The words “environmental, social and governance,” or ESG for short, have been embroiled in a polarizing storm of political rhetoric. These simple words are nothing to fear and should not be fodder for political posturing or gamesmanship.
In fact, they are most appropriately looked at through an investment lens to identify risks that are not typically presented in a company’s financial statements or annual reports.
The current furor over ESG is largely positioned along ideological and political lines. That’s plain wrong, and why President Joe Biden’s recent veto of a congressional resolution that would tie the hands of investors was the prudent action to take.
ESG risks are long-term business risks. CEOs actively consider these factors and hire business consultants to analyze and help mitigate them — similar to other risks they face. Companies and investors must focus on long-term survival and success. The ever-growing body of scientific, industry and academic evidence supporting the material impact that ESG factors have on sustainable investment returns requires fiduciaries — those who must act in the best interests of their members or clients — to consider them.
The question not being asked enough: should investors who own shares of, or purchase bonds from, public companies get information and data on long-term corporate risks?
Investors can decide what to do with the data. The companies are public. They are funding their balance sheets with other people’s money. Their investors have a right to fully understand the risks.
Today, investors get audited year-end data but very little information about future risks and prospects. Company annual reports are required by the U.S. Securities and Exchange Commission to include analysis of long-term business risks. These risks are not labeled as ESG, but there is a direct link to those categories.
Federal agencies have strongly supported corporate disclosure, and ESG factors are closely aligned. With increased regulation, for example, investors need to understand a company’s waste volumes and mitigation. Is it water waste, physical waste or gaseous waste? These are environmental risks. What about a company’s workforce and turnover? That is a social risk. And statistics on CEO pay and succession planning? That’s a governance risk.
This is information about a company’s future that helps stock and bond investors make educated decisions. We’re talking about prudent disclosure, not partisan politics.
Trustees of other people’s money, especially their retirement savings, should consider all information and data. That is the very definition of fiduciary duty. If a company doesn’t want to disclose this information, they should not use other people’s money. Their option is to be privately owned.
The disclosure and measurement of long-term business risk should be supported, no matter what initials are used to describe it.
As investors with an ownership stake in the long-term health of corporate America, we strongly urge action to support increasing corporate disclosure, such as President Biden’s decision to veto Congress’ joint resolution to nullify the Department of Labor’s rule allowing investors to consider ESG factors in decision-making.
Maintaining a diverse investment portfolio is critical. U.S. investors need the flexibility necessary to adapt their strategy to the latest available data. Tying the hands of investors would create a competitive disadvantage.
It is imperative for CalSTRS, our peers in California and other states, and the companies in which we invest, to consider ESG risks in all business decisions. Denying our 1 million members the opportunity to fully understand our investments and plan for the long term is just plain wrong.
Christopher Ailman is the chief investment officer of CalSTRS, which has over $300 billion in assets and is a multi-generational investor.