Reflections From a Responsible Investing Pioneer

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00:11 - 00:55

Hello and welcome to On Purpose. I'm your host, Travis Allen, senior investment strategist and National Director of Purpose Driven Strategies at Bernstein. Well, if you have a responsible investing option in your 41k, today's guests deserves part of the credit for making that happen. Barbara Krumsiek is the former president and CEO and chair of Calvert Investments. Barbara's one of the pioneers of responsible investing. She has helped shape the industry from the start. She joins us to talk about the pace of progress in responsible investing, the threat of greenwashing and how geopolitics may be the greatest ESG challenge that we face today. Barbara, we're thrilled and honored to have you on the podcast.

00:56 - 00:58

Thank you, Travis. Glad to be here.

00:59 - 01:16

Well, it's great to talk to you again. You have been one of the leaders and a prominent voice for ESG and responsible investing since its early days in the eighties and nineties. I thought we might start by having you tell us how you got started on this path.

01:17 - 02:05

I think there's one significant aha moment Travis which came about mid-point in my career. I spent the first 20 plus years being aware of and curious about a sustained and responsible investing. But when I was recruited as a potential candidate to be the CEO of Calvert Group, then the leading socially responsible investment firm in those days it was the mid-nineties. That aha moment came when I studied really how Calvert selected stocks in which to invest and realised that what Calvert was looking at was really material to the success of that company, whether its environmental opportunities and risks, whether it's diversity in leadership, the board workforce, whether it's supply chain issues and human rights issues overseas.

02:05 - 02:26

So this is all material, the challenges. These are factors that don't show up in today's stock price. And so what were you really looking at is quality of management. So I basically said this is a really good way to invest. Yes, there are values and other factors, but they are for the benefit of the investors in these strategies.

02:26 - 02:38

And this was at a time where, you know, today everyone's talking about ESG, but this was at a time where it wasn't something that would come up very often in an investor conversations.

02:38 - 02:39

Absolutely.

02:39 - 02:47

What was it like to be talking about these issues and bring them to the forefront before people were really ready to have those conversations?

02:48 - 03:42

Well, it's an interesting thing. I think there are two reactions, one from my colleagues on Wall Street who knew me as a managing director and head of several businesses at the time, one of the largest asset managers on the planet, Alliance Capital. I thought this was quite a leap. They thought, you're leaving Wall Street, so to speak. You're leaving the conventional, mainstream investment business, to which I'd say I don't think we have to give a performance. It was indeed offered the job at Calvert. So I became the CEO and served for 17 years. And then there was the faction of the traditional social investment perspective, which was often informed by religious investors, also those who were very deeply involved in the environmental movement. And I did not come out of those parts of our industry. So there was a skepticism. Was this going to be a person who could lead this leading firm?

03:42 - 04:01

You know what's interesting is that, you know, in the last five years, there's been this huge growth in ESG and in some ways it's now becoming mainstream. It's not there yet because there's still a lot of educating that needs to happen and people are learning about it. What do you think's driving that again?

04:01 - 04:39

Again, our terrific insight and question. I'm actually really surprised to see how fast it's grown from $1,000,000,000,000, I guess was estimated two years ago in assets under management with ESG frameworks to almost 3 trillion. By Morningstar's measurement, I think it's a couple of things. I think there's the performance has been no give up, if I can put it that way. Of course, there have been challenges the last year or two with the run up in oil prices, some of that due to geopolitical pressures and the supply issues from Russia. But over time it has been proven there's nothing. So that research has been done.

04:40 - 05:07

Secondly, I think there's been a lot of focus on the obligation of investors to look at risks and issues in the ESG space. The principles for Responsible Investing were launched, and I had been active in the United Nations Environment Programme Finance Initiative during those days where there was a commitment by major investors to be thinking of these issues. So so they started perhaps to learn that these ESG issues are material.

