When we interviewed Karina Funk about her role as co-portfolio manager of Brown Advisory’s flagship sustainable equity strategy, she emphasized how her team has developed an original fundamental research methodology focused on “performance first” investing at the intersection with long-term sustainability. 

Funk approaches her work with a logical, analytical perspective that comes from her engineering background. As a partner and portfolio manager with Brown Advisory in Boston, she has taken lessons from private equity and publicly traded companies to create a framework to identify companies with advantages in sectors of the economy where the scale is already there—in other words, identifying sustainability as a driver of performance for public markets. “Three reasons to think of impact within public equities are scale, necessity and availability of capital. Large companies with large global footprints have a material impact on sustainability profiles,” said Funk as a panelist during the 2017 South by Southwest conference.

Lessons From Clean Tech

Funk’s interest in sustainable investing began when she was working as an investment manager at Massachusetts Renewable Energy Trust and spotted technologies in the marketplace that were equipped to positively impact the environment.

She maintains that her training as an engineer helped her identify the possibilities and challenges that were emerging in clean tech. “Mainstream investing wasn’t really latching onto what we now call clean tech,” says Funk. “Yet, as time went on, investors became really interested and every VC firm wanted a piece of it.”

Funk soon realized that there were big challenges in scaling and that clean tech was competing against commodities and liquid fuels. This led her to start analyzing financial statements and the way valuations were getting set. “At the time, venture capital deals went from a focus on forward earnings to anything relative to the last deal that had been done in the space,” explains Funk.

As history unfolded, the clean tech bubble burst and those VCs were left holding empty wallets. A lesson Funk reflects on, and one that Brown Advisory also prioritizes, is finding investment opportunity at the intersection between greater greed, and greater good.

“There are other motives to say or do the right thing, but the intersection between strong financial performance and sustainability is the most compelling investment opportunity in any asset class,” says Funk. “We can’t simply provide funding to companies that are limited in their ability to compete in today’s market.”

How The Sustainable Business Advantage Framework Works

Funk and her team’s investment process begins and ends with fundamental, bottom-up research. “We employ a research process and we stay focused on sustainability strategies and how they relate to company fundamentals,” says Funk. “We need to see proper evidence of sustainable business advantages that add to shareholder value.”

Funk calls this process the SBA: Sustainable Business Advantage. She developed it working with David Powell, her co-portfolio manager for the Brown Advisory Large-Cap Sustainable Growth strategy. She offers this simple example to illustrate how it works:

Company A takes on the R&D expense to make the most energy-efficient water heater on the market. Company B manufactures a widely available standard water heater.  Which company is a better long-term investment for advisors and their clients?

If other competitive factors are equal Company A has what Funk terms a sustainable business advantage. This SBA generates more future value because Company A’s products grow revenues faster since they’re selling a product that pays for itself (based on energy savings).

How does Funk monitor for SBAs? By judging companies’ business practices against 3 criteria:

1. Faster revenue growth: According to Funk, a company with a product or service that drives efficiencies and saves money for customers can drive faster revenue growth.

2. Cost improvements: A company with meticulous attention to operating efficiently drives cost improvements. “You can see how companies have a long margin improvement trajectory if they can save on energy, water and resource usage that saves them money over time,” clarifies Funk. 

3. Enhanced franchise value: A company that works sustainability and ethics into an elevated customer experience may improve the value of their franchise, by capturing more market share.

Simply put, when a company manages its environmental, social and governance (ESG) risks—such as managing labor relations and maintaining a solid governance structure—that’s table stakes for a high-quality investment. “The fundamentally strong companies that manage their ESG risks and are also capitalizing on SBAs, these are the companies that are poised to outperform over long periods of time,” emphasizes Funk. They are also candidates for investment in Funk and Powell’s Large-Cap Sustainable Growth strategy.

Leading By Performance And Values Alignment

All work done at Brown Advisory under Karina Funk’s watch does not originate from an ESG focus on sustainability. The team’s investment process starts with thorough fundamental due diligence. “To be competitive, and get returns, an investor has to understand both risks and opportunities. Finding fundamentally strong companies that are going after sustainability opportunities is how we find our best ideas,” states Funk. “Whether it’s called sustainability or not, people can find opportunities everywhere.” Employees at Brown Advisory adhere to a value system that prioritizes doing something better, whether it’s something better for the clients they serve, or better for the global community. Funk believes it’s the firm-wide value system that allows its employees to continuously improve. The company maintains very consistent and repeatable processes when applying this lens to their investments. “Everyone has a different definition of sustainability,” says Funk. “At Brown Advisory, we’re building our internal expertise around sustainability to become better investors and help our clients achieve their goals.”

Funk understands that a client’s motivation to invest more sustainably and achieve competitive financial returns requires a balanced approach. “There are many motivations to do the right thing. I ask clients this question: Are you part of the problem, or are you contributing to the solution?”

Paul Ellis founded Paul Ellis Consulting to work with financial advisors who want to integrate sustainable and impact investment strategies for their clients. Kristina Markos, M.L.S., is a senior communications professional specializing in finance and sustainable themes. She also teaches graduate and undergraduate communication courses at Lasell College.