If you’re baffled by environmental, social and governance investing, PG&E Corp.’s recent troubles are likely to raise more questions than answers.
The California power company has been devastated by wildfires that ripped through the state in 2017 and 2018. PG&E’s liabilities are estimated at $30 billion and a bankruptcy filing is imminent. Its stock has tumbled 89 percent from its high on Sept. 11, 2017, through Wednesday.
Not to be confused with socially responsible investing, which avoids businesses that some investors find ethically or morally questionable, such as tobacco, gambling or weapons, ESG attempts to identify companies that are exposed to higher-than-average environmental, social or governance risks. The idea isn’t necessarily to beat the market but to engineer a smoother ride by limiting investment in high-risk companies.
It’s a worthwhile endeavor, but it’s easier said than done. The strategy didn’t flash many warnings around PG&E, and it’s not the first time a company has turned out to have crucial vulnerabilities that failed to show up on ESG’s radar.
Socially responsible investing just received a big endorsement, but what it really needs is some clarity.
Yale University announced last week that its endowment might exit private investments it deems unethical, extending a policy it has long applied to investments in public markets. In fact, the university counts itself among SRI’s pioneers. Its ethical investment policy declares that “Yale was one of the first institutions to address formally the ethical responsibilities of institutional investors.”
Given the influence of Yale’s $29.4 billion endowment — second in size only to Harvard University’s $39.2 billion trove — the announcement will undoubtedly raise SRI’s profile. But SRI and the broader sustainable investing industry have never lacked attention. As my Bloomberg colleague Eric Balchunas recently pointed out, sustainable investing enjoys “to-die-for PR that eludes most categories.”
That attention hasn’t yet translated into investment, however, at least as judged by flows to exchange-traded funds. Just $6.6 billion of the $3.5 trillion in ETFs, or 0.2 percent, is invested in the category. Balchunas offers fund providers some sensible tips for sparking more interest, including lowering fees, choosing snazzier names, offering more concentrated portfolios and preaching to a broader audience.
But the industry has a more fundamental problem: Investors are lost among the various styles in the sustainable investing zoo. If the industry wants to attract investors, it must first explain what it has to offer.
It’s not easy being a socially conscious investor. To see why, look no further than Facebook Inc.
By any reasonable ethical standard, the social media giant doesn’t measure up. The Cambridge Analytica debacle and its aftermath revealed that Facebook is collecting far more information on its users — and even non-users — than it let on. And, as my colleague Shira Ovide pointed out, when CEO Mark Zuckerberg had the opportunity to come clean last week during two days of congressional testimony, he ducked questions about how the company operates.
Facebook’s wily ways appear to be catching up to it. According to a March 21-23 Reuters/Ipsos poll, only 41 percent of Americans “trust Facebook to obey laws that protect their personal information.” An April 8-9 SurveyMonkey/Recode poll askedrespondents which technology company they least trust with their personal information among Amazon, Apple, Facebook, Google, Lyft, Microsoft, Netflix, Tesla, Twitter, Snap and Uber, and 56 percent chose Facebook. The runner-up was Google, with just 5 percent.
Given all the questions surrounding Facebook, investors may be surprised to learn that its stock is commonly held by so-called socially responsible funds, which invest in companies deemed to be good citizens.
The biggest such exchange-traded fund — the iShares MSCI KLD 400 Social ETF, with $1 billion in assets — bills itself as an “exposure to socially responsible U.S. companies” and urges investors to use the fund to “invest based on your personal values.” The fund has a 3.5 percent allocation to Facebook.
The California Public Employees’ Retirement System recently opened a new chapter in socially responsible investing (also known as environment, social and governance, or ESG, investing) when its investment committee decided to start requiring that the boards of the companies it invests in include climate change experts.
With this move, Calpers is attempting to turn ESG investing on its head. Rather than divest from companies it deems undesirable, it will engage those companies and attempt to improve them from the inside.
Which begs the question: What’s causing Calpers to rethink the traditional levers of ESG investing?