The Robert Zicklin Center for Corporate Integrity hosted a discussion on “The ESG Advantage” on Oct. 31 with Pathstone Chief Impact Officer Erika Karp, highlighting the importance of environmental, social and governance considerations for investors and businesses.

An ESG expert and advocate with 25 years of experience in capital markets, primarily at UBS Group, Karp has come to learn ESG’s role as a determining factor for value growth — but the Wall Street veteran began the talk by acknowledging realities ESG addresses that can no longer be ignored.

“People may not realize this, but about 10,000 species go extinct every year,” Karp said. “That, obviously, is inextricably linked to the climate problem. When it comes to hunger, education and health care — another crisis, mental health care — when it comes to these huge crises, we have a compounded problem whereby trust in institutions has been lost to some degree, and we have to rebuild that.”

Throughout the talk, Karp carefully clarified which terms she avoided and proffered alternatives.

“Again, if anyone uses the term ESG investing to you, or an ESG strategy, or an ESG fund, run in the other direction,” she said. “I like the term, ‘impact investing.’ I like the term, ‘catalytic capital.’”

Karp addressed two myths of impact investing, the first being that investors must give up market-rate returns to invest sustainably. In fact, not only did she say there should be no difference, but sustainability analysis is the “secret sauce” for many of the “baddest, mean hedge funds.”

Subsequently, the idea that ESG analysis is counter to fiduciary duty was myth No. 2. If professional or individual investors aren’t looking at material ESG factors, they’re breaking it.

While centered on investing sustainably, Karp’s admonitions were filled with several complexly stated opinions — one being her preference for active ownership over divestment.

“With regard to divestment, it is great to get attention and to make noise,” she said. “But the bottom line is, as someone who does this, you’re not going to affect the cost of capital for a large company. You’re just not.” 

The comment flowed from Karp’s concessions that Adam Smith and Milton Friedman — both titanic economists with questionable legacies — were, at one point, on the right track in their assumptions of the lasting impacts of corporate behavior on capital markets. Even before he wrote “The Wealth of Nations” in the seminal year of 1776, Smith believed people generally were interested in the circumstances of others — see “The Theory of Moral Sentiments.”

But the cost of an unleashed, profit-focused market to other parties, namely lower classes, people of color, the environment and a multitude more, were unforeseen or ignored.

“And then we come out with the invisible hand, and that’s kind of slapped us in the head,” Karp said. “When it comes to capitalism, he didn’t think about externalities, didn’t think enough, say enough about the long-term outcomes in the capital markets.”

Karp continued by quelling Milton Friedman’s long-lived idea that a company’s board of directors is ultimately accountable to its shareholders.

Shifting that duty of care to the company itself, a concept inspired by South African and British economist Mervyn King’s corporate governance philosophy, sees board members ensure the company’s long-term sustainability and success. This benefits shareholders as well, leading to more ethical decision-making.

“I would like everyone to think about that,” Karp said. “Because there are, you know, legacy definitions of economic activity and governance that, just like with ESG, have put us at risk.”

Across the variety of topics within ESG she addressed, Karp gave two examples of companies she feels have successfully integrated ESG practices into their business strategies: European multinational chemical producer BASF SE and the Houston-based hydrocarbon exploration company Apache Corp. 

The latter, an oil and gas company, was mentioned by Karp for its carefully designed composition of fuel used during the fracking process — which typically consists of a cocktail of polluting synthetic chemicals pumped into the ground — as well as its considerations of “double materiality” used to describe externalities.

“Apache is also really good at a big view of the world,” Karp said. “They understand energy sustainability. It’s not just a matter of the company itself, but it’s a matter of national security.”

Lastly, the possibility of the duty of care for corporate leaders of the current generation in power to the company was raised as having the potential to leave the new generation hanging out to dry.

“I’m allowing past generations to be hung out to dry,” Karp replied. “I am suggesting that new generations use their voice and use their power. Again, their fathers expressed it the other way around before… The duty of care as it relates to that intergenerational flow; that is moral. That is ethical.”