Fall 2024 Workshop
Outgoing IMAP Director Nalin Kulatilaka welcomes attendees with history about IMAP
IMAP Executive Director Susan Murphy welcomes attendees with an IMAP overview
Incoming IMAP Director Eddie Riedl welcomes attendees and gives some context to our topic
Professor Keith Ericson gives keynote talk on 'What Shareholders Want'
Professor Keith Ericson concludes his talk
Our distinguished panel, (L-R) Peter Fox-Penner, Ariel Babcock, Cecilia Fryklöf, & Eddie Riedl
Panelist Cecilia Fryklöf of Nordea Asset Management makes a point
Panelist Peter Fox-Penner of Energy Impact Partners shares his insights
Panelist Ariel Babcock of Fidelity Investments shares her perspective
Attendees engaged in discussions during the breakout sessions
Attendees networked during breakfast
Attendees viewed and discussed posters during breaks
Following the workshop, several attendees toured BU's Computer & Data Sciences building, the largest fossil-fuel-free building in Boston.
Thanks to all who attended our 3rd annual Fall Workshop on October 18, 2024. It was a huge success.
Overview
Our 2024 Fall Workshop examined how investment managers balance investors’ desire for both financial gains and positive environmental and social impacts. Many shareholders have opinions about where their money is and should be invested. Some are willing to sacrifice some financial return in exchange for supporting companies that maintain a certain standard of employee welfare and environmental responsibility; some seek even greater positive impact on environmental or social issues from the corporations that they invest in; and still others simply want to maximize shareholder returns.
Key Takeaways
- Shareholder investment choices can signal their preferences or preferences can be identified via regulation. Identifying investor preferences can occur simply by the choices they make as to what type of funds they invest in. However, some investment firms are more proactive in identifying these preferences, for example, by surveying their investors. And there are some jurisdictions—notably, Europe—that have regulations requiring firms to survey their investors to determine their preferences regarding sustainability and specific environmental and social goals. Firms can and do use these surveys to encourage individual investors towards more sustainable investments.
- Investors usually care about multiple issues and vary in how they weigh their relative importance. Most investors care—at least a little—about sustainability issues, but there can be considerable differences across investor groups. Perhaps most notably, there are generational gaps in investor preferences: millennials exhibit more interest in sustainable practices, but this cohort lacks much financial control as older generations of investors continue to hold more wealth. All investors can help drive change: for example, pensioners can raise sustainability concerns with pension investment firms; and consumers can make more sustainable choices in their purchases. Across all investor groups, it remains important to identify and understand the inherent trade-offs in costs and benefits relating to investing in certain types of funds, and purchasing certain types of products, when incorporating non-financial goals such as sustainability.
- Current regulations in both the US and Europe can help prevent greenwashing. European investment funds are subject to the Sustainable Finance Disclosure Regulation (SFDR), which is a disclosure regulation requiring that a designated sustainable fund must clearly lay out its investment objectives and the type of firms included within its portfolio. While US investment funds are not subject to a US-equivalent of the SFRD, they may use this latter regulation to highlight how each investment is vetted. Further, US investment firms must disclose their investments and comply with SEC disclosure rules; failure to do so can lead to SEC fines relating to fraudulent marketing. The SEC also has a so-called “80% names” test, requiring investment firms to define the terms used in naming a fund, and demonstrating that at least 80% of the portfolio aligns with this definition. Europe also has a similar, though stricter, fund naming rule.
- Both the US and EU have varying layers of current regulations. In the US, many states have legislation that aligns with their particular view of ESG and sustainability; this creates a bifurcated regulatory environment of differing federal versus state-level regulation, which is challenging for US investment managers to navigate. It also means investment firms must offer numerous fund choices to meet varying investor preferences. However, many of these federal and state-level regulations are being challenged on fiduciary duty grounds, leading to further uncertainty. In the EU, there is variation by region as well.
- While many companies and investment firms face short-term performance pressures, the long-term implications of sustainability risks remain. More sustainability issues are becoming financially material and thus must be addressed; in order for businesses to thrive in the long-term, they need to consider their environmental and social aspects to ensure profitability tomorrow. Some EU regulations are helping to foster this longer-term thinking. In addition, some investors specifically focus on longer-term investments: for example, in the energy sector, even a 5-10-year window is short, given the typical multi-decade life expectancy for many energy assets. Investment firms can focus on governance structures, incentive alignment, and the right metrics to help promote a more long-term perspective.
- Financial investment companies can help instill a more long-term view and shape investor preferences, but don’t always choose to do so. Investment firms can actively engage with their clients, companies, policy, and the media to highlight the importance of long-term thinking. However, with diverse and dispersed client bases, it is difficult for investment firms to comprehensively lay out and address these issues. Both investment and sustainability goals are long-term but can fail to align due to market pressures. One reason is that public policy—like pricing externalities (e.g., carbon pricing)—remains underdeveloped, making it harder for companies to prioritize sustainability. Yet climate risk continues to become more prominent, even for firms that do not emphasize sustainability; one example of this is the increased flooding risks to infrastructure across the US. Notably, recognition of climate risks continues to vary across sectors and businesses.
- GFANZ, the Glasgow Financial Alliance for Net Zero, provides an example of how companies can share best practices. GFANZ is comprised of organizations across the financial sector (including asset owners, banks, private equity, venture capital, and insurance), all dedicated towards facilitating member firms to convince their investees on the merits of achieving zero. GFANZ provides an excellent example of considerable (global) cross fertilization.
- As long as sustainability-related issues materially affect firm financial performance, they will remain key investment considerations regardless of current political views. If a factor included in an investment analysis can be demonstrated as financially material, this limits the impact of current (potentially changing) perspectives of the political and regulatory regime. Firms prioritize the consideration of financial impacts, as well as adverse impacts that will have a financial impact because of a systemic risk that cuts across portfolios. However, differing regulations (including across states) can affect both how investment firms communicate with their clients, as well as how companies are evaluated.
