Environmental Social Governance Investing

Impact Investing

What does the Postman do when there are no more letters to post? It’s not a trick question. He either retires or he does something else. What does the rates trader or the fixed income portfolio manager turn to when the well dries up? Global central bank policy has sucked the volatility out of the FX markets. Remember, traders love volatility as movement equals opportunity. Range bound markets offer slim pickings. Central banks have curbed the capacity of FX markets to swing violently.  At last count there is close to $20trn yielding negative rates. It is truly amazing and radical in the sense of the shift taking place within sub-sectors of asset allocation. Goldman Sachs made headlines recently with a report titled: “Crypto: A New Asset Class?”. Whilst provocative, the research note includes interviews with heavyweights in the space including Michael Novogratz [Cofounder & CEO, Galaxy Digital Holdings] and Michael Sonnenshein [CEO, Grayscale Investments]. Whether the consensus agrees that Crypto currency is a legitimate asset class is not the point. The fact is that Goldman Sachs has posed the question: should crypto be considered an institutional asset class? Such a question from such an institution would have been unthinkable just a couple of years ago. Similarly, the surge in fascination with all things ESG has increased with impressive momentum. The death of fixed income and evaporation of rates opportunities have lent massive human capital behind the new best toys in the shop-front.


Financial markets are the physical basin through which waves of asset allocation trends flow over decades and generations. The 40 year bull market in bonds is at an end and what a run it has been. Some of the main protagonists have been more humble than others in recognising this. When the “Bond King” Bill Gross left Pimco he was at the peak of his powers. Around that time, he gave an interview to MoneyWeek and suggested, rather honestly, that luck and timing had a lot to do with his success. Are we at the precipice of another enormous asset wave that could last decades? The tail winds behind ESG or Impact Investing remain obvious. The proverbial dogs in the street know that human activity is destroying the planet exponentially. There is now general consensus that immediate action is required on global climate change policy. If we have learnt anything from history it is that policy moves markets. Cast your mind back to March 1981. FED chair Volker has raised interest rates to over 15% in attempts to curb inflation and destroyed the economy in the process. The bogey man of inflation needed to be defeated by all means necessary. In the following decades, successive FED chairs reduced interest rates in attempts to stimulate economic recovery. This is policy. The impact for fixed income assets with long durations was momentous and stellar careers were made on the back of consistent bond returns and recurring positive equity performance. When you open your newspapers today, what is the dominant policy position? Is this position isolated to one specific region? Unfortunately there is no hiding place and universal policy adoption is mandatory. Stock markets are leading indicators. Like the ISM [purchasing manager survey reports] and Building permits reports they front-run the market and provide extremely valuable information. Tesla has many critics and its price earnings ratio is nonsensical. In saying that, it would be a mistake in any analysis of potential opportunities, to ignore the market information related to ESG within the enormous rise of Tesla stock. The market is telling us something about the inherent valuation distortions between traditional fossil-fuel based engines and electric vehicles [EVs]. Successful investing requires an ability to forecast not just what the next best stock or asset is going to be. More importantly, it involves a process of determining the directional flow of asset classes. All assets compete with each other. The set up for ESG could be hugely positive if fixed-income investors re-allocate in search of even modest returns. This part of the wider secular shift within asset classes themselves and the broader secular shifts associated with interest rates, debt and technology. The mainstream media will highlight the obvious reasons for why ESG investing is an attractive option. Less observable explanations include the duality of the demand for this asset class. There is generational consensus from both millennial investors and top-down government officials about the requirement for sustainable investing. The intensity of the enthusiasm for change varies but the motivation is there.  Investor demand is also pivotal. Capitalism as a construct has been tested through the recent financial crisis. Perhaps the climate emergency will offer redemption. One of the principle functions of financial markets is capital allocation. Investor demand should recycle capital into environmentally friendly projects and businesses. ESG opportunities will be at the forefront of this.

Impact Investing emerged through philanthropic work challenging the inability of central governments to address serious global issues. The cult of philanthropy was most notably associated with the likes of Bill Gates. Mr. Gates brought a hard nose business efficiency and technological approach to the distribution of funds and selection of projects. Impact investing has evolved and matured through a framework where profitability and investment are aligned. Impact investing funds secure capital for early adoption technology businesses through investors hungry to secure exposure. Traditional Impact investing funds have followed a thematic approach focussing on core environmental issues like climate change. Typically a screening or ESG gates system is adopted whereby certain sectors including armaments, tobacco and fossil fuels are excluded. The modern Impact investing funds are sector agnostic outside of the exclusion list thereby offering a diversified portfolio of companies. Examples may include construction companies that utilise new technologies to recycle the bi-products of their onsite activities. Sustainable focussed companies address problems related to environmental, social and governance issues. Can we drill down a little deeper into practical examples of this? Improved construction processes specifically related to more sustainable waste management offer attractive incentives for investors. Impact investing seeks to tackle head-on some of the core global issues. These include poverty, environmental abuses and ageing economies. A growing number of human services companies are utilising technology to improve the quality of care provision, nursing and disability services. Technology is to the fore also across the food sustainability and waste management sectors.

The Future

There are three primary trends behind the surge in Impact investing and ESG. These may be neatly categorised into three areas as follows:

  1. Millennial sensitivity to ESG issues.
    Surveys have consistently shown that the demographic age group of the 23 to 39 year olds are much more positively inclined to pro-active equity selection based on responsible investing principles. It is estimated that millennial’s will receive up to $40trn of asset transfers inside the next 20 years. One would be prudent to take note of this trend.
  2. Private Capital required.
    The scale of the issues [most notably related to climate change] is such that public monies and philanthropy are not enough to deal with the problems. Private investment is required and urgently. The momentum behind this realization has shifted the level of engagement between companies, shareholders and wider private investors.
  3. ESG has Alpha.

    There is now an abundance of research supporting the arguments that companies who focus seriously on ESG issues that are important to their business outperform the sector average.

Impact investing can essentially be defined as the intentional marriage of profit and values. Let’s be clear the idea is not new. For several hundred years the Methodist church has recommended that its members do not invest in companies associated with armaments, pornography, tobacco or “sin stocks” as they have colloquially become known. The “divest” movement grew out of negative reaction to the apartheid system in South Africa. In Ireland, 10 Dunnes Stores workers went on strike in 1984 when checkout worker Mary Manning was suspended for refusing to handle South African goods. She had been following a union instruction given to all members as part of the struggle against apartheid. We have seen the evolution from negative screening to SRI [Socially responsible Investing] and now ESG. The latter is an extension of sustainable investing policy. It not only adopts an exclusionary screening process but importantly rewards companies that pursue environmentally friendly company policies, treat workers with dignity and respect and create sustainable products. Impact Investing is about “screening in” the good companies – combining profit with environmental, social and community benefits.

The genie is most definitely out of the bottle in relation to Impact investing and ESG. The more you explore the practical application of ESG and the real changes that are taking place the more confidence I have that we have only scraped the surface in terms of potential impact.


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