ESG and sustainable investing in general have come under fire of late, with critics pointing to a lack of transparency and differing definitions creating confusion about what investors are actually buying.
Adding to the confusion is the broad ESG approach – companies can focus on different metrics, be it a specific area such as 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’s all about financial performance.
“We believe that ESG is simply not sustainable without returns,” she said at CNBC’s Delivering Alpha conference on Wednesday. “We’re solely focused on risk-adjusted returns,” she added, noting that environmental and social considerations are important when considering an investment.
ESG, or environmental, social and governance investing, has received significant attention during the pandemic as assets under management have exploded and funds have seen record inflows. Regulators are now demanding enhanced disclosures around ESG, but Shundrawn Thomas, founder and managing partner of Copia Group, said investors have been investing on their principles for years.
“I think some of the same trends that we’re seeing, if you’re talking about how wealth owners want to use their investment money and their weight to affect things that are very important to them — that’s a trend that’s been around for quite some time .” he said.
Thomas added that while metrics may be more codified now, he’s used the same tools to identify opportunities in the market throughout his investing career – which has spanned three decades.
Even if returns are not the focus of an investment vehicle, sustainable investing can still generate alpha for investors.
Roy Swan, director of the Ford Foundation’s Mission Investments, said the company can invest in high-impact ideas while maintaining the returns needed to sustain an everlasting foundation.
The Ford Foundation announced in August that its Mission Investments portfolio has produced a compound annual return of 28% since its inception in 2017 through 2021.
“The reason we disclosed this information was because we wanted to encourage others who aren’t sure that impact investing … can address big social issues, promote people’s well-being, and generate financial returns, so you recycle and everything.” can do again again,” he said on Wednesday.
Swan said the foundation has specific issues it invests in, 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 when it comes to how ESG is used to increase returns. She added that the recent market turmoil could spark a kind of fresh start within the sustainable investing landscape.
“I think we’re just sorting out between some of the less attractive strategies that haven’t generated these outsized returns, but the more active strategies that are actually making the outsized returns using ESG tools,” she said.