Tag: Impact Investing

 
When industry leaders look at the future of sustainable investing, our tendency is to pat ourselves on the back for the tremendous progress we have made and make optimistic predictions about the wonderful progress that still lies ahead. While not wanting to be the skunk at the garden party, and while remaining a die-hard optimist when it comes to possibilities, I am more pessimistic about probabilities if we remain on our current course. We need to up our game.

I assume that none of us believe that the global community will adequately address climate change and other critical sustainability issues simply by continuing to do what we have been doing. And I assume that none of us believe that humanity is so smart or gifted or somehow smiled upon by destiny that global sustainability issues will naturally resolve themselves through new technologies and the inevitable march of progress. To the contrary, we will need to consciously shape a revolution in the way we do business and govern and organize societies if we are to build a sustainable capitalism capable of delivering inclusive growth. We will need a Sustainability Revolution equal in significance to the Industrial Revolution that ushered in the modern period.

This revolution is not inevitable. If you read books like Thinking, Fast and Slow by Nobel laureate Daniel Kahneman, about how humans actually make decisions, you understand that deep-seated cognitive biases often prevent us from making rational choices, as short-term, emotional thinking tends to cloud longer-term, more logical and expansive thinking. If we are being asked at the present historical moment to focus on the long term and remake capitalism and re-shape human society in profound ways, there is room for healthy skepticism about whether we are up to the task.

And the task is made more difficult by the current crisis of the public sector.

On July 4, I was in attendance as 101 immigrants from 42 countries and five continents were sworn in as new U.S. citizens at a public ceremony in Portsmouth, NH. To say that I was teary-eyed, or that the ceremony was profoundly moving, would be serious understatements. Afterwards, however, I couldn’t help but reflect on the troubling gulf between this beautiful testament to America’s promise and the sorry state of our public life. Increasing numbers of Americans, feeling left behind by globalization, technological advances and political gridlock, have lost faith in established institutions, including the media, corporations and our democratic system of government itself. We are witnessing a profound trust deficit and a breakdown of what we might call the Enlightenment consensus – shared ideals, shared notions of the truth, a belief in science, reason and democratic norms. Instead, alternative facts, a rejection of science and a rejection of truth itself characterize a new tribalism where group identities and grievances replace traditional notions of the common good.

Against this backdrop of a legitimization crisis in the public sector, we must nevertheless find a way to transition, over the next 25 years, from an industrial age economy fueled by coal and oil to a sustainable economy fueled by renewable energy, conservation, innovation and new technologies. We must also transition from a global system of haves and have-nots to a more vibrant, dynamic and just global community. As the UN Sustainable Development Goals make clear, it is not only the existential threat of climate change that we must tackle but other urgent priorities including gender inequality, extreme poverty, and access to education, health care, nutrition and clean water.

I grew up during an era when we expected a vital public sector to lead the way on such matters. The public sector is no longer vital; it is moribund. Under these circumstances, the private sector – businesses and markets, with some assistance from multi-lateral institutions and NGOs – will need to step into the breach. This is the task of sustainable investing over the next 25 years – to lead the Sustainability Revolution and usher in a new phase of sustainable capitalism, and to do so without the favorable, forward-thinking public policy environment that would otherwise be optimal.

The good news is that the transition to sustainable capitalism provides a clearer path to economic growth and wealth creation. In the year 2016 alone, employment in the solar energy sector grew 17 times faster than overall job growth in the U.S. economy and accounted for 2 percent of all new jobs. More Americans now work in the solar industry than for Apple, Facebook and Google combined [1]. Moreover, business corporations increasingly understand that the future of their businesses are inextricably linked to healthier, better educated employees, vibrant communities and ecological health. Investors, meanwhile, are embracing sustainable investing in record numbers and mainstream asset managers – Morgan Stanley, Blackrock, State Street, Fidelity – are beginning to respond.

The bad news is that financial markets are still dominated by short-term traders whose decisions often distort and undermine positive social and environmental outcomes. The business class is still overly focused on quarterly earnings and other short-term markers that fail to take sustainability concerns into account. Women still face discrimination, unequal pay and other inequities despite overwhelming evidence that advancing gender equality can make companies more profitable and communities more vital. The climate continues to warm. The recalcitrant wing of the business community, represented by the Chamber of Commerce, the Koch Brothers and others, continues to do everything in its power to oppose the sustainability agenda. Indeed, they are busy trying to take away shareholder rights as I write.

