Moving down the sustainable investing spectrum: SRI and ESG
KM: Let’s talk about the evolution from a siloed approach to investing and philanthropy to a more integrated approach. We’ll start with the first step, which is SRI. How frequently do you see requests for this, and what does its implementation look like?
SB: The first thing I do with clients who express interest in this area is to try and understand their mission. Often, we hear from clients that they want sustainable investments or ESG, and then you ask them what they’re trying to achieve, and they haven’t thought about it in that way. Having those discussions makes it much easier to implement what they want in their investing.
A common request is to build a portfolio that excludes “sin stocks.” This is easy to do. What gets tricky is how far down the value chain you want to go. For example, what happens if a company owns convenience stores that sell cigarettes? Do you want to sell that holding? When clients come to us with requests like this, we go through every company they own and screen based on what percentage of revenue comes from those sin stocks. Typically, because of how we invest, those percentages are very small, so most clients will take out the tobacco company, for example, but live with a fraction of a percentage in a particular sin stock.
KM: Next on our spectrum is ESG investing, where ESG data is incorporated into the investment decision-making process. What does that look like in practice?
SB: Because our investment approach focuses on high-quality companies with increasing cash flows and sustainable growth, ESG factors are one of many factors that our managers consider in their investment decision-making. The evaluation is not new, but the focus on it and the description of it has become much more important. All of these factors are going to help companies be sustainable over time.
More recently, we’ve seen managers releasing written ESG policy statements. That is important because it informs the mind and helps fill in any gaps.
KM: There are some limitations in ESG investing for philanthropists, a big one being it does not incorporate a client’s values. Rather, ESG investing recognizes that companies with effective policies and practices around ESG factors might have less overall risk, resulting in more favorable investing outcomes.
SB: SRI looks at your values. ESG is trying to move into the “right” direction, but it won’t necessarily give you a portfolio of companies that align with your values. The problem with just relying on ESG factors is that you are capturing data that is self-reported by the companies, which I hope changes over time.
Focusing in on impact investing
KM: What about philanthropists who want to go one step further and make change?
SB: That’s impact investing. Impact investments are made with the intention to generate positive, measurable social and environmental impact alongside a financial return, according to the Global Impact Investing Network. You have to define what type of impact you’d like to make, and then identify funds that can accommodate those needs. There are a few things to keep in mind with this. First, the most important thing to me is intentionality. You want managers that are doing this to make improvements in the areas they’re focused on. In terms of asset class, impact investments can be across a range of asset classes, though typically we think of them as private investments. I also like to see impact measurement that shows what the manager has accomplished. And the last thing to keep in mind is financial returns – there are impact funds that don’t necessarily provide a market-like return.
KM: The impact investing space has taken off. This market has doubled every year since 2016 and is expected to hit $2 trillion by 2026. As more dollars flow into these strategies, what challenges are we seeing?
SB: The challenges are always the same across all investments – finding great opportunities that fit our criteria overseen by intellectually honest and talented managers. I don’t know how much of the market is managed that way. What we need to understand as managers is whether these funds are making the impact that we believe our clients deserve.
There is no one-size-fits-all with impact investing, so another challenge we are facing is identifying the right funds that resonate with our clients.
There seems to be a generational shift, where the next generation is more likely to want companies that make a positive impact. What do you think the future looks like in this space?