For the first installment of our 74&W Exclusives series on Sustainable Investing, we spoke with Chris Davis, Senior Director of the Ceres Investor Network on Climate Risk and Sustainability. We talked about his own career journey, the state of investor and corporate buy-in, what hurdles lie in the way of broader acceptance of sustainable practices, and why investors who aren’t thinking about environmental, social and governance factors simply aren’t doing their jobs.
To start off generally, tell us about Ceres and what it does.
Ceres is a sustainability advocacy nonprofit. We work with larger, typically US listed companies, and institutional investors on sustainability as a core business and investment strategy from a risk and opportunity standpoint. We do thought leadership. We write reports. We do how-to guides. And we work one-on-one with the companies and the investors to try to enhance their integration and action and prioritization of material ESG [Environmental, Social and Governance] issues. We’re interested in real-world outcomes and our goal is a sustainable economy. Our tagline is “Sustainability is the bottom line.” So we try to do economic advocacy and make the business case rather than the moral case or the strictly environmental or social case. We try to show why it’s in the long-term interest to be sustainable in terms of creating value for business investment.
Your own career has had an interesting trajectory. Can you describe how you ended up in your current role?
Sure. This is my third career. I always wanted to work in the environmental area. I’m old enough that the first Earth Day in 1970 was an influential and pivotal event in my life. So first I went into environmental engineering and tried to do pollution control. I decided I wasn’t going to change the world very fast or on a very large scale by doing that, so I decided to go into environmental law, and did that for almost 30 years. And then I became obsessed with the problem of climate change in the early 2000s. I was unsuccessful in developing a legal practice around that at a large law firm. And I rapidly decided that the environmental issues I was working on didn’t matter so much. You know, they were smaller-scale: cleaning up hazardous waste sites, brownfield redevelopment deals and things. I decided I needed to work on solving climate change and find the place that provided the best opportunity for impact, the best platform for doing that. After some due diligence, I concluded that it was Ceres, and they were willing to hire me to lead the investor program. So I’ve been here for seven and a half years. It was a great choice. We get to play at a fairly high level and, I think, be relatively influential.
As you’ve just alluded to, there appears to be a particular emphasis on climate change in what you and Ceres are doing. Do you consider that to be the most urgent ESG issue of all?
I do, personally. It’s certainly not the only one we work on, but it’s related to so many other things. It’s related to food, water and energy. They're all intertwined. So we do a lot of work on energy transition, which has a big impact on greenhouse gas emissions. We do increasing amounts of work on food and water as critical drivers. And climate change also has massive social impacts, the impacts of extreme weather, drought and so forth. So I think it’s wrong to consider it just an environmental issue. It’s the mother of all ESG issues.
So when you look at the various ways of addressing climate change, how important a role should the investment community play in that?
I think investors are critical. I mean, they provide the capital. Institutional investors own at least half of the public companies in the world. Many of the large pension funds kind of own the market. They are, in effect, universal owners. So they're very influential there. They have to take a longer-term perspective because they have liabilities and obligations to their beneficiaries that go out decades, multiple decades. I think [that need for long-term perspective] is being recognized and investors are kind of organizing and signing up, whether it’s in our investor network, which is 140 members now who have a focus on ESG in some way, or the PRI, the Principles for Responsible Investment, [which] has a huge number of members globally, [and] which is really around integrating ESG factors into the investment process.
What are some of your favorite examples of how the investor community has been able to bring about positive change through focus on ESG?
Well, you know, attribution and causation are hard to determine, [but] I think there’s a lot going on. In terms of producing a near-term [impact], the most tangible things result from shareholder activism. We work with a lot of investors who file shareholder proposals on, broadly, climate-related issues, and about 40 percent of those proposals are in effect settled, withdrawn by agreement, where the company agrees to do substantially what the investor has asked, like do a corporate sustainability report or something like that. I think the recent shareholder proposal votes on climate disclosure and scenario analysis in Exxon and Occidental, [which] got majority votes, [are] really starting to move the fossil fuel industry to take a broader view.
I think investors, along with a number of enlightened corporations, bringing the business case really helped the Paris Agreement, helped give the negotiators courage that, you know, “If you build it, we’ll come.” We worked on that for years.
Although it’s not nearly enough yet, the amount of institutional money that is going into renewable energy is increasing. Canada’s second-largest pension fund, Caisse de dépôt du Québec, CDPQ, has made a big climate-related investment commitment. I think that that kind of thing can make a difference in terms of reducing their carbon footprint, investing in solutions. Some of that has been driven by investor pressure and investor focus. So, yeah. A lot is happening.
