The vignettes section features a discussion with Steve Lydenberg who is the co-founder of KLD Research & Analytics, the first firm to conduct an environmental, social and governance (ESG) analysis of S&P 500 companies. He also co-created the first socially responsible investing index of U.S. companies, now called the MSCI KLD 400 Social Index. The focus of the discussion is how ESG has fallen short in addressing systemic issues such as inequality and climate change.

Steve Lydenberg’s passion for social change was inspired by anti-Vietnam War demonstrations, consumer boycotts and the movement to divest from apartheid South Africa. His passion for research and fascination with the powerful tools of the finance sector to address the social issues of the day brought him into the field of finance and sustainability.

KLD was marketing the data on systems-level investing and by 2010, ESG data was being integrated into the valuation models and portfolio risk management. However, the need was felt that ESG data need to evolve to address some of the serious issues like inequality and climate change. This feeling became more certain after the launch of the United Nations Sustainable Development Goals (SDGs) which defined the systemic issues.

System level issues are defined by some characteristics; they involve global issues, they are destabilizing in some fundamental way and it is hard to impact hem and predict their outcomes. We can deal with them using different tools. For e.g we can become part of a collaborative effort dealing with a particular issue. Another example is public policy where investors should play a proactive rule in public policy making and must not become part of such discussions only when it involves something that has a direct bearing on them.

Industry has struggled when it comes to evaluate the intangibles. Social and environmental systems have value which is very hard to price. Suggesting a solution, taking example of climate change, The Task Force on Climate-Related Financial Disclosures has prompted investors and businesses to engage in scenario analysis when it comes to climate change. The range of possibilities explored through such scenarios helps in dealing with such system-level issues.

We duly acknowledge Investment News for the piece