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Table of Contents

Setting the Standards for Green Investors

Episode 10 of the Green Investor Podcast from Investopedia (April 14, 2022)

A United Nations-backed panel of climate scientists warned in its latest report that the world may be on track to warm by more than three degrees centigrade, twice the Paris Agreement target, with implications for how that would dramatically remake societies and life on planet Earth. The latest report from the Intergovernmental Panel on Climate Change comes after years of net zero pledges by national governments, cities, businesses, and investors. And this latest installment delivers the loudest warning cry yet on the impact of greenhouse gas emissions hitting record levels. The focus of this report, the third released since August of 2021, is on humanity's vast arsenal of technology, knowhow, and wealth that remain insufficiently deployed in efforts to ensure a livable climate in the future. 

Speaking of the UN, it also released its latest Financing for Sustainable Development Report, put together by its Inter-agency Task Force on Financing for Development. The report says that ESG investment criteria—that stands, of course, for environmental, social and governance—are missing the true calling of ESG funds, which is environmental impact. It calls for more of these funds to direct investments into emerging markets who need it most and not back into top ESG holdings like Apple, Microsoft, and Alphabet—three of the most widely held ESG stocks in ESG funds. The report raises the age-old investor quandary of whether the purpose of ESG investing is to reduce risk and pursue profit or to help do good in the fight against global warming. And if both, in what order? The UN Task Force pointed out the sustainable funds may have even less exposure to emerging markets. The non-sustainable funds, which it says correlates to the rise in greenwashing accusations against funds who may just be using the ESG label to improve their marketing. 

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Meet Lisa Woll

L

Image courtesy Getty Images / Nicholas Hunt / Staff

Lisa Woll is the CEO of US SIF: The Forum for Sustainable and Responsible Investment, a U.S.-based membership association that promotes sustainable investing across all asset classes. Ms. Woll is also a founder of the Global Sustainable Investment Alliance, a collaboration of the five largest member-based sustainable investment organizations on Earth. Prior to joining US SIF, she was the executive director of the International Women's Media Foundation. Ms. Woll has also spent a decade working on children’s human rights and is a member of the Advisory Council of the Children’s Rights Division of Human Rights Watch.

What's in This Episode?

Behind the investment industry's shift towards sustainable and responsible investing are some powerful organizations and nonprofit institutions that are trying to set the standards for ESG, socially responsible, and impact investing. US SIF: The Forum for Sustainable and Responsible Investment is one of the original organizations that has been helping create these standards for asset managers and investment banks for over a decade. Lisa Woll is the CEO of US SIF, and she joins us today on the Green Investor. Thanks for being here.

Lisa:

"Thank you, Caleb."

Caleb:

"I know I gave a very broad, 50,000-foot overview, but you're the CEO. You tell us what US SIF is really all about and what individual investors need to know about it."

Lisa:

"Sure. So, US SIF really is about expanding and advancing the field of sustainable investment. How an investor uses ESG—environmental, social, and governance—information in the investment process. And we have members that range from asset owners to asset managers, financial advisors, consultants, community development financial institutions, nonprofits, and big data and research providers, such as Bloomberg and MSCI, Sustainalytics, for example. Our members are very engaged. Many of them were the original leaders in the 70s and 80s in kind of growing and starting the field of sustainable investment."

"And we tried to grow the field, expand people's knowledge through series of strategies that include advancing the field through our member services, research. Many sustainable investors and other investors know our every two year trends report that looks at the size of the sustainable investment market and the trends in the market. We do a lot of education and training. I'll talk a little bit later, perhaps, about the courses that we have that are available to both retail and financial professionals as well. And we work a lot with policymakers to change the policy system in which the field operates. And then we also work with media like you to try to expand the public's knowledge of the field. We place a lot of opinion articles and how-to articles so that an investor, whether accredited or not, can look at an article and say, 'Oh, this gives me more information on how I could think about gender lens investing or climate or diversity in the investment process. So, we sort of talk about educate, inform, transform. That's kind of our key words for our strategy."

The Green Investor podcast is for informational and educational purposes only and does not constitute investment advice. We will not make recommendations to buy, sell, or hold a particular security or asset, although we may discuss financial products with our guests. Some of our guests may invest in securities mentioned on this podcast. Some of our guests may sell or market securities mentioned on this podcast, but all listeners should do their own research or consult with a financial advisor or broker before making any investment decisions.

Caleb:

"Yeah. We're birds of a feather in that way, in that we're educators as well. And you're a nonprofit or funded by a nonprofit. So, who is funding that nonprofit? Your member organizations, or can anybody do that?"

Lisa:

"In order to be a member, you have to be involved in the financial services industry in one way or the other, and you need to either be doing sustainable investment or starting down the road to do it. Our budget is largely made up of member dues, but we also have several courses that have a registration fee. We have had an annual conference for the last several years that have been canceled because of COVID-19, but we did do a virtual one last year and we'll be doing one in New Mexico a little bit later this year in June. That provides some revenue for us. And then we get some foundation funding. So, between all of those pieces, both earned revenue, membership dues, and some foundation funding, we have a fairly diversified budget."

Caleb:

"You know this better than I do, but when folks are trying to enter this investing theme for the first time, or maybe they're being recommended by their financial advisor, there is so much confusion about what is and what isn't and what is ESG and what is SRI? It's an alphabet soup to a certain degree. But beyond that, it is the measuring of the things that are the most important to investors. And there's been a lot of talk about, well, do these measurements or guidelines actually measure the impact of the bottom line to a lot of these companies that are being evaluated? Or do they measure the impact to climate itself? Where does US SIF sit on that bench?"

Lisa:

"Well, that's sort of the question about how does data get used? Does it get used by an investor to understand what the climate risk, for example, or the climate opportunity is for a company or what the company's impact on the world is vis-a-vis climate? And so that's what we're kind of calling Materiality One and Materiality 2.0, and that will be one of the plenaries at our conference, which is what is data meant to be used for, and how does it get used?"

"And what I would say is that certainly there are members of ours and in the financial services industry in general that are really looking at the bottom line of how does a particular issue impact a company's risks and opportunities? And I would also say that there are probably an equal number of people who are interested in that piece, but also very, very concerned about the impact of a company's practices on society as well. And I think that people are beginning to think more about that secondary piece in terms of what kind of data is important to an investor. And so, I expect over the next few years that there will be more interest and push to get data that's not just looking at impact on companies, but companies' impact on society."

Caleb:

"We know that's become a more important theme among investors of really all ages, but especially younger investors who are maybe beginning their investing journey or starting to do that portfolio construction. And maybe they don't want fossil fuels, or maybe they don't want companies whose boards or executives they don't approve of, in their portfolios. So, there are great tools out there. Morningstar has them. MSCI has them. Sustainalytics, and we had Shila Wattamwar from Sustainalytics. There are some good tools out there, but to your point, how you use the tools is important given your endgame as an investor. Are you concerned about impact, or are you concerned about bottom line? So, it really is how you want to look at that prism. Am I right?"

Lisa:

"Yes. But also I take a little step back because I didn't come from the financial services world and so many people that I know or knew and still know, probably like many of your friends, they don't know finance very much at all. And so, for me, one of the first things to think about is, 'How is your average student getting educated about finance?" and about just the difference between a stock and a bond or a stock in a mutual fund? And I feel that in this country, we have a very low rate of financial literacy, which is problematic no matter what kind of investing you're looking at."

"But I think there's multiple things that a sort of retail investors can do to enter the field. One of the things that perhaps doesn't get talked about as much as community development banks and credit unions, which is where you can put your cash, and they're putting their investments in low-income and underserved communities. And that's something that really any investor can do, even if they're not ready for the stock market or mutual funds or private equity funds, et cetera. So, we always like to talk about that because you can find a CDFI virtually anywhere in the country. So, that's one thing an investor can look at."

"And then I think any investor that's going to invest in the stock market really has to do their own due diligence about what kind of company they want to invest in, whether the fund they're investing in is giving you the information you want about how they're utilizing ESG criteria. And we have a lot of guidebooks for both asset managers, asset owners, and retail investors on how to start making this decision and where to find the data that you need to make those decisions. One of the questions we get asked so much by journalists is, 'How do I explain this field to the average retail investor, someone who might have $20,000 they want to put in a discretionary fund outside of their retirement that they might have at work'. And so, we created a 30 minute, online free course (that you can go to our website and access) that would help a person who maybe is not that familiar with the financial markets in general, but really doesn't know anything about sustainable investing. And they can take that course for half an hour and learn a bit more about it. So, that's an option as well."

Caleb:

"We're going to link to that, folks in the show notes. So definitely check that out. And I've taken a look, and it is super helpful. A lot of good terms and definitions and educational material in general on the US SIF site. So, thank you for putting that there. I know everybody that looks at it appreciates it. Disclosure is a big deal. We know that the rules are maybe a little bit tougher in Europe than they are here in the U.S., but we're starting to see a ratcheting up of those rules. The SEC is proposing making mandatory for companies to disclose their climate risk and make that very easy for investors to find. They recently put out a proposal. It's out for comment for a month or so. Did you think the SEC went far enough in what it's proposing? Or do you think we need much tougher restrictions, rules, and guidelines here in the U.S. for U.S. companies and investors? 

