The three dimensions of investing today are risk, return, and impact. Experts say investors concerned about ESG need to ‘do their homework’

"Future of Finance," an Insider virtual event, was presented on June 8, 2021.
“Future of Finance,” an Insider virtual event, was presented on June 8, 2021.

  • When it comes to data on sustainable investing, asking the right questions is key.
  • Execs from Bridgewater and LGIM outlined policies that could encourage better ESG disclosure.
  • The conversation was part of Insider’s virtual event, “Future of Finance,” presented by Grayscale on June 8, 2021.
  • See more stories on Insider’s business page.

As financial institutions grapple with the steep risks posed by the imminent global climate crisis, ESG (environmental, social, and governance) investing has emerged as a potential solution. While these sustainable investment strategies have gained popularity with investors, data and reporting surrounding ESG factors can be opaque and confusing.

Karen Karniol-Tambour, co-chief investment officer for sustainability at Bridgewater Associates, the world’s largest hedge fund, said that sorting through that data and making sense of it is part of an investor’s job. She said answering questions about an investment’s sustainability merits may feel like a new challenge, but is not any different than answering familiar macroeconomic questions about a country’s growth rate, for example.

Karniol-Tambour made these comments during Insider’s recent virtual event, “Future of Finance,” presented by Grayscale, which took place on June 8, 2021.

This panel, titled “Sustainable Investing Pays Off?” was moderated by Bradley Saacks, senior finance reporter at Insider, and featured Karniol-Tambour along with John Hoeppner, head of US stewardship and sustainable investments at Legal & General Investment Management (LGIM) America, a division of the $1 trillion global asset manager.

Karniol-Tambour said that the key question for Bridgewater in evaluating ESG investments is what they are trying to get out of the data.

“Don’t think about what is presented to you, but [think about] what concept are you actually trying to capture,” Karniol-Tambour said.

Hoeppner said in analyzing sustainable investments, LGIM is trying to “create [its] own points of view and rely less on others.”

The firm has two key goals in mind when it looks to ESG investing, Hoeppner said. The first is to raise standards across the board with regard to disclosure and the second is to find an investment advantage by looking at subsets of ESG data that are closely linked to mispricings in the market.

Karniol-Tambour said her clients want to make the highest returns with the lowest risk possible. She said that there are many areas in which ESG factors are material to making money in a particular market.

“For example, if we’re going and deciding whether or not we think the price of copper is going to go up or down, you really just can’t do that analysis without looking at what’s the pace going to be in which it will transition away from carbon,” Karniol-Tambour said.

“Investing is not two-dimensional risk and return. It’s actually three-dimensional risk, return, and impact -or risk, return, and sustainability. And that third dimension, deserves just as much care, attention, analysis, customization.”

Multiple strategies are available to investors seeking to maximize impact. Hoeppner said that divestment, or opting out of investing in certain assets because they are not sustainable, is “overused” as a strategy. He said that LGIM, as a major investor in many public companies, prefers to use its access to have “constructive engagements” with their portfolio companies through discussions and proxy votes on how to navigate risk.

Moderator Bradley Saacks asked the panelists about the regulatory environment for ESG investing. Hoeppner mentioned that in the US today, if you are participating in a 401k or pension as part of your corporation, it is legally unclear whether or not you can have a sustainability fund in your lineup.

He said he is optimistic that regulators will sort out the issue, which he attributed to an “incorrect assumption” that ESG strategies were deployed for non-financial benefits, whereas he believes most ESG research is actually performed with the goal of reaping financial benefits.

He also expressed the hope that the Securities and Exchange Commission (SEC) enforces some sort of mandatory disclosure for climate risk for all companies, arguing that information is the basis for a free market.

Karniol-Tambour pointed to Australia’s policy of making companies report their potential exposure to modern slavery and eradicate it as an example of sound policy based on a robust data ecosystem.

Without disclosures and data, Hoeppner said, it is difficult to discern companies’ credibility on ESG issues.

“All investment managers see ESG and sustainable investing as a commercial opportunity,” Hoeppner said.

“How do you tell one asset manager from another one when everyone says that they have the best sustainability credentials? The hard answer is that you have to do your homework.”

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Green stocks have got caught up in the tech sell-off. But it’s just a dip, as climate investing is set to power ahead under Biden, according to JPMorgan

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President Joe Biden has pledged to tackle climate change

  • Investors may have become overexcited with some green stocks, JPMorgan’s European heads of ESG research said.
  • Yet green investing is only just getting started, they said, as Joe Biden and others focus on the climate.
  • The research chiefs said the US is unlikely to let the EU be the standard-setter on green investing.
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Green stocks have sold off quite aggressively this month, but fears of a bubble are overblown and a new climate focus from Joe Biden and other governments means environmental investing is only just getting going, JPMorgan’s co-heads of ESG research for Europe have said.

