hoping to undercut the drive to link social values to corporate and investment activity, says Smith. At the Interfaith Center, his work these days involves helping the organization respond to and counter the pushback.
Smith was in Wisconsin earlier this month to speak at the 50th anniversary celebration of Seventh Generation Interfaith Coalition for Responsible Investment. The Milwaukee-based organization, originally Catholic but now incorporating other faith traditions, promotes “integrating social and environmental values into corporate and investor actions,” according to its mission statement.
Pioneer in corporate social concerns
When it comes to the organized use of investment as a tool of social conscience, Smith got in on the ground floor. After attending Union Theological Seminary in New York, Smith joined the fledgling Interfaith Center for Corporate Responsibility in the early 1970s.
The center was an early user of shareholder resolutions to call attention to human rights abuses and other social issues. An Episcopal Church resolution filed with General Motors that called on the automaker to withdraw its business from South Africa until the country ended the racist system of apartheid was “the very first [corporate shareholder] resolution by a religious group,” Smith says.
The use of corporate shareholder resolutions combined with the development of investment organizations serving individuals and groups seeking to put their money where their values are spread in the decades that followed, adopted by religious communities as well as some secular organizations.
From “a small group of religious investors addressing companies on these ethical or social issues,” the movement has evolved, Smith says, growing astronomically as well as becoming more diverse.
Today, the Principles for Responsible Investment Association (PRI) is an international network of investors who believe addressing ESG is better for the bottom line, he says. Collectively, PRI-affiliated investors have more than $120 trillion in assets under management. “We couldn’t imagine that 15 years ago, much less 50 years ago.”
Another group, Climate 100 Plus, focuses on companies with high emissions of greenhouse gases. Its members, with $60 trillion in assets under management, seek to influence those companies on issues surrounding climate change.
“It is an entirely different world, with much broader concerns by investors,” Smith says.
Social values meet shareholder value
Concerns about the consequences of business behavior on society and the environment have spread to many companies. Many “are saying that these issues are important to their employees, their customers, their shareholders, their reputation and deserve to be addressed,” Smith says. Their publicly stated concerns include climate change, diversity or human rights, although “some live it more seriously than others.”
Corporate executives have shifted in their views. “I can remember some executives in the early days saying to us that they found these discussions very interesting,” he recalls, “but their job was to provide returns to shareholders.” Increasingly however, proponents of ESG argue that attending to such issues provides a better return.
Yet another variation on the practice is called impact investing — a conscious decision to put investment dollars into projects that the investor believes has a positive purpose — supporting low-income housing, for example. “The goal there is to have your capital work to promote social change,” Smiths says.
Religious organizations or private charitable foundations may intentionally guide their decisions by their values. Many other companies and investors that employ ESG criteria don’t argue that it’s “the right thing to do,” Smith says. Instead, “they think it’s a wise and prudent thing to do [and they] often say that they believe it creates and protects long-term shareholder value.”
Big investment houses that guide their strategy using ESG principles consider those concerns “important issues to be addressed because of their fiduciary responsibility,” he says.
Pension funds in particular may be constrained from highlighting values in investment choices. “Their job is to take care of other people’s money,” Smith says, and approach investment choices as “prudent fiduciaries simply looking to adjust for risk and protect shareholder return.”
At times the decisions can get complicated. Several years ago sluggish returns from fossil fuel producers meant that investors forgoing them out of concern about climate change “were doing awfully well,” he notes.
With world events pushing up oil and gas revenues and their stock prices, however, “portfolios without them had to pay a penalty,” he continues. “But over the long term, there’s a question then: What is the wise choice here?”
After about three decades at the Interfaith Center, Smith joined Boston Trust Walden, a prominent ESG-guided investment house. Retiring at the end of 2022, he has returned to the Interfaith Center as a senior policy advisor.
Responding to backlash
His mission there now includes addressing the attacks on ESG investment practices and policies that have blown up in the last year.
The leaders of those attacks have a variety of motives.
Some see ESG as a threat to parochial economic interests. A number of climate organizations and investment funds screen out fossil fuel companies as part of the effort to encourage a shift “toward a low-carbon future,” Smith says. But in Texas, where oil remains a key component of the economy, state officials have pushed back.
They think, ‘We should be protecting our oil companies,’” Smith says. “And they have been very straightforward about that — anybody who’s attacking the oil industry should be countered.”
Other critics continue to claim that by excluding companies because they have poor records on ESG issues, “you’re going to underperform,” Smith says. “That can be the case sometimes, but it has often not been the case. There’s lots of stories coming out about how ESG portfolios perform very competitively.”
And some of the attacks are ideological, taking aim at ESG not simply as an investment approach but as a symbol of “woke capitalism” that focuses on anything other than the bottom line, he says.
Attackers sometimes embrace their own form of values-based investment screening, just from a different perspective.
Encouraged by the U.S. Supreme Court opinion earlier this year that blocked colleges from considering race in college admissions, “some conservative investors have filed resolutions with companies arguing that they should do a diversity review, because white men are being discriminated against,” Smith says.
Despite the attacks, ESG investing’s continued growth remains robust, but the criticism worries Smith nonetheless.
“I think it is concerning,” he says. Resolutions and bills have been introduced in more than 30 states that would block state investments using ESG criteria, according to Smith, and Republican leaders in Congress have held hearings to attack ESG practices and are circulating more than a dozen bills. Investment houses with large ESG portfolios are seeing some states drop them.
“This isn’t just rhetorical or ideological criticism,” says Smith. “It’s bringing power and economic leverage to bear.”
Smith expects some companies involved in ESG work of any kind will “be a little more cautious about talking about what they’re doing in this space. Nevertheless, he’s optimistic that in the longer term, both on the corporate side and on the investment side, the work will continue where a commitment to it has already been made.
“This train has left the station,” he says. “I don’t think companies are about to retreat from their commitment to sustainability. The business case is too strong.”
GET THE MORNING HEADLINES DELIVERED TO YOUR INBOX
Our stories may be republished online or in print under Creative Commons license CC BY-NC-ND 4.0. We ask that you edit only for style or to shorten, provide proper attribution and link to our web site. Please see our republishing guidelines for use of photos and graphics.