Monday, July 6, 2020

'Bring the problem forward’: Larry Fink on climate risk

Editor’s Note: The Sustainability Investment Leadership Council (SILC) is pleased to publish the following interview of BlackRock CEO Larry Fink. We thank our colleagues at McKinsey for agreeing to our publication of the content; it originally appeared in McKinsey Quarterly at:

Are you interested in accessing additional high-quality information and perspectives regarding the sustainability sector? You are welcome to attend our July 14 webinar entitled “Business Strategy and Risk in the Pandemic Era.” Ropes & Gray Partner Michael Littenberg, PKF O’Connor Davies Financial Services Partner-in-Charge Marc Rinaldi, and COSO Chairman Paul Sobel will join Houston Baptist University Professor Michael Kraten for a lively discussion of this timely topic.

One hour of complimentary CPE and CLE will be available to individuals who qualify for credit (see Notes at the conclusion of this message for additional information). Simply reply to this message if you wish to join us on July 14.

And now, without further ado, we present the interview with Mr. Fink.

The physical impact of climate change will lead to a major capital reallocation, says the head of BlackRock, the world’s largest asset manager.

During a 40-year career, BlackRock CEO Larry Fink has learned that financiers seldom ignore risks to their businesses: “Once they recognize a problem,” says Fink, “they bring that problem forward.” Fink himself has made a practice of bringing problems to the fore in his yearly letters to CEOs and clients. When he focused on climate risk in his 2020 letter to CEOs and a related letter to clients from BlackRock’s global executive committee, citing work by McKinsey and others, he sought to advance a discussion that he’d seen accelerate during the previous year—and to spur executives and policy makers to act. In this commentary, adapted from an interview with McKinsey’s Rik Kirkland in February 2020, Fink expands on certain themes from his 2020 letters, including the threats that climate change poses to the poor and vulnerable, the diverging interests of advanced and developing countries, the importance of fair policy solutions, and the value of better nonfinancial reporting.

The Quarterly: Why did you choose to concentrate on climate risk in your CEO and client letters this year?

Larry Fink: Throughout the year, and more frequently as the year progressed, the question of climate change was raised by all our clients throughout the world, whether in Saudi Arabia or in Houston or in Sacramento or in Europe. And it was raised not just by our clients but by regulators and government officials. At the same time, we were witnessing more evidence of the physical impact from climate change. All this really hit me when I was sitting down to write my CEO letter, which I generally try to do right after the August break.

I was just writing down all the themes that I wanted to talk about. Climate risk was actually not a major component of the first draft. But then, in September, when I had meetings with the UN [United Nations] in New York City and then with the IMF [International Monetary Fund] in Washington, the urgency of the conversation became very clear to me.

The Quarterly: What were you hearing from your clients? What keeps them up at night?

Larry Fink: As finance now starts looking at potential climate risks, it raises so many different capital-allocation questions. One great question was asked by a client—I’d say among the smartest clients we have worldwide. This client said, “We never think about climate change as a risk. And yet we’ve been great investors over the long run because our time frame is ten to 15 years. Now, through the lens of sustainability and climate impact, how do I think about our strategy for today? Can we expect the same type of positive outcomes and liquidity? Should we factor in the physical impact on some of our investments—whether physical investments, like real estate, or municipal investments in cities and states?”

They raised many large questions about whether they should think about investing differently and whether they should add the lens of climate risk to their long-term investment strategy. And the answer is yes.

The Quarterly: A key point you made in your letters is that we may see a “fundamental reshaping of finance,” with a significant reallocation of capital “in the near future.” How will that happen? Can you give an example?

Larry Fink: Well, if 5 percent or 10 percent or 20 percent of our clients are starting to ask these questions and trying to design strategies to effectuate the climate theme over a long horizon, that in itself is a capital reallocation. We’re hearing this in our conversations with insurance companies, which are looking at climate change and how they should insure. That represents a major societal issue that’s unfortunately very regressive. We don’t talk about how regressive this could become.

In the United States, insurance rates are generally set by state insurance commissioners. It’s very hard for an insurance company to raise rates extensively even if it thought a jurisdiction may have real, physical climate risk. So, suppose you buy a house, and you think you’re going to live in that house for 20 years. Your insurance has to be renewed every year. But the house is in an area where the insurance company does not have the ability to raise rates unless reinsurance rates are raised. Ultimately, it’ll be able to raise rates. In the interim, it may say, “I can’t provide you with coverage anymore.” Then you have this long-term asset that you want to protect, but the insurance companies may not insure you. That is another form of capital allocation and reallocation.

And we’re starting to see more evidence of climate change and its impact on capital allocation. I do believe that if you’re a long-term investor, you’d better frame all your investments through that lens.

The Quarterly: Are investors able to do this now? And if they can’t, why not?

Larry Fink: Investors need more transparency. This is why in my letter I asked for greater disclosure, using SASB [Sustainability Accounting Standards Board] and TCFD [Task Force on Climate-related Financial Disclosures]. The key is gaining the ability to compare and contrast different companies. We could use that transparency to assess company A with respect to company B, or industry A with industry B, and try to come up with a better strategy.

Most investors are not going to abandon hydrocarbons, but they want a portfolio that will be more persistent in a more sustainable way. If it’s possible to score how every company is doing, investors are going to look to us to be actively investing and searching for a better portfolio composition with higher sustainability or ESG [environmental, social, and governance] scores. That’s what we’re going to do. And that’s where I do see huge movement.

The Quarterly: You make the point that most investors won’t abandon hydrocarbons. Why not? And what are the implications of that?

Larry Fink: If we believe we can stop using coal today, we’re fooling ourselves. There are more coal plants being built—countries are adding new coal plants right now. We don’t want to talk about that. We don’t want to think about it, but that’s the reality. The answer is not to think that we can just run away from coal worldwide. It is to create better science and technology to find ways to help make coal cleaner.

As much as we may change our behavior in the United States as a very wealthy country, and as much as Canada and Europe might change their behavior, there are many parts of the world that are just beginning their growth curve and their wealth creation. It’s very hard for us to be judging them on their economic path. And there lies the problem. We could do all that we are potentially able to do, and even that will not be enough, because so many other parts of the world are just adding more and more carbon to our air. That’s not going to change anytime soon. So we need to be fair and just. We need to be open-minded.

