Ep. 9: What ESG investors want, according to GreenBiz’s Grant Harrison

Over the past few years, the surge in energy in corporate sustainability has been fueled by renewed investor interest in environmental, social and governance (ESG). Sparked by Larry Fink’s 2020 investor letter, this seemed to signal a new era of investor enthusiasm for ESG information from companies they invest in. However, the anti-ESG rhetoric and increasing politicization of ESG has caused many companies to backtrack. Many companies continue to guess at what investors want from them on the ESG front. 

In this episode, Mike chats with Grant Harrison, Vice President of Sustainable Finance and ESG at GreenBiz, to better understand the current ESG investment landscape and how companies can better engage investors with non-financial information. 

Read the full transcript of the conversation below. You can also listen to this episode on Spotify, Apple Podcasts, Amazon Music and YouTube.

TRANSCRIPT

Mike Hower: Hey, everybody. I'm here today with my friend Grant Harrison at GreenBiz. Grant has several years of experience on the ESG side of things — particularly covering what investors care about  for GreenBiz as an analyst. He also heads up their GreenFin events, which is a wonderful convening of investors, corporates and everybody focused on ESG from the finance angle.

Today, I wanted to invite Grant here to talk about what investors are thinking of ESG in 2024 — particularly with all the changes we've been having with the anti-ESG pushback. Some companies are rolling back their ESG focuses — at least publicly. And so today, we're gonna dive deep into that and  learn a little bit more about how companies can communicate their sustainability and ESG work to investors and also what investors are looking for. Because  on my end of things — I work with a lot of companies that are thinking about engaging investors on ESG — but it often feels like a guessing game. So today, we're going to stop the guessing and try to actually figure out what these investors care about.  Thanks for being here today, Grant. 

Grant Harrison: Thanks for having me on Mike. 

Mike: All right. So, the first question I wanted to cover today is — I kind of already alluded to this — the word ESG or the acronym ESG has been the focus of a lot of, shall we say, enthusiastic discussions on the investor and financial fronts and in those communities.

So some companies are dropping the term ESG altogether. There's a lot of questions about what's the future of ESG just as an acronym slash word. Where do you see that heading from all your conversations you've been having and the coverage that you've been doing for GreenBiz? 

Grant: Yeah, I'm happy to give you that. I'll start by saying, someone recently corrected me somewhat pedantically that ESG is in fact not an acronym — it's an “initialism.” So, I learned that, yeah, and learned what an initialism was from that. 

Mike: What is an initialism? You know what? What is it? 

Grant: That's a deep question. I don't know. That's too profound to get into. 

Mike: I think this is a good way to kick off a communications discussion. Because in sustainability, we don't even know what an acronym is like — this is how hard it is. Okay, great. Alright, we'll move on. 

Grant: Okay. So with that foundation set, I would say first maybe important to quickly touch on why this all happened to some degree —which is in an oversimplified sense for brevity's sake, one side maybe over promised and the other side exaggerated the consequence of what is behind this ESG concept.

So the over promise maybe was that the conflation of ESG with impact the people who have been quote unquote doing ESG for a long time are well aware that ESG is a noun — ESG is a body of information, non-financial information that kind of indicates risk over the long term for things that are not incorporated into traditional pricing and short term views that finance takes. 

And in that overpromising, the other side that is primarily responsible for this pushback exaggerated then the consequence of what ESG does. It fell into the realm of critical race theory and other kind of culture war topics that made it sound like it was something that could in fact be weaponized to change culture — or as Mike Pence I think had said a few times to achieve what couldn't be achieved at the ballot box.

So all of that is born out of that confusion of what it can do. And then the consequence on the rightward pushback of what it reports it is doing. So anyways, I guess you could say there is confusion on what is doing well by doing good — but on the term that we now know as an initialism ESG. I will start by saying Larry Fink, CEO of BlackRock, the world's largest asset manager — his annual letter to CEOs, kind of a seminal document every year that the investment world and corporate world pays attention to. This one had a total of zero mentions of the initialism “ESG” but 13 mentions of transition. So, in terms of what is the moniker that is going to capture the work that's being done, it does seem like maybe your question being what's going to happen to ESG moving forward as a communications tool for the work.

