Financing impact: What your clients wanted this year
Thursday, December 20, 2018
Thursday, December 20, 2018
A more in depth exploration of key sustainability topics
Financing impact: What your clients wanted this year

As 2018 draws to a close, we’re given the chance to reflect on how our clients put their values into action. Here at Ethic, we worked with investment advisors, foundations and impact investors to put $55 million into 112 accounts, all of which have an expressly social or environmental value and advance our goal of building a more sustainable future.

During a year in which we received dire projections on climate change, governance scandals rocked massive corporations and diversity issues played out on a national stage, the value of investing one’s capital into businesses that align with individual beliefs became all the more apparent to clients—and those advising them. The numbers speak for themselves—according to the latest report from US SIF[1], sustainable, responsible and impact investing (SRI) assets have expanded to $12.0 trillion in the United States—up 38 percent from $8.7 trillion in 2016.

Amid concerns about disingenuous representations of sustainability, known as ‘greenwashing,’ Ethic clients often express the importance of transparency and measurement when adopting our technology. That’s why, at Ethic, we are committed to making impact measurement unambiguous and easy to comprehend. Doing so affords advisors the chance to engage their clients around the issues they care about in terms they understand. This has, in turn, afforded our clients the opportunity to attract, engage and retain investors who are serious about aligning their portfolios with their values.

As investors seek out investments that offer not just favorable returns, but also opportunity to address critical issues, we’ve found that the most commonly applied lenses are climate, corporate governance and gender. With that in mind, Here’s a summary of the impact advisers and investors have had based on where they put their money to work in 2018.

Climate

2018 was concerning for investors who care about the health of our climate. The Intergovernmental Panel on Climate Change, a group organized by the United Nations, released a report urging “rapid and far-reaching[2]” actions to prevent alarming changes to things like global temperatures, biodiversity, safety of our water supply and food security. The necessary changes won’t be easy: global CO2 emissions from fossil fuels will rise 2.7 percent this year, a group of scientists from the Global Carbon Project estimates.[3] Meanwhile the current U.S. administration is working to dismantle restrictions on fossil fuel emissions and other climate protections.

Such considerations make the actions of client-focused investors all the more urgent. Corporations that operate without regard for their environmental footprint risk significant reputational risk and habitat mitigation costs. Businesses that lean heavily on fossil-fuel infrastructure could be caught flat-footed as the world moves toward a future powered by renewable energy.

This year, 100% of the 112 accounts invested with Ethic incorporated climate impact investing into their portfolio strategy. In 2018, we partnered with investment advisors who channeled portfolios away from fossil-fuel intensive businesses which saved 3,127 metric tons of carbon. That’s the same amount produced by running 469 homes or driving more than 7 million miles.[4]

Corporate Governance

A star executive of Nissan Motor Co. plunged the company into crisis and the stock into a nosedive[5] over alleged reporting misconduct. At Wells Fargo & Co., leadership woes continued as more investigations surfaced into its business conduct.[6] A string of tweets from Tesla Inc.’s CEO forced the company to pay millions in a settlement and find a new chairman.[7]

Countless corporate governance failures have cost companies their reputation, capital and partnerships, posing serious risks to their investors. For Ethic clients that have prioritized the corporate governance solution, it seems to be paying off. In 2018, 75% of clients with Ethic accounts included corporate governance into their sustainability strategy.

Gender

2018, already dubbed “The Year of the Woman,” witnessed record numbers of female political candidates and a #MeToo movement that empowered women and rattled the gender status quo. Perhaps unsurprisingly, gender equality was an area of focus for our investors. 75% of Ethic clients put gender investing into action in 2018.

There’s evidence that gender-lens investing, a strategy that incorporates gender into allocation decisions to either affect performance and/or to address gender disparities, is linked to financial outcomes. In a private markets study released this year by Calvert Impact Capital, companies with a higher percentage of women in leadership and board positions on average outperform companies with the lowest percentage of those metrics.[8]

While climate, corporate governance and gender are the most common issues we address with our thematic portfolios, Ethic technology enables advisers to customize solutions tailored to address each clients’ personal sensitivities. We empower advisors to truly hear their clients, understand what they believe and translate that into an investment portfolio. Engaging with clients about current events, and showing them the impact they’ve been able to make, is one of the best parts of our job.

In the midst of child separation at the southern border, we worked with investment advisors who had clients that were keen to stay away from businesses tied to ICE detention centers. Amid mass shootings at Marjory Stoneman Douglas High School in Florida, the Borderline Bar & Grill in California, the Tree of Life synagogue in Pennsylvania and others, we helped advisors build custom portfolios driven by client desires to include gun-control parameters. Devastating wildfires in California sparked discussion of deforestation, and how companies tied to palm oil production play a role in deforestation in places such as Indonesia.

One of the exciting aspects of impact investing is that it evolves to address the key issues we face. There is no one-size-fits-all approach to allocating capital behind one’s values. How did your clients manifest their values in their portfolios? What were the topics that kept arising in 2018? What were the difficulties you faced in implementing them? We’d love to hear from you.

At our core, we believe that companies that embrace sustainability – and the investors who back them – position themselves both to drive positive societal change and create long-term competitive advantages. It’s our privilege to work with clients on shaping their portfolios to match their values, finding innovative ways to put purpose into action. Let’s do it again in 2019.

Sources and footnotes

[1] US SIF Foundation: Report on US Sustainable, Responsible and Impact Investing Trends, October 2018

[2] IPCC Special Report: Global Warming of 1.5°C, Summary for Policymakers, C.2.

[3] Global Carbon Project, 2018. Carbon Budget 2018. http://www.globalcarbonproject.org/carbonbudget/18/files/GCP_CarbonBudget_2018.pdf

[4] **MT refers to Metric Tons. Please note these estimates are approximate only calculated using the EPA’s Greenhouse Gas Equivalencies Calculator. https://www.epa.gov/energy/greenhouse-gas-equivalencies-calculator

Estimates are based on year of ownership of the benchmark portfolios and indicative year of ownership of the Ethic portfolio using the total $55MM investment amount indicated above and using the pro-rata ownership of emissions produced by the underlying holdings using latest available year emissions data as of the date of this analysis.

[5] Bloomberg TOP Live, 2018. Nissan’s Chairman Ghosn Arrested, Faces Dismissal Over Allegations of Hiding Pay. https://www.bloomberg.com/news/live-blog/2018-11-19/nissan-in-spotlight-as-ghosn-faces-allegations

[6] Egan, Matt. CNN Business, September 2018. “The two-year Wells Fargo horror story just won’t end” https://money.cnn.com/2018/09/07/news/companies/wells-fargo-scandal-two-years/index.html

[7] Clifford, Catherine. CNBC, December 2018. Elon Musk: “Twitter's a war zone,' so 'let's go!'” https://www.cnbc.com/2018/12/10/elon-musk-twitters-a-war-zone.html

[8] Calvert Impact Capital, 2018. “Just Good Investing: Why gender matters to your portfolio and what you can do about it.” p. 11 https://www.calvertimpactcapital.org/storage/documents/calvert-impact-capital-gender-report.pdf

Contributors

Jay Lipman, a co-founder of Ethic, is driven by the need to address climate and environmental risks with the resources to which we each have unique access. He has been ranked among the Forbes 30 Under 30: Social Entrepreneurs.

Melissa Mittelman creates content at Ethic and is an alumna of Bloomberg News, where she covered private equity & deals. Melissa previously worked at Deutsche Bank, providing institutional, cross-asset sales coverage for ultra-high-net-worth investors.