Morningstar Magazine - April/May 2018 - 57

securities out or putting securities in based
on ESG characteristics like a fundamental investor
might, and like many do. You have to enact
change in a different way so that the index
continues to move forward from an ESG perspective. The strategy there is to benefit the
underlying clients in these passive structures
while trying to enact change in a different
way than you would from a fundamental
investment standpoint.

Bottom-Up Policymakers
Lydenberg: I would contrast this with the
recent news that JPMorgan Chase JPM, Amazon.
com AMZN, and Berkshire Hathaway BRK.A
have decided to address on some kind of
a systemic level the problem of healthcare and
healthcare costs. What is interesting is that
two of the three are financial-services companies,
and they've decided to create what economists
would call a positive externality. That is
to say, there is a market failure of some sort, and
the financial institutions here want to step
in and address that.

These companies are saying that they are going
to take some of their assets to create those
positive externalities themselves. It's a different
approach. As large financial institutions
confront the question of how you assure that
these systems within which you are operating are
healthy systems, they will need to take a
combination of both approaches: engagement
with the companies that they're investing
in and actions on their own to demonstrate that
they also, with their own assets, can create
positive externalities.
One of the things that struck me about this
announcement was that it represents an utter failure
of government to address the kind of system-level
issue that we traditionally have expected governments
to handle. Here, we have corporations, because
of their enormous size and influence and what's at
stake for them, taking it on themselves.

There's a growing body of empirical evidence
that shows a positive relationship between ESG
performance ... and financial performance.
Robert Eccles

Snider: The Paris climate conference was
the same thing. I remember at the series summit
in the year leading up to COP21,3 Christiana
Figueres4 brought in corporations and large asset
owners and said, "Here's the business case.
You have to convince the governments that this
is important." Without that kind of strategy,
you might not have had the success of Paris. It was
definitely a combination of bottom-up and
top-down policymakers getting together. More and
more, it's the corporates and asset owners and,

in some cases, the asset managers pushing
for these policy changes rather than the traditional
top-down policymakers.
We also have consumer demand for companies
to address some of these same issues, and it
is easier these days for consumers to band together
through social media to have influence.

Eccles: The rhetoric is there, but there are
still challenges to putting this into practice. There
are estimates that the private sector is going

3 The 2015 United Nations Climate Change Conference, or COP 21, negotiated the Paris Agreement, a global agreement on the reduction of climate change.
4 Figueres was the executive secretary of the United Nations Framework Convention on Climate Change from 2010-16.

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Table of Contents for the Digital Edition of Morningstar Magazine - April/May 2018