Q&A: Values and voices
Dr. Henning Stein is Invesco’s Global Head of Thought Leadership.
Here he discusses the importance of ensuring that everyone’s voice is heard – both within organizations and across society – and warns that, as awareness of inequality increases, companies should expect to face more pressure to align their values with those of the communities with which they engage.
How does the notion of equality resonate with you personally?
First of all, I’m sure it means many different things to many different people. When I first spoke about the death of George Floyd with my colleagues, for example, I said I obviously couldn’t know how it feels to be a person of color in America.
But I do know what it’s like to be a gay Jew who’s married to a Muslim. I know what it’s like to be “different.” And I know what it’s like to be a member of a progressive congregation whose synagogue was once bombed in retaliation for endorsing the black civil rights movement.
On the other hand, I also know what it’s like to be relatively privileged. I grew up in a household that gave me the kind of familial support and financial backing that can lead to opportunities many people don’t get.
So I’ve seen something of equality – and, by extension, inequality – from both sides of the fence. This doesn’t make me an expert, but it does mean I can draw on my own life experiences in trying to develop a rounded understanding of these issues. I think I appreciate what it means to have your voice heard.
Is inequality an ESG issue?
Yes, because ESG is about being accountable. It’s about what businesses really believe in and whether they truly meet the expectations society has of them. Above all, it’s about values.
Now, the fact is that no business is perfect in this respect. Some are more proactive than others, but there are always occasions when events in the wider world remind us all that we can do more to align our values with those of the communities in which we operate.
The Paris Agreement on climate change, for example, has propelled environmental considerations high up companies’ agendas. Numerous corporate scandals have underlined the importance of good governance. And now events have turned the spotlight on to inequality – and we need to respond to that.
Ultimately, ESG gives us a chance to transform a negative into a positive. And in this case every organization has the power to help tackle inequality through its social interactions.
What sort of corporate philosophy would qualify as genuinely “positive” in this regard and how might investors identify it?
We have to look beyond superficialities and find out if a company really believes in giving everyone a voice. It’s very easy to fly a gay pride flag on your website one day and a Black Lives Matter flag the next, but what does any of this really mean? Okay, you’re showing support, which is great, but what are you actually doing?
We still see something similar in relation to environmental considerations. There are businesses that talk the talk but don’t walk the walk, which is why we have to be alert to the risk of “greenwashing.”
The same kind of disconnect can apply to a company’s social behavior – so here, too, we have to dig deeper. For example, we could try to establish whether a business channels funds or resources to social initiatives that advance the fight against inequality. We could invite a firm’s managers to articulate their stance on these issues. We could talk about how inequality links to structural topics such as education, opportunities and wage levels.
Do you think this will become a “new normal” in terms of due diligence?
I really hope so. There are many companies that espouse change, but there are far fewer that actually achieve it. We need to distinguish between those that are just quick to signal their virtues and those that are sincerely committed to embedding the necessary values. So here, again, it’s about accountability.
As asset managers, we should support these values if they’re already evident. And we should try to instil them if they’re lacking but there’s a willingness to improve. It’s the same for any aspect of ESG.
Should we see the fight against inequality as another facet of an asset manager’s fiduciary duty?
Yes, because we know equality translates into performance and stability. As active owners, we have every reason to help further this cause – and, quite frankly, how could anyone think otherwise? As was famously said about the same struggle more than half a century ago: “If you’re not a part of the solution, you’re a part of the problem.”
Socially responsible solutions
Demand and distinctions
One reason why S has traditionally lagged E and G may be that it has lacked a catalyst for universal recognition. The twin tragedies of COVID-19 and George Floyd could prove pivotal in this respect: history may yet record 2020 as the year when organizations and investors truly grasped the importance of inequality in particular and social concerns more generally.
It is too early to say whether this means that S will remain a focus within the mainstream over the longer term. Yet our experience of late – especially with institutional investors – is that it increasingly forms a substantive part of the overall ESG conversation, whereas in the past it might have amounted only to an afterthought or even elicited no discussion at all.
In tandem, organizations and investors are steadily expanding their social focus. While familiar subjects such as gender diversity and wage disparities might have dominated previously, today the full extent of an entity’s social obligations is more likely to enter the reckoning – as are the many stakeholders that these obligations encompass. Demand for socially responsible solutions therefore looks set to rise further.
As this shift unfolds, it is important to note that such solutions, broadly speaking, can be divided into two distinct camps. Some revolve principally around financial materiality; others aim to deliver returns while also having a more far-reaching social impact.
The debate around wages offers an illustration of the first approach. With the European Commission consulting with trade unions and employers in a bid to establish a fair minimum wage, EU businesses that are already committed to paying a “living wage” are better placed to cope with regulatory change and its associated costs; a well compensated workforce is also more likely to be satisfied, loyal and productive. In this instance, a socially responsible solution is geared mainly towards a business’s long-term profit and performance.
An obvious example of the second approach would be investments in entities that have “progressive” agendas. These might include companies that are high achievers in racial equality. In this instance, although usually still contingent on financial parameters, a socially responsible solution is geared towards realizing a more stakeholder-conscious outcome.
