Can investors play a role in addressing systemic racism and sexism in our society? Damn right they can! Dorrit Lowsen, COO at Change Finance, joins the pod this week to discuss how our firm is pushing for gender and racial pay equity within some of America’s largest corporations.

Transcript

Dan Carreno, Change Finance:
Welcome to The ESG Update presented by Change Finance. I'm your host, Dan Carreno. I am the head of business development at Change Finance. We are an ETF provider dedicated to environmental, social, and governance investing. And our mission is to help investors align their portfolios with their values without sacrificing returns. Joining me this week is the President and COO of Change Finance, Dorrit Lowsen. Dorrit, how are you doing today? 

Dorrit Lowsen, Change Finance:
I'm doing great, Dan. Thank you. 

Dan Carreno, Change Finance:
I appreciate you being here. I asked Dorrit to join us this week because she has spearheaded a great engagement effort at Change Finance that revolves around racial and gender pay equity. It's a big project, and we've been getting a lot of questions about it. I thought it'd be worthwhile for Dorrit to discuss it on the podcast. So, we will get into that in a moment. But first, we are going to cover a really thought-provoking article about ESG investing. We'll do the typical thing. I'll summarize the article and then get some of your feedback and insights. The article that we are going to discuss this week is titled "When ESG Investing Hurts the People of the North American Arctic." The authors of the article are Jessica Shadian and Nauja Bianco. The thrust of the article is that there are numerous banks refusing to finance fossil fuel extraction in the Arctic National Wildlife Refuge. The authors are pushing back on this, saying that this has some negative social implications. I'm just going to share a couple of quotes from the article. They say that, "by putting the Arctic in a snow globe, institutional investors are contributing to the ongoing cyclical poverty found in many Arctic indigenous communities, not least, in the North American Arctic." And "if institutional investors continue to boycott Arctic investment in the name of climate change, they do so at the risk of those who live in the Arctic and the moral purpose underpinning ESG investing." There’s a lot to unpack here, but I wanted to speak about it is because they're asserting that there's a conflict occurring here between the E and the S of ESG investing. Dorrit, I wanted to get your feedback here. Do you think that that is true? And if so, how should investors think about that? 

Dorrit Lowsen, Change Finance:
I think that they have a valid point. Every investment decision that we make has multiple impacts to consider. And when, in this case, a bank decides not to make a certain kind of investment for environmental reasons, it could have negative social impacts in particular communities. It's similar to when we decide not to put a factory in a particular community, perhaps because we've done an environmental study, that community then loses out on those jobs. I'll pull another quote out of the article: "When institutional investors say no to investments, then those communities lose opportunities to become equity owners grow their own economies and self-sufficiency." I want to highlight something else that the article discusses; problems in the Arctic stem, not exclusively from fossil fuel extraction in the Arctic, but from our use globally of fossil fuels to fuel our economies. So, whether or not we extract fossil fuels in the Arctic, the Arctic is suffering. When a bank decides not to invest in fossil fuel extraction in the Arctic but still invests in fossil fuel extraction elsewhere, they are harming those communities. They are harming them by continuing the ecological damage that is destroying their way of life and destroying their ability to participate in other aspects of the economy. We need to question the conflict of investing selectively in fossil fuels and in fossil fuel extraction and question whether investment in fossil fuels makes sense at all. Can we do more good for communities around the world, and especially for communities that are most threatened and most impacted by climate change, by pushing further and faster for a renewable economy that doesn't depend on fossil fuels?

Dan Carreno, Change Finance: 
Let me bring up another quote from the article, because this is one where I think there's definitely going to be some disagreement. They say that, "gas development will become increasingly critical during the transition to the global renewable energy economy. And so why does Arctic gas then sit alone in not being able to make its contributions to that transition?" I think there's a perception that somehow, maybe ESG investors are more opposed to fossil fuel extraction or exclusively exposed to fossil fuel extraction in the Arctic relative to other areas. Do you think that is true? 

Dorrit Lowsen, Change Finance:
Not at all. I think rather than selectively investing in some fossil fuel extraction and not in others were better off looking ahead and accelerating the pace of change away from fossil fuels altogether. We already see that energy transition accelerating. We see the cost of renewable energies coming down radically, so that renewable energy is as cost competitive or cheaper than fossil fuels. It doesn't seem to me that it makes sense to be so focused on new gas development in the Arctic or anywhere else. So, pushing for gas development in the Arctic, as opposed to pushing for rapid development of renewable energy sources just doesn't seem to make a lot of sense. We might be better off, for example, looking at whether the Arctic might be a good candidate for the location of new, renewable energy development. 

Dan Carreno, Change Finance: 
To bring up another quote here from the article, they say that, "these questions need attention and more scientific research. Climate policies coming from major banks and others need to be driven by science, not sentiment." My reaction here is that for better or worse, it's not being driven by science or sentiment. It's being driven by money. These are business decisions. Right now, you have major fossil fuel players writing down huge assets in places like Appalachia because commodity prices are too low for extraction for it to be economical. That's driven by static demand, and competition from cheaper energy sources, like wind and solar. So, in that environment, why would banks rush to finance these capital-intensive fossil fuel extraction projects when the future cash flows are very uncertain? These are business decisions. I want to encourage everybody to read the article. It's good to get these different points of view. I will also say that this is just a very nuanced issue, and there is a podcast that has done some very in-depth reporting on the Arctic National Wildlife Refuge. That podcast is called Threshold. They did a whole season about that particular topic, which won a Peabody Award. I would recommend it if anybody wants to hear the different opinions from indigenous communities in that part of the world. That's a way to get a very in-depth perspective of what's going on there. We'll put that aside for now. Dorrit, I want to talk to you about this shareholder advocacy project that you're working on there at Change Finance. I mentioned before that this revolves around gender and racial pay equity, but could you give us a high-level description of what's going on and what you're working on? 

