By Kevin McNabola
Orange Board of Finance
Are environmental, social and governance investments the new investment strategy moving forward?
There is growing evidence and hard data indicating that nearly two-thirds of all retirement endowment and investment portfolios will include ESG over the next decade. Here in Connecticut and in many parts of the United States, we have seen a significant increase in ESG investing, especially in college and university endowments and state pension funds.
Connecticut, along with Rhode Island, Massachusetts, New York and New Jersey, have taken significant steps to invest in companies and portfolios that have embraced ESG principles. The state treasurer has engaged Connecticut’s $43 billion pension fund over the past four years to include many new investment partners with investments heavily weighted to ESG and away from traditional investments in the fossil fuels. Treasurer Shawn Wooden is convinced that ESG investing will eventually outperform conventional investing.
It is important to understand that the Treasurer evaluates ESG issues taking into account financial criteria when making investment decisions in the retirement portfolio, including weighing companies that promote sustainable business practices and promote diversity in the workplace. within boards of directors. This is done so that there is real potential for value creation for stakeholders, consistent with fiduciary duties to act in the best interests of investors and to maximize returns. However, the gloomy economic climate of 2022, characterized by rising interest rates, volatile markets and persistently high inflation, will make it difficult for university endowments and state pension portfolios to generate healthy returns, regardless of ESG investments.
Many CEOs of publicly traded companies, such as General Electric, Starbucks, and Pepsi, are proponents of ESG measures. Many business leaders believe that taking action to improve working conditions, increase the diversity of their teams, give back to their communities, and take a stand on sustainable environmental policies strengthens their companies’ brands. As millennials become employees, consumers, and investors, they grade good performers in the company and reward them with loyalty.
Many US-based companies are taking proactive stances to incorporate best practices within the ESG framework. It is important to adhere to certain best practices for benchmarking and strengthening the company’s ESG program.
As a former corporate executive at General Electric, I think the best approach would be for companies to identify the appropriate ESG criteria for their industry and their business. When developing an ESG policy framework, companies should not try to be everything to everyone. Instead, identify three to five measurable ESG criteria that are important to the business and customers, but most importantly aligned with business strategy.
I would also recommend that asset managers and investors not divest entirely from investments in oil and gas or other fossil fuels, as they have been the foundation of the US economy for decades. A diversified portfolio is always the way to go.
I hope to continue on this topic in the coming months and present analysis in the near future to compare some of the portfolios of state pensions, university endowments and US-based companies to see if ESG investing has outperformed the traditional portfolios of institutions that have not invested heavily in ESG.
Kevin McNabola is the City of Meriden’s Chief Financial Officer and a member of the Orange Finance Council.