I sat down to chat with Geeta Aiyer, President & Founder of Boston Common, a recognized leader in the impact investing space (rated A+ for governance and strategy by PRI), and one of my personal impact investing heroes. This interview is part of an ongoing series on the topic of whether index investing in public equities can be impactful. For more perspectives, see my original post on the topic, my interview with Calvert CEO Jon Streur, and my conversation with Green Alpha CIO, Garvin Jabusch.
Sonya: First, my favorite question- what was your a-ha moment about impact investing?
Geeta: I’ve had many a-ha moments along the way. I’ll share a couple.
The first was an issue that we would now call “financial materiality of ESG data.” Back in 1993, we didn’t have that term yet. I was an analyst and portfolio manager at US Trust Boston, and Albertsons was one of the supermarket stocks we held. When their competitor, Lucky Stores, settled a class action gender discrimination lawsuit with a landmark judgment of $108 million, that gave me the opportunity to approach Albertsons and ask them what measures they were taking to prevent the same business risk there. By demonstrating that unfair employment practices were a financial liability, we shareholders were able to push Albertsons forward on gender equity policies.
Another a-ha moment- One of my clients asked whether we were fighting for board diversity because it was the "right" thing to do, or because diversity would make the board and company better? Back then, we were fighting for board diversity to break up the crony capitalist model. The boards we were asking to diversify were full of members who were interconnected and thought about things in the same way. As shareholders, we wanted boards to provide independent oversight. Today, we can show that improving board and management diversity improves the operating results of the company. And of course, we also wanted equity for underrepresented groups. So the answer to my client’s question wasn’t one or the other, it was “both!”
Sonya: Well, let’s jump right in. Do you think indexing in public equities and impact coexist?
Geeta: Well, there are a few things to consider. Is indexing good for investing? Is it good for changing the world? Is it good for the empowerment of the investor? I think that on all 3 counts it fails.
Sonya: Wow, that’s powerful. Let’s take those components one at a time. Is indexing good for investing?
Geeta: Indexing is inherently a momentum strategy that invests in yesterday’s “biggest hits.” Impact investors acknowledge that the future will be different from the past due to disruptive forces of climate change and innovation. Investors can’t change the paradigm and create a better future when using the “how things were yesterday” model.
Sonya: But indexing is often less expensive than active management.
Geeta: Yes, it often costs less, but also delivers less. Indexing promises to deliver a certain return: the return of the market benchmark, minus fees. Our goal as active managers, is to outperform the market Net of fees, without taking extreme risks. And we want do this while investing in diversified portfolios of companies with ESG leadership and financial quality.
The point about risk and diversification is an important one. In recent times, the S&P 500 index, which is cap-weighted, has become extremely concentrated in large cap exposure to a single sector, technology. Holding many names overall does not diversify away the correlated risks that the sector faces, such as future regulation, labor market and trade challenges.
Sonya: Returning to your list of ways indexing falls short. Why do you think active management is better for changing the world?
Geeta: We believe that each investor has global ownership of any equity they own. You own the supply chain and the carbon footprint. The problems of the world may seem overwhelming but with equity ownership, you have tremendous leverage for global change. Systemic environmental risks increasingly have financial consequences and we must keep that in mind with our shareholder work. We must also think of the quality of life that our beneficiaries will enjoy.
Sonya: So how do you do that in your work?
Geeta: The model we use at Boston Common gives us impact through the power of shareholder engagement with the companies we own. We believe that social and ecological challenges are going to affect economic outcomes. Because we know the companies we own, the risks they face, and their competitors, we can serve as a sounding board on their business sustainability and governance. We build and lead coalitions of investors and stakeholders to create change at the company. We empower the companies to make public commitments to the environmental and social goals they are working towards. Research shows that this is positive for both the company and shareholders. Those companies that weave sustainability into their business strategy see improved fundamentals, which are eventually valued by the markets. Our engagement with the companies we own makes them better companies: better operationally, better for the planet and their communities, and better financially.
If our discussions with the company don’t work, we might file shareholder resolutions (depending on which stock market and the shareholder rights) , vote proxies, or potentially sell the stock. We are long term and patient investors, but we aren’t permanent holders.
Sonya: You’ve just told me all the reasons indexing doesn’t work for investing. Is it weird to benchmark your company’s performance to an index that you disagree with?
Geeta: Yes. But that’s not a battle I want to fight. Indexes are used as benchmarks for measuring and reporting. We can use that to showcase "what we are not", like our hugely lower carbon footprint, or our holdings in solutions companies.
Sonya: Ha, fair enough!
Sonya: You mentioned that active impact investing is better for investor empowerment. Tell me what you mean by that.
Geeta: We think of money as a lever with which you can change the world and we value equally the financial returns and the environmental or social returns. To the extent they want to, our clients can be activist investors along with us; they can listen to engagement calls or sign on to letters. Some investors want to participate with us, many want to delegate this to us, knowing we will be tenacious, proactive and clear-headed in our engagements on their behalf. We’ve led country-wide efforts, such as in Japan, and have a wide range of companies, including ones in emerging markets, engaged under our flagship initiatives. We know that whatever level of participation in the engagement, clients love to hear how things have changed. These success stories connect them to their investments.
Sonya: Do your clients know what they own?
Geeta: Yes. And more importantly they read about the impact their money made. They accept the constraint that no company is perfect, they are pleased to be investing in better companies and trust our quality orientation. They get a real charge from our efforts to help companies reimagine the positive role they can play.
Sonya: Where are you seeing opportunities for impact investors right now?
Geeta: Both international and emerging markets are financially attractive places where impact investors can have a big role. Internationally, we have the opportunity to invest in companies that are leading society's transition to a low-carbon, low water and resource-use future, creating new solutions and technologies at scale. Meanwhile, almost half the world's GDP and most of its growth comes from the emerging markets. Good governance and ESG momentum are important for superior sustainable returns here. We have invested and engaged globally for many years. We see so much opportunity for return and impact in these markets.
Sonya: It’s such a pleasure to speak with you! Your passion for this space inspires me. What drives you to do this work?
Geeta: I feel a sense of urgency like never before. Our clients have a stake in the future, and we investors have a seat at the table with companies. We have to be active stewards of our future instead of just going along for the ride! In the face of game-changing systemic risks like climate change, inequality without mobility, how can we merely be clever analysts? We have to be intentional stewards, who use capital and voice to change the trajectory of our planet, and our financial system. Corporations and finance are two huge pillars of society. Being passive and keeping the status quo just isn't an option anymore.
Sonya: It’s been a delight! Thank you for your time.
This interview has been lightly edited for length and clarity.
For more information about Geeta and Boston Common Asset Management: https://bostoncommonasset.com