I’ve been thinking a lot about definitions lately. Impact investing, socially responsible investing, ESG, and sustainable investing often get used interchangeably as if they were all the same thing. To get some clarity and perspectives, I interviewed Wayne Silby, co-founder of Calvert Investments.
Calvert Investments launched the Calvert Social Investment Fund in 1982, the first mutual fund to implement socially responsible investment practices and take a pro-active approach to influencing corporate behavior. This strategy proved popular with investors seeking to have their money managed in line with their values.
Given his status as a pioneer of Socially Responsible Investing (or “SRI”), Silby is arguably the leading authority to provide us a proper definition. And it seems I am not the only one keen to get his thoughts. When we spoke in October, it was his third time he had been interviewed that week.
I started by asking him about Milton Friedman, the Nobel Prize Economist, who in 1970 wrote that the social responsibility of business is to maximize its profits and leave governments and charities to solve social problems. Friedman wrote this a few years before Silby co-founded Calvert Investments.
Silby disagrees with Friedman’s logic. “It’s as if the purpose of medicine is to maximize the amount of money you make, as opposed to keeping people healthy.” He notes Friedman’s view runs contrary to the original concept of a public company. “Looking back at the history of corporate law, if you wanted to establish a limited liability company in the 1800s, the granting of a corporate charter often required the demonstration of some public benefit,” says Silby.
But he admits when he and is co-founder John Guffey graduated from Wharton business school, public benefit was not top of mind when they established Calvert Investments. It was a traditional for-profit investment company, and they made a lot of money by engineering the first variable rate money market fund while still in their 20s. Enlightenment came later, after Silby attended a Buddhist retreat in New Hampshire, where the emphasis was on putting one’s virtues into practice.
“Being in college in the late 60s, we had some different ideas from the previous generation,” he reflects. “There I was, at this Buddhist conference, reflecting on what my claim to fame would be. Would it be that I generated 20 basis points more than the next guy? Is that what was going to be on my gravestone? So, I started to ruminate on this. That is when I got the idea to start a fund that really reflected our generation’s values: on the environment, on boycotting apartheid in South Africa and opposing the Vietnam war effort, etc.” From these ruminations, the Calvert Social Investment Fund, the world’s first socially responsible investment fund, was born.
Still, their aim was not charitable, it was to make money while doing the right thing and build off what others were doing. “John and I weren’t born Mother Theresa. We were two Wharton business school graduates. But the idea of the Social Investment Fund meant going out of our way to think about things in the context of the 60s generation. And we got help from people like Robert Zevin who was already providing investment advice to clients on constructing socially-responsible investment portfolios.”
They established an Advisory Council to develop the right investment screens to implement this new fund’s concept. The Council had leading energy policy experts like Amory Lovins of the Rocky Mountain Institute, and Hazel Henderson an expert on ethical markets and the environment, and Tim Smith, head of the Interfaith Center of Corporate Responsibility. Marc Sarkady, a global leadership consultant (and guru of the aforementioned Buddhist conference), was the first Chair of the Council. According to Silby, the Council was instrumental in shaping the Fund’s portfolio construction process. “We created the fund by investing in the companies that conformed with screens developed by these notable experts. And we then acted as shareholders to express our views.”
That meant being the first Fund to file shareholder resolutions designed to positively influence corporate behavior. In one example, Silby recalls, Calvert got Dell Computers to adopt a recycling program after filing a resolution asking the company to study what happens to its computers at the end of their useful life. Michael Dell invited Calvert to his office for a meeting and decided this was a good idea. Dell subsequently implemented a recycling program that became the industry standard.
Silby notes how Calvert was smaller compared to other investment companies at the time, but “it had a certain voice and a sense of responsibility to the broader society in how it operated. We were just some people who felt we’re all in this together as a society, so how do we invest in ways that bring our values more in conformance with our actions?”
The Fund concept eventually proved popular with investors, but it took time. Silby recalled how difficult it was initially to get traction. Being new to the investment world helped. “Today people get it,” says Silby, “but back then people thought we were communists or trying to bring down the capitalist system. I remember being thrown out of New York office at Merrill Lynch many years ago. We were seen as socialist guys. Those were the days! A lot of our work involved messaging with the grassroots, with shareholders and working with the broker industry to offer these products and believe me, it wasn’t easy. This didn’t happen overnight. It was a pioneering fight that took quite a while. In those days, thinking about the social impact of your investments did not exist. It was a new phenomenon. We were young and fortunately never worked in the industry before, so we didn’t know what we didn’t know. We were just asking what makes sense.”
