Hearing From The Source Of Social Investing

Jan. 10, 2020 2:24 PM ET


  • Interview with a panel of socially responsive investors for a better understanding of what is happening between the hype, biases, inaccuracies, and any substantive change going on in this space.
  • Wide cross-section of socially responsive asset managers from ESG to impact to the environment to animal welfare thematic strategies provide their real world, in-the-trenches perspective, and thought leadership.
  • Whenever traditional mindsets are in direct collision with changing investor perceptions and client values, we tend to get industry-changing disruption. There may be something meaningfully structural going on here.

There is a growing explosion of interest, media coverage, investment products, and dollars going into socially responsible investments - despite a large percentage of advisors still not openly receptive or adopting the strategy with their clients. Financial services manufacturers have responded with a flood of socially responsible financial vehicles (mutual funds, ETFs, insurance sleeves, private equity, etc.) at a very brisk pace.

Historically, whenever there is a great deal of friction and opportunity - where traditional mindsets are in direct collision with changing investor perceptions and client values - we tend to get industry-changing disruption. There may be something meaningfully structural going on here.

To get a better understanding of what is happening between the hype, biases, inaccuracies, and any substantive change going on, the Institute for Innovation Development decided to reach out to a cross-section of socially responsive asset managers - from ESG to impact to focused thematic strategies - and get their real world, in-the-trenches perspective and thought leadership. We would like to thank Ultimus Fund Solutions - one of the largest independent fund administrators - who provided introductions to some of their socially responsive asset manager clients and that has created fund vehicles for all of them to enable more access for investors to socially driven investment options.

Let me introduce you to our panel and then we will jump into getting a true lay of the land from the following experts in this field:

Erika Karp, Founder & CEO, Cornerstone Capital Group - a New York City-based investment advisory firm whose mission is to build and support the field of sustainable and impact investing for values-based investors.

Robert Uek and Bill Page, co-managers of the Essex Environmental Opportunities Fund - Essex is a Boston-based investment manager that operates at the nexus of environment and finance investing in companies that enable greater natural resource and energy efficiency.

Vicki Benjamin, President, Karner Blue Capital - is Bethesda-based and the first investment management firm that offers strategies centered around animal welfare. Through investment in animal welfare industry leaders and engagement with those that lag behind, they seek to earn financial returns for their investors, influence the behavior of corporations and improve the lives of animals globally.

Matthew Blume, Director of ESG Research & Shareholder Activism, Appleseed Capital - the institutional impact investing group of Pekin Hardy Strauss Inc., a Chicago-based independent firm providing funds and separate account strategies for investors that support their values through impact and ESG investing.

Robert G. Smith, President & Chief Investment Officer, Sage Advisory Services - an Austin-based advisory firm that offers fixed income and equity ESG investment solutions that embody a commitment to sustainability and responsible investing.

Hortz: From your perspective as active leaders in social investing, what are your biggest concerns on the space right now?

Appleseed: Our biggest concern right now is probably "information overload." With the explosion of new products and strategies in the space, it can be nearly impossible for clients to digest it all and figure out which solution actually makes the most sense for them. In our experience, clients are looking to align their portfolios with their values, and this can be a real challenge with the huge number of different products that exist, as well as the varied messaging that is swirling around the space. This is an excellent opportunity for advisors to offer guidance and help connect client goals and passions.

Essex: Given the heightened interest in ESG investing, many asset managers are launching new ESG focused funds or re-positioning existing funds to have an ESG tilt. We are concerned that many of these funds are sub-optimal offerings that are trying to capitalize on the rising interest in social investing but are not truly committed to a genuine effort to bridge institutional quality portfolio management with social impact. Investors need to look beyond labeling to determine if a so-called ESG strategy is appropriately aligned with and capable of delivering on his or her social and financial goals.

Sage: There are a few concerns in the ESG space right now, first of which is the continued issue of Greenwashing (a form of marketing spin in which green values are deceptively used to persuade the public an organization's products, aims or policies are environmentally or socially friendly). Investors need to look beyond labels and understand the investing methodologies and impacts of the strategies in which they are invested. In addition, investors should evaluate the ESG reporting capacity of the managers that they are working with to determine if there are third party verification and auditing of their ESG strategies. This transparency is key in order to fully understand how assets are invested and whether the strategy is, in fact, investing in an ESG manner and creating impacts as expected by the investor.

Cornerstone: I do see a critical gap in the set of tools being used - in the ability to systematically measure impact. The lack of consistent, broadly applicable measurement standards makes it extremely challenging to understand how investment dollars benefit, or harm, our world. Organizations such as the Sustainability Accounting Standards Board (SASB), of which I am a founding Board member, the Global Reporting Initiative (GRI) and others are working diligently to progress the adoption of consistent data reporting standards and meaningful metrics.

KarnerBlue: The impetus of Socially Responsible Investing, in theory, was to generate change by lowering cost of capital through investment in "good" companies and engaging with those that lag behind in material social and environmental policies, thereby creating impact. The confusion, however, now exists for investors, for as without scale or corporate advocacy strategies, it would be difficult for a single manager to affect change, and thereby be a "Socially Responsible Investor". The integration of ESG or sustainability data into investment decision making does not in itself render a strategy as "socially responsible".

Hortz: When you look at the flood of articles now being published, are you happy with the tone and substance of the coverage? Are there important issues or topics missing or we are not talking enough about?