The Quarterly: The need for “fair and just” policy solutions is something you wrote about in your letters. What do you mean by that?

Larry Fink: One of the biggest tools that governments could use—one of the biggest tools the environmental groups are recommending—is a carbon tax. A carbon tax is an incredibly regressive way of taxing people. The wealthy are not impacted as much as the less fortunate, who are trying to meet their budgets every day and have to pay higher heating bills. A carbon tax makes their lives much more difficult. This is why I’ve said we need to work with governments to try to minimize how regressive the impact of climate change is going to be.

We need to make sure that if there is a carbon tax, all the money is going to renewables and redistribution. And there should be some type of credit back to those people who cannot afford to pay the tax. The problem is that in so many states, a component—if not all—of the carbon tax would be used to fill a budget gap. This is where we need the combination of public and private working together. We should have a plan so that all that added tax would not go to fill our deficits, but would go for infrastructure spending, renewable technology, and redistribution.

There’s another issue we haven’t even spoken about. If the science is right about climate change, the impact on the subtropical and equatorial parts of the world will be devastating—the density of the population is so heavily oriented to the equatorial parts of the world. That’s also going to be the area that’s most harmed. We have to have this conversation. We have to be thoughtful about it. And if I’m right about finance moving this forward, this problem is probably coming sooner than later.

The Quarterly: What will it take to address these issues? Are we ready?

Larry Fink: I’ve witnessed five or six different crises in my career. Some of them were quite severe. All of them were financial in nature, whether it was the high-yield crisis or the dot-com crisis or the Thai crisis of 1997–98, the real-estate crises, and the Great Recession. We were able to mitigate these crises and reduce their severity through monetary policy. In unison, all the central banks tried to correct these financial difficulties. In most cases, the duration of these crises was short. Sometimes they were very severe. Many families were impacted. But the crises were short.

When you start thinking about climate-change impact, whether you believe in 5 percent of the science or 100 percent of the science, it becomes apparent that we don’t have a global government body to arrest this problem. This is going to require every government, small and large, to start finding ways of mitigating it.

About the author(s)

The remarks here from Larry Fink have been adapted from a February 2020 interview conducted by Rik Kirkland, a partner in McKinsey’s London office.

Notes Regarding CLE and CPE Credit Regarding the July 14, 2020 Webinar:

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Tuesday, June 23, 2020

The Historical (And Yet Contemporary) Importance of Behavioral Accounting

Editor's Note: The Sustainability Investment Leadership Council (SILC) is pleased to publish the following blog post by Michael Kraten, Professor of Accounting at Houston Baptist University. Please contact with questions, comments, or suggestions about our blog, or to express interest in our organization.

This post has also appeared on the blogs of Econvue and the Public Interest Section of the American Accounting Association, and on Dr. Kraten's own blog Save The Blue Frog. We encourage you to use these links to peruse these outstanding online publications.

The field of behavioral finance studies the behavior of the investment markets. Similarly, the field of behavioral economics studies the behavior of the global economy and the numerous national, regional, and local economies.

But what of the field of behavioral accounting? How does it resemble the fields of behavioral finance and economics? And how does it differ?

Behavioral accountants, like their colleagues in the other financial professions, focus on elements of human characteristics that can be identified in aggregate data sets. They recognize that organizations, like markets and societies, are composed of individuals who make personal decisions in often-predictable ways. Thus, because behavioral researchers can understand and predict individual decisions in various situations, they are also able to understand and predict the impact of aggregate decisions.

Accountants, though, specialize in the development of organizational reports that describe the conditions of organizations. Internal and external users of their reports rely on them to make important decisions that impact the well-being of those organizations. Thus, at times, accountants feel inherent tensions between the goals of “measuring and reporting data accurately and objectively” versus “measuring and reporting data that persuades the user to make decisions that help the organization.”

Individuals study to become public accountants to learn how to implement measurement and assurance procedures in support of the first goal. Separately, they study to become behavioral accountants to learn how to support the second goal. These goals overlap, but they are not mutually exclusive. In certain situations, they are perfectly aligned. In other situations, though, they have little in common, and they may even conflict.

A Controversial Example of Behavioral Accounting

A prime example of controversial behavioral accounting is commonly known as “greenwashing” in sustainability circles. Organizations cherry-pick data that appear to portray them as responsible guardians of the environment, and then present that data to persuade readers that they are responsible stewards of the natural world.

Volkswagen’s notorious collection of falsified emissions testing data is an obvious and egregious illustration of greenwashing behavior. Other illustrations are more subtle in nature, generating healthy debates over whether the content is misleading at all.

Consider, for instance, the pledge that was made by E. Neville Isdell, Chairman and CEO of The Coca-Cola Company. In 2007, he declared that “Our goal is to replace every drop of water we use in our beverages and their production.

On the one hand, the firm produced data that indicated the successful achievement of that goal. But on the other hand, investigative reporters have noted that “… ‘every drop’ includes only what goes into the bottle. The company does not count water in its supply chain — including the water-guzzling sugar crop — in its ‘every drop’ math.

Indeed, a public accountant may be able to provide assurance that the “drop for drop” phrase is (technically speaking) an accurate description of Coca-Cola’s water utilization patterns. But a behavioral accountant may protest that the vaguely defined phrase invites selective interpretation.

A Universally Admired Example of Behavioral Accounting

Ben & Jerry’s provides a contrasting illustration to the controversial food and beverage example of Coca-Cola’s environmental accounting practices. The ice cream manufacturer is often credited with producing the world’s first Corporate Stakeholder report (i.e. Integrated Report) more than two decades ago.

Using an internally developed proprietary format that the firm called Social & Environmental Assessment Reports (SEARs), Ben & Jerry’s published sustainability data on its web site for many years until concluding the practice in 2018. The reports employed colorful graphic imagery to express its core values, its focus on its social mission, its multiple year planning processes, its goal setting practices, and its outcomes. It also hired an independent public accounting firm to prepare annual independent review reports on the information.

