To ESG or Not ESG—Answers to Your Questions

Audio Description

ESG has come under fire lately in several high-profile articles in academia and the media, prompting fiduciaries to raise concerns. Is ESG really all it’s cracked up to be? During this episode, we separate fact from fiction when it comes to responsible investing. 


00:00 - 00:33

The whole notion of responsible investing or specifically aligning an institution's investments with its mission and purpose continues to gain traction. But lately, a handful of high profile articles, both in academia and the media, are raising concerns about whether responsible investing or specifically an investment focus on ESG factors in particular, is really all it's cracked up to be. So today we're going to sift through some fact, some fiction, maybe most importantly, some key nuances for fiduciaries when it comes to responsible investing.

00:41 - 01:09

Hi, everyone, welcome to Inspired Investing. I'm your host, Clare Golla, Head of Foundation and Institutional Advisory at Bernstein. This is the podcast where we connect and share insights with listeners like you who are engaged in the nonprofit and broader philanthropy sector or who just want to learn more. I could think of no one better to help us get to the bottom of this current ESG debate than my colleague Travis Allen, Bernstein's National Managing Director of Purpose Driven Strategies. Welcome, Travis.

01:09 - 01:11

Thank you, Clare. It's great to be back on the podcast.

01:11 - 01:35

Yeah, it's good to be here. We can finally have one of these conversations recorded live for the rest of the world. So Travis, as you know, ESG has come under fire lately. A few well-placed articles in particular, are prompting questions from investment committees, and we're getting questions asking whether ESG belongs in their organization's portfolios. What do you say to fiduciaries who are feeling uncertain these days?

01:35 - 02:12

So first, I would say that this is a healthy conversation for fiduciaries to have, it's actually part of their responsibility to think about the appropriateness of different types of investment strategies for their portfolio. The thing I would warn them about, though, is to not make any knee-jerk reactions to any particular article or latest finding, to really go back to why they started to embark on conversations around environmental, social and governance issues in the first place. Is it about alignment with their mission? Is it because they believe that it would actually improve returns or reduce risk?

02:12 - 02:42

So really to go back to the foundation of what started them down this pathway towards ESG in the first place. And then from there to find the right point of integration or interception with the tools that are available to them. And there are a lot of tools, that's one of the things I know we'll talk about, the broad set of environmental, social and governance investment approaches that are available to them with their mission and also their tolerance for risk and complexity.

02:42 - 03:11

And so I think that committees are actually in a good place. We have more data than we ever have. We have more tools than we've ever had for them to consider in terms of ESG. But the last thing I would just say is that it doesn't have to be all or nothing, right, that some boards or committees may decide that they want to have certain portions of their portfolio reflect a real emphasis and focus on environmental, social and governance issues; in other portions of their portfolio, not be as focused. And that's OK, too.

03:12 - 03:50

But what they really need to do is to take a step back. Think about the origins of their interest in ESG. Is it aligned with their mission and values? What was the original prompt for them to move in this direction? Take time to gather information, right? Rely on experts to provide some education and consulting services to the board and the committee, and then after they've gathered all that information, make a decision about again, how far along on the spectrum do they want to be? Does it all have to be in environmental, social and governance strategies? Can it just be a portion? Those are all very reasonable things for boards to be considering today.

03:51 - 04:22

Yeah, it's a great point. And I love that you went back to the origin and the why. Why are we doing this in the first place? And it's important to say, we love getting these questions because it does mean that fiduciaries are, you know, they're fulfilling their duty. They are asking these questions on behalf of the institution. But we know that to align your portfolio with your purpose, that's going to look very different from one organization to the next. So. So maybe from there you could address some of the overarching flaws that you've seen in some of the points that have been raised recently.

04:23 - 05:22

First, let me just say that there are very valid questions being asked about the broad category that people are including in ESG and all the different approaches. And many of the criticisms are valid criticisms, but that doesn't mean that investing with an ESG focus doesn't have merit. It may just mean that it requires an additional level of due diligence for fiduciary committees. Let me just say that upfront. The second thing I would say that makes this a difficult conversation is that when you see articles that say ESG is good or ESG is bad, they're really talking about such a broad suite of potential environmental, social and governance responses. And some strategies just do integration and some do divestment and some do positive screening. And so lumping everything in together, I think, is really, really counter productive and not, it's just not helpful.