According to the 2016 US SIF Foundation Trends report, SRI assets represent approximately 22 percent of the $40.3 trillion in assets under professional management. That means approximately 80 percent of investments still fail to take into account ESG or sustainability factors. A 2016 UN PRI survey of over 1000 chief executives found that, although 88 percent agreed that greater integration of sustainability in financial markets is essential, only 10 percent cited pressure from investors as one of the top three factors driving them to take action[2]. This is insufficient. We need to alter these numbers. We really do need to up our game.

All of us should have a sense of urgency about this moment. The UN Sustainable Development Goals (SDGs) have set an ambitious agenda for where humanity and the planet need to go. To get there – to usher in the Sustainability Revolution – will require a healthy, vibrant sustainable investing industry that changes the face of investing and hence of businesses and capital markets. Despite the growing interest in sustainable investing and the continued mainstreaming we are seeing every day, however, the pace of progress remains too slow. Our current trajectory will not get us to where we need to go. The mere accumulation of well-intentioned efforts will not get us there, nor will technology and innovation come to the rescue and save us. It is not inevitable that we will achieve our goals. There needs to be a new level of intentionality and mindfulness regarding the end game of sustainable investing.

In my view, we should publicly commit ourselves to a goal of having the majority of all assets under management, and all investment inflows, integrate ESG or sustainability factors by the year 2030, which is the target period of the SDGs. This is an ambitious yet achievable goal. We can achieve it through investor education, research, shared best practices and clearer standards, through asset allocation and investment decisions, through company engagement and the development of new financial strategies, tools and products. Setting a more public goal, building consensus around it and consciously devising strategies to implement it will help get us to where we need to go. It will incentivize us to work together more collaboratively, to be more innovative and entrepreneurial, and to set a faster pace – which will ultimately be required.

We must do everything in our power to assure that sustainable investing ultimately prevails and that sustainable development is ultimately achieved. The task ahead is to turn possibilities into probabilities.

Article by Joe Keefe, President and Chief Executive Officer of Pax World Funds and its investment adviser, Pax World Management LLC, as well as its majority-owned subsidiary, Pax Ellevate Management LLC.

Under Joe’s leadership, Pax World has become one of the leading innovators in the rapidly growing field of sustainable investing. Prior to joining Pax World, Joe was President of NewCircle Communications, a strategic consulting and communications firm specializing in corporate social responsibility and public policy-oriented communications. He served as Senior Adviser for Strategic Social Policy at Calvert Group from 2003-2005 and as Executive Vice President and General Counsel of Citizens Advisers from 1997-2000. He is a former member of the Board of Directors (2000-2006) of US SIF, the trade association representing asset managers and investors engaged in sustainable investing throughout the United States.

Joe is a leading advocate for investing in women and the critical role that gender diversity plays in business success. He was one of the founders of the Thirty Percent Coalition and the first chair of its institutional investor committee, whose work has led to women joining over 100 previously non-diverse boards. He is Co-Chair of the Leadership Group for the Women’s Empowerment Principles, a joint program of the United Nations Global Compact and UN Women, and in 2014 was honored at the United Nations as one of five recipients of the Women’s Empowerment Principles of Leadership Award. He also serves on the Board of Directors of Women Thrive Alliance, a global network of over 230 member organizations working to achieve gender equality.

Joe has been named by Ethisphere magazine as one of the “100 Most Influential People in Business Ethics” five times, was recognized in 2012 by Women’s eNews as one of “21 Leaders for the 21st Century” (where he was the sole male honoree,) and in 2015, Financial Times named him one of its 10 “top feminist men” for his work helping women succeed in business and beyond. In 2016, Joe was named the University of New Hampshire’s “Social Innovator of the Year” and received the Global Leadership Award from the World Affairs Council of New Hampshire.

Article Notes
[1] “The Transformation of Growth,” Generation Foundation, June 2017
[2] “What Do the Sustainable Development Goals Mean for Investors?”

While offering the standard disclaimer that past performance is no guarantee of the future, I nevertheless offer some predictions for, and reflections about, the future of sustainable and impact investing.