05:07 - 05:41

So there was a pick up on the asset management side. And thirdly, it's the clients. It's that people are asking for it. It used to be back in, as you put it, those really early days we could target teachers, perhaps social workers, individuals that had a particular affinity for perhaps these issues that we look at now. It's everybody. And actually it's generational, too. It's a lot of young people that feel strongly about these issues. So I think the values that are embedded in ESG have just become more important to investors.

05:42 - 06:00

Barbara, I have to say, I really have seen your client preferences change so quickly, so I totally agree that this is happening faster than I would have thought even a few years ago. Just think we have people who want to drive F-150s buying electric vehicles.

06:00 - 06:03

And Travis, there's a two year waitlist for those vehicles.

06:04 - 06:37

It's incredible how quickly behavior can change. And so one of the other things that has changed, I think, for the better is the shift towards a focus on ESG and. C-suites and corporate boardrooms. Right. So it's not just the clients, but also the folks who run. These companies are now more focused on ESG. Part of that could be because their clients and customers are more focused on these issues. But but maybe, you know, what do you make of that shift? Like what's driving that and what should we take away from that?

06:37 - 07:07

Leading groups of corporate executives have signed on to broadening their scope of what they're looking to accomplish, to incorporate, very importantly, shareholders, but also stakeholders. And that means having a focus on your employees, on your customers, and, frankly, on issues that affect communities. And so that has brought, I believe, a lot of CEOs to the table in terms of embracing ESG.

07:07 - 08:06

Also, I would say, Pat, on the back to the more traditional ESG asset management sector that really put a high premium on companies taking note of of where their performance is, perhaps lagging on environmental issues and and diversity issues and being active shareholders and putting forward resolutions in the proxy process at the annual meeting, requesting environmental studies, requesting greater incorporation of environmental risk, requesting diverse boards be a focus, and and then acting on their desires to see that by perhaps affecting the reputation of the company and then also maybe not continuing to own that stock. So I think to some extent there's been a whole confluence of different factors that CEOs have drawn the attention of CEOs and boards which are now being challenged to to consider ESG factors in in their oversight of the company.

08:07 - 08:59

Yeah, I'm glad you mentioned the feedback mechanism towards shoring up areas of weakness. One of those sort of long, long term areas of weakness has been around equity and access and representation, whether it's gender, race, ethnic, LGBTQ, in name it. We've made some progress in terms of representation. If we look at boards and where the CEO of an asset management company in the nineties, you probably do all of your other women who are in those types of positions in our industry because unfortunately there weren't enough of them. And so although it feels like we've made some progress, it also feels like the progress has been really slow. So maybe can you give us your thoughts on what should we be focusing on? Like, are we making progress or, you know, how do we accelerate the progress?

08:59 - 09:41

Travis It feels like the progress is slow because it has been slow. It's probably one of the biggest disappointments for me in the past 20 years. I would say part of the issue is this isn't a one time effort to create equity, create a diverse board, create diverse management, and then you're done. It doesn't work that way. There is such a serious amount of work that has to go into continuing to stay vigilant about wanting to have the diverse voices, because you'll be a better company if you have them at all levels and figuring out what it is that is stopping the company from achieving that.

09:41 - 10:05

We had Calvert started early on on diverse boards and made that a major focus. It's a very visible role. It's one that you can work on via the proxy process and the shareholder advocacy process. And by focusing on it, I think we and others helped get to, at least with gender equity, got to a pretty good place.

10:05 - 10:41

But then of course, it's a broader focus than that. And for some industries, the issues start really at the hiring process. And are there enough candidates being considered at all levels in the organization that represent these diverse communities? If the candidates aren't there, is it the company's fault? Are they not looking in the right places or is there an educational issue? And I applaud the many firms, including some asset management firms, that get involved really more in the high school and college level to make sure that there are candidates that are ready to enter their particular sector and industry.

