ESG: Three Letters with Global Importance
Article originally hosted and shared with permission by The Christian Economic Forum, a global network of leaders who join together to collaborate and introduce strategic ideas for the spread of God’s economic principles and the goodness of Jesus Christ. This article was from a collection of White Papers compiled for attendees of the CEF’s Global Event.
When former UN Secretary General Kofi Annan stepped to the stage in January 2004 to share a call to action for the global investment community to address the growing environmental, societal, and governance concerns that were interwoven into the capital markets, he began the first ripple in a wave that would grow the following year with the seminal 2005 paper, “Who Cares, Wins.” This led to the historic coming together of the heads of leading institutions from 16 countries to launch the Principles for Responsible Investment in 2006. From that point forward, the tidal wave that became ESG investing has become pervasive in all aspects of the international capital markets and continues to grow at an unprecedented rate. As momentum grows and curiosity is peaked, the question is asked: Just what is ESG investing? At the simplest of levels, ESG investing is defined as “Environmental, Social, and Governance” (ESG), and the criteria are a set of standards for a company’s operations that socially-conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.
Environmental criteria may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also be used in evaluating any environmental risks a company might face and how the company is managing those risks.
Social criteria look at the company’s business relationships. This includes all relationships and qualities regarding employees, vendors, suppliers, and customers.
Governance criteria pertain to areas where investors may want to know that a company uses accurate and transparent accounting methods and that stockholders are given an opportunity to vote on important issues. They may also want assurances that companies avoid conflicts of interest in their choice of board members and any illegal practices and that they adhere to the proper use of political contributions, executive compensation, and internal controls.
While there are many offshoots to the traditional ESG ecosystem (Socially Responsible Investing, Biblically Responsible Investing, Impact Investing, Sustainable Investing, and more), we will stick to the terminology and broad application of ESG investing for the remainder of the paper.
Over the next two decades, estimates hold that nearly $30 trillion USD in wealth will transfer from the Baby Boomers, the generation of the population born between 1944 and 1964, into 2 the hands of younger generations. Many columnists, journalists, and financial experts have coined this “the great wealth transfer.” As capital flows from one hand to another, the expectation can be set that the way in which that capital is allocated will also shift over time with the transfer of wealth. Why does this matter? With the first sustainable mutual fund launched back in the 1970s, ESG investing is by no means a fresh or new idea, but the larger identifying factor is found in the chart below:
When a character in Ernest Hemingway’s The Sun Also Rises is asked how he went bankrupt, he replies, “Gradually…then suddenly.” The same can be said of how ESG investing came to be what it is today—gradually…then suddenly.
As the millennial generation has come to develop in the form of career-establishing adults, the capital that they have invested, coupled with the “great wealth transfer” noted above, has driven much of the momentum that has been seen in this movement. 76% of millennials think climate change poses a serious threat to society, based on a survey by The Harris Poll, with one-third of millennials investing exclusively in investments that take ESG factors into account. Based on the potential $30 trillion wealth transfer projected over the coming two decades, one could conservatively estimate a nearly $10-$15 trillion inflow into the ESG space. This could push Global ESG assets to nearly $50 trillion by 2025, representing more than a third of the $140.5 trillion in projected total assets under management.
With the millennial generation pushing towards this initiative, it has led a larger group of investors and the capital market ecosystem to join in the conversation. A recent survey conducted by U.S.-based investment management firm, Nuveen, noted that 89% of clients surveyed said that it is “absolutely essential for companies to actively manage against the risk of pollution, spills, and other disasters.” While much of the ESG conversations focus on climate change and the “E” component, investors are becoming more alert to the “G” role, with 91% of clients in the same Nuveen survey stating that companies need to enact more policies to make them more accountable to shareholder concerns.
Groups such as the Business Roundtable in the United States have shifted to a stakeholder value model, whereas individual companies have also stated goals in the space, including Microsoft (MSFT) announcing it would become 100% carbon-negative by 2030, remove its historical carbon emissions by 2050, and launch a $1 billion climate innovation fund.
Starbucks’ (SBUX) “new sustainability commitment” is to become resource positive in terms of carbon emissions, eliminating waste, and water usage. “By embracing a longer-term economic, equitable, and planetary value proposition for our company,” writes CEO Kevin Johnson, “we will create greater value for all stakeholders.”
As Christians, we recognize that the Gospel affects everything and that the Gospel changes everything. When we look at ESG investing, we must do so through the lens of the Gospel. As mentioned in earlier paragraphs, ESG investing has been a movement that can be distinguished by more than just morals but as one that has been observed by real dollars flowing into investments. It is a reminder as stated in Matthew 6:21: “For where your treasure is, there your heart will be also.”
The marketplace will inevitably become more mature, and with that maturity comes an opportunity for Christians to enter the public square and be a voice for the direction that this industry can take. As stated in Proverbs 1:20: “Wisdom cries aloud in the street, in the markets she raises her voice.”
How does a Christian approach ESG investing? How do we find ways to be a representative of Christ as we pursue these investments? We must first remember that in all we do, we must show our love for God by seeking His glory. As the Westminster Shorter Catechism says, “Man’s chief end is to glorify God and enjoy him forever.” Glorifying God through our investments highlights our view that the Father invites us to share in His kingdom. The Christian worldview privileges stewardship, and stewardship does look for growth, stewardship does give a privilege to investment, and stewardship does value savings and thrift. It does prioritize productivity and growth and flourishing.
The Christian is called to be salt of the earth and light of the world (Matthew 5:13-16). As salt acts to prevent decay in food, so should believers act to restrain evil on this earth—which includes doing so with our investable capital. As light illuminates a dark place, so believers should bear witness to the truth. God’s Word is the truth, and it is a public truth which is true for everyone. Christians can utilize their investments within the ESG space as an evangelical tool—one that highlights the goodness of God’s creation, our desire to worship Him in deed, and our ability to demonstrate our trust and faith in Him by way of our investment allocations. As 1 Timothy 6:17-19 states: “As for the rich in this present age, charge them not to be haughty, nor to set their hopes on the uncertainty of riches, but on God, who richly provides us with everything to enjoy. They are to do good, to be rich in good works, to be generous and ready to share, thus storing up treasure for themselves as a good foundation for the future, so that they may take hold of that which is truly life.”
The movement within the ESG space seems to be accelerating with the onset of COVID-19, and the greater focus on societal good and solving for injustices is poised to expand further. Christians must meet the demand for ESG with distinguished and disciplined views based on scripture. A sharper understanding is emerging as to which ESG approaches are financially, or performance, relevant and which are more focused on social objectives. Though we did not explore in any detail in this paper the topic of ratings and scoring, screening criteria, or the development of industry norms (such as the UN Sustainability Goals), these are items to investigate and understand further as you step into this space.
As we evaluate and determine various aspects of ESG investing and recognize that the secular world will continue to push and look to define this space, I am reminded of a short quote from John Bunyan’s Pilgrims Progress, “I focused on the fact that what God says is indeed best. It does not matter if all the men in the world are against it.”