Impact Investing Will Brush Off Trumpian Scorn

By Antony Currie (Reuters - Breaking Views)

April 27, 2018

This week’s swipe at impact investing by the Trump administration will backfire. The U.S. Department of Labor issued a so-called field assistance bulletin on Monday telling pension funds to downplay environmental, social and governance issues, or ESG, when deciding where to park their clients' cash. The move had delegates at the annual Ceres sustainable-investing conference in Boston up in arms. But it may ultimately work in their favor.

The missive said that "fiduciaries must not too readily treat ESG factors as economically relevant” and “must always put first the economic interests of the plan." As much as $23 trillion is already devoted to sustainable investing worldwide, according to the Global Sustainable Investment Alliance. But U.S. pension and insurance funds are not yet big players. In part that's because many equate ESG investing with lower returns, even though plenty of studies show returns as good or better than unfiltered portfolios provide.

The Labor Department's edict could nonetheless give timid money managers cover to avoid ESG issues. That’s a pity, because ignoring them can have real financial costs. On a broad environmental front, hurricanes, floods and other disasters caused some $300 billion in losses last year, according to Swiss Re. More narrowly, Barrick Gold lost $5 billion after being forced to mothball a mine in Chile in 2014 because it hadn’t addressed water and pollution concerns.

Sustainability brings benefits, too. Nike's Cyrus Wadia told the Ceres audience that the company reduced water use and carbon dioxide emissions by at least 80 percent after switching to recycled leather for its latest sneakers. It slashed a third off production costs, too.

The Washington bulletin also highlights where ESG advocates can focus their efforts. There are not yet common standards for measuring and reporting climate and water risks. It’s a point made by panelists ranging from banks like Citigroup and JPMorgan to companies including confectioner and pet-care provider Mars and electric utility NiSource as well as investment powerhouses Fidelity and State Street .

On Thursday, the United Nations, Citi and 15 other banks unveiled ideas on how financial institutions can improve climate-risk transparency in their loan portfolios. It’s one step, and the sooner standardization arrives, the easier it will be to quantify ESG risks, benefits and investment performance more clearly – and brush off the Trumpian scorn.

On Twitter https://twitter.com/AntonyMCurrie

CONTEXT NEWS

- The United Nations Environment Finance Initiative and 16 global banks on April 26 released a methodology “to increase banks’ understanding of how climate change and climate action could impact their business.” The study, begun 10 months ago, is designed to help financial institutions meet the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures.

- Nonprofit environmental-investment lobby group Ceres is holding its annual conference in Boston between April 24 and April 27.

- The U.S. Department of Labor on April 23 issued a so-called field assistance bulletin saying that "Fiduciaries must not too readily treat ESG factors as economically relevant to the particular investment choices at issue when making a decision."

- It went on to state that "fiduciaries must always put first the economic interests of the plan in providing retirement benefits. A fiduciary’s evaluation of the economics of an investment should be focused on financial factors that have a material effect on the return and risk of an investment based on appropriate investment horizons consistent with the plan’s articulated funding and investment objectives."

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