05:22 - 06:05

And so it's important to really get, you know, one or two levels deeper than that and say, OK, what is it that this ESG manager is doing and what impact, if any, does it have on risk and return? And what impact does it have in terms of responsibility, right? How are they measuring that? But I think the focus oftentimes is, ESG is good for performance, or ESG is bad for performance, and I think that, you know, those types of arguments, you're always going to be able to find data to support the viewpoint that you want to have. And so it's much more important for fiduciaries to focus on what it is that managers are actually doing as opposed to, you know, this broad-based ESG is good, ESG is bad. Right. Now,

06:05 - 06:32

I couldn't agree more. It reminds me of the conversation we have with so many investors around alternatives. They'll lump in alternatives, right? As if all alternatives are the same, right. And we know that there's such a diverse spectrum, right, with different purposes and outcomes and characteristics of different types of investments. So just like that, right, these aren't a monolith. You can't just go and say, and some of these articles are making some pretty big blanket statements, I would say. Anything else that you would add?

06:33 - 07:00

Yeah, I think that one of the exciting things about ESG is that there has been a greater emphasis on transparency and accountability and measurement. And so for these committees, you know, again, the focus should be on what are we learning and what are we investing in? What are we not investing in in the strategy as opposed to saying, is ESG going to benefit us or not benefit us?

07:00 - 07:40

If you think about it, if you step back for a second, like no one does this to value managers, right? No, no one says, you know, all value managers are bad, right? Values underperform for a number of years, underperform growth and quality and other types of investment approaches. And no one says that means that all value is bad and you should never do value. They say, well, there are differences in value approaches, right? And so you have to find the right value approach, make sure it fits in with your portfolio. And I think similarly, you need to find the right ESG approach to make sure it fits in with the rest of the portfolio and really evaluate ESG strategies on their merits and not on, you know, what's being said about ESG strategies more broadly in the media.

07:40 - 07:40


07:40 - 08:09

Well, let's unpack this a little bit because one of the arguments that's been made, you know in some of these articles is around the whole greenwashing phenomenon, right? That certain companies are engaged in certain activities, regardless of of what else they do or what they're trying to, you know, sort of accomplish in the world. And they're framing it as environmentally sustainable, you know, activities or they're framing it as socially responsible activities. How would you respond to that?

08:10 - 08:36

So greenwashing is a very serious issue. All you have to do is to look at the corporate social responsibility reports for various types of companies, and it gives you a sense for the fact that, you know, you look at some of these and you think this is like a philanthropy, right? This company and they could be an industries that are really, really tough from an ESG standpoint, right? They could be in the private prison industry and with all the difficulties that go along with that.

08:36 - 09:30

But the corporate social responsibility reports are glowing in their approach to environmental, social and governance issues. And I'm not saying those companies can't make any progress. But you do also have to be transparent and acknowledge the inherent difficulties in certain industries. One of the criticisms that has been levied is that, you know, companies are really wasting resources by producing all of these reports, right? That they're really just greenwashing and they don't add a lot of value. And I disagree. I know that the reports can get better, and I know that the reports include a lot of fluff oftentimes. But I think that it's very hard to imagine that we're going to have a world where there's a greater level of accountability for companies if we don't also have transparency and an ability to measure and maybe the ways that companies are measuring things today are imperfect, but we can engage with them on that, right.

09:30 - 09:56

Rather than saying, don't bother telling us anything, we should say, No, no, no. It's great that you're sharing more about the gender diversity at your company. But what we'd really like to understand is how that's reflected in compensation, how is that reflected in promotions, and then work with companies to get them to be better about disclosing that information because we believe it has a material impact on, you know, the company's long-term corporate financial performance.

09:56 - 10:20

And so that's been the focus, you know, for us, for example, engagements a really big part of what we do from an ESG standpoint, talking to companies about best practices, talking to them about the need for transparency and then holding them accountable and checking in so that we can measure whether or not they're truly making progress. It's a big piece that is oftentimes missing in these discussions again about, again, good ESG or bad ESG.

