ESG Part 6: A Conversation on Corporate Governance/ESG at Rowan University
In the introduction to our ESG series, we promoted a GIC conference that was held on Friday, October 14, at Rowan University in Glassboro, NJ: “Environmental, Social, and Corporate Governance with Rowan University.” The day was fruitful and filled with information. We plan to highlight three sessions from it as a part of our ESG series.
For the final session of that one-day conference (this Sunday, the last shall be the first) I had the honor of moderating a discussion with two distinguished experts positioned to address the topic of the G in ESG, governance. One of them spoke from an investment perspective and the other from a legal perspective. The session was titled “A Conversation on Corporate Governance/ESG,” (https://www.interdependence.org/resources/environmental-social-and-corporate-governance-with-rowan-university-governance-a-conversation-on-corporate-governance-esg/#.Y49-jC-B1oM).
My two panelists were Jaynee LaVecchia and Michael Zezas.
Having served 22 years as an Associate Justice of the New Jersey Supreme Court, Jaynee LaVecchia is currently the Senior Associate Justice. She has written more than 300 opinions, including opinions on “environmental and administrative law, and state constitutional principles controlling the actions of the Branches and agencies of State government."
Jaynee has also served as the New Jersey Commissioner of Banking and Insurance and as the Director of the Division of Law within the Department of Law and Public Safety.
Michael Zezas is a Managing Director and Head of US Public Policy Research and Municipal Credit Strategy at Morgan Stanley.
After joining Morgan Stanley in 2007 as a credit analyst and portfolio manager, Michael Zezas became the Head of Municipal Credit Strategy in 2010 and Head of US Public Policy Research in 2016. On behalf of Morgan Stanley’s investors, Michael and his teams of analysts continually assess how public policy issues influence investment strategy in the municipal credit market.
Jaynee’s and Michael’s full bios can be found at the session link above. It was an honor to share a conversation with them, and I thank them for taking time out of busy schedules to join us at Rowan.
Though we hope that readers will take time to listen to the entire 45-minute session, we note that background noise in the room makes it difficult to hear every word. Bullets cannot do full justice to a nuanced discussion, but we offer a half dozen of them below, plus one, for readers to consider.
· After my introductory remarks, Michael Zezas offers his opening perspective beginning at 5:57. He observed that the ESG market — now about $500 billion in ESG-specific mutual funds — has segued from its evangelical phase, as ESG concepts were forged and promoted, to a phase where quantitative analysis is foremost and where those wishing to set up an ESG investing framework need to hire data people to cobble together the “measures of impact” required.
· Since there is not yet a consensus on uniform principles and measurements for ESG, growth in the ESG market is going to continue to be investor-led and outcomes determined by free-market demand. The process will remain messy until, over time, consensus emerges. Ratings agencies have not been able to lead — most issuers have not jumped on the idea of paying extra for a green label or an ESG score because they wanted data demonstrating that they would be lowering their borrowing costs, and there aren’t yet enough issuers doing it to provide that data. Michael terms this a chicken-and-egg problem.
· Michael thinks that governors and state legislatures who oppose ESG cannot effectively hinder the ESG market, though federal anti-ESG regulations could do that. States with anti-ESG policies will instead incur higher borrowing costs. Investor demand outstrips efforts to squelch the market by forbidding state entities to invest in ESG. Individual investors bring their own preferences to their investment choices, so institutional investors offer a menu of options, including funds reflecting ESG principles.
· Last, Michael sees “substantial” opportunity for ESG investors at this point, “in the sense that you can pursue ESG investing principles but without necessarily having to accept weaker returns or yield give-ups.” Investors are not yet paying a premium for bonds based on the track record of those bonds for “delivering on ESG principles.”
· At 13:33, Jaynee LaVecchia explores the ESG landscape from a legal perspective, looking first at legal advice for corporations that have proposed to follow ESG principles, especially when those corporations have locations in multiple jurisdictions, some with anti-ESG regulations in place. She notes the importance of “memorializing” ESG principles to be followed and denoting who will be responsible for them. Courts are not inclined to second-guess business judgments that adhere to stated principles unless there is hard evidence that “these policies were done at a proven basis for not maximizing shareholder value.” LaVecchia sees maximizing shareholder value in terms broader than profit alone. Retaining talent that enables a corporation “to sustain and thrive” is a key example.
· Jaynee notes the balkanization of red and blue state economic policies “is exactly the opposite of what the federal Constitution called for fervidly through the enactment of the commerce clause provision.” In passing legislation that hinders out-of-state companies from doing business in their states, Texas and Florida, for example, are choosing a path that hasn’t been taken in a long time. She notes that the Supreme Court has opted to consider a case, National Pork Producers Council v. Ross, that involves a legal doctrine called the Dormant Commerce Clause, which holds, based on previous Supreme Court cases, that states are prohibited from creating laws that discriminate against, or unduly burden, interstate commerce. The case is about a California law regarding the treatment of livestock (https://www.ncsl.org/blog/2022/10/17/supreme-court-tackles-dormant-commerce-clause-in-the-form-of-pork.aspx), but Jaynee notes that a ruling will have implications for anti-ESG laws, one way or another.
· Finally, another open issue raised by Michael Zezas is “whether or not pursuing ESG strategies can be considered a fiduciary duty.” Michael explains, “If the government permits the idea that pursuing ESG principles is part or can be part of a fiduciary duty, that broadly enables financial managers and institutional funds; it gives them a much greater legal bandwidth to pursue these things.”
All who stayed for the last session of the conference benefited from important takeways. The link to the video recording, again, is https://www.interdependence.org/resources/environmental-social-and-corporate-governance-with-rowan-university-governance-a-conversation-on-corporate-governance-esg/#.Y49-jC-B1oM.
As I finalize this commentary on a Friday afternoon, I have an email from Morgan Stanley Research. Michael Zezas and others are offering a webcast on ESG on Monday, December 12 — tomorrow, given that you are reading this on a Sunday. Here are details from the email:
Morgan Stanley Macro Forum
ESG – What Comes Next?
Monday, December 12th
09:00 NY / 14:00 LN / 22:00 HK
When it comes to ESG investing, it’s time for a marriage between ESG investing principles and deep sector-specific expertise. To that end, we want to get you up to speed quickly on some key innovations that may accelerate both ESG goals & investment returns: ‘Rate of Change’ investing; ‘Earthshots’, & quantitative approaches to fixed-income & equity portfolio construction. We’ll also check in on client trends we’re seeing.
Morgan Stanley Research:
- Stephen Byrd, Global Head of Sustainability and Clean Tech Research
- Carolyn Campbell, Fixed Income Strategist
- Stephan Kessler, Global Head of Quantitative Investment Strategy Research
- Edward Stanley, Thematic Research
- Michael Zezas, Head of Global Thematic & Public Policy Research
The registration link for the live webcast or a replay is here: https://morganstanley.webcasts.com/starthere.jsp?ei=1585995&tp_key=41bed10ca3
Readers, we wish you a pleasant Sunday, with food for thought.
David R. Kotok
Chairman & Chief Investment Officer
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