Investing in Sustainability

Written by Valentina L. Zamora, Faculty Fellow and Associate Professor of Accounting
March 25, 2021

Black and white headshot of female professorLast month, I had the opportunity to present on a panel entitled “Investing in Sustainability: How to Leverage Your Institution’s Endowment” as part of the 2021 Washington and Oregon Higher Education Sustainability Conference (WOHESC). The panel was about how university endowments, including Seattle University, are divesting from fossil fuels. I take this opportunity to reflect on the lessons we are learning at Seattle University that are broadly applicable to other organizations’ commitments to sustainability. Interestingly, the challenges now rest not with organizations but with individual investors.

Investing in sustainability is now value-relevant for many organizations. Socially responsible investing (SRI) has come far from its roots in student activism to divest, for example, from companies that supplied the Vietnam War, engaged in business in apartheid South Africa, sold tobacco products, and supported the genocidal activities of the Sudanese government. SRI is no longer limited to negative screening of companies to combat climate change. In the last ten years, more than 10 percent of all investment funds are specifically managed along environmental, social, and governance (ESG) criteria. Broad-market ESG index funds are now outperforming their counterparts, and companies with better ESG ratings outperform their peers. Accordingly, these funds and companies enjoy what Larry Fink, Chairman and CEO of BlackRock, calls a “Sustainability Premium” in his 2021 letter to CEOs. For corporate change agents, framing investing in sustainability as sound business practice has generally gained acceptance.

Investing in sustainability is also values-relevant. Like divestment movements in other campuses, Seattle University’s journey was sparked by the persistent activism of students, the support of faculty, the collaborative work of multi-stakeholder committees, and the eventual change in tone set by leadership. There was already ample evidence that divestment delivers little or no change in investment risks and economic returns. We thus were able to focus on crafting our “Moral Case” that divestment is actionable relative to alternatives, representative of intergenerational justice, and consistent with our Jesuit identity as an institution. By making mission primacy central to our divestment argument, we essentially join other university committees in identifying an anchor from which other change agents may pursue future initiatives related to climate change, social justice, and racial equity. For other corporations, there may already be identifiable, innovative initiatives being pursued that align with their mission, vision, and values.

What’s more, investing in sustainability is both value- and values-relevant for individual employees. Take the ESG concerns of those saving for retirement. Research suggests that investments in retirement funds using social and environmental criteria can improve long-term, risk-adjusted returns. Individual investors express a growing interest in investments that are socially impactful, that focus on ethically run companies, and that are accessible through retirement fund plans. Data from investment fund managers estimate that there are over $600 Billion in retirement assets and their surveys suggest that over 60% of individual investors are ready to shift their money to ESG now. Beyond retirement funds, ESG investing now accounts for a third of total U.S. assets under professional management – that’s $17.1 trillion of the total $51.4 trillion.

Small green sprout growing in the dirt. There remains, however, an important regulatory challenge. Late last year, the Department of Labor (DOL) adjusted the Employee Retirement Income Security Act of 1974 (ERISA) to require those overseeing 401(k) and pension plans to always put economic interests ahead of so-called nonpecuniary goals. Nonpecuniary goals are those not expected to have a material effect on investment returns or risks. Moreover, the rule prohibits investment fund managers from including or considering nonpecuniary factors as investment objectives in “qualified default investment alternatives” in 401(k) plans. This rule change essentially prevents individual investors from pursuing ESG goals through their 401(k) plans. In a recent op-ed, the U.S. Secretary of Labor stated that “ERISA doesn’t task retirement plan managers with solving the world’s problems…Fulfilling retirement promises is, by itself, a moral good and a prime policy goal for the nation.”

In contrast, over 1,100 comment letters from a variety of stakeholders overwhelmingly opposed the new rule and generally viewed the change as a direct effort to eliminate ESG criteria from the selection of retirement investments. Nevertheless, investment fund managers of retirement funds are reducing their ESG-focused funds to adhere to the regulatory restriction. By offering ESG investment options, these fund managers may risk being perceived as breaching their fiduciary duty. One possibility is that if the DOL issues guidance to designate ESG criteria as pecuniary, then ESG investments can be re-integrated by fund managers. It remains to be seen whether the DOL will indeed reverse its position under the new Biden administration.

We’ve arrived at an interesting set of contrasts. At the organization level, the economic case for investing in sustainability has largely been made, and the ethical case can gain primacy. At the individual level, the ethical case is the economic case. However, for regulators, the economic case remains the only ethical case.


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