The playful graphics, the earnest social messaging, and the metrics all served to reinforce the impression of Ben & Jerry’s as a socially conscious firm that made business decisions in support of the public interest. The behavioral impressions that were produced by the SEAR Reports undoubtedly supported the decision by Unilever to purchase the firm on friendly terms.

From The Past To The Future

Why did Abraham Lincoln begin his 1863 Gettysburg Address by noting an event that occurred “four score and seven years ago,” instead of simply beginning with the phrase “in 1776”? He must have known that his audience would have leaned into the arithmetic calisthenics of computing the year, thereby placing them in an appropriate frame of mind to focus on his intellectual argument about the war’s threat to democracy.

And why did he end his Address by vowing to protect the “government of the people, by the people, for the people”? Why didn’t he simply vow to protect “democracy”? Once again, he must have anticipated that the repetitive rhythmic triadic cadence would be more memorable to his audience. It’s also why Martin Luther King repeated “I Have A Dream” nine times in his immortal address, and “Free At Last” three times at the very end of the speech.

Lincoln and King both knew that the levels of the persuasiveness of the information that they conveyed to their audiences were just as important as the objective validity of their logical arguments. Such knowledge continually inspires today’s behavioral accountants to redefine traditional profitability measurements into more esoteric metrics like Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) and Adjusted Consolidated Segment Operating Income (ACSOI).

From Abraham Lincoln to the Chief Financial Officer of Groupon, the principles of behavioral accounting have been widely used to influence the decisions of stakeholders. Indeed, it is not sufficient for an accountant to simply “get the numbers right.” It is also important for an accountant to “persuade the user of the numbers to behave in a desirable manner.”

Sunday, June 7, 2020

Our Bonus Webinar: How To Maintain A Healthy Portfolio During Covid

The Sustainability Investment Leadership Council (SILC) is delighted to announce that it has finalized its plans to offer a bonus webinar this week! On Thursday, June 11 at 11:00 am Eastern time, Valerie Grant of AllianceBernstein and Martin Whittaker of JUST Capital will join Sarah Tomolonius of SILC to discuss “How To Maintain A Healthy Portfolio During Covid.”

There is no charge for SILC members to join the webinar. Simply reply to this email and let Michael Kraten know that you wish to do so. Instructions will be forthcoming to view our Zoom conversation.

Please keep in mind that you are also welcome, at no charge, to attend the upcoming webinar that SILC is jointly producing with the New York Alternative Investment Roundtable. It will feature a conversation with Erika Karp of Cornerstone Capital Group and Professor Michael Kraten of Houston Baptist University. If you have not yet informed us of your interest to join that event on Tuesday, June 16 at 1:00 pm Eastern time, please reply to this email message and let Dr. Kraten know of your interest.

Likewise, you are also welcome to join us at our July 14th conversation with COSO Chair Paul Sobel, PKF Partner Marc Rinaldi, Ropes & Gray Partner Michael Littenberg, and Dr. Kraten. As always, you simply need to send Dr. Kraten a message at to express your interest.

As you can see, even though Covid forced SILC to cancel last month’s annual meeting, we are simply not permitting it to stop us from serving our members! We look forward to welcoming you at our upcoming webinar events.

Thursday, May 21, 2020

Once Again, A Lost Generation

Editor's Note: The Sustainability Investment Leadership Council (SILC) is pleased to publish the following blog post by Michael Kraten, Professor of Accounting at Houston Baptist University, about the social sustainability implications of the coronavirus pandemic. Please contact with questions, comments, or suggestions about our blog, or to express interest in our organization.

The piece has also been published on the Blog of the Public Interest Section of the American Accounting Association (see, and on Dr. Kraten's professional blog (see

Precisely one century ago, Ernest Hemingway was living in Chicago and attempting to readjust to civilian life after experiencing the horrors of service as an ambulance driver for the Italian Army in World War I. F Scott Fitzgerald was drinking excessively and wooing his future wife Zelda while attempting to transition from an unsuccessful career in advertising to a lucrative one in writing novels and short stories. And the United States, as a nation, was struggling to recover from its loss of human life during the Spanish Flu pandemic, its failure to permanently “make the world safe for democracy” in World War I, and its inability to prevent the economic collapse of the 1920 Depression.

Hemingway’s and Fitzgerald’s subsequent tales illustrated the plight of The Lost Generation, the demographic cohort that came of age at a time when national leaders and the general public were asking serious questions about the sustainability of American society and its capitalist economy. Although the 1920s are now remembered as a time of prosperity, the decade also represented a time of escalating income inequality, debt-fueled business transactions, racial and religious bigotry, and political turmoil.

Today, much praise is bestowed on America’s Greatest Generation, the demographic group that came of age during the Great Depression and World War II. Much less attention is paid to the Lost Generation, though, the preceding generation that (according to Hemingway) believed that “if you have a success you have it for the wrong reasons. If you become popular it is always because of the worst aspects of your work.”

What caused such a pessimistic, fatalistic, and almost nihilistic perception of American business and society to be adopted by an entire generation? It could not have been a mere single catastrophic event; after all, many American generations experience such events. Perhaps, instead, it was the impact of a wide variety of catastrophic events that generated such cynicism, catastrophes that affected many different types of institutions that supported American society.

And what of today’s youthful generation? What of Gen Z, the demographic cohort that was born after 1996 and is now entering the work force? Their collective memories encompass the national security failure of 9/11, the military quagmire of the Middle Eastern wars, the economic collapse of the Great Recession, the radicalization of contemporary political movements, and the social and medical convulsions of the coronavirus pandemic.

Today, some citizens are calling for dramatic new investments in national programs, arguing that the failure to make such investments will result in severe economic losses. Others reply that massive increases in federal debt will be required to finance such investments, and that excessive spending will impose even more severe economic losses in the long term. 

But neither side is factoring the risk of the emergence of a new Lost Generation into its Return On Investment analyses. If we believe that the potential cost of a climate collapse must be factored into analyses of proposed environmental sustainability investments, perhaps we should likewise conclude that the potential cost of producing another Lost Generation must be factored into analyses of proposed social sustainability investments.

