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Better data and stewardship help ESG investing move from intentions to outcomes

ImpactAlpha, Sept. 15 – The accelerating flow of capital into ESG-themed funds is being accompanied by a raft of new products, strategies and tools. “The era of transparency has begun,” declared Harvard Business School’s George Serafeim and Sir Ronald Cohen in a Harvard Business Review post this month.

In conversation with KKS Advisors’ Bronagh Ward this week, Serafeim said the accumulating evidence of the materiality of environmental, social and governance factors means ESG issues “need to be measured, the risk needs to be underwritten and the opportunity needs to be identified.”

The net inflow of nearly $21 billion into sustainable funds in the first six months of 2020 nearly matches the record total for all of last year, according to Morningstar. Serafeim said better data and more effective stewardship strategies enabled UBS’s announcement last week that it would make sustainable investments the default option across its $2.6 trillion wealth management business.

Often ESG “policies and principles and disclosures and so forth – they might not translate into outcomes,” he says. “We need to actually start thinking in terms of outcomes and to understand if we are effective.”

ESG activism

ESG does not create change, Inclusive Capital’s Jeffrey Ubben said at the Bloomberg Green Festival. “It makes people feel good and is maybe a great way to grow your asset management business.” The founder of activist investing firm ValueAct created a stir this summer with his jump to impact investing.

Life imitates art as hedge fund manager Jeff Ubben launches public-market impact fund

The new fund goes beyond ESG by prodding legacy companies – like oil giant BP and power company AES – toward sustainability. “We’re gluttons for punishment,” he said. “We like to create the value, and be part of the change.”

One strategy: linking compensation to environmental and social metrics. Ubben said such “not-yet-financial metrics” are key to changing business models and driving “massive” returns.

“No CEO has been fired for missing emissions targets,” he said. Yet.

Portfolio construction

To mitigate systemic as well as company risks, ESG investors need to go beyond long-only public equity strategies and add strategies that trade interest rates, commodities and currencies as well as equities, writes Basil Williams of Welton Investment Partners in a guest post on ImpactAlpha. Williams says such portfolio construction can address both company-specific risks and systemic market risks to create better outcomes for both investors and society. His take.

New tools

Five global sustainability reporting standards, including the Global Reporting Initiative (GRI) and Sustainability Accounting Standards Board (SASB) are coming together to resolve confusion in ESG reporting… The Fossil Fuel Non-Proliferation Treaty Initiative, launched last year (see, “Agent of Impact: Mark Campanale”), is seeking to build a global registry of fossil fuels as a baseline for climate action.

Agent of Impact: Mark Campanale, Carbon Tracker Initiative

Reclaim Finance, a European-based climate organization, released an online tool to compare the coal policies of global financial institutions. The leaders: France’s Credit Mutuel and Italy’s Unicredit. The laggards: Blackrock, Vanguard, State Street, JP Morgan Asset Management, Fidelity and others… A Net-Zero Company Benchmark from Climate Action 100+ will help investors identify climate leaders and laggards.

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