For many investors today, financial returns are only part of the picture. They also want to make a positive social and environmental impact — to align their individual gains with broader goals like improving energy efficiency, ending unfair labor practices, and reining in oppressive regimes worldwide.
Among investors there is a growing belief that these investments are good for both their bottom lines and society. According to the Forum for Sustainable and Responsible Investment, the number of assets invested in the United States based on socially responsible factors jumped 22 percent between 2009 and 2011 to more than $3.3 trillion — or more than one out of every nine dollars under professional management.
With this feature we are inaugurating our At the Center Q&A series, where Columbia Business invites a student or young graduate to talk candidly with an established alumni business leader about opportunities, trends, and career insights. Here we asked Uzayr Jeenah ’14, a native of South Africa and active participant in the School’s Social Enterprise Program, to chat with Mary Jane McQuillen ’07 (EMBA), head of ClearBridge Investments’ Environmental, Social, and Governance (ESG) Investment Program. Jeenah spent last summer working for Schulze Global Investments in Ethiopia, a double bottom line–focused emerging markets private equity fund. McQuillen works with ClearBridge’s institutional and high-net-worth clients to integrate ESG investing into their stock selections. She also sits on the board of the Investor Responsibility Research Center and is a member of the Sustainable Investment Security Analysts Committee at the New York Society of Security Analysts, among other positions.
Here are edited excerpts from their conversation.
Uzayr Jeenah ’14: There are a lot of terms out there for what you do. Socially responsible investing; sustainable investing; and environmental, social, and governance (ESG) investing. Which do you prefer?
Mary Jane McQuillen ’07 (EMBA): The nomenclature is something we have been discussing in the investment management industry. The older term that most people are familiar with is socially responsible investing. But, over time, there developed a fair amount of pushback [to this term] from the investor and consultant community. They associated socially responsible investing with below-market returns, low diversification, higher fees, and investments based more on moral guidelines than analysis. Many investors still respect the ideals of socially responsible investing, but the investment return perception was lagging.
After a series of focus groups and surveys, we in the investment management industry found that our clients associated ESG investing with a more long-term focus. From that perspective, we believed the analytical approach of integrating relevant ESG factors into investment research was reasonable.
I think there are a number of reasons. One is that investors are increasingly interested in both their financial returns and in making a positive impact. They see this is possible from the increasing availability of ESG products with long track records of solid performance. We also emphasize using ESG considerations to contribute to the analysis around risk mitigation or return opportunities. That’s supported today by expansive academic literature around the value of integrating ESG into the investment process.
When did you begin your career in ESG investing and what attracted you to it?
My first exposure to environmental issues and societal impact was when I was a national park ranger in the early ’90s. This was before the transition from single-hull to double-hull oil tankers, when there were still a number of small oil spills near harbors and ports. I was asked to help clean up a few of those spills near the shores. This was a memorable — and exhausting — experience: manually scooping up massive volumes of heavy oil at dawn, before the sun rose and melted the oil into the soft sand (which would make it very difficult to pick up), and before the seagulls ingested the oil or the tides pulled it back out to sea. I remember thinking that the damage could have been mitigated if there were stronger regulations and that more resources needed to be invested in this area.
Then, when I studied finance in college and at Columbia, I realized that capital markets and the private sector could have a tremendous influence in setting business standards, public policy, and investment flows. I officially began working on ESG portfolios with ClearBridge 17 years ago (though it wasn’t called ClearBridge then).
I believe that people can combine their values with their career goals— opportunities for doing this are even more available today than when I started. There are jobs in social enterprise, the traditional financial sector, the corporate world, technology, sustainable finance, microfinance, community investing, green real estate, green product design — the list goes on. It’s a very exciting time for new Columbia graduates.
How long has ClearBridge been involved in ESG investing and how do you carry out this approach?
ClearBridge and its predecessor firms established the ESG Investment Program in 1987. We were among the first mainstream investment firms to recognize — and explicitly offer in our portfolios — the opportunity to factor ESG issues into our investment theses and long-term investing views. Most of our clients—both institutions and high-net-worth individuals — are long-term investors who are attracted to our commitment to sustainable investing.
We emphasize the investment attractiveness of the stocks we buy for our actively managed long-term equity portfolios. Our fundamental analysts integrate the material and relevant ESG factors into their investment analysis — and the quality of their ESG research and company engagement is part of their compensation structure. For our eight ESG equity strategies, our portfolio managers consider ESG factors in the stock-selection process.
Are institutional investors able to pursue ESG investments and still fulfill their fiduciary duty?
This is a really important question. To help answer it, I worked with our asset manager partners at the United Nations Environment Programme Finance Initiative, and we commissioned global law firm Freshfields Bruckhaus Deringer to create a legal framework for the integration of ESG issues into institutional investment
The overall conclusion was that as long as the ESG considerations do not replace the rigor of the investment selection process, but are used to enhance the investment analysis, then such considerations would not be considered a violation of fiduciary duty. The report also states that “integrating ESG considerations into an investment analysis so as to more reliably predict financial performance is clearly permissible and is arguably required in all jurisdictions.” This was a significant legal conclusion, as there was not much in terms of legal opinion published on this question at the time.
What is your track record? Do you measure only financial returns?
Our goal as investment managers is to deliver long-term, risk-adjusted competitive returns, which we have been pretty successful at over time. We don’t measure ourselves against a socially responsible investing benchmark; we use the general market benchmarks like the S&P 500 or the Russell 3000.
We also measure our performance in terms of the impact we have on the public equities we own. As you can imagine, publicly listed corporations can have enormous effects on the environment and on society. That impact can be devastating or incredibly beneficial. If we take climate change as an example, industry is a major piece of the “human activity” that has contributed to global warming.
As active and concentrated shareowners of listed equities, we take the impact of our investments very seriously. We play a role in this by working with the companies we invest in on ESG issues, such as CO2 emissions or human rights. Most of our clients are seeking the so-called double or triple “return” from their investments with us — financial, social, and environmental.
There still aren’t a lot of women in senior leadership positions in finance. What’s the one piece of advice you’d give other women in this field who are looking to advance?
One of the top priorities you often hear at conferences like the Columbia Women in Business conference or Women on Wall Street is to find a mentor — and that a predominance of males in leadership positions means women will have more difficulty finding one. But I don’t think that you have to have a female mentor if you’re a young woman. I’ve had more male mentors than female mentors. Not by my own design, but those were the people I reported to, and I believe that they treated me as well as my peers. What’s most important is that you find a good mentor.
What do you find rewarding about this work personally?
There are many careers where you can make an immediate impact — animal rescue, being a doctor or a teacher, etc. Personally, I find the longer-term gratification in the ESG investing space to be rewarding. I believe that many of the investment decisions our clients make with us today will encourage better corporate practices, make a social impact, and lead to more sustainable performance by businesses.
Are you interested in participating in our At the Center Q&A series? We’d love to hear from you. E-mail us at [email protected].