It seems like it's gone by the wayside. Obviously, it's still in my title. It's still in lots of people's titles who work in both financial institutions and companies who lead ESG work. That doesn't really seem to change much. But in terms of communicating the work, yeah, ESG seems like its time was quite tumultuous and maybe it's come to an end. And that's maybe not totally. 

One other fact would actually throw in — I think this is data from a fact set going through conference call transcripts of S&P 500 companies earlier this year — and it was the lowest number of times that companies had cited ESG on  earnings calls since 2020. I think it peaked in 2021. So, another data point that maybe that it's gone by the wayside, but the shift is maybe a good thing because ESG, again, it's a noun. It also sounds hyper scientific — so it kind of has a nice ring to it, but it doesn't really indicate what we're probably trying to talk about, which is like Larry had written 13 times in a letter about a transition.It's a verb. It's something that kind of is maybe a little less politically contentious to say. It's a transition to something that is maybe inevitable to some degree.  

I've seen a lot of shift back, ironically, full circle back to sustainability or something that, again, is kind of hard to rail against, like responsible business or responsible investment.Kind of hard to make the case that being responsible is woke or somehow has an agenda.  But I think transition is probably the key phrase, both because it's the verb that indicates the work and doesn't carry the baggage that ESG does and just can't be maybe weaponized in the way that folks like Ron DeSantis or Vivek Ramaswamy or others who kind of led the the anti-ESG rhetoric charge can't wield in the same way. 

Mike: Yeah, that resonates a lot with what I've been seeing too. And I think I agree that we've been on both sides, that we've been over promising what ESG could deliver and then — so it made it easier for people who were anti-ESG to criticize it. But I also think again — and I'm one of the people that is guilty of this — we were kind of using ESG interchangeably with sustainability for a long time when they are, in fact, two different concepts.  

Moving on — in 2023, there was some investor pullout in ESG funds in particular. I read that this was in the amount of billions of dollars. So what is the current state of ESG investment writ large? Is it on the upswing or the downswing?   

Grant: So, yes, the last quarter of 2023, the Morningstar Global Sustainable Funds saw net outflows of $2.5 billion — the first time they'd entered negative territory. But European sustainable funds remained pretty resilient and actually attracted over $3 billion in net inflows. So, this was almost entirely a U.S. phenomenon and driven by at least the net inflows in Europe — predominantly passive index tracking funds.

So first, on the current state of ESG investment, two main factors of the pullback, or net outflows, from those funds was the political issue that we talked about before, and that — most listeners are probably kind of aware of — there were material political consequences given the coalitions of predominantly red state attorneys general, and state treasurers coming up with their blacklists of sorts for public funds to  not to be managed by firms that they saw as being anti fill-in-the-blank certain industry or being pro woke this or that, or something that basically barred them from doing business — which to be clear, in the end is actually more costly for their own beneficiaries and others of those public funds — the cost of banning those firms kind of landed on them primarily, and net inflows to those firms still were much larger than the outflows they saw because of that.

But anyways, there is the political instance. It's also performance-based. Like, it is true that a lot of those ESG funds underperformed their benchmarks. That is largely to do with this super volatile sector called oil and gas and Russia's invasion of Ukraine and what that did to fossil fuel prices. So, that short blip of boom in the oil and gas industry meant that a lot of these ESG funds underperformed, even though again — ESG information as it's incorporated into these funds is about long term risks that climate change and other environmental factors pose, not the volatile ups and downs of something like oil and gas.

So that issue of proving ESG outperformance in the short term is a hard one to make. And in terms of whether it's on the upward or downward swing — and I'm speaking here in the context of the U. S. — most surveys, those from big asset managers like Schroeders do a lot of good research on this, Morningstar does, Morgan Stanley, others, there's still really high investor interest in sustainable investment, and I'm saying sustainable investment more broadly than just funds that use the terminology ESG. 