The field has grown from $639 billion in assets in 1995 to $8.72 trillion in 2016. It will be very surprising if the next decade does not bring continued expansion in assets and in the types of investors who control those assets, as well as further growth in the products and services available.

High net worth individuals, on their own or as part of a family office or foundation, will increasingly drive their assets into this space. Foundations, historically slow movers in changing their investment process, will feel increasing pressure from the leadership shown by many smaller foundations and several large ones in connecting their mission to their endowments. Pension funds, including private sector funds that might be motivated by recent ERISA changes, will take their time, but more will offer sustainable investment options, especially if plan participants demand this.

Retail investors may be the next big movers in sustainable investment if the market can continue to bring interesting investment options to them in public equities, fixed income, and local and community investment options. Of late, every month seems to bring a new robo-advisor that either focuses on SRI or has created an SRI platform. These robo platforms will put pressure on advisors and advisor platforms to be informed on sustainable investment. Courses like our Fundamentals of Sustainable and Impact Investment are ways for advisors and other professionals to quickly gain familiarity.

We’ll also continue to see more service providers come to market with SRI products, ratings and platforms. Ultimately, investors will benefit from the greater depth and breadth of available products along with greater visibility into the underlying holdings in their portfolios.

Our sector should spend less energy debating terminology and whether one asset class is superior to another.

There is no winner in these debates. This field has been around for more than 30 years and firms will continue to use different terminology. It is more important to have a shared and compelling message on why we do what we do than identical vocabulary.

And if we can agree that the “name game” is not the place to put our attention, can we also agree that impact occurs across all asset classes? The recent debates about direct impact through private markets versus other approaches that are defined as having less or no impact have brought interesting issues to the forefront and multiple measurement tools. However, the same debates have also appeared to “pit” approaches against one another. It’s important to remember that sustainably invested assets are still just a bit more than one-fifth of the US market.

The opportunity we cannot miss in the next several years is to link up each part of our ecosystem to a broad portfolio approach. The future needs more industry leaders speaking inclusively about our shared work so that the public understands that investments that have impact can be made in public equity, private equity and fixed income, and in institutions like community banks and credit unions.

ESG integration will be the preferred strategy among many new entrants to the industry, but the field will remain rich in approaches.

Survey data from our biennial Report on US Sustainable, Responsible and Impact Investing Trends suggests that US money managers are applying ESG integration processes to assets that totaled $5.8 trillion at the beginning of 2016. At the same time, there are firms with decades of SRI experience as well as new entrants trying to address thorny issues like mass incarceration, income equality and clean energy through a multi-faceted investment approach, often including shareholder engagement. Our opportunity is to welcome the multiplicity of approaches and continue to offer education, training, research, convenings and other resources to help financial professionals gain expertise.

However, managers taking an opaque approach to ESG integration are on borrowed time.

Our 2015 report on Unlocking ESG Integration found that only half of the 16 large money managers surveyed that claimed to practice ESG integration provided full disclosure in the form of examples or detailed information on the ESG criteria they consider for these assets. This is becoming an energetic discussion topic among industry professionals, many of whom question whether this lack of information will turn investors away. Managers who disclose the specific ESG criteria they consider and clearly articulate whether their ESG integration practice is systematic and consistent across all affected assets will be better positioned to attract investors.

The future should be one where sustainable investors are present in the rooms where it happens – the offices of their elected and appointed officials at local and national levels.

Commitment to address climate change, the ability to offer shareholder resolutions and a host of other important issues for sustainable investors are at risk in our current policymaking environment. But this engagement is not only important in times when we are playing “defense.” As our paper on the Impact of Sustainable and Responsible Investment has shown, the policy work of sustainable investors has yielded important victories over the last several decades. Sustainable and impact investors are already linking environmental and social outcomes to the financial markets—the engagement in policy should be recognized as a critical way to further support and achieve these outcomes. US SIF is creating a policy training program to help a cadre of our members embed this expertise in their firms.

Europe and the United States will continue to be the leading actors in the sustainable and responsible investment marketplace in terms of assets, but the near future will see sustainable investment pick-up in markets that have been largely quiet.

It’s exciting to think about the opportunity to work together with our partners in the Global Sustainable Investment Alliance (GSIA) to help our colleagues advance SRI in Latin America, Africa, Asia and the Middle East. Already, the GSIA’s Global Sustainable Investment Review has contributions from Africa, Asia and Latin America, and field building institutions are being created in different regions around the world.