After all, a century ago, the Spanish Flu pandemic helped to produce a group of “Lost” authors who shaped the generation that stumbled into the Great Depression. What will the Coronavirus pandemic do today?

Tuesday, May 12, 2020

Webinars: A Different Deal

We hope that you and your family, friends and colleagues are staying healthy and safe during these challenging times.

Due to COVID-19 restrictions and the continuing uncertainty regarding in-person gatherings, the Sustainability Investment Leadership Council (SILC) will not hold our fifth annual conference on May 14th. However, please do not despair! We would like to offer you a different deal.

Drawing upon the wealth of informative content that we planned to present on May 14th, we are developing a series of free webinars to be web streamed throughout the year. During next month’s webinar, Cornerstone Capital Group Founder and CEO Erika Karp will converse with Houston Baptist University Professor Michael Kraten.

In July, the following month, Ropes & Gray Partner Michael Littenberg, PKF O’Connor Davies, LLP Financial Services Partner-in-Charge Marc Rinaldi, and COSO Chairman Paul Sobel will speak to Dr. Kraten.

To join our conversation, please send an email message. He will be delighted to register you for the webinar(s); we hope that you will be able to join us there.

We are now arranging to reverse the credit card charges of any individual who has already registered for our May 14th conference. Please review your credit card statement at the end of the month; then let us know if you do not see the appropriate reversal.

Most importantly, please be healthy and stay safe. We may not be able to welcome you in person on May 14th, but we look forward to seeing you in cyberspace!

Sunday, April 19, 2020

Economic Sustainability and “Coronashock”

Editor’s Note: We are delighted to publish the following essay from Economics Professor Ellen Clardy of Houston Baptist University. Dr. Clardy shares thought-provoking insights about the trade-offs between social and environmental sustainability, and between short-term and long-term considerations.

Please keep in mind that the situation is evolving on a moment-to-moment basis. For instance, certain Federal government assistance programs have run short of funds, although Congress is now negotiating to replenish them.

As always, we welcome reader comments. Please contact with comments about Dr. Clardy’s post, or with suggestions about future posts.

"May you live in interesting times” is a phrase from the 20th century that is often incorrectly attributed to an ancient Chinese expression. Surely, though, it does seem to ring true today, as we are facing the coronavirus, a pandemic that originated in Wuhan, China. Barely 10 years past the Great Recession, a calamity that required unprecedented fiscal and monetary policy interventions into the economy, we are now facing the Great Cessation.[i]

This downturn is unlike any other because the decrease in aggregate demand is not originating from a pessimistic swing in animal spirits; instead, it results from government mandates to shut down or vastly curtail large segments of the economy in the name of public health. Meanwhile, the negative productivity shock is due to many in the labor force being told that they cannot go to work. Because the underlying economy was strong before the Great Cessation, we may expect a quick recovery when we restart the economy. However, we must take steps to limit the damage.

For a system that can be successful in the long term, we need policies to promote social, environmental, and economic sustainability. Needs in one area, however, will inevitably clash with those in other areas. Protecting public health has caused us to sacrifice short term economic sustainability to serve the needs of social sustainability. Putting aside the debate on the wisdom of that decision, we must now focus on policies that promote long-term economic sustainability. In times of crisis, the Federal Reserve is intended to be the lender of last resort.[ii] Originally, the Fed’s primary tool was the ability to make loans to banks, but they innovated many other tools in response to the Great Recession. They are doing so again to respond to the coronavirus shut down and to restore the economic system.

The failure of the credit markets is a primary threat. If businesses cannot access credit, and if panic spreads over their inability to do so, the ripple effect may seize up the banking system. It may even cause a depression. The first step for the Federal Reserve is lowering the Federal Funds Rate (FFR). The FFR is the interest rate that banks charge for overnight inter-bank loans. However, other rates are also influenced by its level, so mortgage rates, auto loans and the like should decrease accordingly. The usual goal of lowering the FFR is to lower the cost of borrowing and thus encourage consumption and investment. In these circumstances, though, this reduction is more about keeping credit available.

The Fed’s Federal Open Market Committee (FOMC) meets regularly to set monetary policy and issue press releases about their decisions; the Minutes of their meetings are released weeks later. As recently as their regularly scheduled January 28-29 meeting, their assessment was that “all is good.” They voted to keep the target range for the FFR at 1.5% to 1.75%, given low unemployment, low inflation, strong household spending, albeit weaker investment and export spending.[iii]

However, preemptive actions by the Fed obviated the need for the regularly scheduled March 17-18 meeting because the Fed recognized the threat that the coronavirus poses to the economy. On March 3, the Fed announced a 0.5% cut of the FFR to 1% to 1.25%.[iv] It was a dramatic move, ahead of schedule, with a cut that was double the typical 0.25% change.

Then the drama increased. On Sunday, March 15, ahead of the Asian markets opening, the Fed announced a massive cut that changed the target for the FFR to 0% to 0.25%. In its press release, it stated that the US economy is coming into this period on “a strong footing,” but it expected the coronavirus to cause problems for both the global and the domestic economies, with the energy industry facing particular stresses.[v] The FFR had last reached such depths in 2008, in reaction to the Great Recession.

Because this rate tool was also near zero and thus “maxed out” during the Great Recession, the Fed learned a lot about creating other tools at that time. Once again, it is turning to some of those tools.

Indeed, it is now time for the return of Quantitative Easing (QE), born of the Great Recession.[vi] “Normal” Fed open market operations that target the FFR involve the purchasing of short-term Treasury notes, but QE involves the buying of longer term government bonds, mortgage backed securities and other assets. The Fed thus becomes a buyer of last resort, enabling access to cash for those who need to sell such assets.

A new tool, the Temporary Corporate and Small Business Liquidity Facility, is an innovation by which the Fed uses money from the Treasury to buy loans from banks, thereby supporting bank loans to businesses.[vii] Similarly, the Fed has announced steps to support the SBA’s Paycheck Protection Program and the Main Street Lending Program.[viii] While the Fed does not lend directly to businesses, this is a workaround to keep the credit markets functioning.