10:20 - 11:18

Right? It is so interesting when you do look at some of these corporate social responsibility reports. I think about my background in community development banking. And you know, every bank is required through the CRA, the Community Reinvestment Act, to invest in underserved communities. And you could look at reports from any given bank and be like, Wow. That's astonishing, right, but then you look at the actual, the full purpose and everything that a community development finance institution does. And then you're like, Oh, I get it, that is really a financial institution that is committed to this, you know, all in. So it's all about the research, as you mentioned, but I love that you also mentioned the measurement. Right. So actually not just doing the due diligence and really understanding and engaging with a company, but then continuing to see if that needle is moving on those specific metrics that you've agreed upon over time. So thank you for sharing that piece. Before we move on,

11:18 - 11:47

the thing I love about your example is that it allows you to then ask, What are you doing that goes beyond the things you have to do? Right, right, right? That's why you need the transparency. So you can say, that's great, but those are all things we know you have to do. So what are you doing in addition to that? And then you can ask other companies, what are you doing in addition to that? And again, we're not doing this just because it's designed to make people feel good. We also want to understand the financial impact of those activities as well.

11:48 - 12:35

One of the things that I find so interesting about this discussion around ESG is that no one ever said, at least, you know, not the people that I've talked to who work in this space, that ESG strategies, I'm just lumping them all together because that's the way they are normally discussed in the media, should get a pass on performance. I insist that they should be held to the same performance standards, both in terms of returns, but also risk as other actively managed strategies. They do not get a pass on performance, so for fiduciaries out there, just because something has ESG in the name doesn't mean that you're not going to evaluate it in the same rigorous way that you do other strategies, right? The goal should be to deliver similar risk and return as other traditional actively managed strategies.

12:35 - 12:57

But with this additional benefit of measurably better environmental, social and governance outcomes. And so that is one of the things that again, hopefully will give, you know, fiduciaries a little bit of a path forward, right? Remember that you also are responsible for measuring risk and returns in the same way you do for other strategies in your portfolio.

12:57 - 13:31

Well, and also there are uncovered opportunities as well that a focus on environmental and social and governance factors actually can bring to investors. I think about, we have a hedge fund strategy that is focused on climate change, right? There are other strategies that, you know, some of our portfolio managers run that are focused on the Sustainable Development Goals, right, in alignment with those. I mean, there are true investment opportunities that come out of wanting to, and the need for certain changes, I think, across the globe. So it's all good points.

13:31 - 13:50

It does bring me back to one specific question. I'm going to pivot a little bit and we're going to do a bit of a lightning round here. I'm just going to start hammering questions at you. So get ready. I'm ready. The first question I think about is fiduciaries do come back to us and say, Well, there's no evidence that ESG improves performance. And so how do you respond to that?

13:50 - 14:17

I say, look, environmental, social and governance research is a part of getting a better sense for the investments that you're making in a portfolio. But there are a lot of other variables that can drive the performance of a stock in the short term. So I don't think it's reasonable to make the claim that ESG outperforms or ESG underperforms. It's one of many inputs into the investment process.

14:17 - 14:51

I do believe that by including environmental, social and governance research and thinking about things beyond just, you know, the items you can see on the financial statements, you get a better sense of what the risks and opportunities are for particular companies as you evaluate them or securities, bonds, for example. So I do think that the research is important, but we've never actually made the claim that ESG outperforms. Again, as I stated before, the objective is to deliver, you know, competitive returns similar to other actively managed strategies, but then also measure the ESG benefits.

14:51 - 15:01

Exactly. I think as fiduciaries ourselves, we're held to a certain standard with traditional financial metrics, and there are plenty of different paths to get there. So I think that's a great point.

15:01 - 15:12

Okay, so the next argument, the Wild West argument, there's no consensus on ESG ratings and there are different providers out there, you know, using different methodologies. How would you respond to that?

15:12 - 15:59

Yes, there is a big deal about ESG ratings and there are many, many inconsistencies. So you know, how could this, you know, an ESG analysis be valid when one ESG rating company thinks X about a company and another ESG company thinks Y about a company? And again, I'll just say that I don't think we should want to live in a world where all of the ESG rating companies agree on everything. I think it's actually healthy to have different viewpoints and disagreements about the, you know, ESG performance of companies in the same way that, you know, we wouldn't want all sell-side analysts to have the exact same, you know, financial outlook for a company. I think it's useful to have those

15:59 - 16:40

But here's the key thing. You can't just rely on the ESG ratings. I think you also have to have your own ability to evaluate the ESG risks and opportunities. That can be one of the inputs. But you also have to, for yourself, in the same way that, you know, bond portfolio managers very often will review the credit ratings of the bonds that they're putting in a portfolio, but they just don't solely rely on those credit ratings, right? They create their own viewpoint on those bonds, will something be upgraded or downgraded and so on. And I think in the same way, ESG ratings should be used as an input to developing your own viewpoint from an ESG standpoint. And if that's the case, then you want to get as many different viewpoints as possible to help you really fully understand the risk and return.

