Consumers who are concerned about using their money to make positive choices may boycott certain companies or purchase products only from those companies whose philosophies align with their values. And this is good.
However, many consumers are unaware of how powerful a tool ethical and sustainable development is in shifting the mindset and direction of a company.
Jessica Ground, global head of stewardship for Schroders considers sustainable investing the “3rd dimension” in investing in addition to “risk and return.”
Based upon her 20 years of investing experience, she notes that firms incorporating strong ESG principles make superior long term holdings. She supports this by pointing out that, according to data from the S&P 500, the average tenure of companies has dropped from 50 years to 15.
This means that if companies plan to be around for more than 15 years, they must take a long term view of sustainability. However, in order to do ESG properly, companies must do more than just “tick a box.” They must engage in fundamental analysis and focus on material issues.
As an example, she says that while it may be less important for a newspaper company to have a climate change policy, it is incredibly important for mining companies to have one.
Investors are becoming more demanding about seeing more than returns. They want to see what the impact of the investments are.
“Things like inequality and climate change are creating a really challenging backdrop for companies and investments to operate. If you’re going to be successful in allocating capital in a forward looking way, then you’re going to need to take these into account…and you’re going to need to hold your investments to account over these things and make sure that they are really incorporated.” – Jessica Ground
This year has seen some big ESG moves from some not so small institutions that prove ESG now has a formal seat at the investing table. Some notables:
- Japan’s $1.37 trillion Government Pension Investment Fund (GPIF) partnered with world bank to commit more capital to ESG strategies.
- Quebec’s $286.5 billion Caisse de dépôt et placement du Québec (CDPQ) announced a CAD $6 billion commitment to low-carbon investments by 2020.
- McKnight Foundation, already an ESG player, increased its allocation to its Global Equity Fund to $75 million (up from $25m) after the strategy returned 17.3% annualized versus the MSCI World benchmark of 6.6%.
- Georgetown University’s $1.5 billion endowment approved a Social Responsible Investing Policy that includes the incorporation of ESG factors into its evaluation of direct investments and external investment managers.
- University of California Regents announced the formalization of ESG considerations within its $100 billion investment policy, with $1 billion committed to climate change.
- Goldman Sachs’ ESG assets increased to more than $10 billion from $500 million over the past two years after acquiring Imprint Capital, an ESG and impact investing advisory firm, in 2015. Imprint Capital has collaborated on a $2 billion low-carbon equity strategy for the $197.1 billion New York State Common Retirement Fund.
- Nuveen, the investment arm of TIAA Global Asset Management, one of the world’s largest asset managers, $850 billion, introduced an ESG-oriented US bond exchange-trade fund to its product offerings.
- BlackRock hired a former adviser to President Obama’s administration on climate change to head its sustainable investing efforts.
- MSCI, a provider of research-based indexes and analytics, launched MSCI Factor ESG Target Indexes, to help investors integrate ESG considerations within factor investing.
“ESG investing now has a formal, undeniable seat at the investment table,” Jamie Kramer, J.P. Morgan Asset Management.
An analysis of more than 300 of the world’s largest companies by the Boston Consulting Group this month revealed that companies with a more ethical approach make bigger profits and are valued more highly than competitors.
- Oil and Gas: The valuation premium for those companies that combat corruption, and have better environment policies and safety processes, is up one fifth over those companies that do not.
- Pharmaceutical: The cash operating profit margin for companies that incorporate ESG strategies is up 8% over those that do not.
The push for socially responsible initiatives is resulting in more transparency and better data that makes it easier to measure the impact of ESG issues.
“You are seeing that investors and regulators are requiring more data and there are a number of initiatives out there, so companies are getting better at disclosing information,” Wendy Woods, Boston Consulting Group.
Companies with a more ethical approach make bigger profits and are valued more highly than competitors.
As more and more transparency is demanded by investors and regulators, Weinstein moments, amongst other scandals, may exist solely in history. We can only hope.
Or, better yet, we can take financial actions to ensure it.
According to the The GIIN’s 2017 Annual Impact Investor Survey, there are currently nearly 114 billion assets under management in the impact investing space.
As the market for socially responsible, ESG and impact driven companies continues to expand, more venture capitalists and entrepreneurs seeking to make an impact with their investments are faced with a variety of new challenges. These can range from how to properly incorporate their company, to understanding the methods of an impact investment transaction.
Founded in 2010, RPCK is a law firm that offers guidance to individuals looking to successfully launch impact-driven businesses and investments. RPCK works closely with their clients to help structure and execute capital investments into companies, organizations, and funds, with the intention of generating social and environmental impact alongside a financial return.
