ESG and Impact Investing: Q1 2019 News Highlights
eVestment announced in March that it will gather more information on environmental, social and governance (ESG) investing practices from the asset managers included in the firm’s database. eVestment is a prominent data, analytics and research platform that is used by investors and consultants in the global institutional investment community. The change responds to demand from users for more detailed ESG data, at both manager and strategy levels.
State Street announced a partnership with Professor George Serafeim to advance its research agenda in ESG investing. Serafeim, a professor of Business Administration at the Harvard Business School, is a leader in the field of academic research on ESG investing. The partnership is another example of how asset managers are collaborating with external experts to develop the intellectual capital that supports ESG products and strategies.
In contrast to developments in the institutional investor community, a recent CFA Institute survey revealed that just 11 percent of high net worth investors identified ESG factors as a top priority. The survey polled 900 investors with at least $1 million in investable assets.
The TPG Rise Fund was much in the news during the first quarter. At the World Economic Forum’s annual meeting in Davos, Switzerland in January, TPG Rise announced that it was spinning out its impact measurement function into a new business, Y Analytics. The separate firm will continue to work with TPG Rise, and partner with other investors, to promote wider adoption of its “impact multiple of money” methodology for impact measurement. Also in January, a terrorist attack in Nairobi targeted the hotel and office complex that housed the headquarters of Cellulant, a Rise Fund portfolio company that is a leading African fintech platform. Six employees of the company were killed in the attack. Finally, in March, Rise Fund CEO Bill McGlashan was among those indicted in the much-publicized college admissions bribery scandal. McGlashan, who built TPG’s $13 billion growth equity franchise and led the firm’s move into impact investing, was terminated soon after the indictment was announced. Jim Coulter, a co-CEO of TPG, has moved into the role of interim head of the Rise unit. Given the high profile of the Rise Fund and McGlashan visibility as CEO, TPG’s association with the scandal prompted much discussion within the impact investing community. It’s unclear how these developments might affect ongoing fundraising for the $3.5 billion second Rise fund.
The MacArthur Foundation has teamed up with the Rockefeller Foundation and the Omidyar Network to establish the Catalytic Capital Consortium. The Foundation defines catalytic capital as “patient, risk-tolerant, concessionary, and flexible (capital) … that can pave the way for conventional investment and mobilize additional capital through a range of blended finance solutions.” MacArthur has committed $150 million to the initiative with plans to invest $10-$30 million on a matching basis in half a dozen funds that demonstrate an effective use of catalytic capital to address the UN Sustainable Development Goals in both developed and emerging markets.
In the area of corporate engagement, activist investors were instrumental in JP Morgan Chase’s decision to cease lending to private operators of prisons and immigrant detention centers. The action by the largest U.S. bank followed an announcement by Wells Fargo in January that it would curtail lending to the private prison industry.
Building on an earlier study released in May 2017, the Knight Foundation commissioned additional research on the state of diversity in the U.S. asset management industry. The latest research focuses on diversity of ownership of asset management firms across mutual funds, hedge funds, private equity, and real estate. Firms were considered women- or minority-owned if at least 25 percent of ownership is held by women or minority individuals. Among the findings in the report, female-owned businesses account for a little more than 4 percent of hedge fund managers, less than 2 percent of private equity fund managers, and less than 1 percent of real estate firms. The comparable figures for minority-owned businesses are 8 percent for hedge funds, less than 4 percent for private equity fund managers, and 2 percent for real estate firms. The Knight Foundation began an effort in 2010 to invest a greater share of its $2 billion endowment with diverse-owned firms. Currently, around 22 percent of the portfolio is invested with such firms.
Continuing the focus on alternative investments, KPMG’s sixth Women in Alternative Investments report indicated that, during 2019, 75 percent of investors are planning to ask managers to report on their diversity efforts, up from 60 percent in 2018. 42 percent of investors intend to require the managers they use to improve their diversity, compared with only 11 percent in 2018.
The partial federal government shutdown at the beginning of the year slowed issuance of further guidance on the Opportunity Zone investment program. Despite that, one count in January indicated that there are more than 50 funds aiming to raise at least $100 million for Opportunity Zone investments. A dozen funds are targeting at least $500 million.
In early February, the U.S. Impact Investing Alliance and Georgetown University’s Beeck Center released the Opportunity Zones Reporting Framework to establish a set of best practices for tracking and reporting impact metrics for Opportunity Zone investments. The framework addresses a shortcoming in the legislation conferring favorable tax treatment on Opportunity Zone investments, namely the absence of any requirement that such investments demonstrate positive social and economic benefit to local communities.
Finally, pledging $22 million of first-loss capital, the Kresge Foundation will anchor two Opportunity Zone funds: Boston-based Arctaris Impact and Fort Lauderdale-based Community Capital Management. The funds have agreed to give priority to needs identified by target communities in an arrangement that the Foundation hopes will serve as a model for other Opportunity Zone fund managers.
A variety of media sources were consulted in preparing this update, including The Wall Street Journal, Bloomberg, The Financial Times, FUNDfire, and ImpactAlpha.