10:42 - 11:35

And then once you're in in the company, what about the corporate culture? And I have spent some time with few boards on corporate culture and evaluating how are we how are you training, onboarding and monitoring your corporate culture? Are you making everyone feel welcome and included? And rather than looking just at hiring statistics by diverse groups, look at promotion statistics, look at retention statistics, and I mean voluntary retention. Are you losing your diverse groups over time? So Travis it's a. You're right. It's a long haul. It's a long road. It's a worthy road to be on. And I think we're all still learning. And I think, you know, my hope is we get there, but we're never quite there. You know, we want a path to continue to be fostering the right values in the workplace.

11:35 - 11:49

My hope, Barbara, is that ESG will help focus an area on another area where we need to make more progress, which is in getting diverse perspectives into the portfolio manager investment decision making role.

11:49 - 11:51

Definitely. I heartily agree.

11:51 - 11:59

Let me ask you, what advice would you give to diverse talent starting their investment management careers today?

12:00 - 12:40

I would say this is a great industry with lots of opportunity and that early in one's career I feel in our industry it is more of a meritocracy. Where do your job, all those phrases people use about, you know, focus and be, you know, work hard or that's all that will probably pay off. But then I remind you that at some point I'll say mid-career, perhaps a third of the way into a career, you're going to hit something that I have been calling the messy middles. All of a sudden those metrics are not there. Your successes and your progress, your talents show themselves quantitatively.

12:41 - 13:01

So you have to be prepared for there are a lot of other things going on. Understand the culture of the company you're with, cultivate peer relationships, cultivate mentor relationships. To the extent you can try to be with a company that has affinity groups that you can feel, there's a, if I can call it a safe place, or at least a place where you can share observations.

13:01 - 13:39

I'm a big fan of folks from diverse populations being active outside of their workplace, particularly in the investment business, in groups that truly can be safe. They're cross-functional, they're cross companies. I'll use as an example the Financial Women's Association of New York, which was very important, helpful to me, mid-career and different women's leadership groups were helpful to me in finance and investing. So find those groups, find those safe places because you're going to come up against some obstacles that you can't anticipate and a lot of a lot of micro-aggressions. That is not a phony thing. That's a real deal being left out, being ignored.

13:39 - 14:03

. I mean, I can share my words for stories. I'm sure you can share yours. That's Travis. And you have to know that it's not you, it's them. And I think the positive thing is once you reach a really visible level in your company, there are a lot of other eyes on you. There are the investor eyes, there are the client eyes, they are the market eyes.

14:03 - 14:53

Now, I really appreciate hearing I wish I heard that a little bit earlier in my own career. But, you know, I just feel like there's an opportunity to engage with companies to promote positive changes today, perhaps more so than there may have been in the past, when things were more hierarchical and, you know, you kind of have to you had to wait and pay your dues. And, of course, you still have to achieve and do all the things you said. But I think more than in the past, if somebody has a great idea for things you can do to improve the culture, doesn't really matter where it comes from in the organization. People are listening in a way that they haven't. So so I agree. I think it's a great time to be coming into this industry and growing your career and, you know, aligning your career with your values and trying to figure out how you can leave leave things better than you found them.

14:54 - 15:14

Absolutely. And it's it's probably something the next generation realizes a lot more than than I did, that if you have to check your identity at the door when you go into your company, you're in the wrong place. You can find a place where you don't have to check your identity. And that receptivity, I believe, is growing for four diverse voices to contribute.

15:15 - 15:15

So true.

15:16 - 15:39

So I wanted to turn to something else that has been a part of the ESG conversation recently. As ESG has grown, so has concerns about greenwashing. And so I thought maybe you could start by just saying what is greenwashing? Because I think a lot of people hear the term, don't necessarily know exactly what it means, but also how can investors avoid it?

15:39 - 16:16

Well, greenwashing as an expression, probably came around the last couple of years when it's become so popular. I think back in the day, there wasn't so much 20 years ago, there weren't a lot of companies, asset management firms or funds that were being deliberately labeled, but with its popularity has come. And greenwashing, of course, refers strictly to the environmental piece of this. But I think it's also being viewed more broadly across the environmental, social and governance spectrum and with its popularity and its and the fact that a lot of assets are going into these strategies, it is felt to me.