Jean-Xavier Hecker and Hugo Dubourg told Insider the Biden-Harris green stimulus plans, China’s sustainability push and Europe’s new environmental investing rules would all boost the market and create new opportunities.

The recent stock-market volatility – triggered by rising bond yields – has hit green stocks, such as those in renewable energy and electric vehicles, along with tech, after these sectors last year.

The iShares clean energy exchange-traded fund was down 12% in the month to Friday according to Bloomberg data, for example, while the S&P sustainability index has underperformed the wider market. Electric vehicle stocks such as Tesla and Nio have fallen sharply too. The S&P 500, meanwhile, has gained over 3% so far in March.

But Dubourg said: “The stocks that have tumbled are largely solar and EVs, where the valuations exploded at the end of last year. So it’s not really ESG investing overall which has been questioned.”

He said the market is “not being nuanced enough” in its approach to environmental, social and governance investing.

Hecker said investors had focused on the “simplistic trade” in recent months, bidding up green favorites. Tesla is a prime example, rising more than 500% over the last year, but falling around 7% in the month to Friday. Yet the market should “not be too concerned about green bubbles,” he said.

“The climate ambitions of the Green Deal in Europe, of the Biden-Harris platform in the US, of China with its 2060 carbon-neutrality ambition will be much more transformative,” he said. The Biden administration’s advisors are hoping to spend around $3 trillion, with climate change a key focus.

Hecker added that the Biden administration is likely to boost green investing as it tries to match Europe’s advancements on ESG rules. “There is no way the US is going to let Europe be the standard setter on ESG,” he said.

Europe introduced new reporting rules for companies earlier in March that aim to help investors work out which assets really are green. It is part of a wider push by the European Union to set standards for climate-conscious investing.

Green investing had a bumper year in 2020, despite the coronavirus crisis. Goldman Sachs analysts said in a note ESG equity and fixed income funds attracted record inflows in Europe and the US last year, at 184 billion euros ($216 billion) and $50 billion, respectively.

Yet there are growing concerns that the craze for green investing is not as climate-friendly as it makes out. A report from a group of global campaign organizations on Wednesday that the world’s biggest banks, including JPMorgan, have invested $3.8 trillion in fossil fuel firms since the Paris climate agreement was signed in 2016.

A separate report released on Monday by the Climate Action 100+ investor group, which collectively managed $54 trillion, found companies were so far badly failing to live up to their climate pledges.

Mindy Lubber, Ceres CEO and Climate Action 100+ committee member said there is an “urgent need for greater corporate action and higher ambition.”

Hecker and Dubourg – who work independently of JPMorgan’s banking operations – said that although some companies could do more, it will take a while for the effects of commitments to be seen. They said Europe’s new rules were a positive step in this regard, as they provide clear benchmarks for firms to be measured against.

As governments increasingly focus on climate change, new opportunities will crop up in sustainable investing, they said. For example, the Biden administration’s climate plans are likely to extend, or increase tax credits for renewables and support carbon-capture technology.

Hecker said carbon capture is “something which at some point is going to take off because it will be needed as part of the mix… to deliver on the Paris agreement goals.”

The JPMorgan ESG research chiefs said tackling climate change would require even major polluters to change their ways and become much more environmentally friendly.

“There will be no such thing as these stocks increasing by 4,000% again,” Hecker said. “Now you need to be looking for relative winners and differentiated business models.”

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The pullback in clean tech stocks presents a ‘rare buying opportunity’, Morgan Stanley says

Sunrun solar installation
Sunrun installers put panels on a home in Sunnyvale, California

  • Morgan Stanley told clients on Wednesday that the clean tech stock pullback is a buying opportunity.
  • Analysts upgraded a basket of clean tech stocks to “outperform”, citing “strong growth in renewables and energy storage.”
  • Morgan Stanley’s US power supply mix forecast says 40% of energy output will be renewable by 2030.
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The recent pullback in clean tech stocks presents a “rare buying opportunity” according to analysts at Morgan Stanley.

In a note to clients on Wednesday, Morgan Stanley analysts led by Stephen C. Byrd said they are recommending clean tech stocks with “strong growth and cash flow” after a recent fall in share prices.