That demand hasn't gone away. That includes both retail investors. So, those individuals with brokerage accounts and IRAs and other ways of investing their own money, that interest has not waned in some ways, more importantly, the asset owners. So the big pensions and endowments and sovereign wealth funds and all those who the asset managers manage money on behalf of their interest hasn't gone away because they are still — I hear this line said somewhat frequently — they are not interested in the next quarter. They're interested in the next quarter century and the fact that these funds have performed X, Y or Z way in the last two years doesn't really indicate or change their decision making around the next quarter century.

These risks remain the same, they're getting worse. So demands from asset owners haven't changed and going back to the the lexicon change from ESG to transition probably going to continue to see growth in transition funds, which is something that happens more in private markets, so a lot of the big private equity houses have launched pretty sizable transition funds.

And that will probably be a trend that continues to grow the ethos in those being — I guess going towards the emissions — is what they'd say, rather than divestment, primarily focused on investing in the infrastructure that is necessary to make this clean economy transition physically possible, which again, if you looked at Larry Fink's letter, I think that would comport with what I'm saying here, what their focus is and also the demand from stakeholder groups like employees who want to see Sustainable 401k options.

That's not a trend that's waning. There's a couple of firms that are kind of leading in that category of meeting the demand from employees to see maybe not just an ESG fund, but a climate friendly fund — which is in a lot of ways different than just an ESG fund. So yeah, the key drivers that make up the demand here, retail investors, asset owners, employees, stakeholder groups, others — that hasn't waned just because ESG funds had an underperforming year or two, or because the term got so politicized. 

Mike: Yeah, that's a great take. And I think it definitely is good to iterate that the articles that you're seeing pop out there in different media saying that ESG as a”thing” is dying, is not true. And that there are lots and lots of investors that are not tree huggers at all that are still focused on ESG funds and investing in them.

Moving on to the regulatory changes that have been happening, in the world of sustainability and ESG. Most recently, the SEC ruling in the United States and everyone's been talking about it. I had a few people on the pod to give their takes on it. I really loved your article you wrote recently in GreenBiz that was talking about how the attacks on the sec rule have done little to dampen investor interest in ESG information.

Can you talk a little bit more about what you covered in the article and what you've been hearing in your own conversations with investors since the SEC rolling?

Grant: Yeah. I mean, going back to the asset owner demand and maybe asset owners being at the core of capital markets and where they flow or don't flow — they're all predominantly universal owners. They can't diversify away from systemic risks. They own the entire market, so to speak, and they have been  kind of the core demander of this. What is called consistent, comparable and credible information about climate risks. This is something that I've been demanding for 20 plus years and the SEC rule landing in a certain way versus another way doesn't change that ongoing long term demand. It's also worth noting — this is not like the end all be all in terms of the securities and exchange commission's responsibility or role or involvement in managing climate risk for investors. This is just one iteration of much more growth in this kind of area that I think we'll see for our lifetime.

So long as climate change is a risk. And so long as investment risk is climate risk, that will be the case. Also, maybe this is mentioned with others on your pod, but the California rules around climate disclosure and risk management — that is a pretty huge factor for a lot of large companies who do business in California — which given it's the fifth largest economy in the world, that's probably a lot of them. And all the disclosure rules in Europe, too, there's not really a great case to be made for waiting on the sidelines or because, well, going back to actually what you said about the attacks. On the rule as soon as it landed, which was to be expected, many of those are, you know, those saying this is an overreach.

This is not the SEC's remit, kind of similar to Mike Pence's argument that ESG equals achieving political results that couldn't be achieved at the ballot box — but doing it through finance, similar arguments about the SEC. This is backdoor climate policy, and this is not their backdoor climate policy. 

