17: Season Finale - A Pragmatic Deep Dive into Socially Responsible Investing, with Sonia Kowal

If you had to pick one myth about ESG investing that you wish more people understood, why would that be? So, time and time again, I'm really disappointed to see the actively blurred lines between ESG investing, values-aligned investing, and impact because by conflating these concepts, investors and clients who are intent on making a difference are pretty misled. So there's this false promise sometimes in marketing material about the positive change your investments can create. So investors can be persuaded by this impact washing to allocate assets to products or strategies that don't actively create change. So when traditional firms, Wall Street firms, other big players sell ESG products, I think most people don't understand that those investment products are not necessarily values-aligned. Definitionally, ESG research integration is part of an investment process to try and improve investment returns. So it's about how a company is performing in various environmental, social, and governance measures, right? Sometimes to mitigate risk, sometimes to understand a company's opportunities. It's not necessarily tied to values, ethics, morality, mission, any of that stuff.

Thank you, Margarita. I'm happy to be here.

Yeah. So, I came to my work in socially responsible investing because I was bothered by the inconsistencies between the ethical lifestyle I was trying to lead and the investments I was making in my professional life. And I came to realize that no matter what I did at home in terms of supporting environmental or social causes, these positive behaviors and choices were dwarfed by the negative events of the investments I was making as an equity analyst and portfolio manager at a traditional firm. I became a portfolio manager. I was managing about a billion dollars before turning 30. But then I was so disillusioned by the greed I saw around me. And I was not hopeful that it was possible to truly drive change within an established firm. And you can tinker around the edges for sure, but not affect the kind of radical change you need to disrupt our current paradigm of investor irresponsibility towards social environmental costs created in clients' names. So there were two events that inspired me to make a change in my very comfortable career. The first was witnessing my colleagues in a very serious and straight-faced discussion on the investment merits of child labor. We had a foundation client that asked us how we made sure that the companies that they were invested in didn't use child labor. And we made a few placating noises and then we returned to our desk after the meeting and laughed at the question because it was obvious that child labor is cheap labor and lower labor costs are good for shareholders. And then I went on a research trip to visit a mining company in the Siberian city of Norilsk above the Arctic Circle. And that place looks like a scene from the darkest part of Dr. Seuss's Lorax. The few remaining trees there were stunted, dying, and when it snowed, the snow was black from the pollution. And there's no safety equipment for the workers, either in the mine or the smelter. And when I tried to ask questions about what I was seeing, I was patronized. And I did not at that stage have the expertise to push back on what I knew was greenwashing. And I went with a group of other investors, and they seemed so oblivious to the destruction and the despair around us, and we enthusiastically invested and made a lot of money. Those two things, those two experiences really made me think that there's this very uncomfortable irony, especially when you're investing for foundations and nonprofits, that this money is set up to do good work, but it's funding activities that are directly contrary to the purposes for which the funds are originally granted. So, that cognitive dissonance that had been buzzing around the back of my head was too loud to ignore and I found my way to Zevin eventually.

Yes, it was. It was in the early 2000s, exactly. So way early. And it's not that you just jumped on a trendy bandwagon. So Zevin Asset Management has been doing this since 1997. Our founder was doing it since the 60s. So definitely we are not trendy in any way, shape or form. We just think it's really important.

So I found my way to Zevin in 2009 as their director of socially responsible investing and then I became president in 2014. It's been an interesting journey especially as a woman to work within this field. It has been, for many women and many other kind of marginalized communities in the financial space, a very toxic place to work. So, it's wonderful to be able to work in a place where we're all refugees from more traditional management, old-fashioned places that greenwash. We are very clear that's not what we're about. And so, we're offering institutional money management as well as money management for families and individuals. For those who have this commitment to social justice and active ownership, we are particular about the clients that we work with and there needs to be philosophical alignment with that so that we can move forward and help each other push boundaries.

It definitely does. We are always thinking about new issues because global events continue to change and educate us on society's expectations for companies and our process also evolves to take new and emerging issues into account. We're luckily small so it's this is harder for a large firm but our process is very adaptable. It's not rigid in this way. The results about our curiosity about the world and innovative thinking can really be easily included. So what we're known for is researching and mainstreaming emerging issues before they become widespread investment issues among other investors. The proxy voting practices of publicly traded asset managers around climate change risk — we were doing this work over 10 years ago. I think we were the first investor to file a shareholder proposal around big asset managers' proxy voting records around climate. The link between racial inclusion and executive compensation — we pioneered that a long time ago, thinking about the prison industrial complex and the link to investors. So yeah, we are proud of being on the forefront of new issues.