Anatomy of a socially responsible investment platform
Although the S of ESG is now enjoying arguably unprecedented attention, Invesco has been devising socially responsible solutions for a number of years. One example is the designing of a bespoke investment platform in collaboration with Amalgamated Bank, whose mission is to provide banking resources to non-profits, unions, political organizations, social impact enterprises and others that further economic, social, racial and environmental justice.
Crucially, we did not first build the platform and then discuss what it could achieve for Amalgamated. Quite the opposite: we first discussed what Amalgamated wanted to achieve and then built the platform.
This solution thus represents a highly customized, ground-up synthesis of a preeminent socially responsible institution’s objectives and Invesco’s capabilities. It will provide foundational, broad market index strategies with high ESG exposure, as well as theme-specific strategies solely focussed on a particular issue – for example, social equity, gender balance or climate change.
Due to launch in late 2020, the platform will undoubtedly evolve further. Social equity metrics are still a challenge, and many large providers of data have yet to fully incorporate them in their gathering and analysis of data – which is why we are currently working with niche providers that specialize in themes such as racial equality.16
Foresight and flexibility will be necessary to drive continued improvement. “How the most innovative and effective socially responsible strategies look now might not be how they look in two or three years’ time,” says Chris Paolella, of Invesco’s North American Institutional Management team. “So we have to stay open-minded. It’s about skating to where the puck is going rather than where it has been.”
Having been involved in its creation, Paolella believes that the platform reflects a nascent determination among institutional investors to address social issues directly. “It feels like we’ve arrived at a pivot point,” he says. “This is becoming a bigger part of organizational culture. It's a subject of emotion and passion, and that's what can really change things.
Active ownership as a force for social change
Data is the lifeblood of almost every ESG investment decision. It most patently underpins stock-picking methodologies that rely on negative screening/exclusion, which is still one of the most popular means of responsible investing.17 However, as with any aspect of ESG, it can tell us only so much.
For a start, many social factors can be tricky to measure. It is possible to capture some in data, but even then the rules around disclosure vary from one jurisdiction to another. As a result, there has been comparatively little pressure to prioritize such matters. While initiatives such as the EU’s Non-Financial Reporting Directive are now bringing more transparency to some companies’ ESG policies and practices18, there is invariably scope to dig deeper.
Relatedly, headline figures often serve as a helpful signpost at best. As Harvard Business School academics Boris Groysberg and Deborah Bell memorably remarked in a study of board membership composition in 2013: “Diversity is about counting the numbers. Inclusiveness is about making the numbers count.”19 In keeping with how we view ESG as a whole, we believe that investing to combat inequality is very seldom about numbers alone and that the key to success instead lies in applying the power of active ownership.
Imagine, for example, that data shows a business to have a workforce that is 50% BAME and to be a supporter of Black Lives Matter (BLM). Should we accept this information at face value? We would argue that only direct engagement and dialogue might reveal that there is zero BAME representation at management level and that the support for BLM goes no further than a token message on the firm’s Twitter feed. As with environmental and governance facets, first-hand scrutiny is frequently necessary to separate those entities that are merely swift to parade their putative virtues from those that are genuinely dedicated to positive change.
Does this mean that those found wanting should be completely disregarded? No, because excluding companies on the basis of set ESG criteria can be surprisingly complicated20 and also limits choice, as a consequence of which investment decisions might not be aligned with clients’ interests.21
A vital function of active ownership is therefore to encourage more social awareness in such organizations – whether through direct engagement, dialogue or a third potent tool, proxy voting – and thus direct their endeavors more towards the greater good.22 For inequality, as for any ESG consideration, close stewardship can make the difference between window-dressing and impact; between box-checking and meaningful outcomes; between signaling and doing.
Socially responsible solutions in fixed income
ESG investments, not only those that aim to tackle inequality, are most readily associated with equities. It is only a few years since the UN-backed Principles for Responsible Investment described fixed income, by contrast, as “the neglected child of responsible investment” and “a sleeping giant.”
With COVID-19 and the death of George Floyd shedding fresh light on vulnerabilities within local, regional and national systems, the giant is stirring like never before.23 Invesco’s innovative approach to municipal bonds illustrates how ESG can be used to encourage the provision of affordable, attractive and equitable public services.
Our research aims to identify ESG-related risk factors across this varied asset class, enabling our analysts to compare issuers and recognize best-in-class opportunities within a specific sector. We focus on risks that could have a material effect on an issuer’s willingness and ability to meet its debt obligations.
We also use direct engagement and dialogue. These allow us to learn more about how municipalities view various risks and how they intend to address them over time.
Municipal bonds often shine brightly when viewed through the lens of ESG. This should come as no big surprise, since local and regional authorities ought to have ESG objectives at the heart of their programs.
As shown below, many of their aims are naturally aligned with the UN Sustainable Development Goals (SDGs). These include quality education (SDG 4), gender equality (SDG 5), economic development initiatives (SDGs 8 and 9) and reduced inequality (SDG 10).