Investors and regulators are increasingly looking for greater transparency and accountability from corporate America on environmental, social, and governance (ESG) issues. The U.S. Securities and Exchange Commission’s (SEC) recently proposed rules on standardized climate-related disclosures and ESG fund labeling come alongside a record amount of ESG-related shareholder proposals this proxy season. And these are moves that JUST Capital polling shows a majority of the American public across the political spectrum support – as partisan attacks on ESG continue to rise.
Against this backdrop, JUST was thrilled to welcome Cambria Allen-Ratzlaff to our team this week as our new Managing Director and Head of Investor Strategies. Cambria will be leading JUST’s investor stakeholder and financial markets strategy, cultivating industry partnerships and initiatives with key market actors in the asset owner, asset manager, and sustainable and impact investing communities. She comes to JUST from the $63 billion UAW Retiree Medical Benefits Trust, where she served as Corporate Governance Director and led the Trust’s global liquid markets portfolio corporate governance program and global proxy voting program.
Cambria has also co-chaired the Human Capital Management Coalition (HCMC) since 2013. The group of 36 institutional investors with over $8 trillion in assets under management works to elevate human capital management as a key driver of long-term shareholder value – advancing human capital on the SEC’s agenda and providing reporting guidance for companies among other efforts. Through this role, Cambria got to know JUST and followed our work from our very first poll of the American public to our recent analyses of human capital metrics disclosure.
We sat down with Cambria to hear her perspective on the growing focus on human capital in a shifting labor market, the future of ESG investing, and why it’s “becoming increasingly irresponsible” for investors to ignore ESG factors.
One of the topics we’ve been looking at closely is the evolving dynamic between labor and management over the course of the pandemic. Given your career, how have you been seeing it?
I’ll start with the investor perspective. That interest had already been growing among shareholders, but investors hadn’t really been vocal about how they were increasingly viewing human capital as a source of value creation in the firm versus merely a cost to be minimized. Unfortunately, we were seeing this posture toward the workforce play out in some of the companies we owned.
To us, this disconnect didn’t make sense, as the sources of value in companies – that is, the ways public companies create value for investors – has shifted tremendously over the past 50 years from property, plant, and equipment (a company’s physical assets) to intangible assets derived largely from human capital, which we define as the knowledge, motivation, skills, and experience of a company’s workforce. In 1975, intangibles accounted for less than 20% of the total market capitalization of the S&P 500. In 2005, seven years before we launched the Human Capital Management Coalition, we were already at 80%. Fast forward to 2020 – already, before everything shut down due to the pandemic, we’re now at 90%. And if you think of many of the types of companies that dominate the list of the largest companies in the U.S., you’re looking at companies where nearly the entire value of the company comes from intangible assets. So if human capital constitutes most or all of many of our largest investments, and we rely on the returns from those investments to pay workers’ pensions and healthcare, the relative success or failure of a company to manage its workforce well is going to matter to us. A lot.
Unfortunately, if investors aren’t vocal about what they want and what they expect from companies, it’s just not going to happen. In the U.S. markets, shareholders still reign supreme at the firm, and if investors and the market infrastructure around them are saying, “Hey, we want you to focus on quarterly returns,” then that’s what you’re going to get. You don’t study what’s not on the test, right? And the investor voice was the one that was missing here.
At the same time, we realized that the lack of information coming out of companies about how they were managing their people meant that we needed to better understand what was happening at our portfolio companies. How is management actually managing their talent?
So we took the time, and in 2017 filed the petition for rulemaking with the SEC urging higher-quality information on human capital metrics, policies, and processes as a way to jump-start the conversation on a regulatory level, as well as publicly state the investor case for why good human capital management is critical to investors and the overall economy. Ultimately, those efforts, along with those of other investors, members of Congress, the SEC’s own Investor Advisory Committee, and numerous other stakeholder groups, led to broader engagement on human capital. Really, we were educating the market and asking some pretty basic, commonsense questions.
And then COVID hits. Some folks – those who have jobs that can be done remotely, and that are traditionally higher-paid – are home and, faced with this very real and visceral reality of a pandemic, are thinking about whether their current work is truly working out for them. You have people working in health care, many of whom had already faced staffing reductions that were increasing workloads, increasing health and safety risks and stagnant wages, and now they’re basically our front line. We don’t make this through it without them. And then you have the other “essential workers” – the people who have been working in low-wage, low-agency jobs – but jobs that provide us with food and critical supplies. And many of them are working with limited or no access to PPE. And finally, you have folks who are out of work altogether, many of whom were also working low-wage, low-agency jobs. So COVID has created this massive shock to the economy and our entire social fabric, and now we’re beginning to expect more out of our employers.
I don’t have data for this – I’d love for JUST to do this – but my guess is that companies that always treated their employees well have performed better during the pandemic on a number of workforce factors like retention – which translates into financial performance – than companies that were “low-road” employers. Either companies were prepared in that way or they weren’t. I’d imagine a lot of this has been a huge driver of the so-called “Great Resignation.”
Where do you see ESG investing headed? Do you think ESG is going to remain a niche investing strategy or become the norm going forward?
We’re certainly at an inflection point, and I think what we’re seeing is just a lot of frustration all-around. We need to make sure that investors are front and center and talking about this, and that incorporating information that may look novel to some traditionalists into the investment process is just a normal part of the process. They’re probably doing it already, and there’s really nothing special about it. In fact, it’s increasingly irresponsible to ignore these factors.
If you’re a bond analyst, for example, and you’re looking at utilities and not looking at environmental factors that could impact the performance of that utility in the context of risk, you’re probably not a great bond analyst. If you’re an asset manager focusing on oil and gas companies and you decide that you’re not going to incorporate climate risk analysis in, say, trying to understand whether the valuation of long-lived assets is reasonable or not in deciding between allocating capital to OilCo A or OilCo B, I don’t know if I’d want to leave my money with you. Probably not.
When folks typically use the term “ESG,” I think they’re really thinking more about the “E” and the “S,” and the conversation seems to have really forced a broader group of people to really focus more on the externalities – really, how does a company behave in the business environment in the face of all of these risks (and opportunities). It’s data that should go into analysis. It’s like, “OK, companies, are you going to have stranded assets in the future? The asset you say is going to be worth something in 40 years, if it’s underwater in 10 because of increased flooding, then it’s not worth anything to us.” We need that information to be able to make decisions. When we all took Econ 101, what was the textbook example of an externality? Pollution. Why? Because pollution creates costs that are not always borne by the producer, and there can be major financial risks associated with this. So what’s the issue?
I think that ultimately that perspective will prevail. Will people keep using the term ESG? I don’t know. You can argue that some people don’t like “sustainable investing,” some do, and some people don’t like “responsible investing,” some do. Perhaps we need a better and shared sense of what ESG means.
The world is not the same as it was 50 years ago. The sources of value are not the same. The risk profile is completely different. Technology was not as advanced, and the internet wasn’t a thing. So why would we cling to the past when the whole point of investing is to make informed decisions about what we expect will happen in the future?
What role would you like JUST to play during this inflection point?
One thing that I love about JUST is really leaning in on the workforce data and having a better understanding of what companies can be doing to create value for shareholders through investing in their workforce. It’s also being able to operationalize a lot of that data JUST is collecting and making sure that it is matched with where the demand is from the investor/owner perspective. That’s one of the main reasons I found JUST so attractive, and I feel coming from an asset owner background I’m bringing in that perspective.
I’m thinking about ways that JUST can really be a leader among asset owner and asset manager communities, and continue to raise JUST’s profile and just educate a broader group of investors and stakeholders about who we are and what we bring to the table.