A recent paper by State Street Compares the investing that age we live in now to the age of Enlightenment.
“Innovations within the investment industry are providing an opportunity, a new method of reasoning that could help solve society’s most pressing issues.” – The Investing Enlightenment
The paper addresses how we can leverage capital markets to improve society as a whole in addition to risk-adjusted returns.
In a recent interview with Forbes, Mirtha Kastrapeli, Global Head of the Center for Applied Research, State Street Global Advisors, and one of the authors of the paper, stressed that “in this new world, portfolios that are focused largely on short-term financial performance will have a harder time being competitive and relevant.”
The paper outlines a 5 step model for effective ESG integration, that can help close the gap between mere intentions and positive actions of ESG integration implementation.
- Take ownership: Support from corporate level executives and Board Members is effective in reducing barriers to ESG integration.
- Get educated: The most important factor for reducing barriers to ESG integration was to provide training on ESG to all sector portfolio managers and analysts.
- Ask: Ask for the data. Ask for the solutions. Investors complain that companies do not provide useful ESG data, while companies complain that investors don’t ask about their ESG performance.
- Incorporate materiality filter: ESG can’t be incorporated without access to the right data. What is the right data? Investors want companies to report on the ESG issues that they believe affect financial performance.
- Align time horizons: Companies need to adjust performance metrics and incentives structures to reflect the long-term nature of ESG investing.
Portfolios that are focused largely on short-term financial performance will have a harder time being competitive and relevant. – Mirtha Kastrapeli, State Street Global
The Economist recently announced its second iteration of Investing for Impact: Risk, Return and The Future of the World to be held February 15, 2018 in New York City.
The speakers and audience members will include leaders from the world’s premier financial institutions, wealthiest families, largest companies, innovative startups and most influential foundations.
This years speakers are listed as:
- Jean Case, Chief executive, Case Foundation
- Robert G. Eccles, Visiting Professor of Management Practice at Said Business School, University of Oxford
- Michael Schein, President and chief executive, Accion
- Andrew Palmer, Business affairs editor, The Economist
- Ross Baird, Founder and chief executive, Village Capital
- Matthew Bishop, Senior editor, The Economist Group
- Richard Robb, Chief executive, Christofferson, Robb and Company
The Economist promises that the conversation and debate will be challenging, and will cut through the hype to focus on the real issues:
“Inequality is rising. Climate change is starting to make its presence felt, as the international effort to fight it falters. Economic globalization, which has delivered huge increases in prosperity for many but not all, is under threat from nationalistic populism. There are good reasons to believe that the world will continue to prosper; yet, far more than in recent years, there are also good reasons to worry that things could take a serious turn for the worse.”
Investors can play a crucial role in determining outcomes by investing in ways that help the world move in a positive direction, and make money as they do so.
Foundations are a powerful force of investors. At last count there were 86,726 foundations in America with more than $865 billion assets and most of their money is invested.
Yet, the percentage of foundations that participates in Socially Responsible Investing and impact investing ranges between 25% – 50%
With social or environmental missions at their core, why aren’t the investments of foundations subject to the same ESG and SRI guidelines as their missions?
There seems to be two schools of thought at play. While one believes that investments should be aligned with their mission, the other is focused on returns alone so as not to disrupt the percentage of donations.
Elizabeth McGeveran, director of impact investing at the McKnight Foundation, mentions that there is also an outdated idea of fiduciary duty.
Foundations may split the functions of investment management and grant making in-house to keep the investment side mission neutral because the investment’s duty to make money to fund the mission.
This means that a foundation may be invested in a space which is in opposition to its stated mission.
However, she also references legal research by law firm Reinhart Boerner Van Deuren that points out that fiduciary duty is to consider the mission of the institution and the fund when making investment decisions.
Foundations are beginning to recognize this, according to McGeveran.
Catherine Howarth, chief executive of ShareAction, claims that a growing number of foundations in the UK now realize that the voices of shareholders can encourage their asset managers to be responsible and socially engaged as investors.
“Foundations could ask themselves: ‘If my mission is an environmental one, then why support high-carbon industries as an investor?’
Or: ‘If we are a social relief organization, then why not consider how the companies we invest in treat their workers?’”
Michael Sonnenfeldt, chairman of Tiger 21 agrees a change needs to occur. “Foundations alone cannot harness the scale of the issues they’re trying to solve,” he says. “There’s about $300 billion in philanthropic giving a year in the US, but we need to look at the $75 trillion invested everywhere.”
The Berggruen Institute, a think tank founded by philanthropist and investor Nicolas Berggruen, is applying an entirely different strategy by engaging with governments directly. Berggruen says that “if the governments are not functional or supportive, then nothing will change.”
“The trouble is that you can identify a need for schools in a country and then build those schools, but you haven’t asked the question: ‘Why aren’t there schools there in the first place? Perhaps the government doesn’t support education, for example, and then your investment in schools is all well and good, but it is not sustainable.”
Because philanthropists are often entrepreneurs who want to see immediate impact and measurable success, they miss the long game.
“It can feel more rewarding to open a school, for example,” he says. “And we do that too… But we also need the long game. And government is the longest game there is, so we have to work alongside them if we want to see structural change.”
He strongly believes that charitable foundations are doing good work, “but we are facing some very large issues that require a different approach and a different level of engagement.”