Essex: With the Essex Environmental Opportunities Fund, we focus on companies that are providing solutions to the substantial environmental challenges that the world faces. Over the past few years, more forward-thinking companies have started to address these environmental risks in many meaningful ways such as purchasing power from renewable sources, building offices and warehouses with more efficient insulation and HVAC systems, and outfitting factories with automation that is safer and saves time and money. These trends are creating opportunities for the companies providing solutions such as distributed solar generation, factory automation, and electric and hydrogen vehicles. The result of this improved corporate behavior is reduced business risk, a safer workplace and a cleaner environment.
Sage: It is also worth noting how the crisis has served to help introduce new and creative forms of public finance to help address some of the global social challenges aggravated by the spread of the virus. Social bonds are “use of proceeds” bonds that raise funds for new and existing projects that directly aim to address or mitigate a specific social issue and/or seek to achieve positive social outcomes. As the pandemic is causing far-reaching economic disruption in emerging markets and developing countries, the social bond market is one avenue through which the public and private sectors can now access the critical capital required to meet healthcare needs, restore economic stability and preserve jobs. In the first half of this year global social bond new issuance supply reached an impressive $38 billion compared with $16 billion for the full year 2019.
Hortz: Any other thoughts or advice you would like to share with advisors on social investing?
Appleseed: Do your homework and understand management’s incentives. Poorly structured incentive systems can push management teams to act counter to the long-term interests of the firm. The pandemic showed us that many management teams have spent the past several years gutting their companies’ balance sheets for short-term stock gains to their own benefit, and this caused serious issues when the pandemic brought the economy to a standstill.
Also, be prepared for volatility. The vicious speed of the crash in March caught nearly everyone off-guard. Passive investing has created an incredibly fragile market structure that is highly prone to volatility at levels we have not seen historically. Your portfolio should be structured to manage volatility going forward because this is not a temporary issue.
Essex: The improved corporate/social balance actions that we have seen and the acceleration in clean technology and environmental investment trends are positive developments that will benefit all stakeholders with improved financial and social returns for many decades. There are rays of sunshine to emerge from this crisis and we need to ensure that these positive qualities are perpetuated.
Silk: The key missing point is that so far, many advisors are only focusing within their local radius and do not give sufficient attention to developing nations. Investments in Emerging and Frontier Markets have the highest impact multiplier when looking at how capital can be a catalyst for change and the achievement of Sustainable Development Goals. Unfortunately, investors have never been this underweight. True ESG and impact investments need to include the rest of the world and facilitate convergence at a global level.
Cornerstone: “Social investing” is just investing! It is done in a more methodical and transparent way, and it allows for the alignment of one’s values and assets.
Sage: The past three years in markets have alternated between a low volatility rally in 2017, a sharp drawdown in the fourth quarter of 2018, one of the best years for equity markets in 2019, and the fastest bear market in history in the first quarter of 2020 during the Covid-19 crisis. It truly has been an interesting “laboratory environment” for an investment strategy, and thus far ESG has shown robustness across all market environments.
Zeo: It’s important for investors to remember that ESG investing is an exercise in risk management. While we agree that a portfolio which aims to manage risk is likely to outperform traditional benchmarks over time, few investors believe that choosing a more responsible company over another will result in outperformance in the next few months. The advantage comes further down the road typically. But what we have learned from recent events is that anything can happen at any time, and indifference can be costly.