- Investment firms would prefer more standardized regulations. Voluntary reporting can lead to variable approaches and disclosures, limiting the effectiveness of sustainability-related data. Mandated disclosure can help standardize measurement and disclosure approaches; for example, regarding scope 1 and 2 emissions as recommended by the ISSB (International Sustainability Standards Board). This is because such standards help to create a more universally applied baseline, which facilitates comparisons across companies and jurisdictions for reporting sustainability factors.
What do Shareholders Want?
Professor Keith Ericson teed off the discussion with a presentation of his research into understanding what shareholders want: just financial gain or something else. (See Ericson’s NBER paper on this here.) Ericson highlighted that individuals can be both owners of firms as well as consumers of their products/services, and thus care about how firms set prices for consumers.
Ericson ran an experiment examining how shareholders who care about consumers as well as profits would react to price decreases for consumers, finding that the gains of small price decreases can be quite large. For example, a firm can maximize profits only – or it can also consider consumers, leading the firm to lower prices (even a little bit) and thus directly benefit consumers by enabling them to save money on their purchases. His illustrative example demonstrated that small price reductions can have relatively limited effects on firm profits but lead to considerable consumer benefits.
To assess how retail investors might trade-off financial versus non-financial gains in their investments, Ericson used surveys (from the Rand American Life panel) asking participants about a hypothetical firm in which they owned stock, and to consider a shareholder vote on pricing strategy. Specifically, Ericson examined the point at which participants would switch from voting for profit maximization versus lower prices for consumers. Related, he examined how these hypothetical shareholders would respond to proposals to make a firm more environmentally friendly by quantifying those environmental benefits in monetary terms and then asking whether shareholders are willing to give up a million dollars in profits for the firm for $64 million in social environmental benefits.
Interestingly, he found that 93% of survey participants place some positive weight on consumers, indicating they do not always vote to maximize profits. Of note, only 7% of participants voted for purely profit maximization. This strongly suggests there are inflection points at which these participants—representing hypothetical shareholders— would trade-off maximizing profits to achieve some consumer or environmental benefit. Within the survey, he found that the median participant was willing to trade a dollar in firm profit for $2.30 in consumer benefits; this trade-off was similar in magnitude when considering environmental benefits. Ericson concludes that shareholders appear willing to forego some financial benefits to give consumers larger benefits. While this trade-off does not appear to be a dollar for a dollar, there is an expressed willingness to incur smaller financial costs to provide larger non-financial gains to other stakeholders (such as consumers and the environment).
This year’s theme was – Shifting Scales: How investors balance financial, environmental, and social risks
How do investors balance financial returns with environmental or social objectives?
Many shareholders have opinions about where their money is invested. Some are willing to sacrifice a degree of financial return in exchange for supporting companies maintaining a certain standard of employee welfare and environmental responsibility; some seek even greater positive impact on environmental or social issues from the corporations that they invest in; and still others simply want to maximize profit and thus their shareholder returns.
How should investors and corporations differentiate their actions based on these diverse goals? The concept of balancing financial return versus social and environmental interests has been called “perhaps the most important corporate law debate over the last several years.” (Scott Hirst of BU Law School in a 2023 article in ProMarket.)
IMAP affiliated faculty Keith Ericson’s paper, “What do shareholders want?” examines this timely and critical issue of what shareholders want firms to maximize. “Consumers are a key group missing from typical ESG or corporate social responsibility measures, even though promoting consumer welfare is arguably a social objective. Consumers are closely related to a firm’s core business, and while firms may or may not have a comparative advantage in promoting other goals, promoting consumer welfare is undoubtedly a competitive advantage for firms,” said Ericson in his article, Should Consumer Welfare be an Objective of the Firm? “Given the similar magnitude of shareholder concern for consumer welfare and the environment, this paper’s results suggest that the impact of firms on consumers should receive more attention when assessing the social impact of investing,” he argues.
An earlier article by Matt Levine in Bloomberg discussed this concept: “But in modern finance we know, or suspect, a few more facts about shareholders, and those facts might suggest that the shareholders have other desires, beyond just the stock going up.”
Shareholders can use their interests to push companies towards certain behaviors. Activism through proxy proposals has been called, “the complaints department for investors,” by Ellen Kennedy in Kiplinger. The 2023 and 2024 proxy seasons were particularly active.
Reflecting corporate pushback on this trend, this past May, Exxon filed a lawsuit against its shareholders to prevent them from bringing forward proposals to influence the company’s actions. In a Yahoo Finance column, author Michael Hiltzik said, “The company’s legal threat worked: Days after the lawsuit was filed, the shareholder groups, weighing their relative strength against an oil behemoth, withdrew the proposal and pledged not to refile it in the future. Yet even though the proposal no longer exists, the company is still pursuing the lawsuit, running up its own and its adversaries’ legal bills. Its goal isn’t hard to fathom.”
This debate reveals a number of ongoing questions, including: How much financial return can or should be traded to achieve these multiple goals simultaneously? How can asset managers determine the appropriate balance within these multiple goals? How should corporate managers incorporate differing investor priorities into their strategic decisions?
This workshop will explore academic research on this question and facilitate a panel discussion to hear the viewpoints of corporate and investment industry leaders.
Our keynote speaker will be Keith Ericson, Professor of Markets, Public Policy, and Law at BU’s Questrom School of Business, who will talk about his research into what shareholders want. Our panel discussion will be moderated by Eddie Riedl, the John F. Smith Jr. Professor in Management, Professor of Accounting at BU’s Questrom School of Business.
Featured Speakers:
