by Joe Keefe, president and CEO of Pax World Funds and its investment adviser, Pax World Management, LLC
The big news story of 2016 was the rise of Donald Trump. A very nasty campaign culminated in the election of a completely unsuitable and unqualified person to serve as President of the United States, in my opinion. There were signs that this was coming: the Brexit vote in the U.K., the refugee crisis in Europe, a populist/nationalist backlash against free trade and globalization, gun violence and racial tension in the United States, the fraying of public discourse, and more generally, a loss of faith in the political class and in government itself. The 2016 election exposed raw divisions that have perhaps been building for decades but have now begun to undermine our shared sense of community and national purpose.
There are valid reasons, of course, for public disillusionment. In the U.S., political polarization has led to policy paralysis and the perception that government is no longer working. Globalization, technological progress and free trade have lifted up elites but have failed to deliver for average citizens whose incomes have been stagnant and whose share of economic growth has been falling for decades. Globalization entails what economist Joseph Schumpeter called creative destruction: The robot replaces the line worker; the coal industry disappears to make way for cleaner energy; some people are advanced while others are left behind. As a result, economic insecurity, rising inequality, political polarization, reactive nationalism, the de-legitimation of leadership – not only political leaders but other perceived elites (CEOs, bankers, law enforcement, the media, academics) – and an increasingly pessimistic mindset have become distinct features of our age. Ian Bremmer of Eurasia Group has labeled this a “geopolitical recession.” It is not surprising that certain segments of the populace become ripe for a reality TV demagogue claiming the system is rigged and promising to restore a glorious past.
Donald Trump’s election can be better understood against this backdrop. It is not surprising that certain segments of the populace became ripe for a reality TV demagogue claiming the system is rigged and promising to restore a glorious past. We have elected a man wholly unfitted to the presidency and to the task before us, but he found a way to tap into a simmering discontent that was ready to boil. And boil it did.
Given the new political landscape, what lies ahead for sustainable investing? How does our industry continue to move forward?
The new administration clearly will be unfriendly to the sustainability agenda, be it improving corporate disclosure and transparency, curbing greenhouse gas emissions, promoting sustainable energy, advancing women’s rights, or human rights in global supply chains. We will not be able to look to Washington for meaningful progress on most of the issues we care about. Instead, we will need to look to the private sector. The fact of the matter is that the private sector is way ahead of the public sector on many of these issues anyway. For example, there is broad agreement in the global business community that we need to confront climate change. Indeed, a large cross-section of global businesses advocated for, not against, the Paris climate accord. They don’t have time for knuckle-dragging politicians denying settled science. They have businesses to run, and wealth to create.
This is where the opportunity lies over the next four years: working with the progressive vanguard of the business community to advance the sustainability agenda over and against the recalcitrance of dim-witted political elites. And for those subsets of the business community who side with right wing politicians and the Chamber of Commerce to resist the sustainability agenda, we should re-double our shareholder engagement efforts to challenge their views. We can turn this moment of crisis into a moment of opportunity.
Our country may be divided, our system of government in disarray, our civic culture bruised and battered, but this is also a moment when sustainable investing is rapidly going mainstream. This mainstreaming of sustainable investing could not have come at a more opportune time. At a fundamental level, it represents the eclipse of a certain view of the world – and of business corporations and markets – classically represented by conservative economist Milton Friedman’s famous dictum that the only duty of a corporation is to make a profit. Today, thanks in large part to sustainable investors (and consumers), a more expansive notion of the corporation is taking hold where companies are expected to serve not only their shareholders but other stakeholders as well: employees, the communities where they do business, their supply chains, and the natural environment. This mainstreaming has been driven by data (research underscoring the materiality of ESG factors to company and investment portfolio performance); by demographics (women and Millennials want their investments aligned with their values); and by the failure of the public sector (with accompanying higher expectations that businesses, capital markets and NGOs to step into the breach).
These attitudinal changes represent a ‘secular’ trend that isn’t going away anytime soon. Increasingly, people understand that the way their money is invested has an impact on the world. They want that impact to be positive rather than negative; they want to be part of the solution rather than part of the problem. As a result, sustainable investors can become one of the most powerful forces in resisting a reactionary agenda coming out of Donald Trump’s Washington.
So, how do we proceed?
First, we need to make sure that the mainstreaming of sustainable investing isn’t purely a marketing or asset gathering strategy – or worse yet, greenwashing. We must hold accountable those who take up the ESG banner so that they fully understand that improving corporate behavior and transforming markets is at the core of what we do. Integrating ESG factors into portfolio construction is all well and good – I am all for it. I think it’s a smart investment approach. And I think mainstreaming will open doors to more investors, more choices, more innovation, more assets, and more impact. But impact isn’t just an add-on. It’s the heart of what we do.
