The best way to predict the future is to create it.
For most of us, the COVID-19 pandemic has been a horrific awakening, exposing weaknesses in societal, economic, and governmental systems around the world. For those of us who are deeply involved with the environmental movement, this pandemic has highlighted global issues that we’ve worried about for years. Today’s societal, health, and climate crises require unprecedented changes in our systems across all sectors. It’s up to us to take action to create a more sustainable, resilient future. It’s up to us to build a virtuous cycle.
In 2008 the Rockefeller Foundation brought the term impact investing to the public. Impact investing is defined by the World Economic Forum as a measurable approach to investing for both financial return and positive social impact.
Socially and Environmentally Responsible Investing
One effective tool to use in building this virtuous cycle is the integration of ESG into our investment approach. Think of ESG as your roadmap to Impact. Clear ESG ratings can assist you in determining the virtuous cycle, the positive impact, that you want to have on your world.
ESG stands for environmental, social and governance – three factors that measure a company, investment or business’s societal impact and sustainability. This criteria can be used to determine risk and return (financial performance). The lingo around this investment lens can be confusing but the basic idea is simple. ESG is often used interchangeably with socially or responsible investing, sustainable investing/finance, mission-aligned investing or even impact investing. Don’t let the monikers put you off.
Companies with a high ESG rating typically perform better, particularly in times of volatility
ESG criteria is used when examining an investments financial performance (to determine risk and return) in addition to traditional financial analysis. Using ESG ratings allows you to decide what kind of impact you want your dollars (investments) to have on the world as well as what type of financial return you desire. For example, an ESG rating shows you how the companies in your portfolio respond to climate change, how good they are with water management, how diverse is their work force, executive level and board membership, the stability of their supply chains and aspects of their corporate culture — does the company foster transparency and innovation?
Companies with a high ESG rating typically perform better, particularly in times of volatility. Why? These companies tend to have a more resilient business model, robust & flexible governance and strong relationships with their employees and their customers.
Ethical Investing Has Financial Benefits
This is not a new idea. In biblical times, ethical investing was mandated by Jewish law. Over 200 years ago in the US, strident religious groups took to avoiding “sin stocks” (alcohol, tobacco, gambling). From there, the idea of divestment grew and became popular in the dark days of Apartheid. Socially conscious investors withdrew their dollars from companies based on a moral objection to South African business practices. In 2005 the term ESG was coined in a landmark study “Who Cares Wins” published after a diverse group of investors, government leaders, analysts and regulators agreed that ESG plays a critical role in long term financial health. Unlike past investment trends based on ethical and moral criteria, ESG now is acknowledged as a rating with significant financial relevance.
Myths, misconceptions and arguments abound around impact investing. Many believe that only ultra-high-net-worth individuals have access to ESG/impact investments. Not true. From mutual funds to ESG-rated ETF’s (exchange-traded funds) to real estate, private funds and equities – all asset classes have this opportunity. Don’t forget your pension fund, your 401K, your donor-advised fund, your foundation’s endowment, or the cash that is being held in your company or your checking/saving accounts. All can be put to work in the virtuous cycle.
Let’s Aim for a Virtuous Cycle of Sustainability and Resiliency
Some hold tight to past history; decades ago ESG/impact investments were considered a fad and only offering concessionary (below or at) market-rate returns. No longer. ESG/Impact investing has proven itself in many ways – from Goldman Sachs’ purchase of Imprint Capital in 2015 to today BlackRock, the world’s largest investment firm, telling companies to consider their societal responsibilities. Academic research has long proven that what is good for the people and the environment is also good for business performance; empirical practical evidence built over the last 10 years shows impact investment funds returning double digits and above comparable portfolios.
You may wonder where philanthropy fits into this virtuous cycle. It has a place, to be sure. But we know that philanthropic dollars will not be enough to solve our greatest global challenges laid out in the United Nations Sustainable Development Goals. In order for us to achieve this framework of 17, we must access all points in the virtuous cycle. ESG/Impact investing captures the “money in the middle” — that is, assets that lay between philanthropy and traditional investing. Why have we avoided employing this holistic approach? Fear, misunderstanding and, quite possibly, greed.
COVID-19 has made it clear we need a reset. Aiming for a virtuous cycle of sustainability and resiliency using tools that have proven themselves is a great place to start.
Head of Impact Solutions
Bank of the West