Financial Advisors

Socially Responsive Investing: New Innovative Resources & Ongoing Needs

Innovative technologies and a new variety of resources are empowering ESG goals by enhancing ESG data, processes, frameworks, and governance. New tools are now available to benefit small and large corporations by standardizing, capturing, and consolidating ESG data and metrics necessary to compare ESG factors across companies and sectors – and to develop ranking systems. New support resources and initiatives are also helping guide and empower socially responsive investment professionals and institutionalizing efforts to address the many systemic risks that stand in the way of a sustainable future.

To dig a little deeper and get a better understanding of what is happening by way of new technologies, tools and resources in this rapidly evolving social investing environment, the Institute for Innovation Development decided to reach out again to a cross-section of socially responsive asset managers – from ESG to impact to focused thematic strategies – and get their real world, in-the-trenches perspective and thought leadership. We would like to thank Ultimus Fund Solutions – one of the largest independent fund administrators - who provided introductions to some of their socially responsive asset manager clients and that has created fund vehicles for all of them to enable more access for investors to socially driven investment options.

Let me introduce you to our panel and then we will jump into getting a true lay of the land from the following experts in this field:

Todd Ahlsten, Chief Investment Officer, Portfolio Manager, Parnassus – a San Francisco-based asset management firm pioneering active socially responsible investing for more than 35 years focusing on integrating deep fundamental and ESG research into its collaborative, high-conviction, low turnover investment process.

Matthew Blume, Director of ESG Research & Shareholder Activism, Pekin Hardy Strauss Wealth Management, managers of the Appleseed Fund – a Chicago-based independent advisory firm providing funds and separate account strategies for investors that support their values through impact and ESG investing.

Patrick McVeigh, President & Chief Investment Officer of Reynders, McVeigh Capital Management – a Boston-based full-service socially responsible investing and wealth management firm that integrates in-house ESG research and fundamental investment analysis to construct personalized multi-year strategies

Zin Bekkali, CEO, Silk Invest – a London-based advisory firm that invests in listed equities across Global Frontier Markets – predominantly in Africa, the Middle East, Frontier Asia and Latin America - with a strong focus on impact investing and has been a signatory to the UN Principles of Responsible Investing since 2011.

Venk Reddy – Founder & Chief Investment Officer, Zeo Capital Advisors - a minority and woman owned, San Francisco-based fixed income investment manager focused on sustainable high yield strategies.

What new tools or resources have become available to help support social investing? Can you share your thoughts on why you feel they are important and how they help social investors?

Parnassus: Public and investor interest in environmental, social and governance (ESG) investing has grown over recent years, and with growing interest, the business case for ESG has strengthened. More companies have begun paying attention to their ESG practices, so the need for useful evaluation frameworks has grown. Now, standards from organizations like the Task Force on Climate-Related Disclosure and The Sustainability Accounting Standards Board (SASB) are being more readily adopted and sell-side research providers are building their ESG capabilities.

Although ESG resources are still being developed, existing offerings now are more standardized and provide companies and investors with better frameworks to refine their ESG evaluations. To the extent that investors are interested in using ESG investment vehicles to express their personal values, these new resources will be helpful for alignment as well.

Pekin Hardy: Transparency & Data: There has been an explosion in the amount of publicly available data on ESG metrics over the last few years. The market has put a lot of pressure on companies to disclose more and more information on ESG factors and sustainability performance, and there are new data providers popping up every day that are focused on aggregating this data and providing it to investors. This has made it far easier for investors to inform themselves on these issues. As an advisor focused on sustainable investing, this expansion in ESG data has allowed us to go even deeper in our understanding of ESG risks and opportunities and has enhanced our ability to customize client portfolios and ensure that they align with client values.

Certifications: The growing importance of ESG and SRI issues has led to the creation of new advisor designations designed to educate advisors on these issues. Designation programs such as the Chartered SRI Counselor (CSRIC) certification can help advisors better understand ESG issues and integrate these factors into client portfolios. Certifications like this can also help investors identify advisors who are well-versed in ESG and SRI investing and who may be able to provide guidance on these issues that other advisors may be unable to provide.

