We also believe that equity investors who want to align their ESG objectives with their portfolios should use active approaches for the higher impact segments of their portfolios. Not enough discussion explores why a social/environment approach, like ours, which is thematic and solutions-orientated, lends itself to a concentrated, active equity approach to investing, as opposed to a passive, index orientation.
Sage: Governance issues are missing in many discussions surrounding ESG. This often happens because there is a lack of clarity in the definition of governance factors. Governance looks at items such as bribery and corruption policies, whistleblower policies, board diversity, executive compensation policies, employee fair pay policies as well as various others. These Governance factors set the foundation and are indicators of well run and transparent companies that are more likely to have positive outcomes on their communities and the environment at large.
Karner Blue: How outperformance in this space is measured should be expanded to include the intrinsic and intangible value of social performance, including engagement efforts to change the behavior of corporations. One could exemplify this to equate market performance to the risk free rate and desired social outcomes synonymous with alpha creation. Investors, especially millennials, are going to hold their advisors accountable and will expect more than financial returns from their investment products.
Hortz: Any thoughts on the flood of new investment products in this growing landscape and any possible repercussions of this explosion of options?
Sage: With increased amount of investment flowing toward ESG investment vehicles, there will be a strengthened consensus and conviction as to the legitimacy of ESG principles.
KarnerBlue: A study conducted by TD Ameritrade determined that performance isn’t the top priority for social investors—67% said they cared more about advancing social and environmental causes than financial returns, which was the priority for only 17% of respondents. This change in preferences will require investment management firms to manufacture and deliver products that will provide more than financial returns, but encourage and facilitate changes in societal and corporate norms.
Essex: We see positive repercussions of the increased amount of interest in ESG investing. On the positive side, there is progress being made with ESG and sustainability reporting by corporations as investor interest increases. We stress however that companies must now articulate how their products and services can solve ESG issues. We invest in companies that demonstrate that their technologies represent solutions for environmental—companies that now move the needle toward reporting impact solutions, i.e. the outputs in terms of, for example, water or carbon saved as they scale their technologies to the market.
Cornerstone: Leaving aside concerns about credibility of some of these products, I think the repercussions are immensely positive. We think there are a lot of interesting and innovative products being launched that hold promise. Given Cornerstone’s laser focus on in-depth manager due diligence of investment managers in this space, we are pleased to report that there is no shortage of investment options to research. And, the more funds that flow into investments intended to achieve positive environmental and social impact, the better off we will be as a global society.
Appleseed: In the past the challenge was simply having a set of products or strategies available to investors that would allow them to construct a portfolio that aligned with their values or satisfied their sustainable investment mandate. That problem has been solved. There is no shortage of products now. However, this vastly expanded universe has now created due diligence complexities that have not been addressed. There is no standardization in the space yet. We don’t have clearly defined terminology, we have all sorts of different ratings systems, each with their own biases, and we have numerous data providers pushing out ESG data, but they all have their own subjective take on things. So many interested and motivated people just don’t know how to navigate all these new products and terms and whatnot. I see the best possible repercussion of all this being advisors stepping in to fill the need by learning this landscape and guiding their clients through it.
Hortz: Do you feel that social investment perspectives and methodologies will become more mainstream and how do you feel that will occur?