The analysts upgraded a basket of stocks from the sector including AES Corporation, Atlantica Sustainable Infrastructure, Solaredge Technologies, TPI Composites, and SunRun to overweight in their note.

The team cited “strong growth in renewables and energy storage given favorable economics and further cost declines” as the main reason for their upgrade.

The analysts also said the trend towards increased environmental, social, and corporate governance (ESG) spending would be a positive for the clean tech sector moving forward, and argued ESG capital is “being deployed on leaders in clean energy” like the names they’ve upgraded.

The team from Morgan Stanley added that they believe federal support in the form of clean energy and infrastructure legislation is an “under-appreciated upcoming catalyst” for the clean tech sector.

Additionally, according to Morgan Stanley’s US power supply mix forecast, there will be a huge increase in renewable energy use over the next decade from 12% of current power output to roughly 40% by 2030.

Still, the analysts reduced their price targets for the sector somewhat due to “a higher cost of capital given a rising rate environment and higher equity risk premium.”

The analysts noted that many investors believe valuations are high in the sector after a run-up in share prices in 2020 and into 2021. However, according to the team, after the recent pullback there are “many Clean Tech stocks reflecting growth that is far below their rapid, multi-decade growth outlook.”

The analysts also noted that “corporate and residential consumer interest in clean energy and energy storage continues to rise substantially.”

The clean tech sector has been booming of late. So much so that Global X started the CleanTech ETF or CTEC, last October to allow investors to bet on the sector as a whole. The ETF has posted a 50% return since inception.

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Impact investing finances companies that aim to do good in the world – here’s how it works and how to get involved

impact investing
Impact investing focuses companies, funds, or firms that are dedicated to improving the environment or society while also providing a financial return for investors.

  • Impact investing targets companies or projects committed to specific social or environmental causes.
  • While many perform well, the return on impact investments may be lower than more traditional investments’.
  • Impact investing is largely limited to private equity, but individuals get involved via broader ESG funds.
  • Visit Business Insider’s Investing Reference library for more stories.

In the past, investing for a profit and “making a difference” were two of life’s lodestars that most people followed separately. But times are changing. 

Investors are increasingly looking to direct their funds towards companies that are making positive social or environmental impacts in the world. The essence of impact investing is putting your principal where your principles are. 

But how exactly does someone find impact investing opportunities? Is it safe and profitable to invest in social impact? Here’s what you need to know.

What is impact investing?

Impact investing is the process of investing in companies, funds, or firms that are dedicated to improving the environment or society while also providing a financial return for investors. 

There are a wide variety of issues that an impact investor may seek to address. These include (but are certainly not limited to):

  • Poverty
  • Hunger
  • Education gaps
  • Climate change
  • Pollution
  • Child or forced labor
  • Wage inequality
  • Diversity
  • Animal cruelty

Some impact investments are concessionary, meaning the company’s top priority is impact rather than investor profit. But non-concessionary impact investments promise a “double bottom line,” meaning that they hope to achieve their social or environmental goals without significantly hindering returns.

A recent report by the Forum for Sustainable and Responsible Investment (US SIF) found that $17 trillion of US-based investment assets in 2020 used sustainable investing strategies (a 42% increase from 2018). Put another way, a third of all assets under management in the United States now take sustainability issues into consideration.

Impact investing, ESG, socially responsible investing: What’s the difference? 

Environmental, social, and governance (ESG), socially responsible investing (SRI), and impact investing are sometimes used interchangeably. All three do involve the strategy of considering ethical values alongside financial values when evaluating investments. The issues that concern them overlap too. 

But there are also some key differences. 

ESG standards help socially conscious investors gauge a company’s commitment to ethical business practices. While no single ESG rating system is used industry-wide, popular ESG data-providers include MSCI, Morningstar, Bloomberg, Sustainalytics, and more.

With SRI, investors purposefully avoid companies with products or business principles that don’t align with their values. For example, SRI investors may choose to eliminate all companies that produce tobacco products or use child labor from their portfolios.

The biggest difference between ESG and SRI is that ESG tends to be inclusive and SRI exclusive. An ESG-conscious investor may still invest in companies that aren’t ranked as highly as others, especially if they’ve expressed a commitment to improvement. But, with SRI, negative investments are typically screened out completely based on the investor’s filtering criteria.

Impact investing is sometimes thought of as a subset of SRI. It can be even more exclusive in that the investments chosen are often companies or non-profits that are fully committed to specific causes. So while SRI investors may invest in any company that doesn’t violate their values, an impact investor may look for companies that are fighting for values such as eradicating hunger, poverty, or other worthy pursuits.