Reynders McVeigh: As social investing and ESG have taken a growing share of the investment universe, a number of new resources have become available to help investors navigate this landscape. We think some of the more interesting new developments have arisen out of the non-profit world and not from the for-profit investment sector. Why is this important? There is a mistrust among committed investors that Wall Street will co-opt this movement for their personal financial gain and will not push for systemic change that might not be in their best interest. Non-profit organizations can avoid this conflict as their mission is aligned with that of social investors.

For example, As You Sow, a non-profit originally founded in 1992 that bills itself as the nation’s leading shareholder advocate, has created a number of helpful new tools as well as leading increasingly successful shareholder campaigns. By organizing shareholder campaigns, As You Sow has been able to create unprecedented levels of shareholder unity that we have not seen from competing for-profit investment firms, In the past year, five ‘As You Sow’ shareholder campaigns returned majority votes! (98% support at General Electric on a Climate Change initiative, 82% at Union Pacific for a Diversity and Gender Equality proposal, 81% at DuPont on Plastic Waste, 60% at American Express for Diversity and Gender Equality, and 57% at Booking Holding on Climate Change.) Votes over 50% have been extremely rare historically but it would appear this new model of unifying behind a non-profit is changing the expected outcomes. The campaign with General Electric brought a commitment for the industrial giant to reduce GHG emissions 5% per year for the next decade and achieve net zero emissions by 2050.

As You Sow has also created a number of useful tools for investors to analyze the sustainability of their retirement plans and mutual funds. Through their website there are free and easy to use resources that will screen investments for sustainability, fossil-fuel exposure, gender equality, deforestation, and exposure to guns, weapons, prisons, and tobacco. Individual investors don’t have to be customers of a financial firm to now access information that allows them to be effective social investors.

Similarly, the Croatan Institute has also been successful with this approach. Founded in 2014, the Croatan Institute works collaboratively with 125 organizations to build social equity and ecological resilience by leveraging finance to create pathways to a just economy. As an outsider to this field, they have been able to lend a critical eye to how social investing can be most effective. A recent panel looked at ESG assessments and whether or not they are helpful, harmful or irrelevant. It is rare you get such self-analysis from the corporate for-profit world. Croatan has also put together a number of useful studies and resources helping social investors to build clean portfolios and to direct more capital to women and minority-led firms.

Silk Invest: Social Investing is becoming more mainstream and more tools are available to facilitate this. Data providers like Morningstar and index providers like MSCI are increasingly focused on this area. Regulators are also giving more guidance and among others putting funds in different categories to highlight their credentials in this area. On the flip side, more tools do not necessarily mean higher quality social investing as some investment houses are using this as a base to “tick boxes” or game the system based on pre-defined criteria. A big area of weakness is that most tools are investment criteria-focused and do not track outcomes. A fund that is focusing on, for example, environment can end up favoring established firms in the home market instead of having a more global view that takes into account future outcomes. The same applies for funds that claim certain social positioning but do not invest in big parts of Emerging and Frontier Markets.

Zeo Capital: Many tools have become available but how many are quality tools? Very few. If we have learned nothing else from Morningstar Rankings or Credit Agency Ratings, it’s that a single score does not tell the entire story. These scoring shortcuts, at best, mislead investors and at worst, in ESG investing, misalign capital to companies who are not deserving, making a mockery of the entire investing space. This is especially true in fixed income. The work SASB is doing on sustainable accounting standards is extremely important. The work Wharton is doing to measure true impact of integrating ESG factors into process, not short cutting through passive products, is also meaningful. The effort Truvalue Labs (now a FactSet company) has put into AI to create heat maps around ESG issues is the most telling at revealing company trends over time if an investor is willing to do the work around it.

Of the E, S and G, S is definitely the hardest to measure and hold companies accountable to. E is protecting the earth, G is protecting the internal people, but S is protecting the external people a company may or may not currently serve. The only way to truly determine how socially conscientious a company is being is by asking the questions, doing your own digging into issues through the help of something like Truvalue Labs and then making a fundamental determination if it meets the thresholds necessary for an investment. None of this is something you can get from a simple score or a passive approach.

