Under CEO John Streur, sustainable investment pioneer Calvert Research & Management hooked up with Eaton Vance in 2016, instantly transforming Eaton Vance into a socially responsible investing powerhouse. With $14 billion in assets, Calvert is the second-largest sustainable asset manager in the U.S., after Parnassus Investments, according to Morningstar.
That’s in no small part due to Streur, 58, who has busily made the case for investing according to environmental, social, and governance factors, or ESG. The message has gained influence with major clients and intermediaries, “even people who might not politically and philosophically agree,” says Streur.
There is now some $8 trillion in sustainably invested assets in the U.S., by Morningstar’s reckoning, including mutual funds, exchange-traded funds, and other products. Calvert’s largest fund is the $2.2 billion Calvert Equity (ticker: CEYIX).
As more companies adopt sustainable development goals and report that data—and as more related data become available—expect the strategy’s popularity to continue to resonate with investors.
Barron’s checked in with Streur recently about the outlook for sustainable investing and, as proxy season approaches, whether engagement works. Here’s what he said.
|Title:||CEO, Calvert Research & Management|
|Work History:||Calvert CEO since 2014, Trillium Asset Management president (2012-2014), president of Managers Funds at AMG (2006-2012), CEO Managers Investment Group (1990-2012)|
|Education:||B.S., University of Wisconsin|
|Hobbies:||Owns Little Seven Seven Ranch in the Columbia River Gorge, which produces premium grass-fed beef and operates a sustainable timber and sawmill business.|
|Boards:||Sustainability Accounting Standards Board, Calvert Impact Capital, Calvert Funds, Environmental Media Association, FMC Sustainability Advisory Council|
Barron’s: Has ESG investing finally hit the tipping point with mainstream investors in the U.S.?
Streur: It has reached the tipping point at which it’s relevant to all investors. It’s early days still. The flows are increasing. You’ve probably seen BlackRock (BLK) changing an existing ETF so that it includes no guns, and filing for a bond ESG ETF. Of course we think we do things better than BlackRock, but I’m very respectful of the influence such a large firm has.
At Calvert, our distribution has picked up quite a bit since we got involved with Eaton Vance (EV). We have 27 old-fashioned open-end mutual funds—five index funds and the rest old-school actively managed funds, and no ETFs right now. All but four have net positive flows. And there is only one reason to hire Calvert: You want responsible investing.
Q: Is increased competition good news or bad news?
A: It is very good news. For a long time, we needed to explain to people exactly what we did and then debate if it made sense. Now the mainstream firms have become active. That’s good for Calvert and the whole movement, in terms of verifying the validity of the strategy.
At Calvert, we want to make a real contribution to how our capital markets function and that companies are able to meet broader responsibilities to society. Our business is really easy: Beat the market and make the world a better place. I’m not sure the big firms have the same motivations.
Q: What are the demographics of investors in your funds?
A: It tends to skew to women and millennials. At the same time, the entire population has an increased interest in ESG. I find interest from 70- and 80-year-old men and everybody else.
Q: How are ESG investors different?
A: ESG tends to have a longer-term timeframe. We think about issues and companies over multiyear time horizons. We want to understand how good one management team is versus another in deploying capital in ways that have a positive impact on their environmental footprint and their social outcomes, but that also makes sense for a shareholder.
Q: Do you evaluate whether companies are faking it?
A: Yes. We look to see if their results are consistent with what they say they’re going to do. A Fortune 50 client recently asked me about a big company which we didn’t own. It was because we looked at this company’s supply chain both in the U.S. and abroad. There are international labor standards about how you treat workers: Some companies build those standards into their policies and audit their suppliers, and some don’t even reference them. We piece through a company’s record and use information from the media, NGOs, social media. How well is this management implementing? That’s where the rubber meets the road.
Q: Do you own Facebook ?
A: Facebook (FB) didn’t have great privacy policies and procedures or great data security. So despite the tremendous success of that platform, the risk was not well appreciated or understood. We determined that Facebook didn’t meet the Calvert principles for responsible investment and we eliminated the stock from our indexes.
Q: How important is engagement to you?
A: To strengthen our position as an investor creating positive change, it’s the most powerful tool we have. You talk about a tipping point: Its effectiveness has really changed in the past three years. The community of investors is much more skilled at how they engage. When Calvert comes to a company, we point out an issue or corporate practice we want them to address, tell them what peers are doing and what we want them to do and why. And we say why it will work for investors in a manner the CFO or CEO will understand.
First, we get them to agree to do real things in private dialogue. Second, when we do file a shareholder resolution and they see it’s going to a vote, a bigger percentage of those companies comes to the table and negotiates a positive outcome. Third, when we do go to a vote, the percentage of independent shareholders voting for our resolutions or other ESG resolutions is rising. That dynamic means management and boards are taking engagement much more seriously.
Q: Why is that? Are you simply better at making arguments? Are they feeling pressure from other stakeholders and are happy to get the help?
A: You got it. Sometimes we’ve had companies almost thank us for filing the resolution, because now they have the internal momentum to do something. Data availability has improved. In 2012, maybe 20% of the S&P 500 was producing sustainability data; today, 90% is. You can measure events happening. They are seeing information on everything—on the environment, on diversity and inclusiveness, on gender pay. When you come with numbers, it’s much more effective than coming with letters.
Q: What is the role of big indexers in engagement?
A: It should be full speed ahead and well structured. If you are an active manager, you can vote with your feet. If you’re an index owner, the only way is to work with the company to strengthen their policies, procedures, and performance. The responsibility in the capital markets for an indexer is not just to own the names, but to do ESG research to engage and have thoughtful proxy voting. That is a critical part of our democratic capitalist system. So everybody who owns shares is knowledgeable and can participate in the feedback loop.
Q: Give us an example.
A: We called Kroger (KR) , which is a grocer and, amazingly, sells guns. Their West Coast chain, Fred Meyer, sells assault rifles. When we called, the person said they couldn’t take the call because they were in quiet period. I said I didn’t want to talk about earnings; I wanted to talk about guns. So we were able to get a call with senior leadership. We said it was inconsistent with being the nation’s grocer to also sell guns—that we wanted them to create a safe environment that families want to be in. We said that whatever profitability they were getting from selling guns would be overwhelmed by the reputational harm from selling guns. We asked them to raise the buyers’ age to 21, and get out of selling assault rifles and high-capacity magazines. That was at 3:30 p.m. At 6:30 a.m. they put out a press release. I think we were a catalyst.
Q: What are the options outside of engagement?
A: Can you deprive a company of capital by not owning the stock? No. If you want to do it, you shouldn’t loan them money. You can own the equity because you can engage, but don’t buy their bonds, don’t give them a bank loan.
Q: What happens if, after engagement, you’re still not happy?
A: We’ll present them with information, we file a resolution, and if we get a specific percentage of the vote, we have an automatic right to file again the following year. We are almost always successful, and we continue to engage. Our goal is to make progress. At what point do we give up? If the risk we’re trying to mitigate is large enough that we think it’s a problem to invest in the company.
There are many companies Calvert doesn’t own for this reason, like the gun manufacturers or the fossil fuel companies, to name just a couple areas. But even after we have divested, we often continue to engage on important issues, such as the rights of indigenous peoples with fossil fuel companies.
Q: Thanks, John.