Screening out investments based on socially responsible concepts and playing the role of activist investor was pioneering if not revolutionary, but they decided to take things one step further. “From there we decided to set aside 1% of our assets to do below market rate investments to serve the underserved and further issues of social justice. That is when some people came to us and said they just wanted to invest in that portion of the fund and that was the impetus for creating the Calvert Foundation (now Calvert Impact Capital).” Silby recalls how this evolution to impact investing made intuitive sense. “To us investing money to benefit the underserved or in new companies and products made sense even though it cost more in time and effort.”
After hearing the genesis and evolution of Calvert Investments and Calvert Impact Capital, I turned to the question of how to define SRI. Is it an investment approach that on one hand means excluding companies that are harmful from an ethical, moral, environmental, or social perspective, while on the other hand being an activist shareholder to push for positive changes in corporate behavior? “I would agree with that,” says Silby. “There’s a broader world out there, so how do you act in ways that are socially responsible and that positively impact others” he asks. “You can even invest in ‘bad companies,’ but how do you take shareholder actions to improve them?”
Oftentimes just filing a shareholder initiative was enough to get results. Calvert would withdraw the resolution once a company agreed to take action and adopt its recommendations to avoid negative publicity. “Companies don’t want to be embarrassed,” explains Silby. “They don’t want any trouble, as long as you are respectful and understand their point of view. And often there were people inside these companies that agreed with us, and we were just the flashpoint that allowed them to raise the issue with management. We were just standing up for how investors should vote to support society. We were a small voice, but we struck a chord.”
Calvert’s pioneering work had an enormous influence on the investment industry, leading others to follow suit, but in ways that have deviated from or diluted the original social responsibility concept. Silby observed how the emphasis gradually shifted to environmental sustainability to appeal to more mainstream investors. “I do remember being at the launch of Generation Capital with Al Gore and David Blood in 2004, who came up to me and thanked us for Calvert’s work in this field. But also suggesting ‘nice job, we’ll take it from here’ with more emphasis on sustainability. Meaning this is something we can explain to institutional investors and not get caught up in moral or ethical issues.”
With SRI having its roots in doing the right thing both for society and the environment based on certain moral and ethical principles, I asked Silby if the key difference with sustainable investing was its greater emphasis on the environment. “We were the first registered investment company to stay out of South Africa during apartheid,” says Silby. “And we were the first to start a venture fund in South Africa after apartheid fell. That was definitely based on moral and ethical issues, not because we’re going to make more or less money in South Africa. Sustainability means doing the right thing to create a more sustainable planet, without a moralistic approach, but rather a more thoughtful European policymaker approach. And at Calvert, we started going in that direction too. We evolved into more of a sustainability model over time as the marketplace was more receptive to that.”
Fast forward to today where ESG investing has become the latest iteration of the SRI concept. I suggest that it has become more of a watered down, check the box exercise and companies like BlackRock or Vanguard, given how much money they manage could have a massive influence on corporate behavior through their proxy voting, but choose not to. A recent FT article noted that BlackRock and Vanguard vote with management nearly 100% of the time, so they are not using their leverage to seek positive change, exposing them to criticisms of impact washing.
I also point out how ESG rating methodologies are subjective, inconsistent, unregulated and uncorrelated. I asked Silby for his thoughts on whether boycotting a company’s stock is as influential as boycotting its product or service, and whether there are limits to the impact you can have by screening out a stock from a portfolio. To me it seems the lack of shareholder activism is where ESG funds fall short.
“Again, it’s the corporate mindset, they just don’t want any trouble. If they can bend a little to avoid trouble, especially with their publicity or their rating on the line, they’ll do that.” Although he laments the direction ESG is going, and agrees with many of the criticisms, he feels it is not a reason to throw the baby out with the bathwater. “The fact that the conversation exists now in this industry is what’s successful. We legitimized these conversations. And yes, critics are right about green washing, about corporate marketing departments wanting to cast themselves in the right image, whether the CEO is legitimately on board or not. It’s just standard marketing now. But it’s not a reason to reject ESG. The word ‘impact’ is everywhere and ultimately people will be more discerning about achieving real impact versus checking boxes and creating an image.”