From your perspective in the active asset management arena, what key resources or tools are still most needed? What needs to happen to get those resources or tools developed?

Parnassus: One of the most important needs we see as active managers is the need for a “yardstick” to measure ESG performance. Currently, there is not a standardized way to assess how ESG practices contribute to investment performance. There’s been some work by framework providers, but consensus has not yet been reached. Increased regulation, like the policies enacted in Europe, are most likely to help US investors establish an ESG yardstick here. The Security and Exchange Commission’s recent discussions about mandatory climate and workforce disclosure are two examples. As governing bodies and policymakers continue to intervene, universal measurement standards are more likely to become established in the active space.

Pekin Hardy: Standardization: We need better standardization in both company reporting and in ESG analysis. Because there are no specific requirements around what companies must report with respect to ESG factors, it’s difficult for investors to compare ESG performance across companies and industries. Additionally, there is a lack of consistency in how ESG data providers analyze the data that companies provide. Every data provider seems to have its own approach to analyzing ESG data and its own methodology for establishing ESG performance scores for companies. This creates conflicts that can make it difficult for asset managers, and ultimately investors, to really understand how the companies they own are handling ESG risks and opportunities. It also opens the door for “greenwashing.” Without standards that dictate what ESG metrics companies must report and how companies should be judged on those metrics, there will unfortunately be opportunities for investment product providers to market products that purport to be “sustainable”, but which lack rigor from an ESG analysis standpoint. Establishing standards in reporting and ESG analysis will likely require regulatory changes, as well as efforts on the part of SROs and investor groups like US SIF: The Forum for Sustainable and Responsible Investment and the UN’s Principles for Responsible Investment.

 More ESG Investment Options in Employer-Sponsored Plans: While there has been a huge increase in the number and variety of ESG and sustainable investment products in the marketplace over the past several years, many employer-sponsored retirement plans still lack these options. Despite a strong appetite for such investment options on the part of plan participants, very few employer plans actually offer ESG or SRI investment options. While we are able to help our clients build customized, values-aligned portfolios outside of their employer plans, the lack of ESG and SRI investment options in their employer plans often means that a material portion of their net worth may be invested in ways that are at odds with their personal values. In order to change this, it will require that plan participants put pressure on their benefits providers to make these options available. Stronger regulatory support from the SEC and DOL for these changes would also help move things forward.

Reynders McVeigh: Organizations such as the ones I have discussed above have taken major steps to bring useful and unbiased research and analysis to the public. To be more effective, they need the support of the financial industry. While our firm supports these organizations, there is certainly more we can all do to get these campaigns and research into the hands of the public at no cost to them.

Silk Invest: Impact of ESG strategies is the main area where more resources and tools are needed. Another area of development is to better assess how investment firms themselves internally align with the stated goals. As an example, a firm which claims a focus on gender equality should at minimum apply this in their own firm.

Zeo Capital: No place is better served by fundamental investing than in ESG. If allocators want their dollars to have true, meaningful impact, how can it be in a passive way? The only way to have an ESG portfolio and to align dollars with priorities, is to start with nothing and add each company intentionally versus starting with everything and throwing out obvious offenders. Change does not happen on its own. If companies are not held accountable, why would they be incentivized to change? The most critical piece needed is standardized ESG reporting so corporations stop the marketing spin and start sharing meaningful transparency.

What do you forsee over the next few years as to the evolution of social investing? What part will innovation need to play in its progress?

Parnassus: ESG investing now focuses on large cap companies that have been the first to more widely adopt ESG practices in their businesses. Over the next few years, I think we can expect to see small and mid-cap companies face the same level of scrutiny as their large cap peers now face. This will lead to more disclosure by smaller companies. As ESG knowledge grows and ESG is more deeply integrated into fundamental analysis, I think we can also expect more emphasis on company engagement. I expect investors will begin pressing companies to improve their ESG practices. We already see fund managers that have not previously considered ESG adjusting their proxy voting policies and engaging companies on basic ESG topics like the SASB standards. As this shift continues, we may also see leading investors engage companies on more complex topics that could impact a stock’s business model.

