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Signals: Ahead of the Curve
Asset managers compete on impact as investors move beyond ESG. As 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 U.N. 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 holdings of such ESG ETFs overall – Microsoft, Alphabet, Procter & Gamble, Apple and Home Depot are the top five – have some investors looking for higher-impact strategies. Investing in companies that are not objectionable, says a report from Charlotte, N.C.-based Massif Capital, “is 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, compared to Air Products Inc.’s move into coal-gasification plants, which could 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 computing power’s applications in healthcare; it’s short on 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 how much 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).
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Dealflow: Follow the Money
Clean Energy Ventures backs SunDensity to increase the efficiency of solar panels… Solar is “some of the lowest cost electricity ever seen,” according to the International Energy Agency. While costs have fallen sharply, the efficiency of solar panels has improved only incrementally. SunDensity claims its “smart coating” can increase efficiency by as much as 20%. SunDensity’s coating enables the panels to convert high-frequency blue light into energy along with the low-frequency red light converted by ordinary panels. Clean Energy Ventures’ Temple Fennell called SunDensity’s technology “a critical step-function increase in solar panel efficiency.” The early-stage investment firm led SunDensity’s $2.5 million round. Luminate, Rochester Angel Network, LaunchNY and Clean Energy Venture Group also participated.
- Solar tech. Other startups boosting efficiency include India’s Nocca Robotics, which is making solar-panel cleaning robots to boost panel performance. U.K.-based Oxford PV is developing high-efficiency solar panels. mPower Technology is making “micro” solar cells. Estonia’s Sunstone designs interlocking panels that can be built into a property. Sweden’s Exeger has developed flexible “solar” cells that can draw power from ambient light.
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…While SunForAll commits $4 million to expand solar energy access. CollectiveSun’s SunForAll fund combines grants and low-interest loans to help nonprofits cover the upfront costs of installing solar panels to reduce energy costs for themselves and the communities they serve. CollectiveSun launched the fund to help nonprofits capitalize on solar financial incentives that were unavailable to them because of their tax-exempt status. SunForAll, anchored by BQuest Foundation, committed $4.1 million to five organizations in San Diego including Habitat for Humanity, to install solar panels at its offices and facilities; San Diego Center for Children, for its school campus and youth residential treatment center; and Casa de Amparo, for its children’s shelter. Kevin Mattson of San Ysidro Health, another SunForAll recipient, said the cost savings of switching to solar power would help provide healthcare to underserved residents and vulnerable populations
Agents of Impact: Follow the Talent
Kathleen Simpson becomes CEO of The Russell Family Foundation after serving as the foundation’s interim CEO since January and chief financial officer since 2015… The Nathan Cummings Foundation is requesting proposals for an external chief investment officer to manage its endowment and mission-aligned investment strategy… The Initiative for a Competitive Inner City is looking for a communications director in Boston… Peloton is recruiting a senior manager, social impact, in New York… Philadelphia’s Office of Sustainability is hiring a data analyst.
BLCK VC launches the Black Venture Institute with Operator Collective, Salesforce Ventures and UC Berkeley Haas to introduce 300 Black professionals to venture capital with a two-week fellowship… The American Sustainable Business Council hosts “Creating an Economic System that Works for All,” with Fredrick Alexander of The Shareholder Commons, MaryAnne Howland of Ibis Communications, Cornerstone Capital’s Erika Karp, NYU Stern’s Tensie Whelan and ASBC’s Jeffrey Hollender, Wednesday, Oct. 21.
Thank you for reading.
–Oct. 14, 2020