ESG and Impact Investing: Q4 2018 News Highlights
In late October, the US SIF Foundation released its latest biennial Report on US Sustainable, Responsible and Impact Investing Trends, widely regarded as the most comprehensive assessment of sustainable and impact investing in the US. The Foundation is the educational affiliate of The Forum for Sustainable and Responsible Investment (US SIF). Members of US SIF include asset owners, investment management and advisory firms, mutual fund companies, research firms, broker-dealers, and community investing organizations.
Among the highlights of the report are the following. Institutional investors, money managers, and community investing financial institutions consider ESG factors in investment decision making across portfolios totaling $11.6 trillion. This is a 44 percent increase from the $8.1 trillion reported in 2016. Of the $11.6 trillion, $8.6 trillion is managed on behalf of institutional investors and $3.0 trillion on behalf of individual investors. Across the $11.6 trillion, the top three ESG criteria for money managers are (1) climate change/carbon; (2) tobacco; and (3) conflict risk (terrorist or repressive regimes).
A group of 13 asset owners and money managers have banded together to engage gun manufacturers and retailers in an initiative to improve gun safety. Participants include the public pension systems of California, Florida, and Connecticut, as well as State Street Global Advisors, Nuveen, Rockefeller Asset Management, and retirement plans for Methodist and Roman Catholic faith groups. The coalition issued its Principles for a Responsible Civilian Firearms Industry.
Even as the hedge fund category contracts with outflows, values-based investors are beginning to see a more varied set of offerings. Experienced firms including Avenue Capital Group, Jana Partners, and ValueAct Capital now manage funds with an impact orientation, often using tested activist, engagement strategies to push for positive social and environmental change in portfolio companies.
A positive development for the impact investing ecosystem that we have been following is the gelling of the Impact Capital Managers network. It now includes more than 35 firms serving as general partners of impact-focused venture capital and private equity funds managing more than $8 billion in market-rate capital. In late 2018, Tideline published a report, The Alpha in Impact, that offers reflections on the investment experience of members of the network.
Another development worth noting is formal and informal collaboration between larger, well-established firms moving into the impact investing field and smaller, younger firms that have longer track records of experience with impact-oriented strategies. The partnership formed a couple of years ago between TPG and Elevar Equity was one example of that. A more recent example is the partnership announced in the fourth quarter between KKR and Encourage Capital in connection with the former’s new $1 billion impact investing fund. KKR will take advantage of Encourage Capital’s expertise and contacts to participate in deals that Encourage sources.
Also announced in the final months of 2018 was The Diversity Project which aims to increase diversity in North America’s financial services industry. Participating firms include Capital Group, Eaton Vance, MFS Investment Management, J.P. Morgan, Northern Trust, Fidelity Investments, the CFA Institute, Broadridge, and Deloitte. The group will promote greater diversity among demographics including gender, ethnicity, sexual orientation, age and disability.
Veris Wealth Partners released its fifth survey of gender lens investing products that are both publicly available (stocks, bonds, and cash) and explicitly support gender balance and equity. The report includes insightful commentary on how this part of the gender-focused investing ecosystem is developing, along with helpful supporting data on specific product offerings.
Complementing the Veris report is a forthcoming landscape analysis of private equity, venture capital, and private debt vehicles with a gender mandate. The report, Project Sage 2.0, is being prepared by Wharton Social Impact as a follow-up to a similar survey released in 2017. Among the information included in the new report, there were 87 private funds investing with a gender mandate in 2018, up from 58 in 2017. 27 new funds launched in 2018. Over two-thirds of the 87 funds are first-time funds. And, on average, women account for over 70 percent of the partners in the firms that manage these funds.
The shareholder advocacy organization As You Sow released Gender Equality Funds, a widget that allows individual and institutional investors to evaluate exchange-traded and mutual funds on the extent to which the companies in their portfolios are committed to gender diversity and gender balance. The tool uses ratings on companies compiled by Equileap. While there has been debate about the methodology and the quality of the data it uses, the release is another step in the direction of greater accountability for products that self-identify with the gender theme.
In October, the Internal Revenue Service issued proposed guidelines for taxpayers electing to defer capital gains by investing in economically distressed communities designated as Qualified Opportunity Zones. While the guidelines provided some additional encouragement for investments in small businesses, as opposed to shovel-ready real estate – a high priority for community investing advocates – the implementing regulations continue to be silent on any type of impact accountability or basic social data reporting.
The Kresge and Rockefeller foundations offered reflections on the 141 responses they received from fund managers in response to a call for letters of inquiry about vehicles being raised to invest in Opportunity Zones. The foundations will be moving forward with a select group of fund managers, providing technical assistance and investment capital in an effort to establish standards of quality for investments in Opportunity Zones that result in positive outcomes for low-income communities.
A variety of media sources were consulted in preparing this update, including The Wall Street Journal, Bloomberg, The Financial Times, FUNDfire, and ImpactAlpha.