So time and time again, I'm really disappointed to see the actively blurred lines between ESG investing, values-aligned investing, and impact because by conflating these concepts, investors and clients who are intent on making a difference are pretty misled. So there's this false promise sometimes in marketing materials about the positive change your investments can create. So investors can be persuaded by this impact washing to allocate assets to products or strategies that don't actively create change. So when traditional firms, Wall Street firms, other big players sell ESG products, I think most people don't understand that those investment products are not necessarily values-aligned. Most educational materials, either intentionally or through ignorance, conflate the concepts of ESG integration and values-driven investing. They can overlap, but they don't necessarily. And just definitionally, ESG research integration is part of an investment process to try and improve investment returns. It's not necessarily tied to values, ethics, morality, mission, any of that stuff. So it's about how a company is performing in various environmental, social, and governance measures, right? Sometimes to mitigate risk, sometimes to understand a company's opportunities. So it's a tool for value integration, not ideology. And so that's a point that's missed by many politicians, especially in the US, that are very noisily trying to undermine this practice. Using ESG integration in an investment process alone does not create any kind of impact. It's vital to making good investment decisions, but it doesn't create change by itself. And the impactful part must include the intention of generating measurable social impact alongside a financial return. So I think the onus is on the buyer to do the due diligence if they are looking for impactful investment products, and many are not. Many are just interested in ESG. But if you are thematic and you're looking at funds that create climate change resilience, choosing the right companies is important. But in the public equity space, it's not a given that they will proactively promote positive change. So, it's that concept of additionality that I think is particularly tricky in public equities because when your manager buys a share in a listed company, typically the money goes to the seller of the stock, not to the company itself. So, I don't think you can stock-pick your way to impact in public equities. I think it's important not to buy just blindly into these green or socially responsible labels. It's like the word 'natural' in food products. And in Europe it's a little bit different because you have all these kind of legal background in labeling. Here in the US, just because a fund or a manager has ESG or SRI it doesn't make it so.

We have negative screening and positive screening. We have ESG because we think that's really just a given in this investment world to see the world in color instead of in black and white, to take much more information into account. And shareholder advocacy is the part where we have impact, and we do public policy work as well.

Correct. We don't believe that ESG integration creates impact. Impact doesn't happen by accident. It has to be intentionally driven. We have to answer the question, why do we bother to have impact as investors? Is it to make more money? No. That's the ESG part. Or are we trying to change systemic issues by leveraging our unique voice? I'll give you a little pet peeve of mine. You've seen probably some public equity funds that claim if you invest in them, you can avoid a gazillion tons of greenhouse gas emissions, you can save millions of lives through disease treatment. I understand there's a thirst for this type of digestible quantified reporting. But be very wary of these kinds of statistics that make these claims of individual investors' real-world impact. Some in the small print they might say something like this is a metaphor, but most people will take this kind of reporting literally. And unlike investment returns where the marketing is so highly regulated, there's not any kind of third-party oversight regarding impact reporting. So it creates room for these types of information and if funds could really do all the things that they claimed, the world would be saved tomorrow if we put enough money, and we know that's not possible.

Truly happy to.

Yes.

So clearly Elon Musk doesn't understand what ESG is. As I mentioned previously, ESG is a process for understanding how a company manages its environmental, social, governance risks. It has nothing to do with ethics. So screens are the mechanism to include or exclude a company based on its products. Two very different things. I know details aren't Elon's strong point, but I suppose an investor could make the case for screening in Tesla on a climate portfolio, but in terms of how many investors look at ESG, it's a big fat fail. Tesla has terrible governance, poor management and working environments, and really poor health and safety. So that's why you're comparing apples with oranges. And I don't think he understands that.

They can, but that's something for the underlying user of the ratings to separate out. So, we don't use ratings at Zevin because we think they can be very misleading and really boil a very complex topic into a small number or a rating. So, those two things need to be separated. So, the way a company is rated from the actual services and products it produces.

Correct.

If you've ever worked for a traditional asset manager, you'll know that they're anything but woke. The only thing that matters is performance. And from performance flows increased fees and increased bonuses. So, if clients don't want it or the portfolio managers don't think it helps them make more money through making better decisions, they wouldn't do ESG investing. It's as simple as that. There's no agenda other than making money.