Pekin Hardy:Increasing Assets: First and foremost, I expect to see a continued increase in the amount of assets that are invested in socially responsible strategies. This growth in assets will lead to greater mainstream acceptance of socially responsible investing, and it will also likely lead to more pronounced market responses to good or bad ESG performance or ESG controversies. I also hope that it will lead to more advisors becoming better informed on the subject of socially responsible investing. Despite the growth in these strategies, many advisors remain on the sidelines with approaches that range from ambivalent to outright antagonistic. I believe this is ripe for change as the socially responsible investing movement gathers steam and assets continue to flow toward these strategies. Innovative approaches to marketing socially responsible investment strategies will be key to driving this growth. And continued innovation in the development and rollout of new advisor education focused on ESG and SRI will be necessary to ensure an informed advisor base that is prepared to help clients align their portfolios with their values.

Greater Access to Private Impact Investments: Historically, it has been challenging for many investors, especially smaller retail investors, to access private impact investments. However, this is changing, and I expect this change to accelerate going forward, such that in a few years, nearly any investor will be able to access private impact investments. This kind of evolution will require innovation in security structure, distribution, and in the regulatory environment. We will likely need new fund structures to invest in these private investments, innovative distribution platforms, and regulations will need to evolve to ensure that investor protections are maintained as the investor base is widened.

Reynders McVeigh: This trend to democratize the resources to be an effective social investor will hopefully accelerate in the coming years. While the focus has largely been on shareholder campaigns and the screening of stock portfolios, we believe the next development will increasingly look at how social investors can shift capital into community-based impact investments that support environmental sustainability, gender diversity, and ownership at a local level.

Silk Invest: Over the next few years the industry should see more focus on the quantification of the results of ESG strategies instead of a focus on investment criteria or filters. This should result in the development of clearer “KPI’s” that quantify ESG objectives, results, and impact outcomes. As an endgame, investor portfolios should track both investment returns and ESG KPIs.

Zeo Capital: What we need is less innovation and more authenticity. Philip Morris International announced in August 2021 that it would be issuing an ESG bond claiming, “business transformation-linked financing” (that’s marketing spin if I’ve ever heard it). I’ll give it to Philip Morris International, it is innovative. But they would not do it if there wasn’t a market for it. And that’s the troubling part. What ESG investor believes Philip Morris belongs in an ESG portfolio?

Here’s another example: Green Bonds. The structure of Green Bonds might be the biggest offender of a supposed “innovation” because the penalty for missing goals is usually a higher coupon. If a portfolio contains bonds most likely to miss their “green” targets, it will generate a higher total return. What investment manager would choose to make less total return and work against their personal incentive structure? Exactly my thoughts…no one. A more aligned ecosystem would be one in which ESG triggers were set up as covenants, accelerating repayment of debt if a company fails to meet them. This would result in ESG factors impacting credit ratings, which would finally force the credit markets to face the reality that ESG factors are credit factors—but unfortunately, we do not foresee that evolution over the next few years.

Institute for Innovation Development is an educational and business development catalyst for growth-oriented financial advisors and financial services firms determined to lead their businesses in an operating environment of accelerating business and cultural change. We position our members with the necessary ongoing innovation resources and best practices to drive and facilitate their next-generation growth, differentiation, and unique client/community engagement strategies. The institute was launched with the support and foresight of our founding sponsors - Ultimus Fund Solutions, NASDAQ, Pershing, Fidelity, Voya Financial, and Charter Financial Publishing (publisher of Financial Advisor and Private Wealth magazines).

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Bill Hortz

Bill Hortz is an independent business consultant and Founder/Dean of the Institute for Innovation Development- a financial services business innovation platform and network. With over 30 years of experience in the financial services industry including expertise in sales/marketing/branding of asset management firms, as well as, creatively restructuring and developing internal/external sales and strategic account departments for 5 major financial firms, including OppenheimerFunds, Neuberger&Berman and Templeton Funds Distributors. His wide ranging experiences have led Bill to a strong belief, passion and advocation for strategic thinking, innovation creation and strategic account management as the nexus of business skills needed to address a business environment challenged by an accelerating rate of change.

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