ESG investing claims to pursue both profits and morals at once. Does it work? : The Indicator from Planet Money In part two of our ESG series, we speak with two insiders who have been involved with ESG since before it was cool. To them, it's come a long way — and is now mainstream enough to have a real impact.

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Impact investing, part 2: Can money meet morals?

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Five-ish years ago, Katherine Collins was sitting down with a health care executive to talk about his company's business. This is a normal part of her job managing money at Putnam Investments. She's supposed to find out if companies have good plans or bad and invest accordingly.

KATHERINE COLLINS: And then at the end, we said, well, OK, any other, you know, core sustainability issues that we didn't touch on?


And Katherine cares about sustainability issues. She's the head of sustainable investing at Putnam. She buys stocks in companies that are supposed to be doing better than their peers on things like not destroying the Amazon or not giving executives huge severance packages after harassing employees.

COLLINS: And the person threw up their hands and said, ah, that ESG stuff - I can't stand those people.

CHILDS: ESG, environmental social governance - another way to say sustainable investing.

COLLINS: I was like, oh, well, hello. That would be me.

WONG: Oops.

COLLINS: And he said, oh, but you're asking about our strategy. I said, well, yeah. And he said, oh.

WONG: Oh. Katherine gets this attitude all the time because, as this new label of ESG has caught on, a lot of people have jumped on, and new products have sprung up, some more dedicated to the cause, others that just fill out a checklist.

COLLINS: There is a part of ESG practice that is very report cardy (ph), you know, and very focused on scores and ratings and rankings. And there's some utility in that, but it's not complete in and of itself.

CHILDS: For Katherine, sustainable investing is more about accounting for the things we ignored when we prescribed what finance cares about. We decided to care about how many widgets you sell, not the environmental degradation in the process of creating those widgets.

COLLINS: I am a little concerned that, just like the executive I mentioned, folks have one experience that is different from what they expected and disappointing and think, oh, the whole thing is a racket, and there's no potential here.

WONG: Yesterday we heard the argument for ESG being a racket with no potential here. But there are plenty of people who think not only is this not a racket, it's imperative. This is THE INDICATOR FROM PLANET MONEY. I'm Wailin Wong.

CHILDS: And I'm Mary Childs. This is the second half of our journey into ESG.

WONG: On today's show, can ESG work? And if so, how?


WONG: George Serafeim, a researcher at Harvard, remembers hearing about ESG over a decade ago. He was researching opaque, difficult-to-value factors, and it seemed like sustainable investing might be a rich area for exactly that. So he starts a spreadsheet to track whatever relevant data companies are disclosing to see what's out there - labor practices, water use, whatever.

GEORGE SERAFEIM: And many organizations didn't even have the data internally around employee related issues, supplier related issues, customer related issues. They just never had them.

CHILDS: So at first, George's spreadsheet is mostly blank. And even when companies were measuring things, it was totally random what they measured and how. He remembers two big companies were both measuring their carbon footprint, but one owned their trucks and the other didn't. So one looked way better, but it was just that the numbers were not at all comparable.

WONG: So George sets out to make better data. He calls up companies asking what metrics they're focusing on, what and how they're measuring. He fills in his spreadsheet, and he publishes a big paper with his findings.

SERAFEIM: I was invited in several of the Wall Street firms to present some of the findings. And I remember I went to pretty much all of them, and across all of them, everybody was super skeptical. They said, oh, this is just soft. This is not important. Who cares? This is not value relevant and so forth.

CHILDS: Not value relevant - but something else is happening. More and more companies, major companies, are starting to disclose useful metrics. Coca-Cola and Pepsi start saying how much water they use to make a liter of Coke and Pepsi. Mining companies, including BHP and Rio Tinto, start disclosing data on employee safety - how many people get hurt or killed on the job.

SERAFEIM: One of the most critical moments was when actually important companies such as Unilever, for example, were starting to release more and more data but also making the case about how efforts to improve performance were actually improving their performance, either from a cost reduction perspective or from a revenue perspective.