The European Commission adopted a technical standards list to be used by financial market participants when disclosing sustainability related information under the Sustainable Finance Disclosures Regulation, or SFDR. Under these rules, financial market participants must provide detailed information about how they tackle and reduce any possible negative impacts that their investments may have on the environment and society in general. Moreover, these new requirements will help to assess the sustainability performance of financial products. Compliance with sustainably related disclosures will contribute to strengthening investor protection and reduce what the EU calls greenwashing.

Lisa:

"Well, maybe I can take a step back and say in 2009, US SIF sent a letter to the SEC signed by investors all over the world asking for mandatory and broad ESG disclosure. So that, I think, is 13 years ago. So, it's been a long time coming. We got a few pieces of disclosure under the Obama Administration, and the climate change disclosure is very much something that I would say the entire field has been looking for, not just folks who are working on climate issues. But I would say most investors have been wanting something like this. It's 500 pages. We have not been able to review the entire document yet. I think what we would say is it's an incredibly important step forward. It will allow us to have comprehensive and comparable data at climate risk to companies, and that we think this is a very important first step on what we expect to be additional disclosure elements coming from the SEC over the next year."

Caleb:

"What is it about the U.S.? It seems like we're slower than other countries in terms of getting the guidelines around this. When you look at what's happening in Europe and the ECB and some other organizations there, they were quicker to it. Is it because industry's so entrenched here, or it's just that's the way that the slow gears of policymaking work here in the United States compared to other countries?

Lisa:

"It's hard to answer in the general because there have been so many different countries kind of doing some level of required sustainable finance regulation. From Australia to London to England to New Zealand and, of course, the EU being the big actor, and it remains a conversation, even in the EU, very much under debate in terms of what is going to get counted in a green fund, for example. So, I think the SEC... we change leadership of the SEC every time there's a new administration and that in and of itself makes it an agency because it's also independent. That may be slower to move than others in different parts of the world."

"And I think that disclosure, though, has now become such an imperative because if you've got large asset managers that are doing business in the U.S. and in Europe, they're already having to respond to the requirements of the EU, and at some point they want to be able to have an even playing field where they're not having these different disclosures required in different parts of the world. And so, I think the SEC catching up, at least on climate, which has been probably the number one area of focus by sustainable investors the last decade, is a very important step forward. We expect human capital management to come next. We've already sent in some initial comments on what we think needs to be in there, including a focus on disability as part of that. And then we expect later in the year some kind of proposal, or maybe early next year, on how sustainable funds are named and what the expectations are about how you describe funds accurately."

Caleb:

"Where do you stand on some of the largest asset managers in the world? And I'm talking about BlackRock and some of the others who say divestment is not the path to trying to create change in the industry and reduce global warming. We have to stay invested in these companies in order to make change. There's a big debate over that. Recently, we had Divest Harvard, the student-led organization from Harvard University, on the show, and they were able to convince Harvard to move towards divestment. But where do you stand in your organization on whether that's the path? Or is there no one path only to try to create change in the industry?"

Lisa:

"Well, there's definitely not one path. And so, part of it is, when you look at the issues of divestment, what we would say is if you're going to hold a company that you think does not have great quality standards, you should be engaging with them. You should be using your power as a shareholder to engage with them both from having conversations with senior management to filing a resolution to ensuring that you vote on proxy statements. Those are all really important."

"And that is a strategy that some firms have taken, which is to stay invested in companies that they might not see as the highest achievers right now, but to try to push them to become higher achievers by engagement. I think there is a place and time for divestment in situations such as South Africa, which, of course, was the beginning really of this rollout of sustainable investment 40, 50 years ago. There are some situations where holding stocks, in particular companies that are so egregious on human rights issues and others, just becomes untenable. And then there's a whole nother area where you can really push at companies to make significant change. And one podcast you might want to have is on the really large number of shareholder resolutions that have moved forward in this season, which we've seen growth, particularly in environmental, social issues the last couple of years. And that's a sign that investors are wanting to be more engaged and companies are, to some degree, open to that engagement."

Caleb:

"Listeners will remember that we did have Engine No.1 and Follow This on the show. They're both taking different paths as activist investors. So, again, there... and then there's Divest Harvard, which is trying to get Harvard to divest outright from fossil fuel companies. So, as you mentioned, a bunch of different paths out there for investors to choose from. But what's the industry missing in terms of either more education, more regulation, or a more concerted effort or concentrated effort among organizations like yours to push for a difference? What do you think needs to come next?"

Lisa:

"Great question. A couple of areas that I think are really important: I think the education piece is very important. So, as I mentioned, we have a retail course, but we also have a course on the Fundamentals of Sustainable and Impact Investment, which is meant for advisors, actually. But we get lots of different people taking it: fiduciary students, NGOs that want to engage in the financial services industry, so many others. Advisors still are the primary focus, but many other financial professionals take it, and that's so that they can accelerate their entry into the field. The third course that we have is with the CFFP, it is the only designation on sustainable investment in the United States. And we're only in our second year, or maybe in the beginning of our third, and that's an important driver because it is the only accreditation in the U.S. And so, we're really hoping more folks will take that going forward. And it also gives potential clients the knowledge that this particular adviser has gone through a rigorous, rigorous process in order to say that they're an expert in sustainable investment."

