Larry Fink’s recent clarion call to capitalism that managing “environmental, social,and governance (ESG) matters demonstrates the leadership and good governance that is so essential to sustainable growth” should not fall on deaf CEO ears.
Fink is the leader of BlackRock, the largest asset manager in the world with $6 trillion under management, meaning that it has considerable proxy shareholder voting power in those companies in which it actively or passively invests. Currying BlackRock’s favor is a wise move. ESG matters to which companies should pay attention include factors such as emissions, waste and fuel management, human rights, corruption, impacts on biodiversity, fair labor standards, accident and safety controls, supply chain management, etc. Essentially, if companies don’t make palpable efforts to service their constellation of communities/stakeholders –– including our planet –– they could find themselves with a new board, and management team, who will.
This sentiment is not new. Socially Responsible/Impact Investing models have been around for decades (centuries, in fact) and certain prescient asset managers, such as Boston Common Asset Management (founded by a woman), have been generating market- competitive/beating returns for 15 years. What has changed is the amount of money that is being managed to these ends. CalPERS, a $350 billion pension fund of the State of California, is on the forefront of integrating ESG factors into its investments; and the NYC and NY State pension funds, also worth roughly $350 billion combined, are nipping at CalPERS’ heels. And European pension and sovereign wealth funds, some with a trillion in the bank, are considerably ahead of the U.S.
What is behind this shift in thinking? Doing the “right thing” aside, immense amounts of research from organizations such as Sustainable Accounting Standards Board reveal that proactively coming up with ways to either minimize or mitigate businesses impacts related to ESG issues can have material positive effects on financial performance, traced down to the level of income statements, balance sheets and costs of capital. And while there are a few frameworks by which companies can use to measure and report, leveraging women always factors into the mix of proscriptions companies should use to deliver these results.
In the returns context, McKinsey estimates a $12 trillion bump in global GDP by 2025 if management gender parity were realized. A Credit Suisse study of 3,000 listed firms reports companies with 50 percent senior front office management who are female outperformed the growth of the market index from 2008 to 2016 by upwards of 60 percent. An MSCI review of 1,600+ public firms has pegged companies with three women on their boards in 2011 as outperforming those with none by 37 percent EPS and 10 percent ROE growth over the last five years.
We don’t believe any other singular ESG factor can have such a pronounced impact on company performance, again irrespective of industry. And what’s more, women are not only accretive to financial performance, they are at the core of the sustainable and ethical part of the equation.
A study by the UC Berkeley Haas School of Business of 1,500+ traded firms concludes that companies with women on their boards are more likely to address a litany of ESG factors. And findings published in the Journal of Financial Economics noted that female Directors have better attendance, can actually increase men’s attendance, and are more likely to be assigned to committees that monitor performance. The same study found that boards with more gender diversity are more likely to hold CEOs feet to the fire for sub-par execution.
These behaviors are not surprising in the slightest. Biochemically, estrogen –– a material driver of the female gender –– has been exhaustedly linked to collaboration, compromise, nurturing, relationships and “the village” perspective. The male version –– testosterone –– manifests itself in competition, criminality, sex drive, focus on self and aggression/violence. All genders have both in them, just in dramatically different amounts; men have 8-9 times the testosterone of women as a daily baseline and can produce 20 times more per day.
While there are many other hormonal and societal factors behind the degree and frequency of these expressions –– in the U.S., testosterone levels drop once you become a father and continue to decline the more involved you become with caring for your child –– a quick review of the current (and historical) state of world affairs, and the dire need for the adoption of ESG factors, would seem to underscore the intractability of these basic gender building blocks. It should also be noted that an ongoing study reveals that there has been a 1 percent drop per year in testosterone levels in U.S. men since 1987. While there is no scientific agreement as to the cause of this decline, it could explain why the vast majority of Millennial men don’t want to wear the tough, strong and respected robes of traditional masculinity and would rather be regarded as friendly, intelligent, funny and caring.
The economic, environmental and human risks of not addressing these topics have become enormous. It should be noted that 80 percent of the world’s leaders are men, and only two of the G20 nations are run by women. Good/fair and bad/less-fair treatment of others, and related ecosystems, are biologically influenced; fortunately, these tendencies, for most of us, can be cognitively altered. Biology provides the clay, norms and rules cast the initial mold, which can be modified by awareness, ongoing development, and perhaps most importantly, courage. The key words here are “can be.”