Joe Keefe, president of Impax Asset Management, the North American division of Impax Asset Management Group, says the roles of ESG in investing are paramount, as the role of corporations in society is becoming about more than just making money.
He recently talked with ESG Clarity about regulation, the politics surrounding sustainable investing and what institutional investors increasingly need to know. This is the second piece from that interview. View the first one here.
Looking at the SEC’s proposed rules for fund shops and advisers around ESG, what effects do you see those having for sustainable investment providers like your firm?
We appreciate what they’re trying to do. But there are issues with the proposed rule that could be problematic. At this point in time, you want a rule that’s going to help clarify the space rather than add more confusion. Some of the categories it came up with between integration funds and so forth may prove to be problematic in the way they play out.
They got a lot of comment letters. And it depends how close the final rule resembles the proposed rule.
The final rule could come out better than the proposed rule. I’d love to see that. No rule like this is perfect, but I understand the need to try to put some more definition in the space. And I certainly understand the concern to police at some level greenwashing, so that when you say you do this, it means something.
That’s all well and good and well-intended. But I do think there could be some problematic outcomes if the rule as proposed isn’t amended before it becomes final.
It’s such a weird time in the sustainable investing space, politically. What do you make of the increasingly hostile environment toward ESG?
Of course, we live in a culture, in a country, at the moment where everything seems to be politicized.
If you can politicize a facemask during a global pandemic, you probably can politicize anything. And so ESG or sustainable investing, call it what you will, is now being politicized, and companies that practice it, either as issuers or as investors, are being criticized.
I don’t know exactly what “woke” means, but if you’re awake as an investor, as an asset manager, as an investment advisor, you need to pay attention to certain global trends like climate change, like DEI issues and others affecting workforce, health and safety, other issues affecting corporate relations with the communities where they do business.
What you’re seeing is a historic transition. From the old concept of the corporation – Milton Friedman’s famous dictum that the only job of a company is to make a profit, so it only has one stakeholder, the shareholder – to a much more expansive view of the modern corporation, where the corporation owes a duty not only to its shareholders, which it does, but to its other stakeholders, including its employees, the communities where it does business, its customers and suppliers, the natural environment.
That more expansive view of the modern corporation is quite simply taking hold, and there are societal expectations that companies treat all stakeholders fairly. And the companies that do that have certain advantages, in terms of reputation, in terms of cost of capital, and so on.
These issues – environmental, social, climate, DEI issues and so forth – are viewed to be increasingly material.
It’s not a political movement. It’s an investment strategy. It’s an investment discipline. The attacks against it have been very political. But we don’t incorporate these factors into our investment portfolios because we’re making some sort of political point.
We do it so we can have better long-term returns, lower risk and better performance. And that’s why everyone is doing it.
Legacy sectors like the fossil fuel industry may not go gently into the night. But the fact of the matter is that electric vehicle is going to overcome the internal combustion engine at some point in the not too distant future, just like the computer overcame the typewriter, and the cell phone overcame the phonebooth. It’s where the economy is gone.
Do you see a fundamental difference between asset managers that view ESG considerations as good for business and those that, performance aside, see it as the right thing to do?
The way we invest – and I think this is probably true of most investors in the space right now – is first and foremost about investing. It’s about building investment portfolios that are built in a way that they’re more likely to generate long-term returns and more likely to avoid risk.
And in fact, this whole sustainability transition that we’re talking about was really a transition from a depleted economic model to a more sustainable economic model that yields better social and environmental outcomes. I don’t think the debate which comes first, the chicken or the egg, is as relevant as the fact that these factors have just become increasingly material and investors care about them.
One shop might do it slightly different than the next, but we think it’s a robust investment discipline. And if you do it well, you can yield much better social and environmental outcomes. And that’s what the economy is supposed to do. It’s supposed to yield better outcomes for the people who participate in the economy. We think this is a better way to invest.
These issues have become more and more relevant. I don’t know how anyone invests in this day and age without taking climate into account. I don’t know how anyone could exist in this day and age without taking issues of diversity, inclusion, inequality into account, workplace health and safety systems, so on.
You recently brought on Charlie Donovan as senior economic adviser. How will that affect how you invest in regard to climate change?
We’re really happy that Charlie joined our thought leadership team led by Chris Dodwell in the UK and Julie Gorte in the US.
We’re seeing among investors more interest in not only climate as an issue and building portfolios that are resilient in the face of climate change, but increasingly to know why you built portfolio “X.” Why is portfolio X better built for climate than portfolio Y?
They’re asking more questions. They’re asking for more data. They’re asking for more analysis.
It’s important that we be able to answer those questions. Thought leadership is becoming a really important part of investing.
Again, institutional investors, the big intermediary platforms, they want perspective on why you’re managing money the way you’re managing it. They want perspective on climate, they want perspective on human capital issues, diversity and so forth.
We’ve been doing it for a long time, and it’s really our specialty.
Because we take this stuff seriously, it’s a great business opportunity.
