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What is ESG?

Posted on by Jason Wilson

ESG is a growing trend in the investment world, but only 1% of assets under management use ESG as a primary factor in investment considerations. What exactly does ESG mean and how are companies integrating this practice?

The acronym itself stands for Environmental, Social and Governance. Companies use ESG as a risk assessment strategy incorporated into both their investment decision-making and risk management processes. These factors are often clear indicators of a responsible, well-governed company. Examples of ESG are:

 

ENVIRONMENTAL

Company Activity:

  • Manage resources and prevent pollution
  • Reduce emissions and climate impact
  • Execute environmental reporting/disclosure

Positive Outcomes:

  • Avoid or minimize environmental liabilities
  • Lower costs and increase profitability through energy and other efficiencies
  • Reduce regulatory, litigation and reputational risk

 

SOCIAL

Company Activity:

  • Promote health and safety
  • Encourage labor-management relations
  • Protect human rights
  • Focus on product integrity

Positive Outcomes:

  • Increase productivity and morale
  • Reduce turnover and absenteeism
  • Improve brand loyalty

 

CORPORATE GOVERNANCE

Company Activity:

  • Increase diversity and accountability of the Board
  • Protect shareholders their rights
  • Report and disclose information

Positive Outcomes:

  • Align interests of shareowners and management
  • Avoid unpleasant financial surprises or “blow-ups”

 

 

ESG standards are becoming a larger part of the alternative investment world, including the impact investment space.  ESG issues are not only central to measuring the sustainability and non-financial impacts of an investment, but can have a material impact on the long-term risk and return profile of investment portfolios.

According to oekom’s Sustainability Financial Performance Research Study, investors receive a “double dividend” in the form of a better rate of return with lower risk. The study found that companies that incorporate ESG standards prove to be more conscientious, less risky and therefore more likely to succeed in the long run. Socially responsible investors use ESG screens as a tool to confirm that investments are in compliance with local laws, as well as committed to sustainable and ethical business practices.

Firms like Blackrock and Vanguard have not only incorporated ESG into their compliance and legal risk-mitigation strategies, but also into their investment strategies. Traditional investments like public equity, however, are not the only investments being screened with ESG factor. Investors in alternatives, and alternatives fund managers, are likewise using the ESG framework for assessing risk in the investment decision-making process.

The board of Wellington Management, an investment management firm based in Boston, explained their motivation for using ESG, “ ESG integration is simple: to increase financial returns while upholding the fiduciary duty to incorporate any known risks into the investment process.”

ESG standards provide another level of due diligence, which is in the best interest of shareholders. When the UN launched UNPRI in 2006 and watchdogs like Bloomberg and MSCI started tracking ESG, it became abundantly clear that this was not a short lived fad.

ESG weeds out unsustainable companies with outdated practices and harmful side effects, while also minimizing risk for investors as they invest in more responsible companies with a greater likelihood of succeeding in the long run.

 

Millennials and Impact Investing Go Hand in Hand

Posted on by Jason Wilson

The Millennial generation is set to receive the reins as the US undertakes the greatest generation-to-generation wealth transfer to date. The Millennial generation? those born between the early 1980s and the early 2000s? has a different take on the primary role of business compared to previous generations. As presented in the WEF report From the Margins to the Mainstream, “in a recent study of 5,000 Millennials across 18 countries, respondents ranked ‘to improve society’ as the number one priority of business [36% of survey respondents]. This does not imply that the next generation of investors will not seek market returns [35% of survey respondents]. However, the emerging generation of investors is likely to seek achievement of social objectives in addition to financial returns.”

The Millennial generation also has a larger propensity to donate time, money and work than previous generations. Here are some figures from the Millennial Impact Report conducted by Achieve:

  • 52% of Millennials would be interested in monthly giving.
  • 72% of Millennials are interested in participating in a nonprofit young professional group.
  • 83% of Millennial respondents made a financial gift to an organization in 2012.

The research is clear: Millennials are generous but also very conscientious of whom and where their money is going. Millennials are understandably skeptical of the investments they make. In “Leading Generation Y,” Lieutenant Colonel Jill M. Newman of the United States Army argues, “The [Millennials] have witnessed more scamming, cheating lying and exploiting than ever before from major figures especially in finance in recent years.” The skeptical nature of this generation requires greater transparency on the part of financial sector organizations to attract this demographic.

The Deloitte report Catalysts for Change states that the 75 million Millennials are positioned to become the wealthiest generation ever, surpassing the 80 million Baby Boomers. “From the Margins to the Mainstreams” projects “over the next 40 years, an estimated US$ 41 trillion will be transferred” from Baby Boomers to their heirs, resulting in a powerful Millennial generation. The Millennials’ beliefs and values will be the drivers behind the world’s political, social, environmental and economic changes.