"Education is really important. Retirement plans are really important. So, you know that the DOL is putting out a final rule at some point in the next few months on the use of proxy voting as well as using ESG criteria in retirement plans. Retirement plans... if you could get the majority of employee/employer retirement plans to have one or more ESG options, you would see significant increase of inflows into funds that consider ESG criteria. We think that's really important. It's been a relatively slow mover. One piece that's very interesting is that the federal thrift plan for federal employees is the largest plan in the world, actually, but it is the largest retirement plan in the United States, and they, in the summer, will be adding a mutual fund window to their core options, and that will include ESG options. So, we think that's a really important opportunity for federal employees who oftentimes go to work for the federal government because they care about labor or they care about climate, or they care about human rights to take a look at their retirement plan and go, 'Oh, maybe I should move some money to this fund that's working to address labor rights,' something like that."

"So, the retirement field's very important. And then I think another piece that's very important is... I've been at US SIF for 15 years. The field has changed dramatically in that time, so I feel like I've had three different jobs. It's changed so much over time. One of the things that's happened in the field is what I call the siloing. So you've got the folks who are only on public markets, you've got folks who are only interested in the private markets, you've got folks who are only about bond funds. And so what I think is if we all spoke with a more uniform voice about the importance of using all asset classes, including cash, to drive forward sustainable investment, it's a far more productive conversation than, well, if you're in the public markets, you may be less impactful than being a private equity investor because we know private equity is open really only to a relatively few number of Americans. And so, I would like to see that conversation, which is how do all of us... our members come from all parts of the market but mostly are engaged in the public markets. Not entirely. And then some other membership groups like ours are all engaged in the private market. And I think we need to be talking with a unified voice about using the entirety of the financial markets to be able to drive forward better investments that are better for companies and better for society."

Caleb:

"You make a great point because the public equity markets are huge, but they're nothing compared to the bond market, and the private markets are also enormous. But they are a little bit shrouded in mystery because you have to be accredited. They are closed, there are either hedge funds or private equity funds, and you don't know until you know what's going on inside those. And then to your other point, there's cash and there's other investment vehicles. All of them sort of need to at least be looking at the same prayer book, if not singing from it."

Lisa:

"Exactly."

Caleb:

"What's next for US SIF, Lisa? What are your goals for the next three to five years? And if you guys are really achieving the kind of impact you want to see, what does that mean? What does that look like?"

Lisa:

"So, just from a kind of policy perspective, one thing we created at the beginning of this administration was our set of policy objectives under this administration, and one of those was to create a White House office on sustainable finance and business because we thought that would be a great place to bring together both companies that are very interested in looking at ESG issues and have been leading on it and, of course, investors who have also been leading on it. And we thought it would be great to have a place in the administration where all the different agencies and parts of the White House could come and learn more about what sustainable investment is."

"For example, we've met with multiple offices in the White House and federal agencies that work on issues that are really critical issues to our field to say, 'When you're thinking about these issues, do you think about investors as potential partners or potential experts?' And oftentimes the answer is no. And so, to be able to spend more time educating policymakers, particularly in am administration that is at least interested... quite interested in workers rights and climate and other important issues, being able to do more of that would be great. Getting a White House office on sustainable finance and business would be wonderful."

"Taking the changes that we're trying to get made at the DOL and ERISA and actually changing the law itself, the law on ERISA, so that we don't have a pendulum every time there's an administration change on retirement, that would be great. Being able to get enough funding to take our education work and be able to offer it for free so that more advisers and others will get educated without that barrier of paying a fee, that would be wonderful. And then getting more media to understand this field and to write about it with substance and eloquence, educated points of views, that's always something we like as well. And getting sustainable investment on more television shows. More news shows, more financial shows, where oftentimes it's sort of not present. Whereas print media and radio has been a little bit more interested, I would say, than television has in general. And so, that would be a great thing to see too, which is that every time there's a financial markets interview with an expert, at least one out of five times you have someone who's a sustainable investment expert. That would be a great thing to see in the next five years."

Caleb:

"Hey, man, today you have a list. I'm sure that's just a portion of a very long list that you've created that's on a whiteboard somewhere. But in the years that you've been there, you've taken it very far, and we look forward to watching this continue to grow over the next few years. And I'd love to see you in office in the White House. I'll come visit you there, and we're trying to do our part here by spreading the word. So, good to talk to you. Lisa Woll, the CEO of US SIF. Thanks so much for joining the Green Investor."

Lisa:

"Thanks so much."

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