Cornerstone: On the whole, the increased media focus on this space is a positive. The one thing that really bothers me, though, is the persistence of the myth that impact investing implies concessionary returns. While it's true that some impact investments are designed to achieve modest financial returns, it's entirely possible to invest with the same expectation for market rate returns or better.

To your second question, I think more can be done to emphasize sustainable and impact investing as a fiduciary responsibility. The SEC has muddied the waters with conflicting statements about whether the consideration of material ESG factors should be a fiduciary duty or not. I would also like to see more work in the mainstream press on the circular economy - the concept of intentionally designing waste out of the global supply chain across sectors. I think adopting circular economy principles is perhaps the single most meaningful systemic change we need if we have any hopes of averting climate catastrophe.

Appleseed: I think the media can do more to show how well sustainable investing can compete with more traditional strategies on a performance basis, as that would generate even more interest from investors, but overall, I think coverage has been really helpful. More and more clients and advisors are having the conversation about aligning investments with values, and the stigma that used to exist around sustainable investing is gone. Media coverage has played a big role here.

Essex: One of our frustrations is the re-hashing of articles discussing SRI approaches of yesteryear; today's generation of true social impact strategies is much different from the negative screening approach of SRI 1.0. For example, we are focused on investing to environmental themes, in the stocks of companies we believe have differentiated environmental solutions. We believe climate change and other environmental challenges create long-term investment opportunities yet the SRI market seldom discusses thematic or solutions-oriented approaches.

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.

KarnerBlue: 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 challenges - 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 these 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?

Cornerstone: It's already happening. The climate change crisis has raised awareness of the critical need to invest for the health of the planet; we're also seeing a generational shift, with younger generations wanting to integrate their financial planning holistically into their lives. Just as younger people increasingly cite a company's stance on social and environmental issues as a key factor in deciding to work for that company, they increasingly want their investments to reflect their values and concerns. . I think that one day, sustainable and impact investing will simply be called "investing."

Sage: ESG investing will at some point become the standard. Understanding these additional nontraditional quantitative and qualitative factors allow investors to dig deeper into the operations and impacts of investable issuers. It will widely be viewed as another layer of risk management and become an accepted and material part of financial analysis.

KarnerBlue: Absolutely. The $68 trillion in wealth transfer to individuals that consider sustainability and social responsibility a way of life, versus just an investment strategy, will shape the investment marketplace and put greater accountability on investment managers to provide products that deliver market returns and improve social outcomes.

Hortz: What is your best advice to advisors and their investors to consider about social investing at this time?

KarnerBlue: Investors should determine what is important to them and seek strategies that align to their values. Thorough due diligence efforts will be required to delineate green wash strategies from those that authentically deliver socially responsible investment opportunities. Knowledgeable professional advice can benefit this growing social investing client base.

Appleseed: Do your homework. Not all funds and firms are alike, and their approaches to sustainability could vary pretty dramatically. Don't just rely on some third-party rating to tell you a product is "sustainable" or "green" or whatever. Become familiar with the resources out there, such as The Forum for Sustainable and Responsible Investment and As You Sow. Due diligence is important for any investment, and this is simply one more area where investors and advisors should be sure they understand what they're getting.

Essex: As with any investment advice, the process needs to start with an understanding of an investor's goals - including proactively learning about the client's social goals - and construct a portfolio that can achieve these social goals while also meeting their financial goals. For example, does the investor care passionately about solving for climate change or improving world health or eradicating poverty? If so, then an advisor can incorporate these values by recommending specific strategies and social managers for their asset allocation strategy.

Sage: Advisors should be doing their research in terms of managers and their strategies in this space. As mentioned above, greenwashing continues to be a prominent issue and therefore advisors should be taking a deeper look to understand exact methodologies, manager firm wide commitment to ESG, thought leadership in the space, transparency in terms of process and ESG reporting.

Cornerstone: Manager selection is key to successful impact investing. Because of the volume and varying quality of product, it's important to really understand what the investment strategy is aiming to achieve, and whether its investments are truly aligned with that objective. For advisors, this means one must be open to learning and adapting, and for clients, this means that selecting an advisor that really "gets it" and understands how to navigate this investment landscape.

Thank you all for your participation in contributing your thought leadership and perspectives and for the readers, who are welcome to comment below, in being part of this dialogue. - Bill Hortz, IID

This article was written by

Institute for Innovation Development (IID) is an educational and business development catalyst for growth-oriented financial advisors and progressive financial services executives who are determined to grow their firms in a business environment of accelerating business and cultural change. Run as a social enterprise, the Institute will be dedicated to help make business innovation best practices a vital cornerstone for members’ ongoing growth, competitive differentiation, and client/community engagement strategies. Three current IID initiatives are: 1. Integrating business innovation mindsets, processes and tools into financial services practices through the formation of Advisor Practice Management 3.0 professional development. 2. Applying business innovation as a powerful and differentiating advisor marketing/branding approach and community engagement strategy. 3. Creating a FinTech radar program to increase communication and access between the financial advisor and early stage FinTech communities. Bill Hortz, Founder and Dean, of the Institute and Institute Founding Innovator members (comprised of top cross-industry innovation experts, innovative fintech companies, and progressive minded financial advisors and industry thought leaders) will be contributing articles and hopefully sparking ideas and discourse on much needed, next-generation advisor business models and industry development. We will seek to uncover proven business innovation best practices; learn from innovative business creators; explore innovation mindsets; hear about new approaches, services and technologies; and ultimately discover how to apply these insights to a financial advisor's business. For more details about the Institute, investigate here: https://innovationdevelopment.org/annual-membership

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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