What we know and act on today will determine what the next 25 years look like.

We don’t have a crystal ball for the next quarter century, but we do know where we are today. Today, we can create more inclusive messaging that will attract the broadest range of investors. We can assist the change-makers in firms who are advocating for the addition of sustainable and impact investing practices. We can join forces to set expectations around more rigor and depth in our field. We can invest in working with the media to enhance journalists’ expertise on sustainable and impact investment and to cover it regularly. We can engage with policymakers who too often don’t know that our field exists and why it matters. We can build upon decades of practice and innovation to create an even more exciting and comprehensive ecosystem. And we can commit to working together to address the challenges and opportunities that the next 25 years will bring.

Article by Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment (www.ussif.org) and the US SIF Foundation and leads the organizations’ overall direction. She has been responsible for strategic planning, developing a robust policy and media presence, expansion and diversification of funding, launching the national SIF Conference, creating the Center for Sustainable Investment Education and playing a lead role in creating the Global Sustainable Investment Alliance (GSIA).

Prior to US SIF, Lisa was executive director of the International Women’s Media Foundation, an organization focused on press freedom and expansion of women’s role in the media. During her tenure, the IWMF played a significant role in re-orienting the way journalism training was carried out on the issues of HIV-AIDS, malaria and TB in several African media organizations. Lisa also spent a decade working on children’s human rights. She was the director of the first international study to look at the impact of the Convention on the Rights of the Child and directed the Washington, DC office of Save the Children. She was a member of the Advisory Council of the Children’s Rights Division of Human Rights Watch.

Lisa’s early career focused on domestic social policy and began in the New York City Human Resources Administration as an Urban Fellow and the US Congress as a legislative assistant. Lisa is the founder of Suited for Change, a Washington, DC-based nonprofit organization that provides professional clothing and ongoing career education to low-income women who have completed job training programs and are seeking employment. She was a founding board member and former president of the board of The Women’s Alliance, a national membership organization of community organizations that increase the employability of low-income women. She was also Board President of Women’s Voices for the Earth, a national environmental health organization based in Montana. She has written and spoken widely on human rights and development, as well as leadership. She was a board member of the Children’s Environmental Health Network and the founder, with her teenage son, of Advantage Ethiopia: Kids’ Tennis and Education Initiative.

In 2001, Lisa was named a Washingtonian of the Year by Washingtonian Magazine in recognition of her pioneering role with Suited for Change. She has received numerous other awards and has volunteered on other nonprofit boards and commissions. Lisa holds a bachelor’s degree in political science from the University of Illinois and a master’s degree in public policy and women’s studies from George Washington University. She spent 1990 – 1991 in Melbourne, Australia, as a Fulbright Fellow.

As President of Parnassus Investments, I often think about what responsible investing might look like over the coming decades. The future is anchored in the past, so I believe the best way to begin an answer to this question is with a look back at the early years of responsible investing.

The Origins of Values-Based Investing

The modern movement to link investors’ values with their portfolio holdings is rooted in the 1970s. During this period, social concerns like the Vietnam War, civil rights, women’s equality and environmental protection became passionate causes for many members of the Baby Boomer generation. At this early stage of the movement, some idealists were willing to accept lower returns in exchange for investments that aligned with their views on social issues.

The key feature of these early responsible investment strategies was the application of screens to limit the investment universe. The idea was to avoid companies that were perceived as harmful to the environment and society. Many observers concluded that a limited universe would necessarily diminish returns over time. This notion that responsible investing would, by definition, under perform persisted for many years.

Parnassus Investments began with a different vision. The firm’s founder, Jerome L. Dodson, launched Parnassus in 1984 with the idea that a well-designed responsible investment strategy could outperform traditional investment strategies. Starting with this mission of delivering “Principles and Performance®,” Parnassus developed a process that evaluated both the financial merits and the environmental, social and governance (ESG) characteristics of each potential portfolio company. The result was an investment strategy designed to uphold shareholders’ values and to perform as well or better than non-ESG strategies over the long term.

Sustainability Joins the Mainstream

Thanks to vocal consumers, shareholders and responsible investment firms, a growing number of companies are now promoting their sustainability, workplace and other social achievements as essential aspects of their brands. At the same time, many corporate leaders have come to realize that pursuing social responsibility can reduce litigation and reputational risk, while also improving innovation and efficiency. In addition, recent academic studies have demonstrated that investing in companies with strong ESG profiles can improve portfolio returns.

