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How the Dakota Access Pipeline inspired Calvert ESG research

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By John StreurPresident and CEO, Calvert Research and Management

Washington -- In April 2016, opponents of the Dakota Access Pipeline first set up protest camps in North Dakota -- camps that would later swell to thousands. The $3.8 billion project -- proposed by Dallas-based Energy Transfer Partners (ETP) in December 2014 -- was designed to carry half a million barrels of oil a day over 1,200 miles across four states.

The protests and subsequent publicity shone a bright light on the intersection of corporate interests and the rights of Indigenous people. It sparked broad debate about corporate social responsibility, especially for extractive industries like oil and gas, and pipelines, and the impact on affected communities.

The issues raised underscored Calvert's long-held belief that sustainability principles are key elements for long-term corporate growth and profitability. At the most obvious level, the protests stopped the project several times and created costs for the company and the communities.

From a broader perspective, the Dakota Access Pipeline episode also helped advance our thoughts about how environmental, social and governance (ESG) factors can guide investor choice. We concluded that academic research could be a valuable complement to our own initiatives to elucidate how corporate performance on material ESG factors may be linked to financial results.

Subsequently Calvert sponsored research by Witold J. Henisz and James McGlinch of the University of Pennsylvania's Wharton School, which was then published in the Journal of Applied Corporate Finance. It expands on some of the main issues raised by the Dakota Access Pipeline protests and how companies relate to their community of stakeholders — in this case the local Indigenous population. We believe it is an important contribution to the body of ESG research, especially as it pertains to fixed income, which has received less attention than equities.

ETP was well known for doing a poor job of engaging Indigenous people. In contrast, Calvert has been aware that many companies abide by a set of policies known as "free and informed prior consent." Such policies involve more up-front work, but our experience is that projects generally go more smoothly when there is initial buy-in from the communities.

The ETP episode prompted a number of related questions, such as:

  • How readily available is information about the consent policies employed by companies?
  • Do fixed-income investors distinguish between companies with good consent policies and those lacking them?
  • Does fixed-income pricing reflect such discrepancies between borrowers?
  • How broadly applicable is the experience of consent policies to a wider range of environmental, social and governance factors?
  • Could a company's performance on ESG factors be predictive of its susceptibility to negative credit events in general, like revenue shortfalls, lawsuits, strikes and layoffs?

Our initial observations of the Dakota Access Pipeline event indicated that relevant ESG data was readily available for investors, but it wasn't accurately priced into fixed-income models. This was an important starting point for tackling the questions noted above, through the research of Calvert, Henisz and McGlinch, and a range of other academic studies we have sponsored.

Since the days of the Dakota Access Pipeline, Calvert has significantly enhanced our capabilities for tying social impact to financial materiality. For example, we employ a proprietary framework that generates quantitative key performance indicators (KPIs) derived from public information reported by companies, focusing on ESG factors. KPIs allow analysts to measure qualitative information, and rate and rank company performance relative to its peer group. Analysts are able to identify companies that are improving, leading or lagging compared to the industry standard.

Bottom line: For Calvert, the lessons inspired by the Dakota Access Pipeline continue to strengthen the case that social responsibility is a key factor in financial performance, to the potential benefit of both investors and communities.