In addition, the Fed lowered the discount rate, which is the interest rate that banks pay to borrow at the discount window. Typically, banks avoid using this tool because it is perceived as a sign of bank distress. However, the actions of the Fed have encouraged banks to borrow from it without an implied stigma, and the Fed reports an increased use of it.[ix] Additionally, the Fed has established other access points to credit, including Commercial Paper,[x] Primary Dealer Credit,[xi] and the Money Markets and Mutual Funds.[xii] More may be introduced as the Fed deems necessary. Indeed, the Fed is pursuing many methods to maintain the flow of credit to households and businesses and to prevent panic in the financial markets.

Finally, the Fed is addressing the rising global demand for dollars that has been triggered by a flight to safety. It is lowering the cost of dollar liquidity swaps, thus preventing shortages of dollars by providing credit lines to foreign central banks. The Fed announced a reduction in the cost of the swaps in concert with five central banks on March 15,[xiii] and then announced additional temporary arrangements with nine other countries on March 19.[xiv]

Clearly, the Fed is taking action to ensure that the financial markets continue to function; it will continue to innovate tools as needed to support the credit markets. However, it is aware that monetary policy is a blunt instrument that cannot directly address the impact of the shut down on individuals and businesses. Government fiscal policy is the tool that must provide targeted help to people and businesses.

While it is usually slow to pass laws and slow to implement them, the federal government moved very quickly last month. The Coronavirus Aid, Relief and Economic Security (CARES) Act[xv] was signed into law on March 27. Along with two other bills that were passed earlier in the month, CARES injects money into the economy through expanded unemployment insurance, direct payments to taxpayers, and additional money for the hospital system, certain industries, and state and local governments.

However, the recovery will be delayed if many businesses fail because they cannot make payroll with little to no revenue. The Treasury Department has innovated a system to extend loans to businesses with 500 or fewer employees to cover payrolls through July. The loans are processed through the current banks of these businesses; the borrowers will be forgiven if they retain their employees. There is even talk of a fourth stimulus bill that provides for a long-discussed infrastructure package.

These extensive interventions should preserve our financial markets and help people who are hurt by the cessation, thus restoring long-term economic sustainability.[xvi] But at what cost? Obviously, our government debt will increase. And what about the increase in the money supply? In the long run, a money supply that grows faster than the real economy causes inflation, but the Fed demonstrated after the Great Recession that it can prevent excess money from flooding the real economy by adopting the Interest on Reserves tool. It pays banks to keep excess reserves at the Fed instead of lending the capital into the real economy, while still assuring the system that credit will be available if needed.

The damage from the Great Cessation is yet to be measured, but bright spots are already visible. We are now aware, for instance, that our Chinese offshore supply lines for key pharmaceutical ingredients leaves society vulnerable. Businesses and government officials are likely to initiate future moves to bring this industry back to America, along with the jobs that will follow it. Other industries may pull away from China too; for instance, the Department of Homeland Security and other Executive Branch agencies recently called for the FCC to revoke China Telecom’s authorization to provide telecommunication services in the United States.[xvii] And even though many people are losing jobs, some industries have seen demand grow and are hiring rapidly, such as grocery stores, delivery services, and warehouse distribution centers.

In addition, the amazing ingenuity of the American economy could diminish net economic damage. For example, components of the food supply chain that served restaurants froze when their customers’ dining facilities closed. But grocery store chains like Texas’ H-E-B have reached out to these food distributors to help meet increasing grocery store demand, thereby salvaging food that was trapped in the supply chain.[xviii] Restaurants, too, have shifted from serving meals to selling groceries.[xix] Albeit anecdotal, such efforts will help limit net economic damage, especially if the economy returns to life in the near future. Indeed, the innovative, hardworking people of America, working within a capitalist system, is our most valued asset that can ensure our economic sustainability.


Wednesday, April 8, 2020

Accounting For Coronavirus Risk

Editor’s Note: SILC is pleased to publish the following editorial piece by Michael Kraten, Professor of Accounting at Houston Baptist University.

The piece has also been published on the Blog of the Public Interest Section of the American Accounting Association (see, and on Dr. Kraten's professional blog (see

As Queen Elizabeth makes her emergency address to the British people from her safe zone in Windsor Castle, and as the U.S. Surgeon General Jerome Adams warns the American people of an impending “Pearl Harbor Moment,” is it reasonable to ask why governments and businesses were caught blindsided by the coronavirus catastrophe?

Perhaps it’s unfair to expect foresight in the face of such a menace. But why weren’t health care providers and other organizations prepared to respond promptly? Why the shortages of such basic items as face masks and nasal swabs? Where was the contingency plan to increase production of such essentials at a time of dire need?

If we review the reporting standards of the Global Reporting Institute (GRI), we can find disclosure requirements that address these readiness considerations. GRI Standard 204 on Procurement Practices, for instance, states that:

“When reporting its management approach for procurement practices, the reporting organization can … describe actions taken to identify and adjust the organization’s procurement practices that cause or contribute to negative impacts in the supply chain … (these) can include stability or length of relationships with suppliers, lead times, ordering and payment routines, purchasing prices, changing or cancelling orders.”

Consider the many health care providers that rely on unstable Asian suppliers to provide face masks under terms that permit long lead times, uncertain ordering routines, and the imposition of extreme price increases when products are scarce. If they are required to disclose these procurement relationships under GRI Standard 204, we would be aware of the resulting social risk.

Likewise, GRI Standard 403 on Occupational Health and Safety states that:

“The reporting organization shall report … whether the (occupational health and safety management) system has been implemented based on recognized risk management and/or management system standards / guidelines and, if so, a list of the standard guidelines.”

Consider the employees of our food and delivery companies who are now protesting that their employers are not providing satisfactory protections against the coronavirus. If the employers are required to disclose the standards and systems that they utilize to keep their employees healthy and safe, we would be aware of the extent of their preparedness (or lack thereof) in the face of pandemic threat.

