Responsible-Investing Pioneer Lydenberg Says ESG Needs An Upgrade
Bloomberg Markets|October - November 2021
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. But he didn’t take to the streets. Instead, Lydenberg turned to the world of finance to help catalyze societal change.
SAIJEL KISHAN

In 1990 he co-founded KLD Research & Analytics, the first firm to conduct environmental, social, and governance analysis of S&P 500 Index companies and sell that research to Wall Street. While there, he co-created the first socially responsible investing index of U.S. companies, now called the MSCI KLD 400 Social Index. But, as investor appetite for ESG data and sustainable investments has grown, Lydenberg says ESG has fallen short in addressing systemic issues such as inequality and climate change. So in 2015, he co-founded The Investment Integration Project, known as TIIP, to encourage what it calls system-level investing. Lydenberg, who turns 76 in October, spoke with Bloomberg Markets in August. The interview has been edited for length and clarity.

SAIJEL KISHAN: How did you get into ESG? Did you have a background in finance?

STEVE LYDENBERG: None whatsoever. My only advanced degree is in theater arts and playwriting from Cornell. I was in New York City in the mid-1970s for the theater scene, to see if I could get my plays put on. I didn’t want to wait on tables, so I thought, “Let me do some interesting research,” because I like research. I was concerned about the war in Vietnam and the economy, and I basically stumbled on the Council on Economic Priorities. They were one of the first organizations that was trying to rate and rank companies on social and environmental issues. It was aimed primarily at consumers, and the consumer-boycott theme at the time was very strong. I worked for them for 12 years before I decided that this was a career.

SK: How did you make the jump to finance?

SL: I became fascinated with finance and what it could do. The financial community obviously has great affinity for figures, but it loves a story as well. Many of the charts and figures economists and the financial industry like are essentially stories about the future.

This was also a time of a lot of street demonstrations and really high polarity of protests. There was a fair amount of violence, too. So the use of investment tools was interesting to me, as it seemed to me a more orderly way of bringing these issues to, one, the public’s attention, and two, to actual transformative change.

SK: What got you thinking about systems-level investing?

SL: We had reached a tipping point where the mainstream said, “Yes, of course, social and environmental issues can be material to individual security selection and portfolio risk.” At KLD we were involved in marketing that data. By, let’s say, 2010 it was clear there was a market. Bloomberg was including the data on their terminals.

But, in a disjointed way at the same time, the major issues were really coming to the fore and getting worse and worse. Climate change, income inequality. All this recognition of the value of ESG data and its integration into valuation models and portfolio risk management, that wasn’t really making a difference when it came to the most serious issues of the day.

SK: What event caused you to realize that ESG needed to evolve and that systems-level investing was needed?

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