16:17 - 16:45

Clearly in their proposals feels that a number of firms are saying they are environmentally friendly or or green or ESG oriented and have changed the name of the fund or the strategy and have perhaps done a few things, but may not be doing a really deep dive on ESG. And I'm glad to go into some of the specifics of that because believe me, this is not a new thing for the SCC to be concerned about.

16:45 - 17:27

Call it truth in labeling this one because of the lack of a complete definition of what is E, what is what is G. I think there's been a bit of a door opened for for people to just say they're doing it and perhaps not. And there are some case, some headline cases in the news because one can simply subscribe to a database of sustainability factors and say you're looking at it, but actually not do anything with that data and you have your subscription to prove you you have the data. But is that sufficient for you to call yourself an ESG investment strategy? I could go on and on, but I'm sympathetic to the issue.

17:28 - 17:45

But I was just wondering if you if you think this move by the SEC is sort of a step in the right direction because it doesn't really define ESG in the proposals. But it's basically, like you said, it's truth in labeling. Just if you say you're going to do something, then you have to be able to demonstrate you're really doing it.

17:46 - 18:18

Well, I'm going to say yes and no about how I feel about the FCC. So I'm ducking. I'm ducking an absolute answer. And I know what I've read in the papers and in the writer of the FCC proposals. I think they should not make the names rule more stringent than they make any other names rule. And I don't think they should, for example, say that the ESG factors in the stock selection process have to be weighted more heavily than the financial factors.

18:18 - 18:47

I've read some interpretations that suggest that might be the case. I'm completely against that. I think you can consider the factors and you can decide that they're acceptable but not wait them more than the financial characteristics. So you could say you have to balance both. And I think that would be true of any style of management. If you want to say you're a quality manager or you have to show what you're looking at for quality and how are you looking at it and all this and your your decision of whether that's an acceptable company is your decision.

18:47 - 19:15

There are other factors that are not absolutes and not defined. What I am a fan of is always more disclosures. And for the investment asset manager and for the client, the investor who wants to know, well, what are actually are they doing with this data that should be described? How how is the data being viewed from that firm's point of view? What are the most significant considerations? What are secondary considerations?

19:15 - 19:49

I appreciate that. And I think for people listening, you know, we are still in the comment period, at least for a while, and so there could be some changes. But yeah, I know that perspective. This is very helpful. I hadn't really thought about the dangers of making the threshold for ESG factors in naming make it higher right more difficult than you do for other characteristics. I think that you're right that I would be going too far because you want innovation, you actually want people to take different approaches. So that was very interesting.

19:49 - 20:40

I wanted to turn to one more thing as we sort of wind down and this is a tough one because, you know, I've been talking to ESG focused investors now for years. And sometimes there seems to be this level of sort of good versus evil in the discussion about companies or about funds, about approaches. And I actually really understand the sense of urgency on things like representation and diversity inequity, but sometimes sort of labeling something as this is good and this is evil. So it sort of is counterproductive because, you know, so much of ESG is, I think about also trying to facilitate progress. So how do you think about like how would you describe what ESG can and cannot accomplish so that, you know, the investor or the end client has realistic expectations?

20:40 - 21:27

I agree completely that it is not a good versus evil. There are company practices that one could describe as negative and therefore you want to avoid them. But to to do a broad brush label, I think is counterproductive. When I joined Calvert, I became very clear very quickly that we we needed to both explain what we do. Very, very clearly. But never set expectations that somehow we are going to be able to find the good companies and the bad companies. And I gave the example of to someone with a and it's a bit of an extreme example, but a vegan would feel McDonald's is evil or is bad.