Are there any specific lessons that you take away from these things?
I guess [in terms of] one of the big lessons, there used to be this skepticism, this view that you could either save the world or make money. And I think it’s become increasingly clear through a lot of studies and evidence that you can make money and do at least as well through a good ESG strategy as you can on the ESG-agnostic strategy. So ESG is being seen as increasingly material as a risk and opportunity factor at particular companies, and in investment. Which makes sense if in some way you’re contributing to solving the world’s problems or at least avoiding making them worse, avoiding company-specific or sector-specific risks. So I think ESG is becoming more integral, more integrated into the mainstream investment and mainstream business, and I think Ceres has had a lot to do with that.
Do you think those two circles of the Venn diagram –positive impact and positive financial return –are increasingly overlapping? Or do you think that it has been a perception issue and in fact that this old paradigm that you were talking about, how it was one or the other, was more of a perception problem and in fact there’s always been a pretty good overlap?
Well, I think it has been a definite perception issue. [But] the perception is increasingly wrong. Some of it will just take generational change to change people’s core beliefs. But there is an increasing overlap. ESG issues like climate are becoming increasingly material and increasingly recognized by large mainstream investors like BlackRock, State Street, Vanguard, who are now going public saying climate change is a material issue. They're publishing papers. They're prioritizing it in their engagements with companies. I think companies that heed and lead on these issues are going to do better in the long term. And in the medium term. And possibly in the short term.
It’s intuitive, right? If a company’s business model is basically “use up all the fossil fuel and nonrenewable resources and spew pollution into the air,” that doesn’t necessarily seem like a great business plan, whereas maybe in the past it wasn’t something that was front-of-mind.
Right. [That’s] not sustainable and is being recognized as short-term, myopic thinking that is unlikely to create long-term shareholder value. It also creates systemic risks to the larger market. So there is more and more focus on these issues. There’s more data. There’s more information. You know, investment consultants are starting to get it. And instead of pooh-poohing these issues, [they’re] trying to help their clients figure out how to address them.
So in terms of appetite for or interest in sustainable investing, where do you think we are right now? Are we approaching a tipping point? Have we already passed one? Where’s the momentum?
I think we’ve passed the tipping point. I think it’s widely recognized, [though] not universally, that ESG factors are relevant to investment risk and opportunity, to corporate performance. Not all investors are actively engaged on the issue yet, but more and more are. The amount of assets that have some ESG component in how they're invested is up to like a fifth of all assets under management. So this suite of issues is increasingly recognized as important to investors, and investors are increasingly important to the solutions. You know, they’ll take on the order of an additional trillion dollars a year to invest in clean energy to solve climate change. And certainly not all of that would come from institutional investors, but a big chunk of it would have to. So I think those that are doing nothing on ESG are laggards, or at least have an outdated approach. But we still have a long way to go, particularly in this country.
Speaking of which, what are some of the differences you’ve noticed in investors’ approaches to sustainability in the US versus Europe?
I think things are further along in Europe. There’s more governmental regulation, more [of an] idea of a social compact, maybe almost a different view of fiduciary duty, that your impact on the world and potentially the lives of your beneficiaries are an important consideration rather than just the return on your investments in the short term. A lot of it’s driven by the northern European pension funds. In the Netherlands. In Scandinavian countries. In Denmark. To some extent in the UK. So I think there’s been more leadership, more capital being invested in different environmentally and socially positive investments, both in the developed world and in emerging markets. In the US, it’s just been a little slower. I think there’s been more resistance. Our culture is a little different. Adoption has been a little slower here, and less universal. But there’s definitely been progress.
You mentioned government regulations as being stronger in Europe. At least in some parts of the US, there’s a philosophy that government regulation or corporate action are an either/or proposition. And that regulations hobble business. It sounds like you’re saying that in Europe, there’s a perception that regulation and corporate action can function together to make progress. From a business standpoint, do you feel that government regulations and corporate policy should work in concert toward these issues, especially climate change?
