The ‘Slippery Slope’ of ESG Demands

State Street Global Advisors, PGIM, and other managers are making environmental, social, and governance (ESG) criteria part of their overall investment processes, but the head of Ontario Teachers' Pension Plan reminded an audience Tuesday that the real goal remains being able to pay pensions.

"We're investing if we can get the return we need, whether in electric utilities, battery technology, micro grids," said Ontario Teachers' CEO and interim chief investment officer Ron Mock, speaking on a panel at the Milken Institute's 2018 Global Conference. "All of this is critically important, not just because it's a feel-good. But these are new opportunities going forward and we want to be there."

Mock emphasized that Ontario Teachers' is a fiduciary obligated to pay pensions. "We have to earn a return."

Mock explained that the social piece of ESG is the toughest challenge for the Canadian pension plan, which manages C$190 billion ($148 billion) for hundreds of thousands of teachers. These educators "want to make things better," he said. "Think about Florida and guns in the classroom, automatic weapons in the classrooms. If you think we haven't heard from our teachers about the companies we invest in, you'd be sadly mistaken."

But some controversial asset areas — such as fossil fuels — Mock saw as a "slippery slope." If the plan, for instance, pulled its money from fossil fuel companies, other activists could call from divesting from the banks that serviced these businesses.

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Ontario Teachers' approach resonated with MetLife CIO Steven Goulart, who compared it to MetLife's investment strategy for its massive general account. "We're not doing our job if we're not taking into account all risk factors," Goulart said. "Before we invest in any corporate bond, we ask what are the governance issues that will impact this?" Comprehensive analysis, in his view, is "all part of our job." But in another part of his job — president of MetLife's institutional asset management business — Goulart has customers pushing for ESG principles. The category is exploding, according to Goulart.

Ronald O'Hanley, president and chief operating officer of State Street Corp., likewise saw ESG criteria is critical to determining what risks a company is facing in the years ahead. "If you think about the pension liabilities that Ron [Mock] has to meet, they're very long term," said O'Hanley. ESG has evolved from screening out certain companies such as those in tobacco or alcohol, to including businesses that are working on sustainable or other products, he noted. "When we first started talking about ESG, it was 'thou shalt not.' Then we moved to 'Thou Shalt' buy clean energy." 

Street Global Advisors — which has major passive and active management businesses — has become a high-profile advocate for more women in senior management and on boards, even for companies in its index funds. As a passive investor, it has to own every company in the indexes its products track. "We don't have the freedom to walk away in passive. I can't turn the S&P 500 into the S&P 499," O'Hanley said.