21:28 - 22:05

And another person may feel that because this was back in the day when Wal-Mart was explosively expanding across country and there was a lot of push back, the community stores and community businesses were being negatively impacted, negative community impact. And there were folks that if they woke up in the morning and knew they owned Wal-Mart, they'd be very, very upset. But that's not the same person would wake up and be upset with McDonald's. So we kind of felt that way. If we if we acted on that, we would probably not own very many companies and that we can do more being part of the process as investors, we could be incredibly powerful.

22:06 - 22:28

That doesn't mean to say that if we say we are going to avoid certain types of practices and perhaps, you know, avoid egregious practices, that we will not work by owning the company and working from within. But I do think you're leaving tools on the table that can make positive change in society and also contribute to portfolios.

22:29 - 23:09

If you go at this saying there's a right and wrong, there's a good and bad, we know that there are things that can always be challenged and improved. And if they're not, then you said we would also set timetables and say, okay, we'd like to see within 3 to 5 years that you have reduced your water waste that you have perhaps in another company achieved greater diversity. And then you just say that's it's taken too long, we've pushed and we're not going to own you because you don't fit the parameters that we have put as our investment strategy. So I think ESG, it has such great potential within the investment and finance world to advance positive change.

23:09 - 23:38

That actually creates really nicely into the last question I have for you, which is about that potential. It's been an amazing five years, right, in ESG, and you've been able to watch it for longer than months because you were, you know, again, leading Calvert at a time where, you know, most people didn't have the awareness. So what do you expect or what should we expect for ESG and positive environmental, societal outcomes that may result from it over the next five years?

23:38 - 24:24

Well, I can say something I'm encouraged by and something that I'm challenged by. I'm encouraged by the launching of a lot of green bond strategies. But again, they can be bond issuance that is dependent on ESG factors within a company. Why shouldn't a company that behaves really well in a lot of ways and is financially strong? Why shouldn't they get a better interest rate? Well, lower financing rate. And why shouldn't there be bond funds that really zero in on environmental improvement activities and projects and initiatives and infrastructure initiatives? So I'm very encouraged by that. I know a lot of firms have. I think it's been like the biggest trend in fixed income products has been that so and that was not true slavery as there were not there was this limited to the equity side of the ledger.

24:24 - 25:01

Now we've got fixed income and I think that's terrific. I'm very challenged by and Travis. I didn't say it, but ESG factors actually change over time. I mean, you have to. There may be things you weren't looking at. Now you have to look at them. And the big one is now geopolitical. It's how do you view China? How do you view investing in China? I would posit that every single asset management firm, every single financial advisor has something in their platform and portfolio that's that is exposed in China and some a lot exposed in China. How does one deal with the human rights violations and the governance issues of investing in companies in China?

25:01 - 25:34

And then, of course, we have the war, Russia-Ukraine war, which is frankly horrifying on its surface, but is disrupting the energy industry significantly and perhaps creating a bit of a setback in moving away from the fossil fuels industries. And we do see that, particularly in Europe, that some countries are having to resurrect or revive some energy generation approaches that that are not carbon neutral. So that one challenges me.

25:34 - 25:55

But I really feel the asset management industry and the ESG voices and the ESG focus will continue to dig deep on these issues and deliver products, investment products that will be positive forces in terms of environment, diversity and inclusion and of course, governance.

25:56 - 26:23

More work to do, right? Barbara, this is really been a pleasure. Perhaps I'll have you back a few years from now and we can check in on some of these forward looking. Issues we just discussed. Well, it's been a pleasure to talk to you again. Thank you for sharing your perspective after really being one of the pioneering leaders in getting ESG to where it is today. So I just want to say thank you and look forward to talking to you again soon.

26:23 - 26:24

Thank you, Travis.

26:25 - 26:27

This has been on purpose.

26:27 - 26:44

Thanks for joining us. And remember, we all have values we hold dear. Now you can ensure your investments reflect them. You can reach me on LinkedIn. If you've enjoyed this podcast, please rate us on Apple Podcasts, Spotify or your podcast service of choice. And be sure to subscribe.