Jon Lukomnik (IRRCi) says that “Big institutional shareholders and companies simply do not wait around for the law to force them to do what they recognize is in their financial interest.” Here is one excerpt from a fascinating interview:
Christopher P. Skroupa: Jon, you recently identified two developments at the nexus of investing and sustainability, one of which you dubbed ESG 2.0 and the other systems level investing. Can you explain how they differ from old-style SRI or impact investing?
Jon Lukomnik: Let’s take systems investing first, because it’s a phenomenally important investment paradigm that is only now being understood. Under modern portfolio theory, the biggest determinant of the return on your investments is “the market.” But despite the fact that the market’s return determines more than 90% of the variability of your portfolio—much more than which stocks or bonds or other securities you select—modern portfolio theory says it’s exogenous to your investments. In other words, if you just use portfolio theory, you think you can’t affect the overall market and just have to agree to be buffeted by its cross-currents.In the real world, we know that’s not true. For example, “Risk on/Risk off” markets are caused by investors moving their money. More narrowly, CalPERS changed the market return of the Philippines equity market by getting the laws there that affect foreign investors changed. In fact, Steve Lydenberg, Bill Burckart and Jessica Ziegler of The Investment Integration Project recently issued a great report showing how 50 major institutional investors deliberately try to influence the financial, environmental and social systems so that their investments can thrive.ESG 2.0 is more of an implementation tool. Think of it as the sustainability equivalent of “smart beta” investing, which uses quantitative strategies to gain exposure to specific risk factors (which really ought be called risk/opportunity factors). That has been made possible because of improvements in both measurement and computing technology.
Similarly, ESG 2.0 quantitatively specifies certain ESG risk exposures. So, for example, both the New York State Common Retirement Fund and CalSTRS have put billions of dollars into low-carbon exposure stock index funds, designed to minimize their exposure to carbon risk while maintaining similar exposure to the other risk factors in broad-based stock indices. Others have chosen to gain exposure to high quality governance and accounting companies.
Source: Will ESG Survive Trump?