Moving ESG investing forward
As investors pay increasing attention to companies’ track records on environmental, social, and governance issues, trillions of dollars have flowed into the ESG investing industry.
Assets in so-called ESG funds have risen 38% globally in the past year alone, to $2.7 trillion by the end of March, according to Morningstar Direct. While Europe still dominates with 82% of the market, a burgeoning class of U.S. financial products promises investors an ROI aligned with their values.
At the same time, a backlash is growing against the sustainable investing industry, disparaged by some political and business leaders as “woke capitalism.”
In June, Associate Professor Panos Patatoukas, the faculty director of the Center for Financial Reporting and Management, brought together high-level ESG investing thinkers with wide-ranging perspectives on the direction of the industry. Berkeley Haas asked Patatoukas to synthesize some of the major discussion points.
Some argue that ESG issues cover so many variables as to be meaningless. What do you think?
I think everybody understands that environmental activities are significant, corporate governance matters, and social issues are becoming increasingly important. Where people disagree is: How do we define and verify the different types of carbon emissions? What are the corporate activities that fall under the “S” of ESG? What constitutes good or bad governance? Because there’s a disagreement of what constitutes ESG, there’s disagreement on the measurement of those dimensions.
Pooling environmental, social, and governance together into one single measure is problematic since it’s missing the granularity of the underlying data. You could think of a company with “bad” governance, with an entrenched CEO who has all the power and shareholders who lack voting power, but that same CEO might prioritize reducing the organization’s carbon footprint.
If we can agree on the definitions and measurement and we have external auditor assurance, that will completely change the field. The accounting firms can play a significant role in the transformation that’s happening and accelerate the convergence of policy, regulation, and technology that’s rewriting the ESG investing playbook.
Does removing a “brown” company from a portfolio drive change?
The goal of ESG investing is not just to make money for ESG-motivated investors but also to change companies’ behavior through engagement and divestment. One example is divesting from fossil fuel companies that have negative environmental impacts and buying “green” companies in other sectors.
But will divesting from fossil fuel companies accelerate the path to decarbonization? Where will the technology that will change our lives come from—an entirely different sector or from leading companies in this sector?
Outright divesting should be contrasted with selective divesting. Within the fossil fuel sector, there are leading companies that are innovating, investing in new technologies, and there are lagging companies that are continuing their dirty practices. An alternative would be to divest only from the laggards and reallocate this capital to the leaders. In other words, blending divestment with engagement.
What are you most optimistic about?
I think over time, we will have more transparency and more tools that will allow everyday investors to invest with their values and be more aware of what they’re investing in. And we’re going to have better data to overcome the measurement challenges, monitor corporate impact, align management incentives with long-term sustainability goals, and facilitate the allocation of capital in ideas and technologies that will drive change for good.
The Kurtzig family already had a track record of successful fundraising and organizing in support of a cure for Type 1 diabetes, which daughter Jamie has. Putting those skills to work, they quickly established a fundraising effort for Ukrainian relief via their Arizae Foundation, raising almost $600,000 to date. The 501(c)(3) has funded the creation of shelters, delivered medical supplies, and equipped Lviv city officials with security cameras and Starlink devices, which provide high-speed Internet coverage where traditional connections are unstable or unavailable. Together with a group of local tech companies and universities in Ukraine and the Ukrainian military, Kurtzig is also lending support to develop an air defense system, called “Sky Project,” that’s equivalent to Israel’s “Iron Dome” to repel Russian airstrikes.
From Budapest, the Kurtzigs traveled by rental car into Slovakia, destined for the refugee camp at Michalovce, near the border with Ukraine. Expecting camps overflowing with refugees, the Kurtzigs learned that these border sites are mainly processing centers, where refugees spend only a few days before heading to relatives or points west. Since most Ukrainian men can’t or won’t leave their home country, the camp population was almost entirely women and children. Seeing those exhausted mothers and children walking across the border with their suitcases, having already traveled over a thousand miles via various modes of transportation, brought home the war’s grim reality for Kurtzig. “And their travels weren’t done yet,” he says.
Business Communication in Diverse Work Environments, a new core class taught by a team of Haas professors, offers a variety of expertise. New Assistant Professor Sa-kiera Tiarra Jolynn Hudson, who will begin teaching the course this spring, says the class aims to provide the tools to analyze, reason, and acknowledge other perspectives, so leaders can problem-solve identity dynamics within their own organizations. “A person might notice that only a select few in their group are speaking up,” she says. “Before immediately assuming a lack of competence, we hope for people to first analyze the power dynamics within the group related to gender, race, political orientation, etc.” Here are three pieces of advice from the class.