Admittedly, it can seem a bit hair-splitting. One key point, though, is that impact investing, as the name implies, targets investments, initiatives, and companies that show measurable results – not just good intentions.

Why does impact investing matter?

Impact investing could encourage more people to get involved in efforts that have been traditionally relegated to philanthropy or charitable contributions. With the potential to achieve at least some return, more dollars may be directed towards companies that are trying to address society’s problems.

Admittedly, impact investments tend to generate lower returns than the stock market as a whole. A 2017 study by the Global Impact Investing Network (GIIN) of 71 private equity impact funds found their average net return rate to be 5.8% (well below the S&P 500’s average rate of return).

To be clear, this financial give-up only applies to impact investing in the strictest sense. If by “impact investing,” you actually mean ESG investing, you can expect much better returns. Multiple studies have shown that investors can build ESG-focused portfolios without compromising returns. In fact, Morningstar found that in 2019, US-based. ESG funds actually outperformed their conventional fund peers. 

A recent ruling from the US Department of Labor may eliminate impact investing vehicles from 410(k) or corporate pension plans. The rule prohibits fiduciary financial advisors from selecting investments based on any goals other than achieving the highest possible return for their clients. 

The rule doesn’t specifically call out ESG or impact investing. Still, any investments that have a below-average anticipated rate of return (as many impact investments do) could be eliminated from employer-sponsored retirement plans moving forward.

Types of impact investments

Impact investing is a diverse field – there are many ways you can invest for good. How can you find impactful companies to invest in? 

Again, this depends on how strictly you define impact investing. If you actually mean ESG investing, you have many options. First, you can buy stock shares of companies that receive high ESG ratings. Or for broader diversification, you can invest in ESG mutual funds or ETFs. Leading examples include:

Online trading programs have also led the way in increasing access to values-based investing and lowering the costs. Betterment and Wealthsimple are two examples that have built their own ESG or SRI portfolios.

If you want to take the next step of investing in specific companies that are promoting social good (i.e. impact investing) things become a bit murkier. Most impact investing funds aren’t publicly traded. Instead, they tend to be private equity firms (open only to institutional or accredited investors) or companies.

Accredited investors include individuals with a net worth of at least $1 million or annual income of at least $200,000 for the last two years. Or, investors who are able to demonstrate a certain level of financial sophistication.

Finding impact investing opportunities

There are several lists available online that rank impact investing funds. One example is BTheChange.com, which breaks its list of winners into five different categories:

  • Best for Environment
  • Best for Community
  • Best in Governance
  • Best for Workers
  • Best for Customers

The Toniic Directory is another helpful list of impact investments that includes both private equity and companies offering bonds or other fixed-income opportunities. 

Accredited-level investors may want to look for private equity firms that focus on impact investing. Notable impact investing firms include Sonen Capital, Calvert Impact Capital, and Reinvestment Fund

Some examples of  impact investing

Let’s say that you’re passionate about environmental issues like reducing carbon emissions and the use of non-recyclable materials. To find an impact fund that suits you, you may start by checking out the “Best for the Environment Funds” on BTheChange.com.

After perusing the list, you visit the website for Arborview Capital, a firm that invests in businesses that support each of the environmental goals listed above and more. Feeling strongly that your values align, you make the decision to invest in the Arborview Capital Partners II LP fund. 

In another example, imagine that you feel strongly about investing in local businesses that serve low-income communities. In that case, you may be drawn towards investing with the Reinvestment Fund.

Reinvestment Fund’s promissory note program supports the “triple bottom line” of People, Planet, and Profit. After reviewing your note options, you decide to invest in a 7-to-9-year promissory note that will pay you back at an interest rate of 2.25%.

The financial takeaway

If you’re just getting started with socially conscious investing, you may want to start with ESG ETFs and mutual funds. As publicly traded assets, they are easy to buy (or sell) and generally earn solid returns as well.

But if you have a net worth that’s on the high side or considerable investment expertise, you may be willing to deal with less liquidity and lower returns in exchange for making a bigger difference. And, in that case, it could be highly rewarding to invest in private funds and firms that are wholly focused on making a positive impact in the world.

Related Coverage in Investing:

How the pandemic helped drive a surge in ESG demand

You can make great investment returns while also helping the world. Here are 20 ESG funds that have beaten the market over the past year.

Sin stocks are shares in companies whose business can be considered unethical – here’s why they’re so enticing and who the major players are

What is an angel investor? Who they are, what they do, and how they help startups grow

Equity crowdfunding is a way individuals can invest in private, promising young companies

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