Dorrit Lowsen, Change Finance:
I'd be happy to. In the wake of the George Floyd murder at the beginning of the summer, Change Finance realized that we had to do something more than simply issue a statement. We had to do something that could make a meaningful difference in combating systemic racism. And we had to do it using the tools that we had in our hands: our voices as investors. When thinking about the issues that the country's largest corporations can most readily address, pay equity remains very serious here in the United States. When we look at the data, it tells us that women still make just 82 cents for every dollar earned by men in this country. When you break that down by race, it looks even worse. Black women earn just 62 cents for every dollar earned by white men. Latinx women earn just 54 cents for every dollar earned by white men, and for Native American women, just 57 cents for every dollar earned by white men. Those differences are large. They're durable. They've been very slow to change, and they make huge differences to individual lives. They also impact macroeconomic factors—big impacts on our GDP and on corporate performance. Research from McKinsey tells us that companies with better gender diversity on their executive teams were 21% more likely to perform better than companies with the least gender diversity. Companies with more ethnic and racial diversity on their teams had a 33% improvement over those with less diverse teams. Those are really big, meaningful differences. So, we decided that the way forward was to launch a major campaign targeting, not just one or a few, but all of the companies we invest in because we believe all of the companies can do better when it comes to racial and gender pay equity. We launched that campaign in June. It's an ongoing campaign, and we continue to work with all of the companies we invest in on transparency and pay equity. 

Dan Carreno, Change Finance:
So, what exactly are you asking from these companies then? What's the request? 

Dorrit Lowsen, Change Finance:
Great question. Right now, the request is focused on data transparency. We are asking each company to publish, on a regular basis, data on their median racial and gender pay gaps. 

Dan Carreno, Change Finance:
Help me understand this for a second. There are a lot of companies out there that have achieved pay equality, right? They say equal pay for equal work. That seems good. Right? How does that fit into the conversation about median data? 

Dorrit Lowsen, Change Finance:
Sure. So equal pay for equal work is great. That's a really important step forward, but it's not everything. It tells us that two people who have comparable backgrounds, the same amount of education, the same number of years of employment doing the same job, are getting paid comparably. That's a necessary ingredient for pay equity, but it's not everything because it doesn't tell us whether people of color and women have the same access to all jobs in the company that white men do. And it is still the case that women and people of color disproportionately hold lower-paying jobs. They're more likely to advance in roles that are considered internal or administrative and less likely to advance in roles that are considered revenue-generating and more likely to be higher paying. And so, the disparity persists in median pay. Median pay is a good signal of equal access to all jobs throughout the workforce, because it can tell us whether we have equity in our distribution of gender and race throughout the company. 

Dan Carreno, Change Finance:
Interesting. So, you've contacted a whole bunch of companies about obtaining this data. What's the response been like so far? 

Dorrit Lowsen, Change Finance:
Well, Dan, this is a marathon, not a sprint. So, we went into it knowing that this is work that we will be doing for a while. We did our initial outreach back in June and received in the neighborhood of about 10% response rate. Then we did a second round of outreach more recently, and again, got something in the neighborhood of 10% response rate. We've now heard back from about 15 to 20% of the total number of companies. Those responses vary. Some of them are a simple acknowledgment that we've contacted them. Many of them share some information about what they are doing or some commitment to racial and gender equality. Very, very few of them are really doing what we are asking. Only one company, and that's MasterCard, has done the kind of study that we have asked for and has committed to doing it on an ongoing basis. So we have our work cut out for us. We anticipate that this will be an ongoing process as we continue to reach out to companies on an ongoing basis and continue the dialogue. We also have opened the process up to other investors, and we invite listeners to join us on YourStake.org. It's a platform that enables other investors to add their voices to ours. We have now over a quarter billion signed on to join us in advocating for this really important step towards racial and gender pay equity. So, I do encourage listeners who are interested to look for Change Finance on YourStake.org and sign our racial and gender pay equity petition.

Dan Carreno, Change Finance:
So final question for you Dorrit. I'm going to kind of step back here for a second. I am sure that there are individuals listening who may be investors or financial advisors and are accustomed to looking at returns of investment portfolios. When it comes to this type of advocacy work, they may be asking, why should I care? 

Dorrit Lowsen, Change Finance:
Great question. This is really important work because the data, as I mentioned earlier, shows that companies with better diversity are better companies. They perform better financially. And so, if we, as investors, can encourage companies to change behavior in ways that are good for their employees, good for people, good for the planet, and in ways that enhance their financial returns, that is good for our clients. It's good for our investors. So, this is a good business decision. It's not just from the heart; it is also a good business. And that's part of why we here at Change Finance believe that good investing is good business. 

Dan Carreno, Change Finance:
Dorrit, I feel like your microphone is probably not in a place where you can actually drop it, but I think that is the point where you should drop the mic. I like it. That was excellent. Great answer. We'll wrap it up there. Dorrit, I want to thank you again for being on today and for sharing your perspectives. For anyone listening that wants to find the articles and resources that were discussed during the pod, all of that will be linked to in the transcript for the show, which is on change-finance.com under the INSIGHTS tab. And of course, as always, if you have questions or feedback for us, you can always get in touch with us through the website. Thank you very much. And we will be back soon with another episode of the ESG update.