WONG: In other words, companies were saying that being more conscientious was saving them money and making them money.

CHILDS: George's research suggests that the way they do this is kind of a path. First, companies save money by paying less in fines. The fewer employees are hurt in work related accidents, the fewer lawsuits. The less you dump toxins into rivers, the fewer fines from, you know, the EPA. Next, companies start finding ways to be more efficient. They improve their cost structure by saving water or energy or materials. They improve productivity. And then companies start coming up with new products and services which help them expand. It creates new markets like making shoes with recycled and upcycled materials - speaking from experience of buying them not making them.

WONG: All of which should add up to more future profits, which should show up in a company's share price. That, in turn, should spark more interest in these metrics, kicking off a virtuous circle.

CHILDS: And for George, there's this big, promising moment in January 2018. He talked about it yesterday. The CEO of BlackRock, the world's biggest money manager, issues a very important letter, putting a flag in the ground saying that ESG matters.

SERAFEIM: There is no doubt that the Larry Fink letter, where he's articulating the importance of ESG issues for the competitiveness of organizations - it's elevating that issue to a corporate governance issue - changed the discussion inside boardrooms.

WONG: To George, this was progress because as we covered in the last episode, yes, BlackRock is limited by the fact that it's investing other people's money, so it can't just do whatever it wants. But if Larry Fink brings up environmental stuff to a company's board, that is a big deal. And more to the point, BlackRock owns a ton of shares in basically every major public company. And as shareholders in those companies, it can vote.

SERAFEIM: I can tell you as a board of director members, that is a pretty strong enforcement mechanism (laughter). You can't be voted out of office.

WONG: By the way, as George says, he is on many boards, including that of an ESG consultancy. So he has some skin in the game.

CHILDS: Either way, to George, this 2018 Larry letter signaling that BlackRock was now on the ESG side of things - that tipped the scales and helped answer the question as to whether these sustainable investing factors are allowed to count in investing because the more funds like BlackRock ask these questions - the more good data we have - the more people like George can fill in their spreadsheets to see if this stuff actually helps boost performance, which builds the argument that sustainable investing factors already count.

WONG: George says we now finally have enough data that it's actually becoming useful. We can see who's doing well and who's doing poorly, which means we can make real, informed decisions in the stuff we buy and the stocks we buy.

CHILDS: And if you ask Katherine Collins, the sustainability investor, yeah, it's been slow. That's how things happen sometimes.

COLLINS: Power is constantly circulating, and change happens all the time. And you don't always know where it's coming from or where it's going to, but you can influence it. Like, you can be part of it. To me, that's a much more hopeful set of endeavors, and it's also much more true to how the world actually works.

WONG: This is the fundamental disagreement between the disillusioned ESG investor we heard from yesterday and George and Katherine. That guy yesterday says we don't have time for all of this. We're soothing ourselves with a dangerous placebo when we need urgent government action.

CHILDS: Katherine and George agree - we don't have time, which is why we have to do everything.

COLLINS: There are lots of famous videos trying to define phase changes that look at a pile of sand and, you know, one grain, one grain, one grain, the pile's the same. The pile's the same. The pile's the same - all of a sudden, the one millionth grain, whole pile collapses. You want to be putting your grains, you know, in the direction that you think is right. You know, I don't know why we'd shy away from that. You know, it won't hurt. And it might really, really matter. Isn't that worth trying? Like, isn't that interesting to you? And I have learned it's not interesting to everyone. So that part's a little depressing. But it is interesting to enough people that, like, you know - do you want to try? Like, let's try.


WONG: This episode was produced by Corey Bridges and Andrea Gutierrez, with engineering by Robert Rodriguez. Sierra Juarez and Dylan Sloan checked the facts. Viet Le is our senior producer. Additional editing today by Jess Jiang. Kate Concannon edits the show, and THE INDICATOR is a production of NPR.


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