In November 2021 we at Clariti Strategic Advisors hosted our inaugural Thought Leadership event.
At Clariti we believe that insights, perspectives and community are developed when we participate in open dialogues on topics and themes of common interest. Building and developing an ecosystem of thinkers and community are important to us. We have realized that the engagements we take on and the problems we are enlisted to solve require collective effort to bring to successful resolution.
Thought leadership is about providing unique perspectives, knowledge and forward-looking insights on key industry topics and trends. Collective knowledge can be leveraged, drawing from various expertise, insights and passion, to address the biggest questions and challenges on the minds of our clients and partners.
At our inaugural event we discussed the ESG and Impact spaces — philosophies that are gaining a great deal of momentum and focus yet are still nascent and left with the need for interpretation. Over the past several years we have seen investment dollars steadily increase on these paradigms; however, unallocated capital has been rising steadily alongside this, based on data from private data provider Pitchbook. What is growing the pile of capital that is waiting on the sidelines? Some of the possibilities we explored are: are we at a crossroads where this space needs to be better defined; is there a lack of quality investments, or is there an awareness problem; is there a perception that if we invest for good, does that mean the investments are not quality investments?
The context is important. Why over the past year have we seen a heightened state of focus on the ESG/Impact space?
From our perspective there are 3 key driving forces.
1. The Information Age. There is an abundance of information — so much so that this has driven a heightened awareness on social issues. People are better informed and educated on issues that are impacting the world, which has given rise to a new level of focus.
2. Global Pandemic. The global pandemic has fundamentally changed the world and has had societal implications. These implications vary from a focus on equality, to climate change, to accessibility. The pandemic has thrust these topics into the corporate limelight, further intertwining consumers’ and investors’ personal values with their financial decisions.
3. Discourse for Investors. Change precipitated by the information age, exacerbated by a global pandemic, has forced investors and companies to increasingly ask questions on how and what they invest in — and the debate now extends beyond simple risk-adjusted returns. They are now questioning what their roles are and how they should be moving forward.
Key highlights from our discussion.
1. Definitions, taxonomy and nomenclature. The terms ESG and Impact are often used interchangeably — they are both different and unique in their meanings. ESG is a framework through which companies can measure, evaluate, and improve on the environmental and social impacts of their operations through a system of controls, procedures and governance. Impact is a more abstract concept and is often difficult to define and measure. Broadly, impact refers to companies aligning themselves to important causes that are trying to solve world and/or societal problems. These causes can be important to management, employees of the company, its customers, other stakeholders or the community at large.
2. Lack of Awareness and Understanding of the ESG Space — There is a perception that if investors allocate capital into ESG or the Impact space, they will leave financial gains on the table. However, the very idea is that companies that are better governed and most focused on “doing the right thing” provide better returns — ESG is valuable as a tool or model. This covers everything such as compliance, risk, diversity, stewardship, etc. — these are the companies that will flourish because of their diligence.
3. Do not look at ESG investments in a vacuum — ESG should not be looked to as the ultimate indicator of an investment opportunity’s attractiveness. ESG is just one signal of many. Market participants must remember that Impact and ESG investments are just that — investments. The same principles of risk management, stewardship of capital and analytical diligence must be applied to investments whether they bear the indicia of Impact and ESG or not.
Clariti’s Point of View
Forgo the Labels and Shift to a Way of Thinking.
The fact of the matter is that companies that operate through an ESG lens are better managed. The ESG label may not be very important — if ESG is a framework, or a lens through which all investments can be examined, then, by definition, every investment is an “ESG” investment to some extent. ESG should be considered as a component of risk analysis. Studies and analyses have found positive correlations between ESG performance and operational efficiencies, stock performance and lower cost of capital. Under Modern Portfolio Theory, ESG is nothing more than one of many factors in a “smart beta” model. Why, then, should it turn an entire industry on its head?
Impact Investing is a Complementary Framework
When we think of Impact there is a debate of financial gain versus purpose. The point is that from an asset management perspective we don’t reject the foundations of what we have learned and established — it is progressive and additive. Impact investing simply provides us with greater insights on how to make businesses more sustainable and meaningful in our current world. This also means ensuring that our diverse set of stakeholders are being taken into consideration when making choices on asset class selection and allocations.
We have 3 core pillars and guiding principles that govern how we think about ESG and Impact.
Economic Prosperity
Creating Sustainable Growth
Resolve
Finding Collective Solutions
Progression
Activity to Advance Forward
Together, these three pillars will allow us to create growth opportunities in a sustainable, equitable way. While we must recall that ESG and Impact investing are not frameworks that replace traditional models, they instead complement them and allow for the intertwining of financial and societal objectives.
This field is nascent and subject to innovation and change. Follow Clariti as we keep up to date with news, thought leadership and events on this topic and more.
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