Podcast Summary
ESG investing: To engage or divest?: Retiree Dana Dillon shares her personal struggle with deciding whether to engage or divest from controversial companies based on ESG considerations. ESG investing can lead to positive impact through engagement or may involve risk mitigation and screening.
Investing with environmental, social, and governance (ESG) considerations involves making tough decisions, often with emotional implications. Dana Dillon, a retired teacher and former board member of the California State Teachers' Retirement Fund (CalSTRS), shared her personal struggle with deciding whether to engage with or divest from controversial companies, such as energy, oil and gas, and prison companies. The debate around ESG investing revolves around the question of whether to engage with companies to push for change or to divest entirely. While some argue that holding "bad businesses" is unjustifiable, others believe that engagement can lead to positive impact. The definition of ESG investing varies, from simple risk mitigation and screening, to active engagement and pushing for behavior changes. For CalSTRS, ESG means respecting human rights, civil liberties, and cultural and ethnic identities. Ultimately, it's essential for investors to understand what their retirement savings are invested in and align their values with their investment choices.
ESG concerns over private prison companies' immigration detention centers: ESG issues can impact long-term profitability and investors' reputations, as shown by the backlash against CalSTRS' investments in private prison companies over immigration detention centers' inhumane conditions.
Companies' actions on Environmental, Social, and Governance (ESG) issues can significantly impact their long-term profitability and investors' reputations. The 2016 election of President Trump and the subsequent immigration crisis led many to question their investments, particularly those in private prison companies operating immigration detention centers, such as CoreCivic and GEO Group, which were held passively in CalSTRS' global equities portfolio. The separation of families at the border and the inhumane conditions in detention centers sparked outrage among teachers and other CalSTRS members, leading to calls for divestment. Despite the passive nature of the investments, CalSTRS faced intense pressure to sell, highlighting the importance of considering ESG factors in investment decisions.
Decision Making in ESG Investing: Balancing Profitability and Ethics: Institutional investors face challenges when deciding to divest from companies based on ethical concerns, as it can impact profitability and require careful consideration of both pros and cons.
The decision for an institutional investor like CalSTRS to divest from companies, such as Geo Group and CoreCivic, is not a simple black and white issue. The engagement process revealed many shades of gray, making it a split decision. While concerns over social issues, like the detention of families at the border, were valid, the potential removal of these companies from the portfolio could impact profitability. The report from staff visits to the detention centers presented both pros and cons, with some detainees receiving services they may not have had access to before. Ultimately, the board had to make a decision based on facts and not emotion, recognizing the complexity of ESG investing. The decision was not an easy one, and even those advocating for divestment were left uncertain.
CalSTRS board's close call on divesting from private prison companies: The CalSTRS board voted to divest from CoreCivic and GEO Group by a single vote, with strong arguments made for and against the decision based on fiduciary duty, policy, and morality. Potential ripple effects on companies' ability to issue debt post-divestment are being observed.
The CalSTRS board's decision to divest from private prison companies CoreCivic and GEO Group was a close call, with strong arguments made on both sides. While some board members believed that divestment did not align with their fiduciary obligation or policy, others argued that selling out was the only way to influence change and that it was a moral issue. Emotion ran high during the debate, with some board members sharing personal experiences and frustration over the lack of engagement from the federal government on the issue. Ultimately, the board voted to divest by a single vote, with some members believing that being invested in entities whose profitability was at the whim of government policy was not good business. Since the vote, it's interesting to note that there have been observations regarding the potential impact of the divestment on CoreCivic's ability to issue debt or bonds. This highlights the potential ripple effects of such decisions and the ongoing debate around the role of socially responsible investing in shaping corporate behavior.
Growing pressure against private prison companies increases borrowing costs: ESG investors may demand higher yields from private prison companies due to increasing political and social pressure, resulting in higher borrowing costs for these firms
CoreCivic's borrowing costs have significantly increased since the call for divestment from CalSTRS and other groups critical of the private prison industry. This trend is driven by the growing political and social pressure against private prison companies, including government actions and campaign efforts. As a result, investors seeking to mitigate the associated risks may demand higher yields or interest rates when investing in these companies. CoreCivic, for its part, has defended its practices and engaged in dialogue with critics. However, the trend suggests that the threat of divestment may be a necessary consideration for long-term ESG investors, as companies in controversial industries face increasing pressure to change their practices or risk losing investor support.
Investors must actively engage with companies on ESG issues: Investors cannot solely rely on passive ESG strategies, they need to actively engage with companies, set clear expectations, and demand concrete actions to meet targets, or risk losing clients and facing regulatory scrutiny.
Passive investing in ESG issues may not be enough to bring about meaningful change. Institutional investors, such as BlackRock, need to take a more active role by engaging with companies, setting clear expectations, and demanding concrete actions to meet targets. Regulators are cracking down on greenwashing, and investors risk losing clients if they fail to deliver on ESG promises. Companies must provide detailed and timely disclosures on their plans to address ESG issues, such as climate change and diversity. The debate around the role of ESG in the investment and corporate worlds continues, but it's clear that investors cannot rely solely on passive investing to bring about significant change. Instead, they must actively engage with companies and hold them accountable for their ESG performance. Sources: - Joe Renneson, "ESG investing: a force for good or just a fad?" Financial Times, 2022. - Patrick Temple-West, "BlackRock's Larry Fink: Companies must 'provide proof' of net-zero plans," Financial Times, 2023. - Lindsay Frost, "Why investors can't just rely on passive ESG strategies," Agenda, 2023. - Attracta Mooney, "Regulators crack down on greenwashing as investors demand more transparency," Financial Times, 2023.
Learn about ESG investing and sign up for a free trial of the Feet's Moral Money newsletter: ESG investing considers financial returns and the impact on the environment, society, and corporate governance
ESG (Environmental, Social, and Governance) investing is becoming increasingly popular and important in the financial world. It allows investors to consider not just financial returns, but also the impact of their investments on the environment, society, and corporate governance. You can learn more about ESG investing from the Feet's Moral Money team and sign up for a free trial of their premium newsletter at ft.com/insideesg. If you're a listener of the Feet podcast, consider leaving a positive review to help spread the word. Meanwhile, if you're planning a trip, consider shopping at Quince for high-quality, ethically-made travel essentials. And for Mother's Day, don't forget to show appreciation to the special moms in your life with gifts from 1800 Flowers, where you can save up to 40% on select items. This podcast was produced by Oluwakemi Aladesui, with additional support from Alice Fordham and Josh Gaebert Dwayon. Our sound engineer is Breen Turner, and our editorial direction comes from Rene Kaplan, with head of audio being Cheryl Brumley. I'm Manuela Zaragoza. Stay tuned for more insights on ESG investing and other topics.
