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Sustainability Matters

'We Cannot Divest' From Systemic Risks, Says Pioneering Sustainable Investor

Six questions for Geeta Aiyer, founder and president of Boston Common Asset Management.

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For 30 years, Geeta Aiyer has been at the vanguard of sustainable investing. Aiyer was the first U.S. investor to be elected to the board of the U.N.-backed Principles for Responsible Investment. She also founded two venerable firms specializing in environmental, social, and governance investing: Walden Capital and Boston Common Asset Management. The India-born Aiyer now serves as president of Boston Common, which has developed a reputation for prodding companies to change, including the Washington Commanders football team. Aiyer shared her story with me in late April, onstage at the annual ESG summit of the CFA Society of Washington, D.C. The following interview has been condensed and edited for clarity. 

Norton: How did you get the Commanders to change their name?

Aiyer: The team had adopted its more-insulting name in 1933, and in the late 1960s they added a logo that wasn’t very acceptable to the Native American community. Since 1968, the Native American community had asked for the name to be changed. There were lawsuits and public demonstrations. In 2007, my firm was in a group that included investors and indigenous people, co-chaired by Susan White, who represented the Oneida Nation of Wisconsin. My colleague, Steven Heim, was chair of the group’s advocacy committee, and proposed engaging the team’s corporate sponsors. FedEx (FDX) had spent several hundred million dollars to acquire naming rights for the team’s stadium. Susan White spoke publicly and privately on behalf of the Oneida with FedEx, but the company was unwilling to end its corporate sponsorship, pursuing and winning lawsuits to protect its name and trademark.

The pandemic and the murder of George Floyd in 2020 riled up the country. Our group wrote to the team’s sponsors--Nike (NKE), PepsiCo (PEP), FedEx--asking why they continued to associate with this inflammatory name while concurrently making commitments to fight systemic racism. By July, there was finally change. They temporarily went by “the Washington Football Team” and now, they are officially the Commanders. 

Norton: How did you become a sustainable investor?

Aiyer: My first job was at Cambridge Associates. I wrote a very conventional report about South Africa divestment, but that got me thinking that human rights could be part of investing.

I went on to become an analyst and a portfolio manager. In 1993, I led my first shareholder engagement. I had recommended Albertsons (ACI), the supermarket chain. Their competitor, Lucky Stores, was hit by a class action lawsuit by women employees who couldn’t become managers. It was settled for $100 million, a huge amount for the time. I asked Albertsons what steps it was taking to address how women were treated. What happened afterward stunned me. Company management flew from Boise, Idaho, to meet me, a 30-something analyst. I realized that investors had a voice and reach they weren’t utilizing. We were self-censoring. I never looked back. The combination of bringing these sustainability issues into investing, and the idea that investor engagement was an integral part, has been with me since.

Norton: How has your vision of sustainable investing changed?

Aiyer: Today, there’s so much information available via data vendors and investor coalitions like Principles for Responsible Investment. There’s a narrative around ESG, maybe [built] a little too much around performance-driven reasons. Engagement has become something people want to do. The world has come a long way. But the risks have now become systemic. They’ve escalated. The cost of inaction over the last several years has been great. Saying we will have a [net zero carbon] footprint in 2050 is pointless. In fact, imperfect action today is worth a lot more than perfect action in 2050.
We know that climate change, rising inequality without mobility, and health and wellness are all interconnected and systemic risks. We cannot divest from them. We cannot diversify them away. We cannot hide from them even as active managers. The urgency of these problems should motivate us. We’re only 1.1 degrees higher than the pre-industrial era, and already the North Pole is burning. There are floods in all the major cities. This is at 1 degree. [The 2015 Paris climate agreement and 2021 Glasgow follow-up agreement set goals of 1.5 degrees and 2 degrees, respectively.] If you’re on a trajectory to 4 degrees, then we need to say, "This isn’t a long-term pursuit.” We CFAs know that that the terminal value 15 years out can account for 70% of the present value of a company. The Intergovernmental Panel on Climate Change 2030 deadline [to address climate change] is not that far out. In the early days, we used to say, "ESG investors are here to complete finance, transform finance." ESG isn’t a thing apart. It isn’t some nonfinancial factor. This is finance. 

Norton: It’s hunting season on ESG with criticism coming from a lot of different places. Greenwashing is one. What’s your defense?

Aiyer: For context, FASB is less than 50 years old. The financial standards that we take for granted were only created by us in 1973. We chose what we would count, and ignored some things that matter, like air, water, and human wellbeing. I feel we also optimized to the wrong set of constraints. We made a mistake in thinking that capital was scarce, but not carbon capacity or social cohesion. But correcting this can’t be a political discussion. Financial people are capable of being nimble. We can change this.

Let’s take greenwashing. With sustainable investing, the field is young. Clearly, we want the highest and the best to be appreciated and applauded. We need companies and investors to make commitments. People made big commitments in the runup to COP-26, on deforestation and biodiversity, not to mention carbon and diversity. Let's hold them to those promises. Let's assess the metrics, qualitative and quantitative, that show how they fared, so that we can tackle greenwashing. We need data, we need engaged investors, and we need ecosystems that will sustain us through these challenges. We need to support the basic building blocks like carbon accounting for financials supported by frameworks like the Partnership for Carbon Accounting Financials, where financial players like banks and investors can develop better assessment frameworks, share best practices, and challenge others to join.

Norton: ESG is also criticized for overpromising on performance.

Aiyer: ESG stumbled for one quarter, and it’s front-page news. Neither ESG nor the energy sector could ever be perpetually a winner, because finance theory taught us that such advantage would be arbitraged away, right? But our chances are no worse than any other investor’s.

Another criticism is that ESG investing is trying to divert attention from the need for urgent policy change. Not at all. Policy action, technological change, consumer preference shifts, disruptive innovations, new competitors--these are all desirable. This is the set of changes that will make that transition to a low-carbon economy possible.
I do worry about indexation, which tries to mimic past winners in the form of a market benchmark, because I feel that “tracking error minimization” dominates investors’ motivation. So they load up on other things that correlate with the thing that they’re trying to avoid and are passive on policy matters.  

Norton: Are there ways to get financial data that reflect the true cost of the value of limited resources such as water, air, land?

Aiyer: There is an effort to assess impact-weighted accounts, being done by Professor George Serafeim at Harvard Business School. There is another effort by GIST Advisory. These are promising, but we don’t have the time to wait for the perfect score, which would allow us to measure everything in one dimension. We analysts know that whatever the company tells us, we need to look under the hood and look for corroborating evidence. Financial companies and investors may need to look at many dimensions until such time as those metrics have reached the sophistication that we want.

I also have my reservations about demanding that everything be proved to be material. These are dynamically evolving risks. Materiality is a backward-looking way of thinking about it. Finally, think about fiduciary duty. We invest on behalf of our beneficiaries, for the quality of their life. As an equity investor, I have the longest possible time horizon. Debt has a due date and private equity has an exit. Equity investors own a piece of a company’s future. We must keep that mindset when we talk to companies--to steward our investment, urge them to pay attention to all these metrics, and use that very big voice.

Norton: Thank you very much.

Leslie Norton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.