Co-Founder Chintan Panchal speaks about his vision, the invest impacting community, and its future:
Impact investing is the fastest growing category in the financial space.
Traditional approaches to investing are focused on financial objectives. Impact investors seek returns across multiple bottom lines: financial and social and environmental returns. Therefore, impact investors need to understand how their mission is aligned with the underlying business and how to measure success.
Pachal discusses the challenges his law firm faces in the largest and most competitive legal and financial market in the world.
One of these challenges is the false notion that impact investors are less interested in financial performance than traditional investors. Synthesizing multiple bottom lines (financial returns and measured impact) requires an even greater degree of rigor and sophistication than traditional investing.
Impact investors must be deeply informed about the financial and impact prospects of an investment opportunity, as well as how those objectives interact with each other when the enterprise is stressed. Successful impact investing requires identifying and structuring deals that drive positive outcomes.
Impact investors must also be able to build thoughtful and measurable accountability into their transactions in order to stand better chance of successfully monetizing their investments in the long run.
RPCK has developed creative solutions for structuring, oversight and accountability by working with some of the leading impact investors in the world. Although they are still a young firm, they have helped inject over $500 million into impact transactions worldwide. They do not have a marketing team as they prefer to grow organically.
Pachal states that in addition to the experience RPCK has gained by developing hundreds of innovative impact transactions, they have also built great relationships in the community
The impact investing community is uniquely cooperative and supportive. There is an ethos of support and cooperation in the field.
RPCK gives back to the community by making the new impact investing deal structures and innovations they develop publicly available.
They also speak at conferences like Gratitude Railroad, the Big Path ICS and the GIIN conference, to share their experience and lessons learned from the over 300 impact transactions they’ve structured and executed. They explain how they train lawyers to support entrepreneurs and investors who are looking to achieve social impact alongside financial return.
RPCK plans to continue to innovate in pursuit of creative approaches to challenging problems in the impact investing space. They are committed to building the field of impact investing by sharing their knowledge and experience.
Panchal believes that the industry will continue to see explosive growth, with more demand from all types of investors. And he hopes to be part of the solution in tackling humanity’s biggest challenges.
Oil and gas companies’ climate policies have become the target of investor scrutiny.
Yet, following Shell’s annual meeting in May, despite protests by some of Europe’s largest asset managers and pension funds over the lack of progress on adopting stricter greenhouse gas reduction targets, Shell has yet to make any changes. Pieter van Stijn, a senior advisor for PGGM Investments, criticized the board for inadequate corporate greenhouse gas reduction goals “despite multiple demands from investors.”
Share Action is a registered charity with a vision of making sure investors’ and savers’ voices are heard. Their goal is to unlock the power of investors to influence the behavior of companies in regards to their impact on society and the environment.
Two years ago they co-filed shareholder resolutions on climate disclosure at BP and Shell. Yet the business models of these two oil giants continue to ignore the reality of low-carbon transition. Share Action believes that by prioritizing the production of fossil fuels, Shell’s and BP’s management behavior is misaligned with shareholder interest.
“Given the potential risks faced by asset owners and asset managers from climate change it is now prudent for investors to escalate engagement with BP and Shell.” – Share Action
In response to Share Action’s report, Tim Goodman, director at Hermes EOS, an investment management firm, stated that “both companies should report publicly on a greenhouse gas emissions target.”
Weinstein and his antics. Everybody is talking about them. But fewer are discussing the fallout that the lack of ethics has had on his company. And it is grave.
Thomas Barrack’s private equity firm Colony Capital has pulled out of a deal to invest in Weinstein Co.
“No one is interested in salvaging a company which would benefit Harvey,” the real estate tycoon said. He compared the company to “a patient that’s dying on the table.
Few, if any investors, want to have anything to do with Weinstein.
- Santa Monica studio Lionsgate and talent firm Endeavor, which owns WME and IMG, have opted not to buy.
- Distributors STX Entertainment and The Orchard are not interested.
- Los Angeles-based private equity firm Gores Group, which has been known to deal in distressed assets, has taken a pass.
- Writers on some of the company’s upcoming projects have not been paid in weeks and film makers have been trying to sever ties.
- Amazon has cut ties ending a high profile TV project.
- Apple has scrapped a planned series.
This is what happens to companies who operate without ethics.
“Nobody will touch this company with a 10-foot pole,” said Los Angeles investment banker Lloyd Greif, chief executive of Greif & Co. “Pretty soon it’s going to be on life support, and they’re going to have to make the decision of whether to pull the plug.”