Hawley and the Rapidly Expanding Field of Environmental Social Corporate Governance

Socially responsible investing has become a buzzword for the financial industry. Companies looking to improve their financials may wonder why responsible investing matters, or even if it will end up hurting their bottom line to focus in this rapidly developing area.

Professor James HawleyBut socially responsible investing might be one of the best ways to attract one of the largest generations in history—even bigger than the baby boomers—the Millennial generation who are about to move into their prime spending years. This is one important and determining factor of why socially responsible investing has become mainstream

Millennials are digital natives. They know how to do company research. They are more connected than generations of the past, using social media and smartphones to stay plugged in 24/7. They want to change the world. They want to invest in companies improving the world, including those involved in water conservation and solar energy. 49 percent of this demographic make up a net worth of $1 million, according to Spectrem, but Millennials are cynical as a whole with the so-called socially responsible corporate behavior of corporations and businesses. Many feel that much of the hype is merely PR and want to take a stand with their wallets to change this across the board. Millennials want to improve the world for future generations, not just themselves, which is counter to the typical investor of the past looking merely to turn a profit.

Enter James Hawley, a management professor emeritus and senior research fellow at The Elfenworks Center for Responsible Business at Saint Mary’s College of California in Moraga. Hawley interacts with many from this demographic in his classes on campus, and currently works on research known in the financial trade as materiality. Materiality is defined as anything that from an investment, financial, or socially responsible focus makes a financial difference in the long or short run to investors.

“Materiality is about corporate governance. For shorthand purposes, it is known in the trade as ESG, or Environmental Social Corporate Governance, Sustainable Investment, or even Responsible Investment.  Nobody has the same definition of any of those," said Hawley. The terms, according to Hawley, include how a board is structured, what the board is paying attention to, and how to monitor the actions of a board. It also includes whether shareholders get proxy voting access and the ability to put a proposition on the voting ballot—under certain legally defined conditions—in order to nominate a board member for election. Hawley’s interest in ESG started over two decades ago. When he started out, socially responsible investment (SRI) was a relatively narrow, well-defined field, but as time went on, the field broadened dramatically to include additional definitions.

Hawley takes into account in his daily research environmental and social issues important to the Millennials including the topic of climate change. He researches topics along these lines, including the impact on the environment of various industries along the coast of California and their effects on asthma rates in the valley, and the existence of and awful working conditions of slaves in the Thai shrimp industry.

Some companies have already been revamping the way they do business to include sustainable investment options that include helping to save the world while also turning a profit. 70 percent of female investors agree that ESG factors are important to consider when investing, and 84 percent of Millennial investors are now interested in sustainable investing, according to studies done by the U.S. Trust and Morgan Stanley.

The biggest interest Hawley has is the way in which and the degree to which investors—especially big institutional investors that dominate all of the markets—see these responsibilities as important to their investments.  

On one of his biggest projects, Hawley works as the head, applied research for TruValue Labs, alongside CEO and co-founder Hendrik Bartel. The tagline of the start-up company is, “Sustainability meets big data.” The startup works at the intersection of sustainability and artificial intelligence to provide data driven solutions to help investors understand ESG risk and performance, constantly revising and improving their processes as technology evolves in order to provide ESG insights. “TrueValue Labs automates the reading of texts related to environmental social governance categories and quantifies the reading of what the text means in shades of grey, from zero to one hundred. 50 means neutral, anything above 50 is positive. Anything below 50 is negative. This produces datasets on ESG on a continued basis, in real time, daily,” said Hawley.

The company created Insight360, a technology-based sustainability analytics platform, in order to measure factors that include leadership, economic sustainability, and social impact. Insight 360 was its first product. There are now others in addition. The platform the company uses to analyze data has been created for consistency and scalability, digging through the abundance of information from the internet  much faster, more accurately and less expensively than a team of analysts would by using content it finds to categorize and create company profiles that look at trends and how they are changing over time.

Hawley discusses his field of research from a more personal angle. “Let’s say that your retirement fund is TIAA, for example. At some point, you'll retire.  You'd like a secure future.  Obviously, that's fundamentally a bottom line notion. Some people feel that because of their values—their politics, their ethics, their religious values—they aren't going to invest in certain things like tobacco. That's from a moral stance.  Tobacco is a big debate.  Is tobacco a good investment in the long run strictly from the financial point of view?”  

“What's interesting is that increasingly, many of these have become long run bottom line issues.  Is it viable to invest in coal, given climate change, which is a huge phenomenon, not just socially and environmentally, but also economically and financially? My answer would be no.  It's a stupid investment.  Coal is a dying industry. It should be dying.  There are alternative ways to produce power that are much cleaner than coal, in particular. We have the same ongoing debate about oil.  Those would all come under the link between what some people see as socially responsible investment and other people using the same acronym, SRI, or sustainable and responsible investment. One reason I’m very interested in it, because we see some very significant changes going on currently.”

“For example, you can make what's often called the business case.  Let's say we agree that investing in coal and tobacco is ethically a bad thing to do.  I can also make the case that in the long run, and maybe not so long run, it's also not a financially and economically wise thing to do either. What materiality does is bring together those two arguments on the same page, so that people who come at it from different angles or belief systems can actually say ‘Yeah, that makes sense.  I get it,’” said Hawley.

In line with responsible investment as a topic, Hawley and his co-author Andrew T. Williams, also a former Saint Mary’s professor,  published a book, The Rise of Fiduciary Capitalism (2001, University of Pennsylvania Press), which chronicles the rise of fiduciary institutions—primarily public and private pension funds, and mutual—which he said now own well over 50 percent of the equity of American corporations. Now, over 50 percent of Americans either own stock individually or, more typically, have an ownership or retirement interest in these fiduciary institutions. The Rise of Fiduciary Capitalism investigates the nature of property and ownership in the modern corporate setting, the effects of the decline of traditional, personally held property in equity form, and the corporate governance implications of the developing new form of corporate ownership.

James P. Hawley and co-author Andrew T. Williams argue that, because of their extensive diversification of ownership, fiduciary institutions have become "universal owners" with a significant stake in a broad cross-section of the largest publicly traded firms in the economy. Forced to evaluate portfolio-wide effects of individual firm actions, these institutions have a quasi-public policy interest in the long-term health and wellbeing of the whole society. As universal owners, fiduciary institutions are in a unique position to develop and pursue policies of virtuous efficiency, minimizing negative externalities and encouraging positive outcomes by the firms in their portfolios. In this way, they have the potential to make the firms in which they own stock more responsive to the needs of the Americans to whom they are responsible and thereby make those firms more democratic.

Hawley recently celebrated 30 years at Saint Mary’s College. Prior to Saint Mary’s, Hawley worked at the University of California in Davis. There, he focused on similar interests, including corporate social responsibility, and U.S. corporations, developing an interest in financial theory and the international finance monetary system. His current work with TrueValue labs and research straddling multiple disciplines mainly focuses on financial policy issues, as well as what propels policy.

He received his Ph.D. in Sociology from  McGill University in Montreal, Canada, 1976. He received his M.A. in Economic History from the University of California at Berkeley in 1969 and his B.A. in History from the University of Wisconsin at Madison, Wisconsin in 1966.