As president and CEO of Pax World Management and the Pax World Funds sustainable investment platform, Joseph Keefe provides an opportunity for thousands of investors to put their money where their values are, to the tune of more than $3 billion globally. Keefe recently spoke with Ensia and Forbes about the what and why of sustainable investing and his conviction that it’s not only the right thing to do, but also the smart thing to do — from the perspective of performance as well as principle.
What is sustainable investing? How does it differ from socially responsible investing?
We define sustainable investing as fully integrating environmental, social and governance factors — what we call ESG factors — into investment management.
The distinction I would make between what was historically defined as socially responsible investing and sustainable investing is that socially responsible investing, or SRI, became more defined in the popular mind with screening out investments based upon moral or ethical considerations — weapons, tobacco, alcohol, gambling, so called “sin stocks,” if you will. One of the reasons SRI was greeted skeptically in traditional financial circles was it struck people as counterintuitive. How could you shrink the investment universe and still get market performance? Now, I’ve never seen any evidence to suggest that SRI funds underperformed traditional funds or traditional strategy. But that was sort of the conventional wisdom.
Rather than positioning itself negatively in terms of screening out things, sustainable investing is a more positive approach. It’s based upon an emerging body of research that suggests that companies’ environmental, social and governance performance is intimately connected to their financial performance. In fact, companies that do a better job managing their ESG or sustainability performance over time may indeed be better long-term investments. So, we think it’s a smarter way to invest.
Why integrate ESG considerations into investment decisions?
Any investment approach tries to look at all the factors it deems to be relevant or material to investment performance. There’s all kinds of data now suggesting that a company’s environmental performance or its corporate governance or its social practices will have a bearing on its financial performance. So I think you can integrate ESG into portfolio construction based upon just traditional financial analysis, wanting to make more money and wanting to avoid the risks associated with substandard ESG performance.
But you can also integrate it based upon a desire to align one’s investments with one’s values. People increasingly want to align their investments with their values, younger investors and women investors in particular. There’s a strong argument that can be made that aligning your investments with your values, investing in a way that’s more focused on producing positive social and environmental outcomes, can also be a smarter investment strategy.
What metrics do you use to assess a company’s sustainability?
we’ll look at companies’ emissions, disclosures, recycling, energy efficiency, energy use, their carbon footprint and on and on. Under social issues, we’ll look at whether there are human rights or labor problems in [a company’s] global supply chain. We’ll look at how companies treat women and what they’re doing about gender and equality. Under governance, we’ll look at CEO compensation, whether there are conflicts between shareholders’ interests and management’s interest, and so forth.
We think that the evidence shows that the more you learn about the companies in your portfolio, the better investment decisions you’re going to make. So it really makes no sense to ignore ESG factors. I think this is, in the end, a more holistic, a more complete and, over the long-term, a better approach to investing.
Investing and trading are not the same thing, I would add. Sure, there’s a lot of money that’s made every day in the market by short-term traders trading in milliseconds. Short-term profit is valued regardless of the long-term consequences or externalities associated with it. Sustainable investing tries to integrate those externalities and it tries to be cognizant of those long-term consequences because our investors are not trading in milliseconds. Our investors are saving up for their kids’ college education or their retirement. Their focus is on the long term, and they want to bequeath to their children and grandchildren a climate and an environment and a society that’s as good or better than the one they inherited.
Do you find yourself continually swimming upstream against this focus on quick returns?
Oh, absolutely. Whether the issue is climate change or gender equality or whatever you’re looking at, there are a lot of barriers to progress. The idea that we can just have infinite quantitative economic growth and more and more stuff on a finite planet without consequences is a dangerous idea. But the economic system that we live under makes no real distinction between capital investments that jeopardize the environment or jeopardize public health or exacerbate economic inequality and those that produce more positive results. So, there’s going to be a tension going forward — the long term versus the short term, sustainability-focused investment strategies versus strategies that completely ignore sustainability concerns. We’re in a society where we have to just accept these conflicts and these tensions and do our best.
What trends are you seeing related to sustainable investing?
I think there’s a growing awareness of the risk associated with fossil fuel companies and the need to wean ourselves off fossil fuels and transition to cleaner energy sources. I think that trend is only in its incipient stages. It’s going to get bigger and bigger.
Hopefully at some point we’ll start doing public policy again in this country and there will be a carbon tax or other responsible public policy measures that will help us get there. But in the meantime, there’s going to be growing investor focus on the risks associated with climate and also on solutions associated with climate change. That’s going to be a trend that not only dominates sustainable investing but will also dominate economic discourse over the next 10 or 20 years.
What are the biggest challenges and biggest rewards of running a sustainable investment platform?
A lot of us are still fairly small. We don’t have the voice that we would like to have. We don’t have the assets under management to have as much impact as we would like to have. Whether it’s on climate change or trying to increase the representation of women on corporate boards and so forth, progress sometimes feels to be glacial.
One of the things that’s great about sustainable investing is you feel that your investment dollars can help move the needle and can help, over time, produce more positive societal and environmental outcomes. I think that’s what gets me up in the morning and gets a lot of our investors up in the morning — thinking that our money can make a difference.
How do you go about expanding that, getting to the place where it feels like your voice is being heard?
I think there’s more of a mainstream audience today than there was five or 10 years ago. A lot of traditional asset managers are starting to become interested in sustainable investing. They see a business opportunity because they see growing interest among investors. But I think also they see this is as a way to improve themselves as businesses and to do more positive things. That’s a hopeful development.
I believe that it’s just going to continue because certain demographic trends, such as the transfer of wealth to women, are going to further propel this change. I’m a 60-year-old white male; we were taught, “You make your money over here and then you go and you spend it wisely over there. You do some nonprofit work or you get involved in politics. You drive a Prius or whatever you want to do.” There are certain demographics like women and young investors who are not so compartmentalized and want to take a more holistic approach to investing such that it’s more integrated with the way they want to live the rest of their lives. I think this emerging sensibility among investors is going to really propel a lot of change in the way investment is done.
What is your vision for sustainable investing a decade or two decades or 50 years from now?
I really believe that sustainable investing ultimately has to displace traditional investing. We need to reach a place where we look back and say, “Wow, you mean we didn’t consider environmental and social and governance factors when we looked at investing? We didn’t consider sustainability? We didn’t consider the externalities of commerce?”
I think we’re going to get to a point where sustainable investing basically supplants traditional investing because the notion that you would ignore those things becomes increasingly untenable.
I think sustainable investing cannot be simply a niche strategy for a little part of the marketplace where people want to invest in a certain way. It’s got to become mainstream and it’s got to basically supplant traditional investing, just as our industrial age economy has to be supplanted by a sustainable economy.
Do you see it happening?
I’ve always been an optimist about possibilities and a pessimist about probabilities. But certainly we’re going to do our best to try to make it happen.
What haven’t I asked you that you wish I had?
People think of sustainability sometimes purely in environmental terms. But there are other sustainability issues, and the greatest, in my view, is gender inequality. We make a point at Pax World of trying to work with the companies we invest in to get them to embrace gender diversity on their boards. Once again, there’s a double justification here: Promoting and advancing women and gender equality not only is the right thing to do, but research suggests that where women are better represented, companies actually perform better financially. I think making the investment case for gender equality is a really important part of the work we do and a core element of sustainable investing.