There are other GRI Standards that come close to addressing pandemic concerns, but that fall just short of the mark. GRI Standard 201 on Economic Performance, for instance, states that:

“The reporting organization shall report … risks and opportunities posed by climate change that have the potential to generate substantive changes in operations, revenue, or expenditure, including a description of the risk … a description of the impact associated with the risk … the financial implications of the risk … the methods used to manage the risk … (and) the costs of actions taken to manage the risk.”

Although Standard 201 refers to climate change, it would represent an ideal disclosure requirement for pandemic preparedness if the GRI simply adds the words “and pandemics” to “climate change.”

It may be comforting to know that disclosure defining entities like the GRI have issued standards that address our readiness to fight the current pandemic. But we cannot reap the benefits of these disclosure requirements if organizations simply ignore their reporting responsibilities.

Friday, January 31, 2020

A Debate On Our Hands!

Editor’s Note: SILC is delighted to publish the following Letter to the Editor regarding our year-end blog post entitled “A Little Optimism For The Upcoming Decade.” That post is available online, immediately below this post, at

Apparently, we have a debate on our hands! What do you think? You are welcome to join the conversation by simply replying to this message and sharing your thoughts with us.

Of course, you are also welcome to attend our Annual Conference on May 14, 2020 in midtown Manhattan. We look forward to seeing you there!

In an otherwise fine blog post (A Little Optimism) Dr. Kraten falls into a popular trap, applauding the intervention of the heavy hand of government "But they would not remain a purely voluntary framework for long!".  (Exclamation point in the original!).  All nations, those enjoying a free market economy and those not, have learned that government's track record barely reaches 50% in making the lives of their citizens better and not worse.  Underlying the philosophy of SILC is the notion that voluntary activities by business entities, non-profits and communities should strive to solve society's problems and invite governmental aid only where those activities fall short.  Given the proven productivity of the business community and the often dismal effects of government programs, this history should be recognized rather than ignored.

A second trap, but not in our bailiwick, is the oft-repeated complaint about "wealth inequality".  This datum is almost always misrepresented but is far less important than the improvements among the working poor in the past decade.  If a family's net disposable income has improved from, let's say $52,000 per year to $66,000 per year (after adjusting for inflation), that family is far less concerned about what the top 1% is earning (which is also part of the cause of widespread prosperity) than having a few bucks for a vacation or new sofa for the first time.

Yours truly,
Stanley Goldstein, CPA

Tuesday, December 31, 2019

A Little Optimism For The Upcoming Decade

Editor’s Note: SILC is pleased to publish the following year-end editorial piece by Michael Kraten, Professor of Accounting at Houston Baptist University. Happy New Year!

The piece will also be published on the Blog of the Public Interest Section of the American Accounting Association. See

As the calendar flips from 2019 to 2020, it’s easy to feel a bit depressed about the metrics that have challenged us during the past decade. The aggregate debt of the United States federal government, for instance, has exploded from $13 trillion to $24 trillion. Wealth inequality has also grown, and the number of American citizens without health insurance has resumed its climb after years of decline. Meanwhile, increases in sea levels, meteorological instability, and ocean temperatures are threatening our natural environment.

It’s a grim set of trends, isn’t it? But if we choose to focus on these dismal metrics, we’ll lose sight of the broader picture. There were, after all, many events that occurred during the 2010s that should encourage optimism among those who support the public interest.

At the start of the decade, for instance, the standards of the Global Reporting Initiative (GRI) merely provided a voluntary framework of reporting guidelines. But they would not remain a purely voluntary framework for long! In 2013 and 2014, the European Union issued a pair of directives on non-financial reporting. They required many of the world’s largest corporations to begin to include a wide variety of non-financial information in their annual reports, starting in 2018.

Furthermore, at the start of the decade, the Sustainability Accounting Standards Board (SASB) didn’t even exist. Launched in 2011, the SASB now promulgates detailed sets of standards for 77 industries, including sample disclosure language for inclusion in corporate annual reports. The SASB’s framework and standards, like the European Union’s directives on non-financial reporting, have served to impose sustainability reporting requirements and expectations on the world’s largest for-profit entities.

Meanwhile, the Task Force on Climate-related Financial Disclosures (TCFD) was launched by the Financial Stability Board in 2016 to recommend voluntary practices. Chaired by Michael Bloomberg, the Task Force presented its final recommendations the following year, and then remained in place to launch a Knowledge Hub, a pair of annual Status Reports, and a Consortium. The TCFD, like the GRI and the SASB, now focuses on developing and supporting private and public initiatives to enhance financial reporting practices.

The most startling development during the past decade, though, may have been the dramatic growth of the ESG investment industry. According to Fidelity, Socially Responsible Investing assets in the United States have quadrupled since 2010, rising roughly from $3 trillion to $12 trillion; the size of this asset market now exceeds $30 trillion worldwide (see

If you believe in the power of money, this final metric may be the most impressive one of all. After all, government entities and standard setting bodies may be able to protect the public interest against public apathy and private sector opposition. However, the re-direction of billions of dollars in investment funds can only occur if public opinion and the private sector support the movement.

So let’s try to maintain an optimistic perspective as we enter the next decade of the 21st Century. After all, the decade of the 2010s have produced an impressive array of positive occurrences. It is entirely possible that the upcoming decade of the 2020s will likewise give birth to many new trends that support the public interest.

Friday, November 29, 2019

Rebounding From Tragedy: SILC Club Co-Hosts Panel Discussion About Foundations That Were Formed After The Loss Of Loved Ones

Editorial Note: As you know, our SILC Club presents a series of "after hours" meetings and presentations that address a wide variety of sustainability-related issues. Last month, our Club presented a unique panel about an urgent social concern.

We would appreciate your feedback about the session. If there is significant demand for it, we would be delighted to dedicate future Club meetings or Annual Conference sessions to this topic.

The Sustainability Investment Leadership Council (SILC), working in collaboration with the NYS Society of CPA's Family Office Committee, chaired by Phil Strassler, presented a panel on sustaining families in times of tragic loss. IceMiller generously hosted the breakfast meeting; it was attended by 42 people, including representatives of 20 family offices. Stanley Goldstein was the panel moderator.