Impact Investing is turning out to be an appealing investment approach for Millennials due to its differing outcomes and operations than those of traditional investing. Impact Investing provides a new way of tackling the world’s most pressing issues while still providing an acceptable financial return. It also enables investors to place their money according to their values without having to forgo financial opportunities. While impact investments may currently represent a small portion of many adults’ portfolios, JP Morgan forecasts a drastic increase in these types of investments as money changes hands on a generational scale. They estimate that impact investing may expand from about $9 billion today to $1 trillion by 2020.

Many companies have sought out to democratize impact investing, in anticipation of the growing popularity. No longer are accredited investors the only investors offered a slice of the impact investing pie. With the introduction of new retail offerings, non-accredited investors, like many Millennials, have been given the opportunity to invest in corporations and businesses that share their values through impact investing.

This generous, yet monetarily wise generation will find ways to advocate for social and environmental missions, while still maintaining financial responsibility. Of course it’s only speculation, but it would seem that impact investing is an investment approach that is in line with Millennials. Demand creates supply. With this evidence the future for impact investing looks promising. Impact investing and Millennials go hand in hand.

Unleashing the power of endowments: The next great challenge for philanthropy

Posted on by Jason Wilson

For the better part of two decades, the world of philanthropy has been engaged in an important, sometimes contested, conversation about “impact”—both how we measure it and how we deliver it. More recently, this discussion—in the Ford Foundation’s halls and throughout our sector—has focused on how to create impact through the capital market, specifically through impact investing.

Click here to continue reading on the Ford Foundation website.

The Increasing Demand for ESG Scoring and the Benefits of Standardization

Posted on by Jason Wilson

As we start off the New Year, TriLinc Global will be discussing notable trends from 2015 that we see as relevant to the development and growth of the impact investing sector in 2016 and beyond. This is the third post in a four-part series.

Coinciding with the rise of entrants in the impact investing space is a similarly mounting demand for increased rigor and standardization around ESG reporting. According to US SIF Foundation’s biennial survey, “Unlocking ESG Integration,” the inclusion of ESG factors into portfolio management grew at a rapid pace between 2012 and 2014, reaching almost $5 trillion in US-domiciled assets. However, a key challenge for asset owners and investment managers has been the lack of an effective, uniform and all-inclusive way to measure ESG factors and impact goals.

Ernst & Young’s 2015 global survey, “Tomorrow’s Investment Rules 2.0,” reported that although 71 percent of institutional investor respondents considered integrated reports – which include both financial and ESG information – essential to making investment decisions, over 25 percent said that nonfinancial information had not affected their investment decisions over the past year.  The reason for this was primarily due to the difficulty of verifying and comparing ESG and impact data across firms.

In response, industry players are making strides to develop ESG assessment tools and services, so that investors can use ESG data to more effectively drive investment decisions and portfolio monitoring practices. As of 2014, Bloomberg, one of the largest information gathering and dissemination models in the investment management industry, had gathered and reported ESG data to 17,000 ESG data service subscribers on over 11,000 companies spanning 65 countries.  By adding “non-financial” ESG data to its product offering, Bloomberg has been an active change agent in the sector.

Another new player in the field is Morningstar, which is partnering with Sustainalytics to bring ESG scoring into the mainstream by assigning ratings to global mutual and exchange-traded funds (ETFs).  Resulting from heightened investor demand for more transparent information about ESG practices, Morningstar will test how companies and investment managers effectively gather, report and incorporate ESG information into the analysis and risk profile of their investments.  The new Morningstar ESG ratings will guide institutional firms that create and manage mutual funds and ETFs for the retail market, and will empower “main street” investors to make investment decisions that are both value-based and values-based.

Another industry partnership seeks to offer institutional investors insights into ESG risks, including those not reported through public companies’ mandatory public disclosures. In September 2015, Institutional Shareholder Services (ISS), which provides corporate governance and proxy voting services, began offering its clients ESG screening, analysis and stewardship tools using analytics and metrics provided by RepRisk.  This partnership helps ISS clients – asset owners, investment managers, hedge funds, broker-dealers and custodian banks – manage compliance, reputational and investment risks related to their portfolio companies’ ESG activities.

The burgeoning development of analytical frameworks underscores the demand for the integration of ESG variables into investment management practices.  However, the industry has not yet established a universally accepted approach to ESG methodology, measurement, benchmarking and reporting, as it has for other investment performance metrics.  A growing but still nascent trend, ESG integration will achieve mainstream proportions as sector players assess the various options and coalesce around broadly accepted approaches. Such standardization is crucial to better investment decision-making practices, and will lead to improved risk management and an enhanced understanding of ESG across a portfolio’s performance.

– This post is the third in the four-part series, “Impact Investing: What’s to Come in 2016,” written by Melissa Tickle, TriLinc Global Impact & ESG Analyst.

What’s Holding Back Impact Investing?

