JULY 2019

ESG and Impact Investing: Q2 2019 News Highlights

Category: Impact Investing

By Bill McCalpin, Managing Partner, Impact Investments

ESG
During the second quarter, there was continuing interest in the hedge fund community’s adoption of ESG investing. More institutional investors and consultants are asking hedge fund managers if they consider ESG factors in their investment decision making, and more firms appear to be adopting responsible investing policies. Still, a recent Preqin survey found that only 30 percent of hedge funds reported incorporating ESG data in their processes. The approach may be more popular among activist managers committing to longer term investments in fewer companies. Managers that rely on short-term trading strategies may find ESG analysis less relevant.

An executive order issued by President Trump early in the quarter could have a chilling effect on adoption of certain ESG strategies among corporate pension plans. In the order, the President directs the Secretary of Labor to review all available data on investments in the energy sector by pension plans subject to ERISA. The order appeared to be related to a broader effort by the Administration to encourage investment in fossil fuels and energy infrastructure. In general, corporate pension plans have been slower to embrace ESG strategies than other institutional investors, including public retirement systems.

Impact Investing
Generation Investment Management
has joined the small but growing group of firms that have raised $1+ billion funds for impact-oriented, private investments. Generation’s Sustainable Solutions Fund will provide growth capital to later-stage start-ups in the areas of environmental solutions, health care, and financial inclusion. It is Generation’s third such fund but the first to top $1 billion.

During the quarter, private equity giant Blackstone announced its move into the impact investing field with an effort that will emphasize co-investments in deals led by others, including smaller pure-play impact firms. The strategy mirrors similar tie-ups between TPG Rise and Elevar Equity and between KKR and Encourage Capital. At least initially, Blackstone will focus on opportunities in developed markets across private equity, real estate, and infrastructure. Themes of interest include health and wellbeing, financial access, sustainable communities, and green technology.

Providers of donor advised funds (DAFs), at both national and local levels, are offering more options to clients who are interested in values-based investing. DAF administrators are expanding their investment menus to include ESG mutual funds and ETFs, as well as, for larger balance donors, impact-oriented private investment opportunities. Last year at Fidelity Charitable, impact investment allocations approached $1 billion. Two investors in Beyond Meat, the plant-based meat company with a successful public offering in May, made their initial investments in the company through their DAF accounts at ImpactAssets.

Also expanding their offerings to serve values-based investors are automated investment platforms, more commonly known as robo-advisers. This includes well-established providers such as Wealthfront and Betterment, as well as firms focused exclusively on sustainable investing such as OpenInvest and Vestive. Through such platforms, relatively low-balance retail investors are able to access portfolios of publicly traded securities organized around various themes of interest.

A new guide, “Fundamentals of Sustainable Investment,” helps financial advisors with little experience in values-based investing to move up the learning curve in serving clients who express interest in the approach. Published by The Investment Integration Project in collaboration with the Money Management Institute, the guide is intended for independent and affiliated advisors who work with retail investors, high net worth families, and institutions.

In May, the Global Impact Investing Network (GIIN) released an updated version of its IRIS taxonomy of impact performance metrics. Referred to as IRIS+, the publicly available resource offers a catalogue of specific indicators that investors can use to evaluate the impact performance of opportunities within areas of thematic interest, such as clean energy or financial inclusion. GIIN is promoting use of common metrics in order to facilitate comparisons among impact investment opportunities within particular areas of interest.

Diversity & Inclusion
The $3.7 billion Kresge Foundation announced its intention to invest at least 25 percent of its U.S. assets with female- and minority-owned managers by 2025. Currently, the Foundation’s domestic assets total around $1.85 billion, of which about 15 percent is managed by such firms. The Michigan-based foundation is the first private foundation to sign onto the Association of Black Foundation Executives’ Diversity in Foundation Asset Management Pledge.

According to data provider Preqin, in 2018, 19.3 percent of hedge fund employees were women. This statistic, however, conceals significant differences in representation across functional areas. Women account for nearly half of all professionals on investor relations teams but only 11 percent of senior staff and just 10 percent of investment decision makers. Results of a recent FundFire survey of the largest dozen hedge funds point to actions that firms such as Bridgewater, Baupost, Man Group, and D.E. Shaw are taking to address these gender imbalances and create more diverse and inclusive environments.

A variety of media sources were consulted in preparing this update, including The Wall Street Journal, Bloomberg, The Financial Times, FundFire, and ImpactAlpha.

 

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