Beyond buzzwords: Environment, Social and Corporate Governance has real impact – Advice Eating

Marquette Business Instructor Dr. Christopher Merker shares his expertise

dr Christopher Merker is the Senior Instructor of the Sustainable Finance and Business Program at Marquette College of Business Administration. He is also Director of Private Asset Management at Robert W. Baird and holds a Ph.D. in investment governance and fiduciary effectiveness.

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An industry leader, he serves as Executive Director of Fund Governance Analytics (FGA), an ESG research partnership with Marquette, and is a member of the CFA Institute’s ESG Working Group, an international committee devoted to ESG standards.

Here in a Q&A, Merker shares insights into the importance of ESG, industry trends and how it aligns with Marquette’s Catholic Jesuit mission.

Can you explain to people who have never heard of Environment, Social and Corporate Governance (ESG) what it is and why it matters?

In order to explain ESG it is necessary to provide some context to the market.

Typically, a company’s value is based on its profitability – how much money it makes today and in the future. Stocks are valued moment-to-moment based on what traders believe those companies are worth, and this is reflected in the companies’ market value. What has changed over time is how much of that value is accounted for by tangible or intangible assets. An example of an intangible asset is brand equity – consumer opinion about a company. Tangible assets are what companies own: machines, factories or equipment, things that have intrinsic value.

The way we understand companies today, most of the value is tied up in their intangible assets. Rather, it is about the people who work for these companies and contribute their ideas and their intellectual capital. So it is less the tangible assets that add value.

This brings us back to the question: What is ESG?

ESG is an additional financial approach to better understand the value of our companies in today’s world and looks at things like the environmental and social impacts of companies. It examines how they treat their workers and fulfill their obligation to provide good products and services to consumer markets. In addition, it addresses the governance factors. Questions are asked about how well these companies are run and whether they are responsible corporate citizens.

When did you become interested in ESG? How did you start working in the industry?

Marquette partnered with the CFA Institute in 2006 to become the first CFA program partner at the undergraduate level. We created the Applied Investment Management (AIM) program, which offered the Investment Ethics Management Society’s first course – the first sustainable finance course ever offered in the United States – and the course I’ve taught since 2009 teach. Marquette has been teaching ESG practices longer than any US university.

What drew me most to looking into ESG was seeing some of the crises that developed around corporate governance in the early 2000s. I began to wonder if we had a problem in terms of social stability in relation to our markets.

I was personally interested in learning more about it and it was the perfect timing given the opportunity to teach with Marquette. Getting started to teach corporate governance and socially responsible investment practices resulted in a fantastic partnership. I went on to Ph.D. Working in the governance area with Dr. Peck and other faculty members.

You started teaching sustainable finance in 2009. What have been the biggest changes you’ve seen in this area over the past decade, and how has the course evolved to accommodate those changes?

When I started teaching ESG in 2009, nobody was really interested in the field. It was new. That has really changed in the last five years. And now it’s suddenly on everyone’s radar.

If I compare the syllabus for this year’s course to the first course ever taught by Dr. Peck was taught, you wouldn’t see many differences. That’s how well it was designed from the start. Obviously, the content of what we cover has evolved over time. The data, information and developments of the industry itself have been robust and fast.

According to the CFA Institute, the COVID-19 pandemic has intensified discussions about the links between sustainability and the financial system. Can you explain how the pandemic has impacted ESG investing?

We’ve definitely seen an acceleration in the last two years with COVID. On the one hand, the pandemic has greatly destabilized society and we have seen this impact in our cities and on international security. It has highlighted the interconnectedness of the world and the dangers that come with it. It has given people an increased sense of potential risk. Witnessing how a virus can spread and its effects has made people think about the threat of the effects of climate change.

Some of this is a combination of being more aware of the risks I think COVID has revealed, but I also think we are responding to changes happening around us. People can see wildfires, droughts or coastal flooding.

As a member of the ESG working group for the CFA Institute, which global standards did you help develop and what were the results?

The intent of the CFA Institute was to create a series of product claims – , Standards for investment products that answer questions like: What is a sustainable investment product? Are you trying to influence a specific kind of change in the world? Are you integrating ESG data to become a better risk-managed asset? Are you trying to create change or are you trying to reduce risk?

Over the course of this year-long collaboration, we have developed a set of principles or standards to guide disclosure of product investments. These standards were introduced in May 2021, so it’s too early to tell what impact they have had, but much of what we’ve done has informed investment regulation and securities markets regulators like the SEC. For our first paper, we had a lot of interaction between industry and government.

The SEC recently announced updated climate-related disclosure rules. The changes illustrate how industry standards are changing to meet ESG requirements.

How do you think ESG fits into Marquette’s mission and business school curriculum?

I think it is an absolutely perfect alignment with Marquette’s mission and values, especially with their Jesuit underpinnings. Catholic investment guidelines were only updated in November, and the US Conference of Catholic Bishops’ guidelines were already very much aligned with ESG principles and practices, but this latest iteration expanded social and environmental considerations to align with the Catholic Church matches.

Marquette has been a member of the Association for the Advancement of Sustainability in Higher Education for nearly a decade. I think we’ve been leaders for many years now and I think it’s only going to stay that way.

Why are ESG metrics typically not part of mandatory financial reporting? Do you foresee that they will become subject to disclosure requirements in the next few years?

The world is absolutely moving towards mandatory disclosure, which is why many companies are already doing it – they know what’s coming. Part of the problem was the lack of standardization.

Under the new administration, it is becoming increasingly clear that this will soon become mandatory in the US. Executive Orders now require all government agencies to adhere to certain practices and principles on sustainability issues, and the Department of Labor has recently been investigating carbon disclosure requirements for pensions, so something is looming.

You’ve accomplished many career milestones, from serving on the CFA Global Committee to publishing your book in 2019. What accomplishments are you most proud of?

I have been fortunate to work with so many wonderful people who have been so supportive over the years. One of the things I’m most proud of is the research I did with Dr. Peck, which is about the application of corporate governance principles to institutional investors. Part of this work is recognized; We’re honored to work with the Commonfund Institute, so we’ve been able to use the work we’ve done here to help organizations assess their own governance performance.

Secondly, it has been worthwhile for me to advance the state of sustainability education and to be able to deal with standards as much as I have through the CFA Institute. When I think of the number of students who have gone through the same program over the past 13 years, I see every single one of them. Knowing that I had some influence on people who went out into the world, made decisions and worked to improve the profession is quite satisfying.

What do you hope to see in ESG over the next 10 years and how do you think Marquette can help drive positive change?

I am confident that in the next 10 years we will start making meaningful changes. In the last ten years, a greater awareness has been built; Before you can find solutions, you must identify a problem. Now that there is recognition, we as businesses, governments and consumers can make better policy choices.

For me, it’s all about education in relation to policy making and the decisions we all make. So the goal is to work to drive meaningful change to enlighten this generation and see progress on a variety of issues.

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