Small logo Subscribe to leading news on impact investing. Learn More
The Brief Originals Dealflow Signals The Impact Alpha Impact Voices Podcasts Agents of Impact Open
What's Next Capital on the Frontier Measure Better Investing in Racial Equity Beyond Trade-offs Impact en las Americas New Revivalists
Local and Inclusive Climate Finance Catalytic Capital Frontier Finance Best Practices Geographies
Slack Agent of Impact Calls Events Contribute
The Archive ImpactSpace The Accelerator Selection Tool Network Map
About Us FAQ Calendar Pricing and Payment Policy Privacy Policy Terms of Service Agreement Contact Us
Locavesting Entrepreneurship Gender Smart Return on Inclusion Good Jobs Creative economy Opportunity Zones Investing in place Housing New Schooled Well Being People on the Move Faith and investing Inclusive Fintech
Clean Energy Farmer Finance Soil Wealth Conservation Finance Financing Fish
Innovative Finance
Personal Finance Impact Management
Africa Asia Europe Latin America Middle East Oceania/Australia China Canada India United Kingdom United States
Subscribe
Features
Series
Themes
Community
Data
Subscribe Log In
More

Asset managers compete on impact as investors move beyond ESG



ImpactAlpha, Oct. 14As passive ESG funds emerge as the hottest trend in financial services, active asset managers are touting their ‘impact alpha.’ Rather than simply tracking the market, they are looking for outperformance with strategies around the low-carbon transition, a more inclusive economy and the Sustainable Development Goals.

Already this year, U.S. funds that employ environmental, social and governance, or ESG, analysis have attracted more than last year’s record total of $21.4 billion. But the top five holdings of such ESG ETFs – Microsoft, Alphabet, Procter & Gamble, Apple and Home Depot – have some investors looking for higher-impact strategies. Investing in companies that are not objectionable is fine, says a report from Charlotte, N.C.-based Massif Capital. “It is, however, very different from investing in companies that will not only survive in an economy transitioning to a low-carbon footprint, but that also enable that transition.”

Massif’s focus: heavy industries like steel and cement that are ripe for the kind of decarbonizing disruption Tesla is driving in automobiles.

  • Impact delta. Passively managed ESG strategies generally reflect a snapshot of company operations rather than dynamic corporate strategies. A key indicator: Change in the share of revenues driven by products and services that solve major environmental and social challenges (see, “Global corporations start to capitalize on positive externalities). Tackling climate change is “the next huge break-out opportunity,” says Inclusive Capital’s Jeffrey Ubben, who scooped up shares of oil giant BP based on CEO Bernard Looney’s ambitious decarbonization goals. Massif’s report cites Denmark-based Ørsted’s transition into one of the world’s leading wind power producers – and Air Products Inc.’s move into coal-gasification plants, which will triple its carbon emissions by 2025.  
  • New benchmarks. A Morgan Stanley analysis found ESG equity funds outperformed traditional peers by a median of 3.9% in the first half of the year. But tying sustainable funds to traditional benchmarks like the S&P 500 may tether them to obsolete strategies. “Why would you want to even correlate with the avatar of the destructive economy?” Green Alpha Advisors’ Garvin Jabusch says. “There are enough innovative companies working on lowering the risk for the economy that we don’t have to anymore.” Green Alpha’s Shelton Green Alpha Fund looks for companies driving the green economy like Vestas Wind Systems, Moderna and Brookfield Renewable Corp. Companies in BlackRock’s Global Impact Fund must derive greater than 50% of revenues from products and services targeting the United Nations Sustainable Development Goals. Domini’s Sustainable Solutions Fund seeks, yes, sustainability solutions, with holdings like Tesla, Sunrun and Beyond Meat.
  • Long-short. AI-based algorithms eventually will integrate such proactive strategy analysis. For now, long-short hedge fund managers can play the mega-trends. Atlas Impact Partners is long on companies driving revenues from wind turbines, electric vehicle fleet services and the application of computing power to health care – and short oil field services, diesel equipment and sugar. “The current environment has accelerated the structural winners and losers,” Atlas’ Robert Brown told ImpactAlpha
  • Accounting for impact. As many as one in six companies would have their profits erased if they bore the cost of the environmental damage they cause, according to Harvard Business School’s Impact-Weighted Accounts initiative, which is assigning monetary value to a company’s social and environmental costs and benefits. The group, led by George Serafeim, has also analyzed employment impacts like wage quality, career advancement and health and well-being. The positive impact at Intel: $3.8 billion, or 27% of the company’s U.S.-based revenue. Canadian ratings agency impak assigns an “impak score” based on the extent a company’s activities contribute to one of the SDGs (see ImpactAlpha’s corporate face-off series with impak, including Crédit Agricole vs. BNP Paribas, Nestlé vs. Danone, Engie vs. Enel and Novartis vs Sanofi).

You might also like...