But there's also been attacks from — I guess I'll say pushback — from firms that say this is just not enough or foundations or other organizations that are saying this is so weak and watered down, you should do more. So, not everybody's happy, obviously, but it really doesn't change the fact that this information is out there going to be asked — if it's not in this immediate term — it will be asked over the coming years and that it already, those demands already exist in California and Europe. I will also point to something that I saw from the CERES Investor Network recently — they were capturing what the more predominant versus less short shareholder proposals are as of this proxy season. And at the very top of that list of demands by pretty long measure is demand for transition plans from companies. Transition plans would include, like, near term and long term greenhouse gas emissions reduction targets and strategies to actually achieve those within defined timeframes. So, again going back to the investors being the core demanders of this information, hence why the SEC is showing up to help provide that because they serve investors. Companies are still being asked for that second below that I think by a slightly lesser margin was information on political activity and lobbying and interesting or maybe worth noting for sustainability communications folks is the very bottom on the list was demands for sustainability reports and I don't not entirely sure how they define that but that was that was the last so transition plans is outsized influence coming from shareholders to see that sustainability reports more traditionally at the bottom.

So, that also could be that a lot of them already produced that — I think it's what, like 80 percent or something of the S&P 500 already produced those. But I thought that would be worth noting. 

Mike: That actually is really interesting. I’d like to kind of double down on that a little bit. First, I have one thought about Fink's wording “transition” as a communications pro that worries me a little bit to use the word transition because that sounds like something that happens slowly when we need to be moving quickly. I'm wondering — I haven't heard that word really take off yet — but I'm curious if we see more companies mention it.

It just sounds to me like we've heard “the transition to a clean energy future.” Like that's definitely something that I've heard other companies use, but I'm wondering in the long run — is this watered down in the sense that it's going to be less controversial, but what do you think about that? What do you think of the term transition? Does it sound like it's too easy going even though we need urgent action right now?

Grant: Yeah, it definitely doesn't embody urgency. Like I'm transitioning into being in much better shape, but that's going to take a long time. And I like, I have a very weak and not time bound commitments for that. But then again, ESG, I mean, there's a lot of good going back to some firms I was talking about, that are now a couple of them have launched kind of climate forward ETFs for retirement funds that are — I guess I don't need to go into the details of how they do that — but they're quite cool. 

But they did a lot of research into people's understanding in the first place of what ESG meant. And I realized not every communicator is just communicating to consumers or citizens or people outside of the professional sphere, but people have very little, like the most common understanding was ESG stood for economic stock growth.

Like, when I socialize this with people out in the world who are not in our ESG bubble, financially savvy people and I asked them about ESG, the misunderstandings were pretty wild. So, that also didn't necessarily communicate urgency or capture the whole, what we're trying to move towards.

But yes, transition is a little bit not time bound and wobbly, which maybe, I don't know, maybe sustainability is going to just come back into fashion for that reason. Maybe it captures it better. 

Mike: Although, you know, now that I'm thinking about it a little deeper, as long as we get people on board, if “transition” is what we have to call it, fine, if ESG is just completely turning them off, then yeah, we'll see, we'll see. I'm sure we're going to be changing the words over and over again over the next several decades as we have the last several decades.  

So, the next question I wanted to cover — I kind of alluded to this earlier — about how, and there seems to be this  game of telephone that corporates are playing with investors. Often a company will hire me or other sustainability consultants to help them develop these ESG reports — which apparently now are not that important — but really they're interested in engaging investors on their issue information. So maybe their board is getting pressure from their investors and then the board puts the pressure on the leadership saying, “Hey, we need to be putting out a report or we need to do more to communicate what we're doing.”

Half the time they're not doing anything — so then they need to start doing something — which is good. And it kind of gets the whole thing moving. Um, but what often is missing is like, what do the investors actually want? And I think it's interesting that you say that reports are low on their totem pole of things that to do.

So what exactly do these investors want to see? And, you know, so if you were a communicator of ESG at some big company and knowing what you know now, what would you be prioritizing? Reports have become kind of table stakes. So you can't not do those. But what else do investors actually want to see? And we don't have to get into the details of specific data, but what kind of information are they actually interested in and, how can companies tailor their communication to convey that? 

Grant: Yeah, I think I'd reiterate back to that status of shareholder proposals by topic at this point, they want to see transition plans, which is a form of communication. It's not your traditional long form narrative sustainability report, which are helpful and exist for a reason. But from an investor lens, it's hard to aggregate all of what's in those two decision-useful information. So transition plans, still a communication document, actually capture what they need to and want to know, which is coming after an era of big announcements, big commitments, net zero by fill-in-the-blank. We're going to do everything that we're familiar with here — especially in the communication realm. It's now time to see, okay, it's 2024 on the way to 2030, an important stop gap before 2050 highlighting how these announcements have become reality.