Each of the three panelists prematurely lost a son; the causes were an opioid overdose, a car crash, and a drug addiction / suicide. The panelists launched foundations in memory of their deceased sons; they have devoted enormous efforts to sustaining and building those entities.

The presentation was well received. The foundation entities are well-balanced, with one brand new, one mature with no goal of getting larger, and one highly successful with major aspirations. There was a good deal of advice on raising money; two of the foundations have found significant success doing so. Interestingly, all of the families survived their tragedies intact, and are now stronger for their experiences. This is not typical, though; parental divorces and sibling sufferings are a great deal more common.

We touched upon the relationships of the charitable entities to the causes of the tragedies. The opioid addiction entity does major work in publicizing the problem, working with legislatures to reduce the causes of addiction, and to educate the public. The car crash and suicide charities do important community work; they keep alive the memories of the decedents, but they do not address the causes of the tragedies.

The audience was fully attentive and involved; many people spoke to the speakers privately. There is much more work to be done, whether under SILC auspices or elsewhere.

Saturday, October 26, 2019

Sustainable Investing for Institutions: A Case Study

Editor’s Note: SILC is pleased to publish the following editorial piece by Chris Matteini, an analyst at TIFF Investment Management in Boston. It is an updated version of an article that was first published in the July 2018 edition of the CPA Journal of the New York State Society of CPAs.

The CPA Journal retains all publication rights to the original article. Nevertheless, we appreciate the opportunity to publish Chris’ updated version, and we encourage our readers to peruse the sustainability articles in the Journal.

Sustainable investing is at once intuitive and confusing; it seems like the right thing to do, but there are many different ways to do it. It promises a contribution to solving global issues, but perhaps at the expense of investment returns. It represents new risks, opportunities, and ways of doing business in a rapidly changing world of finite resources. At TIFF Investment Management—a not-for-profit outsourced CIO firm managing approximately $7.5 billion on behalf of over 500 member institutions and this author’s employer—environmental, social, and governance (ESG) research is one component of the manager selection process.

Investors need not bear the weight of the world to implement an effective sustainable investment strategy and make a difference through thoughtful capital allocation. Sustainability issues are business issues that affect corporate value, and investment analysis must consider ESG information to be considered complete. For example, energy use is a cost, and different sources of energy present different risks. Poor supply chain management, including the use of child labor, can destroy a brand. Diverse and independent boards are often more effective than homogeneous and intertwined ones.

The sentiment around business practices as they relate to environmental, social, and human capital is changing; business models are adapting to this, and ESG issues are increasingly becoming business issues. But not all ESG factors affect all industries, and decision-useful ESG data is still relatively hard to come by. There is no widely accepted domestic or global standard for corporate reporting of ESG information; therefore, not all companies report, and those that do use disparate approaches. Many investment managers incorporate some form of ESG into their research processes, but not necessarily in very thoughtful ways.

That said, the sustainable investment movement, in its different forms, has tremendous momentum. By the end of 2016, global negative/exclusionary screening assets under management (AUM) had ballooned to approximately $19.8 trillion, ESG integration AUM had risen to over $17.5 trillion, and corporate engagement/shareholder action strategy AUM was over $9.8 trillion (Global Sustainable Investment Alliance, 2018 Global Sustainable Investment Review,,. (Note: There is some overlap between these strategies). The United Nations’ (UN) Principles for Responsible Investment (PRI) signatories, of which there are approximately 1,900, manage close to $90 trillion in aggregate AUM (UN PRI). The EU Nonfinancial Reporting Directive represents a critical step in the history of capital markets. UN Sustainable Development Goals (SDG) and the UN Framework Convention on Climate Change Paris Agreement are but two examples of international cooperation aimed at solving ESG problems.

Still, while institutional investors may believe in these initiatives, the concerns of investment execution and performance remain. TIFF’s members, for example, have annual spending rates typically between 3% and 5%; their portfolios need to achieve real rates of return in line with those targets in order to support their missions while maintaining their purchasing power. Furthermore, investors may accept that ESG factors affect corporate value and are thus relevant to achieving performance goals, but it there is still no standard framework for measurement or comparison across industries and companies. The Sustainability Accounting Standards Board (SASB) offers an excellent ESG reporting framework, but no one is required to use it. The EU Nonfinancial Reporting Directive is mandatory for approximately 6,000 large companies in Europe but provides a great deal of flexibility to corporations in terms of what they disclose: “relevant information in the way they consider most useful” (Eccles and Kastrapeli 2017).

The current lack of ESG reporting standardization presents both investment risk and opportunity. The risk is in not fully understanding investment vulnerabilities associated with ESG factors; the opportunity results from information asymmetry. For example, the total share of global GHG emissions that fall under a carbon pricing regime (e.g., carbon taxes, cap and trade) increased from less than 5% in 2005 to roughly 15% in 2019. The number of laws and executive acts related to climate increased from just over 200 in 2005 to roughly 1,500 in 2017 across over 120 countries (Generation Investment Management, 2018 Sustainability Trends Report,, and these numbers are likely to rise. An analysis of companies with material exposure to carbon and climate-sensitive regions would be incomplete without an understanding of the costs of emissions and regulatory compliance, which is not standardized. Those investment managers who do the work to cover this information gap will have an edge.

TIFF’s ESG Process

As stated above, TIFF believes that sustainability issues are business issues. ESG factors can affect direct costs (e.g., energy use and sources), revenue (e.g., increased demand for sustainably-manufactured products, decreased demand for non-sustainably-manufactured products), assets (e.g., stranded coal plants), liabilities (e.g., lawsuits related to environmental degradation or poor labor practices), and cost of capital (e.g., higher for companies with physical assets in locations exposed to rising sea levels, increased storms, or increased drought). ESG information, while spotty at the moment, is simply additional and relevant information that should be incorporated into comprehensive business analyses.

