Can Indexing have Impact? My interview with Calvert's CEO
Late last year I wrote a post questioning if indexing can be impactful. The post, which you can read here, garnered a wide variety of responses from the impact investing community. In the end of December, I caught up with John Streur, the CEO of Calvert, to get his take on the topic.
Sonya: It’s great to chat with you. Aside from the current market conditions- that’s a big aside- how are you doing?
John: Fantastic. We’ve been working hard to create and catalyze positive change, and 2018 was a great year in that respect. 2019 is the beginning of even more positive change and I’m looking forward to the corporate engagement we’ll be working on next year.
Sonya: Great, I like to ask everyone- what was your impact investing a-ha moment?
John: My a-ha moment was my very first day at Lehman Brothers when I entered financial services over 30 years ago. I got into the business and immediately realized I would be moving around large amounts of money, influencing client and corporate outcomes. The concept of my responsibility as an investor was on my mind and I felt the weight of that responsibility. That weight caused me to build a framework to think about discharging my responsibilities in a manner that put the clients’ interest first. At the end of the day, I think that putting the clients’ interest first is what Responsible Investing really is.
Sonya: Recently, I wrote about index funds, questioning whether they are compatible with Impact Investing, or as you call it at Calvert, Responsible Investing. I know that you are a strong believer in the power of index investing. Tell me more about that.
John: In our work the first part of the investing process is to understand the impact a company has on people and the environment. In a very real sense that is what ESG research is designed to tell us. For the most part, we are looking at the negative effects on people and environment, because to be honest, public companies are pretty good at being paid for the positive impacts. We look for the negative impacts, and what the related risks are. Once we have risk information, our question is- how do we manage those risks from an investor context? We manage in two ways:
1. The first way is voting with your feet. We can choose whether to own, and whether to under or overweight a security or a bond. Selling or not owning a position is appropriate when there is ESG risk that can’t be improved or mitigated.
2. The second way is to manage the risk by changing the companies’ exposure to the risk. Once you know the risks of an investment, you can create progress by catalyzing change inside of the companies.
You can do both of these things through an index because, as an index owner, you own lots of companies and you’re a long term owner by definition. When you’re a long term owner you can effect change through both outstanding corporate engagement as well as proxy voting.
Sonya: There’s a point where you say “no more” though, right? A point where you will sell? What does that look like?
John: Yes, our investment committee has the ability to sell positions out of the index. Most index funds don’t have that ability but Calvert does. We will sell a position when the ESG risk is too high or progress is moving backwards. We did that in April 2018 with Facebook and Johnson & Johnson for example. In both of those cases, we reached the conclusion that the ESG risk was more than what was appropriate for our ESG portfolios. We continue to support the larger responsible investment shareholder engagement community in their efforts to keep pushing the companies to change, but until those companies make the progress we want to see, we won’t own them. We believe that you can manage an index to provide market exposure but you don’t have to own every name.
Sonya: OK, but if you can divest, is this really passive investing? At what point is this active management?
John: That’s a good question. It’s a balancing act between owning everything in the market and just those names have acceptable ESG risk levels. With a properly constructed ESG index, what should be delivered to a client should be companies with acceptable ESG levels and exposure to a certain segment of the market. If you stick with that, you can have a good balance.
And I think there is a difference between active management and active ownership.
Active ownership tries to increase long term shareholder value for many people via management conversations and shareholder engagement.
Active management drives returns for a small set of clients by outsmarting the market and buying and selling stocks.
I’m a lot more comfortable driving shareholder value by doing so for everyone- solving problems instead of avoiding them. This is the spirit of Responsible Investing.
Sonya: With your wide experience in shareholder engagement, have you found companies more receptive to permanent (index) owners, or with companies that can threaten to take investment off the table?
John: For effective engagement, you have to contemplate being invested for at least a couple of years. We are in a better position to have these conversations as very long term owners.
Sonya: Most indexing companies don’t participate (at least publicly) in the shareholder engagement process.
John: That’s true. It’s not the fault of indexing though, nor the index. It’s the companies that own and manage those indexes that aren’t pushing for change through engagement and thoughtful proxy voting.
Sonya: Shareholder engagement is not free. The process takes both people and cost resources. Is it fair that SRI investment companies are footing the bill for this expense while other investment companies benefit?
John: The fact that we have to do this work, proves the world is not fair. Our mission is to create positive change. Creating more gender equity, racial equity, environmental equity- that’s what we do. That’s why we come to work. It helps our clients and all clients, and creates a better system. We know it costs more for us to do this work, but we make sure that our products are competitive on pricing.
Sonya: Some folks in the impact and responsible investing industry argue that many facets of capitalism have brought environmental and social destruction, and those same issues are reflected in a traditional stock market index. They ask why we should be benchmarking to an index if that index is reflective of a broken system. Your thoughts?
John: We have to deliver returns that are competitive to the benchmark, and we have the tools to do that.
Sonya: So shooting for market rate is not something that bothers you?
John: No. We are not in the concessionary return business. We are in the business of delivering market rate returns with less ESG risk while driving positive change.
Sonya: Thank you so much for chatting with me today. It’s always a pleasure. Is there anything you or the team at Calvert are working on that you would like my readers to know about?
John: Yes. Calvert Impact Capital has a new report out about the importance of evaluating and incorporating gender considerations into a portfolio. It's essential reading.
Sonya: I'll link it below. Thanks for your time today.
This interview has been edited for length and clarity.