As investor demand surges for socially responsible companies, smart money is moving in a counterintuitive direction: Invest in bad companies with the aim of pushing them to improve on environmental, social, and governance (ESG) metrics. "From a socially responsible perspective, improvement is what matters," according to Michelle Dunstan, an ESG-focused portfolio manager at AllianceBernstein. "Change is what’s going to drive improvement of the world. Whether that’s a company who’s focused on reducing their greenhouse gas emissions, a different company who is improving corporate governance, or someone who is revolutionizing the way they treat employees or unions in their firm, all that drives positive change for the world."
Dunstan’s remarks – given during a recent panel on socially responsible investing organized by the Bernstein Center for Leadership and Ethics and hosted by AllianceBernstein at the asset manager’s Manhattan headquarters – come amid a bull market for social impact investing, with ESG-focused money market funds growing 16 percent in the first half of 2019.
Highlighting the trend, KKR in August surpassed the $1 billion fundraising mark for its new global impact fund, while Blackstone in May launched an impact investing platform focused on health and wellbeing, sustainable communities, and green technologies. TPG Capital, which in 2017 launched a $2 billion inaugural impact-investing fund co-led by Bono, is on pace to raise another $2.5 billion for a second impact fund.
But the panelists at AllianceBernstein cautioned against so-called values-aligned investing, urging socially responsible investors to be open to misaligning their values in the short-term with the aim of making long-term change. "I think ‘values alignment’ has very perverse consequences for climate change, for social improvement, because when you avoid the problems – which is what ‘values alignment’ is – then you’re not dealing with the problems," said Paul Rissman ’92, a former executive vice president at AllianceBernstein who recently co-founded the Rights CoLab, an initiative that aims in part to pressure companies to become more socially responsible and then holds them accountable. "What we need to concentrate on is actually changing corporate behavior.” An ESG investor concerned about climate change, for example, might actually invest in an oil or mining company with an eye toward forcing it to adopt climate-friendly practices, Dunstan said. "Rather than ignoring those sectors, we’re going to force those companies to do better. That’s our philosophy."
One way of driving change within a company is through active proxy voting, noted Valerie Grant, a senior portfolio manager who serves on AllianceBernstein’s Proxy and Governance Committee, which provides oversight for the firm's proxy voting policy and for controversial votes. “We are very transparent about both our policies as well as our voting records," Grant said. "We do generally vote in favor when there are shareholder proposals related to greater disclosure on environmental issues. We vote in favor of greater disclosure on gender pay equity."
AllianceBernstein was rated among the top four fund managers most likely to vote in favor of shareholder proposals asking companies to quantify and mitigate their risks related to climate change, based on 2018 data. Pacific Investment Management (Pimco) led the pack. Toward the bottom of the ranking was Vanguard and BlackRock, the two largest fund managers worldwide with a combined $12 trillion in assets, which have both come under criticism from ESG-minded investors.
Amid the recent rush into ESG, it’s not always clear what an investor is getting because of a lack of consistency and standardization around ESG disclosures, the panelists warned. Through the Rights CoLab, Rissman is working to get U.S. agencies to improve sustainability disclosure requirements, something Dunstan is also pushing the Securities and Exchange Commission to address. Investors should beware of “greenwashing,” or when companies deceptively advertise themselves as socially responsible in an attempt to tap into the growing market around corporate social responsibility, warned Shawn Keegan, an ESG-focused credit portfolio manager at AllianceBernstein. "There’s such a supply and demand imbalance, people will buy anything," Keegan said during the panel discussion. "What you really want to do is dig down and do that credit analysis within the projects you’re trying to fund." "What we need to concentrate on is actually changing corporate behavior." "Engagement is important here,” said Dunstan. "You really need to meet with the management teams, understand that they are doing what they say they’re doing, that change is in fact taking place, and there’s going to be a difference in this company one or two years down the road."
While the panelists argued that socially responsible investing is both good for society and financially rewarding, there was some pushback from moderator Mark Zurack, a former managing director at Goldman Sachs and current senior lecturer at Columbia Business School. “If you want a non-economic objective [such as social good], you might have to pay some sort of economic cost,” Professor Zurack said on the conference sidelines.
Research out of Columbia Business School has revealed nuances around corporate social responsibility. According to Bernstein Faculty Leader Vanessa Burbano, an assistant professor of management, CSR can both contribute to job fulfillment as well as lower employee wage demands. But forcing companies to take on socially responsible initiatives can backfire by causing a decline in overall CSR spending, according to Bernstein Faculty Research Grant Recipient Shivaram Rajgopal, the Roy Bernard Kester and T.W. Byrnes Professor of Accounting and Auditing. And CSR initiatives can undermine productivity if workers become leery of their employer’s motivations.
Nearly a half-century after economist Milton Friedman famously argued that "the sole social responsibility of business is to increase its profits," the push into ESG highlights a new way of doing business that will become more pronounced as the millennial generation becomes more active in money and politics, Keegan said. "It’s inevitable going forward," he said.
