By Leon Gettler >>
THE GROWTH of impact or ESG (environmental, social and governance) investing is changing markets and, while much of it has been driven by climate change, the coronavirus pandemic has thrown a new force into this trend.
Adam Rein is president and chief operating officer (COO) of CapShift, a US impact investing firm that empowers philanthropic and financial institutions, along with their clients, to mobilize capital for social and environmental change. He said impact investing is now taking two forms.
One is the broader set of public market investors putting their money into the largest companies in the world and declaring that they are not just looking at the financial forecasts but also at ESG principles, because those factors can present a long term risk for the company or simply because it’s the right thing to do.
A separate group of investors is more focused on private markets, investing in venture capital, private equity, micro-finance and small business lending and seeking to change the world by investing in small businesses. These investors are focused on specific sectors like renewable energy, affordable healthcare or education technologies.
ESG CAPTURES ALL COMPANIES
Mr Rein said the ESG market covers all public companies, focusing on issues such as how the company treats its workers and suppliers, the environmental footprint of its operations and whether the products and services do good or harm.
He said there had been some standardisation for these investors, with one type focused around carbon and climate and the second focused around workers, suppliers and products.
“That data is growing and there’s a whole eco-system of rating agencies and analysts trying to look at the largest corporations in the world,” Mr Rein told Talking Business.
He said there are two driving forces behind this movement. One is financial and the other is around ‘purpose’.
The research showed that funds and analysts that looked at non-financial factors did better at predicting which companies would generate long term returns. Examples of that included Volkswagen and its emissions scandal and Facebook and privacy sandals.
SOME FOCUS STRONGLY ON CLIMATE CHANGE
The second is captured by investors like Larry Fink, the CEO of Black Rock, the world’s largest funds management firm, who sent a blunt warning to the world’s biggest companies at the start of this year telling them that if business can’t play a role tackling climate change or coronavirus, then all economies would suffer, so investors needed to push businesses to have better practices.
Mr Rein said for the last few years, mutual funds had been at the forefront of pushing companies to report on their greenhouse gas emissions, to have sustainable palm oil use and forcing them out of sweat shops.
Now hedge funds are moving in, he said, buying companies with bad practices, replacing the board and positioning these companies with a future based not just on shareholder capitalism but on stakeholder capitalism, treating their workers and communities well.
He said one of the key issues brought up by the coronavirus was supply chains.
“A year ago, you saw a lot of companies shutting down and a lot of companies that didn’t have a lot of transparency in the health practices of their suppliers – and companies that were more proactive on protecting workers were able to stay open,” Mr Rein said.
“Companies where workers were getting sick were shutting down.
“We saw this shake out as an example of practices on how you care for your workers in the middle of a pandemic,” he said.
Hear the complete interview and catch up with other topical business news on Leon Gettler’s Talking Business podcast, released every Friday at www.acast.com/talkingbusiness.