16:40 - 17:01

So I actually don't get this argument that the ESG ratings are a waste of time because they don't all agree. Now, I will say they're not all that great. Right. The ESG rating is still developing and the information is getting better, but there is absolutely some useful information that you can take from them today, but just don't rely on them solely in order to make investment decisions. Right.

17:01 - 17:39

No, I think that's a fair point. You need diversity of perspectives to get to a better understanding and potentially over time, there may be more accountability right across the industry around these types of strategies. But in the meantime, I think this is, it is. It's a healthy environment to have multiple inputs, and that's what we've always done as a research firm. I mean, we never just use our own stuff or just use external. We're constantly looking at different data points. So, all right, how about this one, Travis here's the question. Investment companies are just creating more product, labeling it ESG to make more money. What's your response to that?

17:39 - 18:24

Again, it's really interesting because if you look at flows, I can understand why people make that argument, right. You're looking at flows, and a lot of money is flowing into ESG investment strategies, and I guess you could view that as, well, it's because these companies are creating all these products. That's what's creating all the flows. But I don't think that investment companies are so powerful that, you know, if they create product, it just automatically will generate flows. I think what's really happening is that there has been client demand for investing through this lens, with a focus on environmental, social and governance issues for much, much longer than we've had the proliferation of ESG product. And I think what we're experiencing is that that client demand finally has a place to go.

18:24 - 18:56

Let's say that five years ago, 20 percent of the American population wanted to buy EVs. Well, we weren't manufacturing enough EVs at that point for everybody to get into one. In fact, we're not manufacturing enough today. But my point is that it's really client demand that's driving this adoption that you see in, you know, ESG fund flows as opposed to investment managers coming up with brilliant product. I think they're just coming up with product that meet the needs and the requirements that clients are asking for.

18:57 - 19:23

The last one here, I'd love to get your feedback on this. There has been an argument made that the G in ESG, or governance, doesn't belong with environmental and social, or the E and S, because some folks are arguing that, well, every company needs good governance, every company needs this system of checks and balances for basic risk management. How would you respond to that?

19:24 - 19:52

Look, it's absolutely true that every company needs strong governance as a way of providing checks and balances for, you know, decisions that are being made by the management team. Because, you know, ignoring those risks could have, you know, serious long-term financial implications. I think similarly, ignoring the environmental and social risks can have long-term financial implications for a company, right?

19:52 - 20:29

Think about all of the companies that have had significant financial implications arise because of some environmental risk that was ignored for too long or a lack of transparency, clarity or policies from a social standpoint, right? Think about all of the scandals we've seen recently, right? With employees coming forward saying this is not a healthy place to work for these reasons. So I think these issues are material long term in addition to governance, and so environmental and social issues are just as relevant, in my view, as governance issues in understanding the long-term risks that you face in investing in companies.

20:30 - 20:57

Great. Yeah, I mean, I see it similarly in that, of course, I read that and I think, well, yes, of course, governance is important, and it's definitely important to the risk management of any company and to your point, so are these other factors. Look, I could continue hearing you with questions all day, but we are actually out of time. So thank you, Travis, so much for joining me. To all of you out there in the audience, for more on the nuances of ESG,

20:57 - 21:10

check out the link to our Responsible Investing Insights page on our website. And that's where you'll find blogs and white papers and links to Travis's own podcast, On Purpose. So thank you, Travis.

21:10 - 21:12

It was my pleasure. Always happy to come back.

21:12 - 21:46

Well, and we will invite you back. So don't you worry about that. And thank you all for listening. If you'd like to learn more on Bernstein Foundation and Institutional Advisory services, please see the link to our blogs in this episode's description. If you enjoyed this episode and you haven't subscribed to our podcast yet, please go to the iTunes store, Google Play or wherever you listen to podcasts to subscribe and rate us. Also, please email us with your thoughts, questions and feedback to and be sure to find us on Twitter at BernsteinPWM.

Clare Golla
National Managing Director—Philanthropic Services

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