TIFF has a process for testing managers’ understanding of sustainability trends and ESG factor impact. This process goes beyond asking for and reading ESG policies, which, if they exist, can be misleading at times. It begins with a line of questioning designed to assess how managers think about and process ESG information generally. One of the first questions is, “Do you have a formal ESG Policy?” This may sound simple at first, but implied in this question is another: “Why or why not?” This can lead to a robust conversation about the manager’s philosophy around sustainability, ESG, climate change impacts, and other matters. Even if the manager is reluctant, something can be learned; TIFF is not dogmatic about requiring formal ESG policies. Far more interesting is the why or why not and the myriad questions that result. For example: Formal ESG policy or not, do you consider ESG factors when evaluating businesses? If no, why not? If yes, how and when in the process? Who is responsible/accountable? How do you determine which factors are material to corporate value? Can you provide an example of how ESG factors have impacted an investment decision? This delves into the manager’s process, creating an opportunity to add value to that process.

TIFF has several dozen questions related to general ESG philosophy and process. Not every manager is asked every question; rather, they are asked what TIFF views to be material, depending on the manager, and their answers are tested through a discussion of specific investments. It is easy to write a formal ESG policy that states one believes in the importance of analyzing various forms of capital; the proof is in the actual incorporation of ESG information into business analysis. Questions that test for this include: What is the energy intensity (unit of energy per unit of output) of Company A, and what are its sources? What is Company A’s exposure to climate risk, and how did you determine this? Has Company A experienced labor issues? Does it have a diversity policy? What is the composition of the board? Is management compensation tied at all to ESG metrics? Again, these are examples from a longer list, asked depending on what is material to the company in question.

There is no one right way to integrate ESG. Some managers with glossy ESG policies may not always practice what they preach; others without formal policies, who may not even know what ESG stands for, incorporate ESG information naturally as one component of a thorough due diligence process. Managers who avoid certain industries because of obvious negative environmental impacts (e.g., mining) may fail to recognize the less obvious impacts of the industries in which they invest (e.g., consumer products, via product life cycles). Managers who do invest in mining companies (the world will need metals to meet sustainability goals—think electric vehicles) may have robust processes around partnering with the most sustainable of these companies or engaging with management to improve sustainability performance, with the belief that this may improve a company’s bottom line.

Avoiding Simplistic Thinking

All of this emphasizes the importance of testing what is said and written. It also highlights why TIFF employs ESG research as one component of its manager selection process and not the dominant driver. TIFF’s primary goal is to find managers with competitive advantages and strong alignment of interests.

Negative/exclusionary screening is effective in aligning investments with a set of values. TIFF subadvises a negatively screened portfolio adhering to United States Conference of Catholic Bishops (USCCB) guidelines. Because negative-screen investing is fairly easy to implement, it often does not in itself offer an opportunity for significant investment outperformance, unless one believes that the excluded companies will underperform over the long-term. Certain underlying managers in other TIFF products do in fact avoid certain types of businesses, not because of a mandate to do so, but because they view these businesses as unsustainable by virtue of the fact that they sell products that harm their customers or the environments in which they live. However, while negative screening serves an important purpose, it is not a primary source of investment competitive advantage.

Positive screening, or investing only in those companies that score highest according to some ESG ranking methodology, also has a low barrier to entry. The vast majority of managers TIFF has met with who use positive screens use data or employ a methodology developed by a third party. This is herd thinking by definition, and certain ranking methodologies can be subjective and flawed. Impact investing is compelling for many reasons, but it is also highly idiosyncratic and fuller discussion of it is outside the scope of this article. Shareholder engagement can be effective, but TIFF does not view this as a separate strategy, rather as an extension of strong active management with long-term horizons.

An additional component of TIFF’s ESG process is monthly ESG committee meetings attended by senior members of the investment team, representing all asset classes, and professionals from other groups within TIFF. All manager interactions related to ESG are documented, and an ESG section is included in all investment memos, which are submitted to the investment committee and the board. There is regular dialogue with SASB (TIFF CIO Jay Willoughby is on the board of the SASB Foundation) and the development of ESG frameworks and regulations are tracked. TIFF investment staff attend conferences, not only on sustainable investing, but also on industries that are experiencing and driving sustainability-related change.

This last point speaks to what is perhaps the most important thing TIFF can do when it comes to sustainable investing: partner with investment managers who have competitive advantages based on an understanding of industry changes driving the sustainability movement globally and the different businesses solving global issues. Managers will not find these businesses using negative or positive screens, but through excellence in investing, primary research, and a deeper knowledge of how ESG factors affect corporate value.

Monday, September 30, 2019

Lies, Damned Lies, and Statistics

Mark Twain may not have invented this distrustful phrase about data, but he did popularize it. If the phrase sounds a bit harsh to you, perhaps we should simply say that one should always exercise an appropriate amount of professional skepticism before accepting any metric at face value.

Why is this relevant to SILC? Nathan Kwan of RPS Group, a friend of SILC, responded to a previous blog post by noting that Statistica estimated total 2015 oil, gas, and petrochemical employment in the United States to be 1.39 million. That’s a far cry from the 187,000 employees cited in our previous blog post entitled “Making The Case For Solar.”

Why the discrepancy? The 187,000 figure in the blog post relied on a statistic from a 2017 Forbes articles entitled “Solar Employs More People In U.S. Electricity Generation Than Oil, Coal And Gas Combined.” The author of that article relied on an earlier report from the U.S. Department of Energy.

Can we reconcile the 1.39 million employment metric and the 187,000 metric? It’s not possible to develop a perfect reconciliation with publicly available data; nevertheless, we can indeed derive some insight about the differential. The 1.39 million estimate, for instance, includes what Statistica calls “all broad related occupations.” The 187,000 estimate, on the other hand, is limited to “coal, gas and oil power generation.”

SILC Co-Founder Stanley Goldstein has noted that one might wonder about the employment categories that are included in each estimate. For instance, what about the employees of gasoline stations and vehicle repair shops? Unfortunately, it can be impossible to fully understand the content of each metric without paying substantial sums to the publishers of the data for access to such information.

So, with this in mind, which metric is true? Which can we trust?

They are both likely to be true. The Statistica metric is simply far broader in scope than the Department of Energy metric.

Even Mark Twain wouldn’t call either metric a “lie.” But if he were alive, he’d likely embrace the differential as an illustration of the need to maintain a healthy sense of skepticism about data.