Of all the news out of Washington in the past year, President Joe Biden's February decision to bring the U.S. back into the Paris Agreement may end up having the most direct investment implications over the long term.
Its importance is why, as the chief investment officer at Wespath Benefits and Investments, I have worked with my team over the last several years to engage with our peers from The United Methodist Church, as well as fellow institutional investors, urging policymakers and corporations to embrace the goals of the Paris Agreement.
I am absolutely convinced that international policy initiatives like the Paris Agreement are imperative to generate the support required to promote a more sustainable global economy — one that advances economic prosperity for all, social cohesion and environmental health.
I believe the transition to this sustainable future can create meaningful systemic benefits such as healthier global markets and more resilient companies. We seek these improved market outcomes so that we can achieve the investment return expectations of our participants and institutional clients.
Achieving success in this collaborative endeavor will largely depend on a supportive public policy environment — be it Paris-aligned policies, domestic regulatory changes or further international coalition building. The companies we at Wespath engage on sustainability-related issues echo the importance of supportive policy.
Company support of public policy initiatives makes sense. In some cases, companies are reluctant to implement sustainability-related changes to internal policies and operational practices that exceed the standards set by existing regulation. They believe the cost of doing so may result in a near-term competitive disadvantage. Accordingly, supporting public policy changes that "level the playing field," by seeking to promote more universal sustainability standards and reporting, will generate market-wide, long-term support for a sustainable economy.
While we are encouraged to see some companies supporting public policies by aligning their lobbying efforts with a low-carbon transition, we are increasingly concerned about the disconnect between what some companies publicly state regarding the need for fair public policy, and their continued funding of corporate lobbying efforts that aggressively oppose essential public policy changes.
Wespath's vision for a sustainable economy, as well as the environmental, social and governance best practices accepted by many of our peers, leave little room for lobbying that preserves near-term profit maximization and sacrifices long-term sustainable company profitability. As investors, we expect greater transparency from companies regarding their rationale supporting climate-related lobbying activities.
Many investors are starting to address this issue. Wespath recently joined several large institutional investors, all members of Climate Action 100+ and the Ceres Investor Network on Climate Risk and Sustainability, in asking 47 of the largest U.S.-based corporate greenhouse gas emitters to disclose their climate lobbying practices.
I firmly believe transparency and disclosure of climate-related lobbying activities are important first steps. We want to know if the lobbying activities of the companies in which we invest align with the companies' statements supporting climate policy. Absent such disclosures, investors may be unable to assess the extent to which a company is seriously considering the risks associated with failure to achieve Paris alignment.
I also think the investment community itself must pursue meaningful reform on this issue. For instance, we urge other asset owners to critically examine the way they appraise their external asset managers by evaluating how managers are considering ESG factors in investment decision-making. It is clear that holistic ESG integration, including the consideration of how asset managers consider climate lobbying practices in security selection, should be a core component of long-term investment programs.
There is a need for better expectation setting in this asset owner-asset manager relationship as well. Companies respond to the expectations of asset managers, which reflect the expectations of asset owners. Right now, asset owners are overly concerned with short-term benchmark comparative performance from their active asset managers. Accordingly, asset managers reward companies that produce positive short-term results.
This counterproductive cycle results in companies prioritizing the maximization of near-term outcomes instead of sustainable policies with longer-term value creation. Lobbying against public policy that may jeopardize near-term performance is one of the tools employed here.
If asset owners want real change — if they want companies to adopt sustainable long-term business practices and avoid the market's continuous focus on near-term profit maximization — they must critically evaluate their own expectations of their asset managers. Only then will asset managers adjust their expectations of companies held in their strategies. I am optimistic that ongoing conversations about climate lobbying disclosure will be the spark needed to ignite real behavior change by investors and subsequently, the broader corporate community.
Dave Zellner is chief investment officer of Wespath Benefits and Investments. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines but is not a product of P&I's editorial team.