So, all those near term greenhouse gas targets, progress towards them. Probably all the basics that listeners would be familiar with on disclosure to platforms like CDP and just the basics of data reporting.  I think they want to see — on the governance end of things — real board level oversight and accountability for this, which I think you just brought up, on managing climate risks and emissions reductions.

As they pertain to the commitments they've made, other things on the governance front, like executive compensation and how that should be linked to climate performance. There's been a lot of writing from people I really respect and follow on how that can kind of be easily gamed and somehow, or sometimes the time horizon of a CEO doesn't align with the length of time that goes into these climate commitments. So there's some stuff there to look at, but, I would say those climate transition plans. I mean, it's the survey from the series or the data from the series kind of speaking for investors themselves, saying what they want to see their vote in that alternative democracy, but also external verification, which is part of the SEC rule.

Definitely external verification and assurance is important. But yeah, I think I'd leave it at those. 

Mike: Yeah. And that resonates with what I've been seeing too with a lot of the anti-greenwashing legislation coming out of Europe and which will eventually probably spread across the world. Really just making sure that whatever claims you're making, you're backing them up with data and having that third party assurance, which I think is going to be more and more important. 

Grant: So, also maybe it's worth noting too, like this is coming from a speaker who joins us at Green Biz and Greenfin events, former SEC lawyer who has been quite helpful in educating the audience, but it seems like there's an understanding gap to some degree for a lot of participants in this space that like going back two decades of more narrative long form sustainability reports, false and misleading information in those is still subject to legal risk like fraud is fraud and not saying at all that many reports have been doing that but  there's this idea that like now that the SEC is involved and these are real rules or real mandates in some way.
This has always been subject to legal risk and you've always had to present information that is not false and misleading. It's interesting to see the reaction from attendees when she's impressed that point. So worth noting, I think. Yeah. 

Mike: Oh, that's, that's interesting. So, you know, you talk to a lot of companies, I know a lot of these companies come to the Greenfin events. Are there any companies that come to mind that are doing a good job communicating — any that have put out what they are calling it a transition report already or any companies that you could mention that might be good to look at who are doing a good job on this front right now? 
Grant: Yeah, I would say two things in terms of resources. Maybe to go check out — I brought up series once before but I'll bring them up again — one of our convening partners at GreenFin, which maybe we can get into later, but they've got some really good work outlining and guiding how to approach a transition plan that meets the demand that investors are making, but in terms of individual companies, I would say Seventh Generation, which is a subsidiary of Unilever, comes to mind partly. I also wrote a piece about corporate cash and its carbon impact, and they're quite a leader on this. But it led me to looking into more of their stuff, and they're the only firm I've seen that puts out their climate fingerprint instead of footprint. And the climate fingerprinting work that they do is kind of touching on climate change. Every single function that ties into their work. So  how do their marketing and creative services have an impact on their climate ambitions? How do their banking and financial partners like their cash and investments, like what are the carbon impacts of, are we aware of when our cash goes to sleep at the bank where, what that's funding? Oh, it turns out it's money. Probably funding things that are not totally in line with our own ambitions, like financing fossil fuel expansion, which the IAEA says can't happen if we want to meet our climate goals.

So, that is maybe an exception as that is why I'm highlighting it just to be transparent around lobbying and trade associations they belong to even their parent company Unilever. Heather Clancy, our editor-at-large, covered this recently. They've been pretty open about being like, you know, if, if we belong to trade associations that are actively working to do the opposite of what we need to do to meet our climate ambitions. We will consider leaving and here are criteria for doing that. So, that's a pretty standout example. I would say Patagonia too, but I think a lot of people have the, “well, we're not Patagonia:” response and also Patagonia is not, you know, a publicly listed company. So, it's a little different, but, but for anyone who's wondering about just what totally comprehensive transparency looks like, definitely check out that climate fingerprinting report from Seventh Generation. It's very worth a scan. 

