ESG: Today and Tomorrow’s Trends

ESG, an acronym for environmental, social and governance considerations, has become more prominent in the investment landscape. A recent 100 Women in Finance webinar titled: “What Does ESG Mean in 2021 and Beyond?” discussed this topic.

Panelists included: 

• Lindsey Layman, Senior Manager, EisnerAmper (moderator)
• Heidi Ridley, Co-Founder and CEO, Radiant ESG
• Matt Saunders, Principal, Helena
• Erika Cramer, Managing Partner, How Women Invest

Part I of EisnerAmper’s two-part ESG blog series highlights differentiated ESG approaches that are standing out in a sea of green(washing), as well as trends to consider.

The Importance of ESG

Fund flows toward ESG investing have doubled in 2020. Investors want to achieve a true impact with every investment and to positively affect people’s lives. Long-term winners and losers will best navigate and lead the change. The focus is on delivering strong investment returns and rewiring the economy toward sustainability, which will entail managers and investors advocating for progress. ESG should not look to the S&P 500 for check-the-box aspects. Firms that implement ESG want to invest where social impact is inextricable from other missions of the investee company. With investing in social impact, investors’ principles need to be aligned with the investee company’s principles, beyond the returns. There should also be diversity in leadership: elevating women in leadership, cultural diversity on corporate boards and so forth.

Greenwashing 

Greenwashing is when a company misleads the public with regard to marketing itself as being more environmentally friendly than it really is. To attract ESG investors, companies cannot merely change one or two principles (e.g., adding one woman to the board or reducing their carbon use by 25%). Investors want to see big changes. In order to see true social change, companies need to change from the ground up and not just on the margins. Seek out companies that from day one have mission-oriented goals related to the environment, better health care access, and so on. Legacy firms do have a role to play. They can clip coupons or they can be part of a revolution, such as making a full transition to using true renewable energy. Unfortunately, more greenwashing is happening, and investors need a way to be protected from it. Investors should evaluate companies based on results and not just their policies, website and brochures. For example, look at a company’s past carbon footprint versus where it is now. Is there improvement? It is important for investors to be able to look at metrics to determine if a company is truly geared toward being socially conscious.

Investment Companies with Both For-Profit and Non-Profit Arms and How They Complement Each Other

How Women Lead (“HWL”) is a non-profit whose mission is to elevate women in leadership and close equity gaps. It created a fund through the formation of a sister-entity, How Women Invest (“HWI”), which created access to first-time venture investors, mainly from the HWL network. The limited partners (“LPs”) get highly involved in deal-flow generation and evaluating investment opportunities. HWI created internal “SWAT” teams around portfolio companies. These teams provide strategic support to the women business owners including business introductions, executive hiring and assistance with capital raising. A large percent of the LPs are first-generation Americans and immigrants; a diverse investor group creates diverse deal flow. A portion of the investment proceeds go back to HWL to continue its work and mission.

Helena views itself as a problem-solving institution, and investing is one of the ways it seeks solutions to global societal problems. Another way it does that is by devoting resources through its non-profit or through its arm for legislative action. All of Helena’s work is done through discrete projects. Among the Helena Projects, the organization worked to launch and scale the world’s first commercial carbon capture plant, helped to write and pass legislation in California and executive orders at the federal level for protection of the nation’s electrical grid, sponsored one of the largest experiments in American deliberative democracy through America in One Room, and facilitated the delivery of more than 37 million units of vital medical supplies to hospitals across the U.S. during the opening weeks of the COVID-19 crisis while having built a software platform (in use by the U.S. Army and Air Force) for mapping medical need across the country during the pandemic. 

ESG trends Within Public Equities

ESG investing has never been hotter, and the market is starting to weed out the greenwashing. The year 2020 brought the importance of the “S” in ESG. It’s important to consider public equities with a public mindset and the impact on portfolios and on society. Direct impact is through voting and engagement. Indirect impact can be achieved through investing in companies with products aligned to the United Nations Sustainable Development Goals for those that are legitimately transforming their operations in ways that give rise to change in the real economy. Investors must relate what funds are doing in their portfolio to what they are doing in the real world and what type of change to bring about.  

Stay tuned for part II of the ESG blog series for examples of how ESG-focused managers are taking on new and more complex societal issues while seeking to provide positive returns for investors.