You don’t need to be in a sustainability-focused role to make changes that are meaningful to the planet, says Lecturer Chris Jones, director of the CoolClimate Network, a university-government-industry-NGO collaboration at Berkeley. In his Carbon Footprint Analysis for Innovation class, Jones provides tools that can be used by people working in strategy, investor relations, corporate accounting, or marketing and communications.
The Data Insurgence
Continuing Lecturer Alison Bloomfield Meyer’s new core class Data-Driven Communication takes data to a new level by teaching students how to clearly make their point in every speech, meeting, pitch, interview, or event. “I’m coaching people to sharpen, curate, and focus their information so an audience can act on their message,” Meyer says. She encourages students to follow her three-pronged framework to develop skills:
But it almost didn’t happen. With no employer to fund his continuing education, the costs were daunting. Plus, bank loan requirements at the time demanded a co-signer, which Ceribelli found only by chance in a friend of a friend. He also received a fellowship from Haas earmarked for international students.
Wendy Nguyen, a first-generation Vietnamese American, was raised to give back to society. So when presented an opportunity to speak up against assaults on Asian Americans, she didn’t hesitate.
What inspired this book?
The metaverse—essentially a 3D version of the internet in which users can interact digitally within an environment and with other users—is a hot topic, but what are its use cases? Gaming is the most obvious and frequently mentioned. However, as technologies progress, the metaverse will definitely bring more to our future generations.
Say you’re a doctor with two patients, but you only have resources to operate on one. Patient A has an 85% chance of surviving, but if you operate, you can increase it to 90%. Patient B has only a 20% chance of surviving, but if you operate, you’ll increase it to 30%. Whom would you choose? “If you care about saving lives, you should operate on Patient B, because you have the most chance of increasing their survival,” says Associate Professor Ellen Evers (shown left). Yet, when she and Haas PhD students Stephen Baum and William Ryan posed this question in the lab, participants overwhelmingly chose Patient A.
In gambling experiments, Evers finds that people frequently pay too much for insurance to cover their losses, beyond the probability that they’ll lose. They tend to behave the same in risky hypothetical situations—for example, in deciding to buy back-up tickets to an indoor theme park in case of getting rained out of an outdoor park—paying the same whether there’s an 80%, 50%, or 20% chance of rain. “They’re so worried about feeling regret if something bad happens, they don’t consider whether the chance of something bad happening is minuscule,” says Evers. As a result, people frequently overinvest in a backup plan when there’s little chance they’ll need it, but they also underinvest in Plan B when chances are likely they will. Similarly, we overinvest in projects likely to be successful but don’t invest enough in projects that are long shots. “The more important decisions become, the worse we are at accurately considering their chances of success because we care too much,” Evers says.
Picking your favorite fast-food restaurant seems like an easy enough task. But when Associate Professor Ming Hsu (shown left) asked people to do just that, 30% of respondents picked McDonald’s. Yet half of those people changed their selection to a different favorite fast-food chain when they were later given a list to pick from. While it seems strange that people forget their favorite brand, Hsu found the same thing happened when he asked people their favorite fruit, salad dressing, and other categories.
Professor Clayton Critcher (shown right), the Joe Shoong Chair of Business, has shown that people are not only anchored by starting numbers but are also influenced by other focal values, “attractors,” that seem to draw judgments toward them.
The phenomenon could have many implications in business. In other studies, Critcher leaned on different ways investment firms construct graphs that illustrate how, say, mutual fund values have evolved. Making different incidental numbers salient on these graphs had predictable consequences for how potential retail investors thought the funds would perform.
When Juliana Schroeder (shown right) is searching for a new research topic, she often looks at the world around her. “Every paper starts with a puzzle,” says Schroeder, an associate professor and the Harold Furst Chair in Management Philosophy & Values. “I’m particularly interested in social inference and what people get wrong in their social judgments.” One recent study, for example, started with the observation that people often appreciate constructive criticism from others but are often reluctant to give it themselves. “It could range from being told you have a stain on your shirt to more consequential feedback between spouses,” she says. “Most of us want good feedback in our lives and aren’t getting enough of it.”
The alumni cultivating a nation of growers
2009
Sam Dogen, MBA 06, knew from his first month in investment banking that he didn’t want to spend his career working 14-hour days. So starting with his first paycheck, at age 22, he squirreled away 50% of his after-tax income. He also invested his savings in dividend-paying stocks and real estate.
Learning What’s Next
Texas native Janet Long’s post-retirement life has flourished as she’s followed the strengths honed in her career into altogether new territory.
For Luis Montero, MBA 71 (shown left), retirement offered the chance to take the parts of his career that he most loved and transpose them onto a lifelong passion: music.