This means that shareholder engagement must remain at the core of what we do. Companies that fail to disclose their greenhouse gas emissions should be pressured to do so. Companies that fail to disclose their political spending should be pressured to do so. Companies that fail to disclose their gender pay ratios should be pressured to do so. Such pressure may ultimately come from regulators in a future administration, but for now it will be up to investors – to our industry – to keep up the pressure. Also, those new arrivals who profess to be doing sustainable investing must take steps to assure that their proxy voting on shareholder resolutions are aligned with their ESG policies. To offer sustainable investing portfolios, on the one hand, but then turn around and vote proxies in a manner that undermines that very agenda, is simply not acceptable. If mainstream firms are going to take up sustainable investing, then they also need to embrace their role as engaged shareholders committed to improving the ESG performance of the companies they invest in.
It is also imperative that public policy advocacy remain at the core of what we do. The public policy environment will be hostile for the next four years but we must nevertheless press ahead. We need to continue to pressure the SEC and the new administration to advance transparency and disclosure in capital markets. We must continue to advocate for shareholder access to the proxy ballot. We must continue to advocate for disclosure of ESG-related risks and opportunities. On climate policy, we need to work toward putting a price on carbon, understanding that markets will require price signals if they are going to be part of the solution when it comes to climate change. And with historically low interest rates, a crumbling infrastructure and the need for higher-paying jobs, we should be advocating for investment in modernized, sustainable infrastructure (which is not exactly what I think Donald Trump means when he talks about infrastructure investment).
We should be developing new ideas to accelerate impact. We need to find ways to model it and measure it, to tie incentive compensation to it, to unearth the next generation of policy choices that will catalyze inclusive, sustainable growth. In the late 1970’s, underinvestment in low-income communities led to the Community Reinvestment Act (CRA), encouraging banks to meet the credit needs of underserved communities. Mutual funds, hedge funds and other large financial institutions have not been asked to make similar investments. Perhaps it’s time they should. This might help drive investment to rural communities that have been left behind by globalization and tragically bought into Donald Trump’s demagoguery on trade and protectionism. Also, investments in community development financial institutions and other high impact investments are hampered by securitization and liquidity issues that prevent them from achieving scale. We should be proposing solutions that open up these investments to a much larger swath of investors so that they can have more impact.
We will need to play defense where necessary, but we should take advantage of the mainstreaming of sustainable investing to enlarge our voice and go on offense. We should take our agenda to the country through the business community, through capital markets and through policy makers. A transformational agenda around sustainable capitalism has much more to offer disaffected Americans left behind by globalization than does the promise to build walls, deport immigrants and give more tax cuts to the wealthy. On climate, on infrastructure, on equal rights for women and minorities, on access to finance, nutrition, health care and education, on a host of critical social and environmental issues, the sustainable investing industry has much to offer.
America today may be polarized but we have the power to change this. It is more important than ever that we build an economy that works for everyone. It is more important than ever that we summon the better angels of our nature, that we summon our optimism, and get to work. Restoring a sense of community, of shared sacrifice and national purpose is really the job of all Americans, but our industry in particular, at this point in our history, must take this responsibility extremely seriously.
Article by Joe Keefe, President and Chief Executive Officer of Pax World Funds (http://paxworld.com) and its investment adviser, Pax World Management LLC, as well as its majority-owned subsidiary, Pax Ellevate Management LLC.
Under Joe’s leadership, Pax World has become one of the leading innovators in the rapidly growing field of sustainable investing. Prior to joining Pax World, Joe was President of NewCircle Communications, a strategic consulting and communications firm specializing in corporate social responsibility and public policy-oriented communications. He served as Senior Adviser for Strategic Social Policy at Calvert Group from 2003-2005 and as Executive Vice President and General Counsel of Citizens Advisers from 1997-2000. He is a former member of the Board of Directors (2000-2006) of US SIF, the trade association representing asset managers and investors engaged in sustainable investing throughout the United States.
Joe has written and spoken widely on the subjects of sustainable investing and women’s empowerment. He is Co-Chair of the Leadership Group for the Women’s Empowerment Principles, a joint program of the United Nations Global Compact and UN Women, and is the former Chair of the Board of Directors of Women Thrive Worldwide, a leading non-profit organization shaping U.S. international assistance and trade policy to help women in developing countries lift themselves out of poverty.
Joe was named by Ethisphere Magazine as one of the “100 Most Influential People in Business Ethics” in 2007, 2008, 2011, 2012 and 2015. In 2012, he was recognized by Women’s eNews as one of “21 Leaders for the 21st Century,” where he was the sole male honoree, and in 2014 Joe was honored at the United Nations as one of five recipients of the Women’s Empowerment Principles Leadership Award. In 2015, Financial Times named him one of its 10 “top feminist men” for his work helping women succeed in business and beyond.
He is a former Democratic Nominee for United States Congress in New Hampshire’s First Congressional District and a former Chair of the New Hampshire Democratic Party and member of the Democratic National Committee. He received a Bachelor of Arts in Philosophy from the College of the Holy Cross, and a Juris Doctor degree from the University of Virginia School of Law.