In the context of these developments, it is not surprising that responsible investment strategies have grown dramatically. Morningstar now tracks more than 200 socially conscious mutual funds with combined total assets in excess of $100 billion. Many of the new offerings have been launched by large investment managers, who hadn’t traditionally been associated with the responsible investing movement. For example, Natixis, Eaton Vance and BlackRock have developed sustainable fund lineups over the past three years.

The Baby Boomers who grew up with the responsible investment movement now have more options than ever to align their investments with their values. Meanwhile, their children, the generation dubbed “millennials,” have demonstrated a keen interest in ESG investment options.

Expectations for Broader and Deeper ESG Influences

Given this backdrop, I expect two developments in responsible investing going forward:

• First, ESG research will be incorporated at some level into investment processes that aren’t primarily marketed as ESG solutions. This is because investment managers will recognize the performance advantages of companies with positive ESG profiles.

• Second, as traditional asset managers get comfortable with using ESG research, they will continue to look for ways to offer ESG versions of their traditional investment products. This is the natural response to the increased desire by shareholders to align their investments with their principles.

Both trends should increase the demand for even more ESG research from third-party providers. This research will likely come from traditional brokerage firms that already provide fundamental research, as well as from research firms that specialize in ESG analysis. Eventually, demand for ESG data should lead to more transparency and standardization of ESG metrics, expanding on the work that the Sustainability Accounting Standards Board (SASB) is already doing. In turn, corporate executives and board members will become even more savvy about ESG issues. These improvements in measurement and transparency should lead to better company and portfolio-level ESG performance over time.

Risks and Opportunities for Responsible Investment Managers

As ESG research becomes more widely available from third parties, responsible investment managers’ competitive advantages could potentially erode. However, I think portfolio managers who succeed at finding companies that continually raise the bar on corporate sustainability will be able to add value relative to their peers over time. And, in my experience, on-the-ground research—visiting companies and establishing relationships with management—is a critical aspect of developing this type of comprehensive view of portfolio holdings.

Company Engagement

But getting to know company leaders is not enough. Advocating for the values we share with our clients through engagement with management is a natural evolution of the original concept of linking shareholders’ values with their investments. An ongoing exchange of ideas with management can develop a better understanding of how the company operates. It also provides insights into management’s sensitivity to ESG-related issues and the level of effectiveness of the board’s oversight.

Furthermore, as a relationship deepens over time, it is easier to address controversial events that may arise, discover what steps are already being taken to improve ESG performance and help management formulate additional remedies, if needed.

Building relationships that help companies improve their corporate social responsibility is good for all stakeholders. Because of this, a leader in the responsible investment industry must be willing and able to effectively engage with the management teams of portfolio companies on ESG issues.

Responsible Wealth-Building for the Long Term

In summary, I am confident that companies will benefit economically by pursuing excellence in corporate responsibility. This is especially true in the context of climate change and increased resource scarcity. As responsible investing integrates into the mainstream, I anticipate that ESG data will be incorporated into greater numbers and types of investment strategies. I believe that those investment firms that can successfully identify companies with leading ESG profiles, strong financials and attractive fundamentals will be the most likely to succeed. Finally, I think that leadership in the responsible investment industry will require meaningful engagement with portfolio companies on ESG issues.

Article by Benjamin E. Allen, President of Parnassus Investments and a portfolio manager for the Parnassus Core Equity Fund. Parnassus has offered socially responsible investments since 1984.

Mr. Allen joined Parnassus Investments in 2005 as a Senior Research Analyst and was previously a Parnassus research intern. In 2008, he was promoted to Director of Research and subsequently became Portfolio Manager of the Parnassus Core Equity Fund in 2012. Prior to joining the firm, Mr. Allen worked at Morgan Stanley in New York, first as an Investment Banking Analyst and later in the firm’s venture capital group. Raised in Massachusetts, he is an alumnus of the Boston Latin School. Mr. Allen graduated Phi Beta Kappa and magna cum laude from Georgetown University with a bachelor’s degree in government, and completed the general course in philosophy at the London School of Economics. Mr. Allen received his master’s degree in business administration from the University of California, Berkeley.