Yeah. They can and they should. Both corporations and investors need stable policy signals. Pricing carbon is a key example. If you’re going to invest in a power plant or you’re going to invest in a renewable energy private equity fund, you kind of need to know what the government rules are, or the production tax credit, the investment tax credit, the wind and solar. There’s a belief that it has to be priced, it will be priced, it’s being priced in various states. But there’s a lot of uncertainty here as to whether they’ll be in effect, whether they’ll be repealed, whether they’ll be cut back. [That uncertainty] is going to retard investment in renewable energy. It’s happened again and again. So regulation can both level the playing field and avoid people making short-term profits at the expense of the environment or people. It can [provide] sort of a roadmap for investment, and it can also create positive incentives. Not that the government ought to subsidize everything. But I think right now it’s almost like a feeding frenzy by everyone who has some beef with the EPA or government regulation. Those in charge are in effect anti-government, anti-regulatory. And there’s a balance. I mean, when I used to represent private companies in environmental practice, I think sometimes the EPA kind of got in the way or imposed requirements that weren’t really sensitive to the best way to solve the problem, the least-cost way and so forth. So there definitely needs to be a balance. But in this country, the pendulum has swung [too far] right now. Theoretically, companies [are] supposed to disclose the material risks from climate change or material ESG issues, but very few companies do, and the SEC has not shown a lot of interest lately in enforcing those [rules]. But disclosure tends to drive action.
A lot of states are stepping up, or at least staying on course on regulations. [And] ironically, the business community, [as evidenced by] this “We Are Still In” movement for Paris, and enlightened companies that will be doing business way beyond the current administration, are moving toward renewable energy while the administration is pushing the revival of coal. So I think businesses and investors, [driven] by their fiduciary duty and their longer-term economic interests, are forced to take a longer, broader view. And we’re seeing more and more of that. It’s really on the private sector now, at least in this country.
How do you think investors should be thinking about ESG factors when it comes to valuation of companies?
They need to be part of the mix of relevant information. The ESG risks and opportunities of a given company or sector vary a lot. But it definitely has to be part of your toolkit in doing due diligence and doing corporate engagement. You know, “What are the ESG issues that could be material to a particular sector and company?” Failure to take this into account is a major omission. You’re just not dealing with a bunch of increasingly relevant variables. Mainstream investment analysis needs to include ESG factors today, or you’re not doing your job.
As you talk with investors about sustainability, what are the most common hurdles you have to overcome in order to get them to see that they have a role to play?
The first is sort of conceptual understanding: “How are these factors relevant to our business, our day jobs?” And then second is expertise, having somebody with ESG expertise on the staff. And then, you know, how do you integrate it? How do you implement ESG integration? We’ve [produced] a guide called The Blueprint for Sustainable Investing that, after trying to make the business and the fiduciary-duty case for why this is important, describes to institutional investors 10 steps for ESG integration.
So, kind of the flipside of that question: For those already on board with the idea of sustainable investing, what pain points or unmet needs do you hear them talking about the most?
Lack of consistent ESG data across companies. Your ability to do analysis depends on the data that you have, and without uniform disclosure standards it’s spotty who discloses what. A lot of it’s voluntary reporting that’s selective, cherry-picking.
[The pain point we hear] from asset owners is often the lack of sufficient institutional scale and quality products with track records offered by mainstream managers, [which] limits their ability or willingness to put money into the space.
And some of it’s expertise. If you have a pension fund with a staff of 10 people, how do you deal with ESG issues? You have to rely on external expertise from consultants.
And then I guess the other big one is the link between ESG factors and performance, trying to understand that, trying to become convinced of it. And you know, it’s not a panacea on the risk or opportunity side. But just trying to understand the drivers and evidence of materiality is a question we get a lot.
The first pain-point you named was a lack of ESG data. What sources for such data have emerged to date?
There are all kinds of ESG ratings that come out. There’s a whole ecosystem of service providers that are developing and using and incorporating ESG data into ratings, scoring and so forth, and that’ll hopefully drive corporate behavior. Sustainalytics, MSCI, Trucost. Morningstar now gives ESG ratings to companies. Credit rating agencies [like] S&P and Moody’s are now starting to include ESG factors in their ratings. So I think that’s an important move. SASB [The Sustainability Accounting Standards Board] is trying to integrate ESG into mainstream financial reporting, coming up with the material factors in each sector. Sometimes I think we probably don’t agree that they’ve captured all of them when the issues are emerging or whatever. But I think they are of increasing importance. You know, it’s only as good as the data that are relied on.
So how satisfied are you with those sources, and what needs to happen to put investors on a surer footing when it comes to assessing ESG factors?
It’s still fairly early days. I think there’s wider-spread uptake of those ratings and a lot of larger investors – BlackRock, State Street – have their own internal proprietary ESG rating criteria and models. But it’s only as good as the data that you get. And frankly, in emerging markets, we need companies to do a better job of more consistent ESG reporting. You know, get it into their financials, standardize it. SASB, I think, takes a crack at that. But it’s spotty.