I asked Silby for his views on Tariq Fancy’s Secret Diary of a Sustainable Investor in which Blackrock’s former Chief Sustainability Officer went from being an ESG protagonist to its sharpest critic and an advocate for a carbon tax to influence corporate behavior.
While he had not read Fancy’s Secret Diary, Silby seemed unsurprised that a Blackrock insider would become a critic, suggesting their pivot had more to do with following a market trend than a genuine strategic shift to influence corporate behavior. “With Blackrock, I don’t think Larry Fink had an epiphany one day, but I think his younger staff convinced him that this is where the market was going and came up with the arguments around why this was important, so he went with it. And I agree that a carbon tax is the way to go. It’s crazy to me why we haven’t done that yet. Sometimes I think climate change ought to just be called pollution and people should be responsible for the pollution they create. That is why a carbon tax would make so much more sense.”
I asked if he was concerned about the backlash the ESG space is experiencing particularly from certain politicians. “Regarding the ESG pushback, I’ll say two things. First, the pushback is a sign of our success, that we are a force to reckon with and are raising important issues. Second, I feel like SRI has been coopted by other movements with diverse agendas. A lot of ESG has become greenwashing or just check the box.” I asked Silby to elaborate on this. He said he feels that the political blowback we are witnessing against ESG by conservative politicians is in part a result of the original agenda and mission of SRI being hijacked by “woke” objectives. According to Silby this has given politicians on the right an opening to use SRI as a lightning rod for their criticism.
Diversity has always been an important component of SRI. “Calvert was the first fund to file shareholder resolutions on having women serve on corporate boards for example,” he said. “Very early on we were suggesting model language on diversity to be included in corporate charters.” At the same time, Silby would like issues of diversity to be considered alongside other important issues, such as ecology, poverty and injustice.
I asked Silby if he thought Calvert’s work influenced companies like Ben and Jerry’s, Patagonia, Unilever and Vital Farms to espouse corporate social responsibility and sustainability as part of their culture and brand, and whether this helps them attract and retain staff, customers and ultimately boost profits.
Within the risk-return framework, he thinks it has more to do with the former. “It doesn’t always translate into higher profits. Return is not the only thing. There is also risk. Sustainability and thinking in terms of your processes, procedures, planning for future challenges, etc. creates more unity in the company culture, and that is important in terms of managing risk. Portfolio managers generally will pick that kind of company over profit maximizing ones that are very volatile and risky.”
I asked Silby if he thought better regulation and more disclosure, for example about carbon emissions, could lead to better outcomes with ESG investing.
“I’m not big on regulation because there needs to be a cost-benefit justification. The Europeans and Canadians have moved more in that direction. I’d rather it just be based on people’s own consciousness or heightened awareness. Regulation is different from disclosure. Disclosure is a principle of investing, and disclosure is like legitimizing a conversation. We worked a lot on disclosure at Calvert. Equal Employment Opportunity Commission and workplace discrimination was one of the big items where we filed shareholder resolutions to get companies to publish data on their pay scales, female workforce participation, etc. But I’d rather people be inspired to do the right thing than be regulated to do so.”
For my final question, we pivoted to the subject of impact investing. I asked if there is a tradeoff between investing for impact and earning financial returns, or whether you can achieve both impact and fully risk adjusted returns.
“There’s a tendency with marketing people to go in the direction of saying hey, I have a deal for you. How would you like to save the world and make a lot of money at the same time? That is the sales pitch, but that is not what impact investing is all about. You have to be more realistic. I personally have made a lot of investments where I didn’t expect a great return, but the social impact exceeded the financial returns. I don’t see a problem getting a little less return if it means achieving social goals.”
Silby’s vision and work have been hugely influential on the investment industry and continue to inspire individuals (including myself) who work in the impact investing space. I congratulated him on his successes. Silby was humble in his response. “We were not exceptionally talented, but we stood up for things. That is what was exceptional. I presented the vision, and amazing people showed up in support. And the timing was right for it to happen. For innovation and change to happen you need people who are not connected to the old ways of doing things and are willing to just ask questions like shouldn’t investments make a better world and why aren’t we thinking in those terms today?”
I agree. We have to keep pushing for innovation and change even if things occasionally go in a different direction. “The green washing sticks in my throat sometimes,” he admits, “but what are you going to do?”