Mike: Yeah, I haven't heard that term. I've heard of handprint. I have a client — they use the term handprint to talk about how their products and services help other organizations meet the UN SDGs and stuff, but never had a fingerprint. That's interesting. 

Grant: Yeah. 

Mike: So GreenFin 24 is coming up, coming in hot. I'm sure you're super busy getting all that great content together. I was there last year leading a panel. It's a great event, particularly for anybody that's really focused on the financial part of the issue. Definitely learned a lot, really good connections made there. Anything that you're excited about for this year's event — like any interesting speakers or any topics that you're excited to tackle there? 

Grant: Yeah, I think I could go on for way too long about this. I'm the one of two people in the world that think about this 365 days a year. So I'll spare you from the full dump, but maybe one just because I was just mentioning it about Seventh Generation. There's other firms that are starting to think more critically about where their corporate finance functions play a role in achieving their sustainability targets.

This “CFO meet CSO” concept has been one for some time at events like GreenBiz or GreenFin, but really digging into the environmental or social impact of the corporate finance function. So, that includes like what I was talking about with knowing what happens when your money goes to sleep in the bank and engaging with those banks, other things like your insurance provider, like that's again, some of these kind of things that have been treated as either climate neutral or more just like mundane administrative background stuff actually has huge climate impact and there's more and more predominantly nonprofits for now, helping guide how you can start doing that.

I don't think a ton of Chief Impact or Chief Sustainability Officers are uber familiar with their treasury colleagues or those who are making decisions about business insurance or the retirement plans, things like that. So we're digging into that conversation a little bit. Definitely some stuff on the insights in the policy landscape.

So, like maintaining momentum on DEI — there's obviously been a fair amount in the legal universe — including the Supreme Court striking down universities’ affirmative action policies and just a lot of legal risks around doing DEI. So, getting up to speed on how best to approach that is similar to keeping on with collective action in the wake of climate action 100 plus initiative, having some departures and other coalitions of investors or other financial firms. Dealing with antitrust accusations. 

On the speaker front, there will be many — Tom Steyer will be with us. There's a couple of other, former state department and other climate leaders whose names you'll be familiar with, which I can't announce quite yet, but we'll be joining us.

So, come and find out. But the last thing I'll say is about the Carbon Finance Forum — kind of similar to what we do with other GreenBiz group events — invitation-only add on to the event for early stage carbon project finance, which is a space that remains kind of nascent and opaque. So many of these have high potential carbon removal projects that remain underfunded and can't get off the ground. So, a meeting for about, I think it's 50 that will be approved to join us carbon project investors. So climate impact funds, family offices, pensions, all those types of asset owners and carbon buyers. So the big , corporate buyers, which are across sectors, but that should be really interesting.

Hopefully they will bring some of their legal and finance colleagues as well to tackle that. And I could offer about 48 million other words about it, but I'll leave it there. And I'm quite excited. June 17th to 19th in New York at the Javits Center. 

Mike: Awesome. Well, we'll definitely include a link to that in the show notes. So folks that are interested in learning more about the event, you can look there. Well, I think that's all the time we have today. Grant, thank you so much for coming on the pod today and for sharing your expertise. And for those who don't already follow Grant on LinkedIn, definitely follow him. He has some great content around the topics we just covered today. He also has a column that comes out weekly, right? Your column. 

Grant: On the Money. Yep. 

Mike: That's a great name “On the Money” — and GreenBiz.  So, if you're new to this space and you're trying to kind of wrap your head around it, or if you're further along and trying to stay on top of things, Grant’s definitely a great person to follow.

So thank you so much for coming today, Grant. 

Grant: Yes. And Mike, I'll give one last plug for those who don't know. Mike is still a GreenBiz contributor. So, look out for his contributions to GreenBiz too. 

Mike: I'm going to get back into that. I haven't been recently but hopefully going to get back into that in the next month or two. So, yeah, definitely read my stuff if you want to read all the random stuff I cover.

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