I think stock exchanges can be an important driver, by imposing listing rules or guidelines on ESG reporting, [so that] you need to report in order to be listed, or at least are strongly encouraged to report. More needs to be done to get more uniform data disclosure. Ideally, mandatory disclosure, where you’re required to do it and it’s clear what you need to disclose. The SEC ought to be doing that. In France, there’s a climate reporting rule. There’s ESG reporting that’s required in the EU, in the UK. Here, it’s less far along from a regulatory standpoint. It’s more voluntary.
You’ve suggested in the past that divestment is a tool with limited use. What are its limitations?
Ceres is by no means against divestment. We realize that it’s an important tool. There’s kind of two views, or two schools of thought, and neither is right or wrong. [There are] those who believe that you should divest either on moral reasons or to avoid the risks of fossil fuels and stranded assets. And there are [others], largely universal investors like big pension funds, who own the whole economy. They own the S&P 500. If oil companies are in it, they own it. That’s just part of their investment strategy. So as long as they're going to own these companies long-term, divestment is inconsistent with their own-the-market investment strategy. If you’d just owned the S&P 500 and that’s where all your eggs were over the last decade, you’d have made a lot of money. A hell of a lot more than I did. But I think the idea is that engagement with these companies is an important risk-management tool and that if you divest, you leave your seat at the table. The company may be delighted that they're free of these pesky shareholders that were bugging them to change their business practices. Some of the European oil companies were persuaded to start investing in renewable energy, in battery companies, in electric vehicle charging, things like that. So engagement can really be part of the solution, to get the companies to disclose the risks in ways that will support investment decisions. So the main limitation of divestment is you lose your seat at the table and you can’t influence the company anymore because you are no longer a shareholder. And we would hope that the big energy companies can be part of the solution here. They bring a lot to the table in terms of capital, scale, engineering ability, long-term focus. So I think a lot of the major pension funds think that engagement is the better strategy and one that they’ll pursue unless and until it’s shown to be ineffective. We are big supporters of shareholder activism [aimed at] long-term value creation. We think it can have a significant impact. And it has.
One obvious theme in all of this is the long-term focus you just mentioned. You’ve talked in the past about how quarterly capitalism is not really a natural fit for sustainable investing. Can you explain what you mean by that?
The analysts who are on quarterly earnings calls tend to be focused on quarterly earnings. And these are longer-term issues, issues that will play out over a period of years. Ceres isn't convinced that quarterly earnings reporting is constructive. You know, giving quarterly guidance, having to beat the Street or meet or beat the analysts’ estimates for your quarterly profits, or your stock price will tank. [That focus on] wanting to make a quick buck is not a constructive exercise in long-term value creation, long-term thinking, by companies, by investors. [As] somebody said, “The long term is not just a collection of a whole lot of short terms added up.” It’s a different strategy.
In our data-driven 24/7 economy, it’s hard to ignore quarterly data. But these are five-year issues or 10-year issues. If you have a storm that takes out a bunch of plants or coastal real estate and your investments are concentrated there, it can manifest itself in the short term, but from a probabilistic standpoint, the likelihood that this quarter is when these risks will play out is probably low. There’s greater certainty that climate change will affect your portfolio (or sectors in your portfolio) in a longer time period. So I think focusing on this quarter is somewhat antithetical to long-term sustainable business and investment strategy.
How well is the investor focus on ESG getting through to the companies?
I think a lot of companies [remain] unconvinced that many of their mainstream investors really do care about these ESG issues. Or [companies’ perception is that investors] say they care but their behavior or their questions or the pressures that the companies are under are shorter-term. I think a lot of companies are not convinced that investment decisions really reflect prioritization of ESG issues, of sustainability, [in part because people aren’t asking] ESG questions on quarterly earnings calls. I mean, quarterly earnings calls are not about the longer term, so that’s not where you’d expect to get them. But that’s what the CFO hears, and the CEO. So we hear a lot that, you know, “We’re not hearing from our investors on these issues.” Or, “They tell us they care but it’s not clear how they use this information in making investment decisions.” And, “We don’t feel like we’re being rewarded for our sustainability strategy.” But all of this is a work in progress. I mean, most of this whole movement and the data didn’t really exist so much five years ago, at least in the US. So I think it’s an evolving process.
In terms of that process, from a systems point of view – institutional wherewithal, availability of product, buy-in, etcetera – what are the biggest hurdles remaining in the way of investment truly filling its role in terms of solving climate change and other ESG issues?
Actually prioritizing the opportunities. Most asset owners don’t get up in the morning and say, “How can I invest more in renewable energy?” People say, “How do I meet the risk and return targets for my asset class or my portfolio?” So I think [it’s about] actively looking, communicating to asset managers that you're looking for products, you’re looking for solutions. And then actually investing in them.