Posted on by Jason Wilson

With the unveiling of a new report at the White House last Wednesday, the investors who have pioneered the impact investing movement are now urging the U.S. government to create policies that will turbocharge its growth. Seasoned impact investors say there is much more potential to direct private capital towards addressing the world’s pressing social and environmental challenges than what is done today–especially if a number of policies can be tweaked.

Their report details more than two dozen government actions that could both remove existing barriers to impact investing, increase the effectiveness of the government’s own programs, and proactively provide new incentives to encourage growth. “If you were to imagine a crew team on a river, it’s like we don’t have all of the oars in water, because private enterprise has, for the most part, sat on the sidelines,” says Jean Case, CEO of The Case Foundation and an advisory board member. There exists a fear that social and environmental goals of good organizations will be diluted as financial interests blend with what is traditionally charitable work. But advocates say there are safeguards and transparency will help in many situations, and the potential to do good far outweighs the downsides.

In the end, what is needed are more standardized ways for people to access social impact investing opportunities.

Click here to read more.

Why Impact Investing is an Emerging Paradigm Shift in Philanthropy

Posted on by Jason Wilson

Impact investing is a frequently featured topic of conversation at forums or conferences on philanthropy today.  Its popularity is linked to the potential for impact investing to cause a paradigm shift in the way philanthropy is approached—targeting investment capital as a complementary resource for achieving the social and environmental changes typically pursued by philanthropic organizations. The central theme underpinning the potential of impact investing is the creation of economic value and social value being, not necessarily, mutually exclusive.

Market-based approaches to critical social and environmental challenges do exist or can be developed, and those interventions can attract private sector capital. This provides a significantly larger, complementary source of capital alongside of philanthropic budgets and increasingly limited public sector resources. All in all, financeable interventions can satisfy a range of objectives—from mitigating climate change to creating jobs in agricultural communities to providing health care for underserved people—attracting a broad population of investors interested in creating change.

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Impact Investing Aided By White House

Posted on by Jason Wilson

On June 25, 2014, at the White House roundtable on impact investing, corporations, banks, foundations, and individuals including Prudential, Capricorn Investment Group and the Omidiyar Network committed to invest more than $1.5 billion in new capital into companies and funds that strive to generate positive financial and social returns.

 In addition, US government agencies announced programs to support impact investments and social enterprises. These commitments followed the release of a new report from the U.S. National Advisory Board to the Social Impact Investment Task Force that provides a framework for how federal policies can support impact investing.

As the industry matures and more investors enter the market, policies that remove barriers to growth and provide incentives for more impact investments will grow in importance. Government, philanthropy, and nonprofits cannot solve the world’s numerous problems alone, but with their aid in impact investing, social issues can be improved while creating a profit.

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Mainstreaming the Movement

Posted on by Jason Wilson

This article focuses on Toniic, a global network of impact investors that aims to “harness the incredible potential of socially minded impact investors to catalyze the broader impact investor movement and support the growth of high-impact entrepreneurs and funds.” Their CEO Stephanie Cohn Rupp discusses the network’s approach, and the evolution of the impact investing sector in general.

Firstly, she talked about the need for more connections among investors, and the tactics Toniic uses to bring investors and entrepreneurs together. And, secondly, she shares her thoughts on current trends, and what they mean for the future of the impact sector.

Click here to read more.

Impact Investing: Making a Difference and a Profit

Posted on by Jason Wilson

Several not-for-profit organizations have recently been teaming up with money mangers and investment banks to create and market a new line of products that offer investors the opportunity to engage in impact investing, a form of socially conscious investing. The goal is to invest money in companies, organizations, funds or projects across globe that can influence positive social change, while delivering financial return to investors. In recent years, it has gained momentum and product variety leading to more and more retail investors and millennials getting involved in this ex-wealthy investors’ niche. And, with this growing interest, organizations such as the Rockefeller Foundation and Goldman Sachs have created their own funds aimed at deploying capital toward the physical, social and economic revitalization of disadvantaged communities across the U.S. and the world. The groundwork has been laid for the creation of numerous products to meet the demand of a new generation of socially conscious investors, and, as long as such investments produce competitive social and financial returns, their popularity will only grow from here.

Click here  to read more.

Impact Investing: Not Just For Billionaires

Posted on by Jason Wilson

Judith Rodin, president of the Rockefeller Foundation, has coauthored a new e-book, “The Power of Impact Investing,” that highlights impact investing is not just for the 1%, it is for anyone interested in learning how to make financial returns while having an impact. In a survey done by Hope Consulting last year, 48% of Americans living in households of $80,000 and up showed interested in impact investing products – Rodin’s book aims to aid them in their endeavors. Her foundation has also been a huge supporter of the Social Impact Bonds infrastructure, funding Social Finance US which has facilitated social impact bonds in the US, given a grant to the Harvard Kennedy School’s social impact bond technical assistance lab, and worked with the Obama Administration on pay-for-success models.

Click here to read more.