For many managers, it is true. ESG investing is a marketing scheme. I've been shocked about what some managers will say about what they do to entice clients. They've learned how to imitate the language of impact without doing much of anything. And it works. It's so disappointing to me coming from a firm with deep authentic roots in this space that even when investment firms backpedal on ESG as a result of political pressure in the US, that clients who are taken in by their marketing efforts choose to stay with them. And I think consultants have gotten a bit better at parsing the wheat from the chaff, but they still have a long way to go beyond the marketing reports by investment firms to really understand the how and why of ESG and impact. I think what we're seeing from many traditional asset managers who don't have that mandate for clear corporate change, but they do have this mandate to grow at all costs, they call it stewardship, which is different than advocacy and engagement. What they then do is just pushing for a change in policy at a company. But that usually results in very little actual impact on the ground. If you're only looking at things from a risk analysis perspective, you're satisfied. You see the company's checked the box on a policy. Great, we did it. It's a win. Asking how companies are actually doing, what's different in the company after a policy is adopted, how is it changing the behavior to achieve a better goal, and how are the underlying issues better as a result of this over a long period of time — so yes, I think sometimes it can be a marketing scheme. So it's buyer beware.

I have a little sympathy for this one as well. I guess I would respond as a yes. And if you've just invested in a BlackRock ESG fund and you think you've saved the world, think again. So, I think also Mr. Fancy is a little jaded by the type of investing that he was in charge of that maybe didn't care to change or couldn't change because it's such a big firm. Like we mentioned before, ESG on its own doesn't change anything, but real shareholder advocacy does. And real solutions include non-extractive impact investing alongside shareholders. I think there's this failure of public equity managers to listen to and engage with NGOs, community groups, and other grassroots voices to really understand the trickle-down effect of corporate or policy activities. That's hugely problematic because there's a very real risk that what investors ask for from companies could have large unintended consequences on the ground if you don't include stakeholders and these inequitable power structures are reinforced. I think without consulting those that are the most impacted, our actions as advocates, however well-intentioned, may uphold the status quo or indeed inflict further harm. So listening to and upholding those stakeholders, we're trying to give a voice to those impacted and create better companies as a result.

Absolutely. I think our industry needs to do a much better job of engaging with them instead of ignoring their voices or patronizing them because we think we know best because we're educated investors. At Zevin, we're regularly consulting with leading environmental advocates, human rights experts, labor groups, whoever, in an attempt to inform our own investing process.

There's a source that I would point your listeners to that's really interesting.

By the Center for Economic Democracy here in the US, and it's a paper called 'Social Movement Investing' that came out a few years ago, and it explores the practice of investing in alignment with social movements.

So, I guess the why is that in combination with fundamental analysis, ESG analysis gives us clues into the potential long-term performance of a company. And it can flag risks and opportunities sometimes before they're recognized by other market players. Sometimes we discover slow improvements or disintegration that plays out over long periods of time, but also ESG factors can dramatically affect prices of securities in the short term. So, it's not a silver bullet for sure, and it depends on your time period, but we have established minimum standards for some ESG criteria and we are just really trying to figure out what's material to a company and its fundamentals over a certain period of time. Sometimes we're trying to balance a company's positive influence on social and environmental well-being against negative impacts and practices. I can give you an example for one particular issue. The types of information that we're looking for when we are seeking to identify institutional racism in company practices and diversity issues within a company's workforce. We are looking at data disclosure. So in the US, companies have had to file these things called EEO-1 reports to the Equal Employment Opportunity Commission. We're looking at additional data on retention and promotion rates, whether people of color and/or women are promoted at the same rates as their white or male counterparts. We're looking into litigation related to harassment or other discrimination. We're also interested in if they have clauses in employment contracts that seek to waive an employee's right to seek outside counsel if they experience harassment or discrimination at work. Those are the arbitration clauses. We're looking at employee surveys, although to a lesser extent. Sometimes they're not that useful because surveys are completed and led by employees working in human resources. So, it's not all that objective. The gender and racial and ethnic composition of a company's board is very telling. If a board is not diverse, that's often reflected in the ethos of the company and the emphasis on diversity, equity, and inclusion within the workforce. Then again, just because a board is diverse, it doesn't mean that things are great at the company either. We're interested in company policies, how companies are governed. Does the company have a nominating committee charter that explicitly calls for diverse candidates and inclusive non-discretionary discrimination hiring policies? Or corporate culture — how do you get to that almost intangible thing? How companies respond to public policy issues that are incongruent with the company's corporate culture — that can be demonstrative of whether a company is genuine in their intent to foster diversity. Also, the lobbying that companies do, are they lobbying in support of policies that are destructive to racial issues — that is a very clear sign that there's a lack of commitment to racial justice issues. So, that's just one facet of our ESG research process.