A lot of institutional investors got burned on clean tech venture capital investing. We just issued a report about how that market’s changed and how the risk/reward prospects have improved. I think a lot of people [who] were burned on that type of ESG investing have been reluctant to go back, and have kind of generalized across sectors and asset classes. You know, venture capital isn’t the same as infrastructure or private equity, but I think there’s been some reluctance.
There’s a perception of risk if you concentrate your investments too much in a narrow theme or sector. I think that’s an obstacle. I think the [supply] of proven investment vehicles that are of institutional quality and scale is still somewhat limited, [although] a lot of new things are coming to market.
And I just think there’s just a general risk-aversion to investing in things that are new. I mean, pension funds, institutional investors, are very conservative. They’re risk-averse. And I think [one] obstacle [is the lack of] investment consultants who actually have expertise in things like renewable energy as opposed to saying, “Oh, it’s risky,” because they're just not in the space, so to speak. I think those are the main obstacles.
Let’s take a look at an example of how some of the issues that we’ve been discussing play out in the real world. Mazda just came out with a new technology that takes the standard, gasoline-powered internal combustion engine and gives it diesel-like efficiency – 50, 60 miles to the gallon. Their position is that it’s a sustainable approach, since it doesn’t pose the lithium problems associated with electric vehicles. Should an investor see that as more of a short- to medium-term stopgap measure, or a real part of the solution in terms of energy, climate change and pollution?
Well, I have to say I don’t know much about the Mazda approach. [But] fossil fuels are not going to go away. I don’t think the whole world is going to go to electric in the next five years. So things that are much, much more efficient, that get mileages in the 40s and the 50s, that get to where the proposed mileage standards are, are steps in the right direction, part of the solution, at least in the short term. I think we definitely need to electrify, [and yet] what Mazda has done sounds constructive.
But it’s not helpful that the Trump Administration and, frankly, the auto industry, [are] proposing to roll back the CAFE standards, the mileage standards. I think if we do keep stringent mileage and efficiency standards and keep ratcheting them down, that’ll drive more efficient vehicles. Most people are short-term thinkers, and if gas prices are low [like right now], the car manufacturers make more money on SUVs and pickup trucks. They probably have a lot of shareholders who want them to make money in the short term. So it’s a dilemma for the CEOs, knowing the future’s in electric vehicles, but the sales this year and this quarter are probably in pickup trucks.
So here’s that convergence of government regulation and quarterly capitalism. If government regulation drives [production of] more efficient vehicles, then it’s a level playing field. But otherwise, right now, most of the manufacturers are probably not making money on electric vehicles. They're maybe loss leaders. And [those companies] are going to have investors who press them to maximize short-term sales. [If] the stock price lags, [the CEO gets] booted out. You know, there’s a segment of investors who [are] impatient. There’s a segment of investors who like [the move toward sustainability] but they maybe [aren’t] vocal enough. So it’s complicated.
Final thoughts for how institutional investors and asset managers can drive change?
Investors need to prioritize these issues and figure out how they can contribute to them. Asset managers are starting to see that a focus on ESG is really important to their business in terms of attracting clients, attracting investment, showing that they understand these issues and are managing them and creating products. It’s being viewed increasingly as an area of opportunity.
The impact investing movement is really growing. I think that with millennials, with high net worth individuals, family offices, foundations, we’re starting to see them wanting to “do well by doing good,” to drive both financial returns and impact.
Chris Davis is Senior Director of the Investor Program at Ceres, a nonprofit organization focused on sustainable business and investment strategies. He is chief of staff of the 135 member Ceres Investor Network on Climate Risk and Sustainability, which collectively manages over $17 trillion in assets. Chris works with North American institutional investors on climate change and other environmental, social and related governance (ESG) issues that present material investment risks and opportunities. Prior to joining Ceres in 2010, he spent almost 30 years practicing environmental law. As a senior partner at Goodwin Procter LLP, Chris chaired the firm’s environmental practice, co-founded and led the clean tech practice, was a member of the private equity team, and worked on a wide variety of investment, project development and corporate M&A transactions. He is a member of the American College of Environmental Lawyers and has held various leadership positions in the American Bar Association's Section of Environment, Energy and Resources. Prior to his legal career, he worked as an environmental engineer. Chris holds degrees from Dartmouth College and Harvard Law School, where he was a member of the Harvard Law Review. He is an avid cyclist, skier and outdoorsman.
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