ESG and sustainable investing generally have come under fire recently, with critics pointing to a lack of transparency and differing definitions sparking confusion around what investors are actually buying.
Adding to the confusion is the broad approach to ESG – firms can be focused on different metrics, whether it be one specific area like environmental factors or maximizing social impact — sometimes at the expense of returns.
But for Impactive Capital co-founder and managing partner Lauren Taylor Wolfe, it all comes back to financial performance.
“We believe that ESG without returns is simply not sustainable,” she said Wednesday at CNBC’s Delivering Alpha conference. “We are exclusively focused on risk-adjusted returns,” she added, noting that environmental and social considerations are important when considering any investment.
ESG gained widespread attention during the pandemic, with assets under management ballooning and funds attracting record inflows. Regulators are now calling for enhanced disclosures around ESG, but Shundrawn Thomas, The Copia Group founder and managing Partner, noted that investors have been investing around their principles for years.
“I think some of the same trends that we see — whether you talk about how asset owners want to use their investment dollars and heft to impact things that are very important to them — that’s a trend that’s been in place for quite some time,” he noted.
Thomas added that while metrics might be more codified now, he’s been using the same tools over the span of his investment career — which spans three decades — to identify opportunities in the market.
Even if returns aren’t the sole focus of an investment vehicle, sustainable investing can still generate alpha for investors. Roy Swan, director of missions investments at the Ford Foundation, noted that the firm can invest around high-impact ideas, while also maintaining the returns that are necessary to sustain a perpetual endowment.
The Ford Foundation said in August that between its Mission Investments portfolio generated a compound annual return rate of 28% from its inception in 2017 through 2021.
“The reason why we disclosed that information was we wanted to encourage others who are on the fence about whether impact investing can … address big social problems, advance human welfare and generate financial return, so that you can recycle and do it all over again,” he said Wednesday.
Swan said the foundation has specific themes it’s investing around, including affordable housing and financial inclusion.
When it comes to applying an ESG lens to public market investing, Impactive Capital’s Taylor Wolfe said investors need to be creative around how ESG is used to drive returns. She added that the recent market turmoil could spark a reset of sorts within the sustainable investing landscape.
“I think right now we’re just weeding out between some of the less attractive strategies that haven’t generated that outsized return, but the more active strategies that are actually creating the outsized returns using ESG tools,” she said.