Absolutely. So that is the whole point of ESG — is to drive alpha. So if we thought this was just a social justice issue, that would be separate, but we're trying to figure out which companies get it, and the 'it' can drive better corporate performance. And we've seen that, and many studies have shown that a diverse workforce is much stronger, it's much more resilient, and it can respond better to threats and opportunities. And so what we are trying to do, and we've had some success in the shareholder advocacy part, is to get large companies to really focus on this by tying it to their executive compensation goals because there is this war for talent especially in the tech sector and they need to be five steps ahead of everybody else to get the best and the brightest. We talk about how talent is equally distributed but opportunities are not. So how do companies really think about getting to those best and the brightest that others might have overlooked and that will drive the output that we're looking for?

Yeah. So a number of years ago, we engaged with Apple over this very issue and we filed a shareholder proposal with the state of Rhode Island, the SEIU, the service employees union here in the US, and engaged with them, filed a shareholder proposal. It got a pretty low vote because it was the first year and it was a fairly new proposal. But then about six months later, the company reached out to us and said, 'We need to talk about this because we actually think — have come to the conclusion that this is actually important to do.' And they integrated it. I don't remember the exact details, but I think they changed their executive compensation policy, especially their cash bonus policy, to include sustainability factors with a focus on diversity, equity, and inclusion for their top executives.

Yeah, we have a pretty strong focus around workplace equity. I mentioned gender, race, ethnic diversity, equity and inclusion, climate change, sustainable governance. So we're really thinking about intersectional risks and impacts. So gender and race, right? Or climate change and social impact. So we find an opportunity where investor action or voice is needed, then we can jump in. Our impact report — usually over half of our engagements are on the social side of things. When we're doing our research and thinking about the ESG side of things, we're gaining insights or through stakeholder consultations on those front lines of impact as I described. We are identifying in that process areas where we think an engagement could really help the company. And then once we have a company in our portfolio — typically we hold a fairly concentrated portfolio of about 30 to 50 equity names — and then we flesh out those efforts towards progress. And it's fairly iterative and an ongoing process. We're looking at these most material ESG factors to press for improvement. Then we're establishing goals for company change. And then we're monitoring and reporting on progress based on those goals. And progress takes time. And you have to measure that progress.

Yeah. And that's such a simple and not a very good way of measuring how has a company improved their practices in response to our advocacy. And then we also keep track of how our work supports the work of other groups looking for these measurable outcomes. So it's really tricky to measure the impact in public markets, right? So we could attribute change to a resolution like in the Apple scenario, but change usually is not typically the consequence of any one action. It's a cumulative impact brought on by the efforts of various constituencies and we're part of many collaborative long-term efforts to create change and we're often joining forces with investors and civil society groups to build support for dialogues so that everybody's input is amplified through our work. We hope to give power to other stakeholders both inside and outside of companies to improve corporate behavior. So we use the concept of the five dimensions of impact in the Impact Management Project, but that collaboration is really key. And just filing a shareholder proposal and counting that as a win is way too simplified. It's easy, but as I mentioned before, is the win the vote? Is the win that you withdrew it before it went to a shareholder vote? Is it that you got the company to do something? Or is it that something actually changed for those stakeholder groups in future years and how much did that change? So I think the industry needs to work on that a little bit more and I don't know if there will be a clear answer. It's helpful to understand the many layers of change and how it can take many shapes and forms. So, it's a helpful caller.

So, that's really tricky because as an individual investor, it's hard to catch the attention of corporate management. Sending emails and letters is useful to express support or disappointment. Obviously investing with a manager that really does this work in an authentic way because we can't do this work without our clients. So that's another way. And I think another interesting way that I don't think has been used very much is having an individual ask their financial advisor or their investment management company how — at least in the US — how they voted on certain shareholder proposals that are important to them. A good way to figure out at least in the past shareholder season which are the top kind of shareholder proposals are looking at the ICCR proxy book. These are an amalgamation of some of the most important engagements on social and environmental issues in the US. And you can pull out for example a few proposals that resonate with you and ask your financial adviser, 'How did you vote on this for me?' or 'How did my mutual fund vote on this for me?' That — at least the mutual fund voting is public record in the US.

ICCR book. Proxy voting book. There's another group in the US called As You Sow. They also have a proxy book that identifies some of the key shareholder proposals that focus on ESG issues. I think the other thing to be cognizant of is that in the US also there's a lot of anti-ESG shareholder proposals that look very similar to pro-ESG investment proposals. And hopefully folks interested in this work are not voting for those very right-wing type engagements.

I guess the biggest one is if they don't want to talk to you at all, and that happens, and then we just have to keep on trying. But when you get them on a call, unfortunately now corporate counsel is in every meeting. It didn't used to be like that, but that can inhibit the discussion. I understand why they're on the calls from the corporate perspective, but when companies stick to their script and the language and they're not willing to actually have a conversation, that's a warning sign. When they don't take stakeholder input and just use their own data, they deny what we're seeing. When we see lobbying against some of the key issues that we're worried about — I can give you an example. Amazon, for example, we've been engaging with them over years. There are so many sources that have revealed the company's continued pattern of anti-competitive behaviors, surveillance, micromanagement of workers, and poor health and safety records, especially in their warehouses. But the company disputes all of this and they only use their own data to evaluate their performance. Last year, a Senate report alleged that Amazon regularly cherry-picks data to report on the health impacts of its work corridor requirements and ignores findings from other groups. OSHA in the US, they have done inspections and investigations and they found that Amazon warehouse workers were twice as likely to get injured at an Amazon facility compared to the industry. And that's a fact that's supported by worker testimonies, but Amazon disputes this. So, you know, that's a red flag that they haven't even internalized that there's a problem.

I'd love to give another example of impact if that's possible.

Another successful engagement. When we talk about having impact, we talked about these kind of longer-term changes that sometimes take a long time. But we have done work on paid sick leave in the US and there's a very clear kind of before and after with a very measurable outcome of us removing an obstacle. So your listeners might be surprised to hear that in the US almost 90% of private sector workers don't have access to a single day of paid family leave. One in four new mothers returns to work just 10 days after giving birth. I don't know if I could walk 10 days after giving birth. This is so depressing. It's absolutely insane. Right. This is a huge problem for companies. It's expensive to give paid family leave. But what we have seen is that companies that offer paid family leave to workers, all workers, not just those at the top, they're reporting improved morale, cost savings from less employee turnover. But what it's telling you is that when virtually all low-income working Americans still have no access to paid family leave, that's where a company is — it's like one of those signals on corporate culture. Who is a company valuing, right? So also LGBTQ+ workers are also extra harmed by this because there are many policies, corporate policies, that exclude adoptive parents. LGBTQ+ workers, they are much more likely to parent adopted children and raise foster kids. And again, that's a really important distinction as well. A number of years ago, we developed an investor engagement plan aimed at moving companies to address this issue. And so, we met with employers. We worked with a nonprofit to develop benchmarks for company policy. The three things that we're really interested in are: are the employer's policies equal between different classes of employees — salaried, hourly, full-time, part-time, that kind of thing, regardless of gender or family circumstances; are they adequate in terms of length, in terms of the children and the bonding time that's needed; and are they accessible — do employees know how to access this? So we wrote to more than a dozen firms who we felt that their policies were inadequate and then filed in conjunction with a few others some shareholder proposals asking companies to improve their approaches and got some really great results at a number of companies that affected many thousands of people pretty quickly. So we're really proud of that work.

Yes. I think those that are entrenched in short-term profit making, those that don't see the long-term, those that are the most extractive or in the most competitive field, the most resistant are the ones that are most threatened by this kind of focus on the future. So I think companies when they are threatened get very strange in their behavior, and I think that's just a natural defensive response. For example, Exxon, right? I don't know if you're aware, but they sued two of their shareholders a few years ago for a shareholder proposal on climate risk. That is not normal company behavior, right? If a shareholder proposal is important, it will be voted on by investors. If it's not important, it will die a death. But for Exxon to feel so threatened by these small investors that they have to sue them, that's an interesting threat response. AI is another area where I think things are interesting and because it's so competitive, nobody is willing to step back and think about, do we really need to grow at all costs? What are the threats and the risks for doing the work that we do?

Yeah, I think there's definitely a dichotomy between what's happening in Europe and what's happening in the US. And the US, we're going back to our roots. Many people in this industry weren't around. They weren't here 10 or 20 years ago, but we are used to facing this kind of onslaught and not being fashionable or trendy. I think doing what we do, staying strong, working together towards having more social impact is going to be key. It's interesting that companies that we're engaging with since the presidential election have still been fairly positive. The discussions have been productive, but I think both companies and investors are going to be much more aligned on how they work together and those relationships will keep us going towards better social progress after this administration is over.

My pleasure. Thank you, Margarita, for having me.