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The case for a multidisciplinary approach to impact

Headlines about the ascent of sustainable investing have been ubiquitous in recent years. Between 2018 and 2020 alone, total US assets applying environmental, social and governance (ESG) norms 42%, Bloomberg Analyst make prediction that global ESG assets will exceed $50 trillion by 2025.

Amidst this surge of activity, one question remains: is this reallocated capital really making a difference? As industry audiences (correctly) condemn the cynicism green washingand as serious projections With regard to the scale of the climate crisis emerging, there is an ongoing debate as to the optimal and most effective approach for environmentally and socially minded investors. Let’s dive into three of them that are commonly used Policy Clients to address ESG issues:

Investment

One approach, often referred to as impact investing, involves actively seeking companies whose mission and business activities are considered beneficial to the environment, society, or both. An investor keen to accelerate the adoption of “green” technologies can create a portfolio that intentionally drives capital toward companies leading renewable energy, electric vehicles, sustainable agriculture or recycling solutions.

Of course, it is important that investors have visibility into the methodology and data inputs used to assess a company’s sustainability credentials. Otherwise, they risk inadvertently pouring money into a company that is only taking cosmetic measures to appear more sustainable — or one that has a positive impact in a given area, yet has a poor track record elsewhere. For example, an investor might be disappointed to learn that they had allocated capital to support corporations that are leading the way in curbing carbon emissions, only to find companies engaging in serious human rights abuses. have happened.

busted

Much of the sustainable investment conversation to date has focused on disinvestment, also known as negative screening. The process involves using a specific set of criteria, usually informed by the investor’s own values ​​and preferences, to determine which companies, sectors or business activities should be excluded from a portfolio. . Some investors may choose to exit entire industries, while others may exclude only a handful of securities that have a poor track record on certain issues relative to peers.

Evidence shows that this practice is just a not-so-good effort and may, in fact, protect investors from undue risk. as different real world Example For example, companies’ failure to adequately manage environmental, social and governance concerns can leave them with reputational, regulatory and material challenges that can generate remarkable financial results.

The disinvestment movement actually tends to put downward pressure on stocks, making it more challenging (and therefore more expensive) for some companies to raise new capital. Activists have long called on major institutions to get rid of fossil fuel investments and their efforts may pay off, in the form of research. it shows that it is becoming increasingly difficult for oil companies to obtain financing. In addition, one of the high-profile disinvestment campaigns could be snowball effect: Where one influential organization runs, others may follow.

Disinvestment has certainly served as an important awareness tool, critical conversation about the role of investors and the broader financial services industry in promoting more sustainable results. However, despite its potential to attract widespread attention, disinvestment is only one potential means of effecting real change. Recognizing this reality, some value-aligned investors are choosing not to walk away from all corporate bad actors but, in many instances, want to remain firmly in the fight.

shareholder commitment

As we mentioned above, some ESG investors are reconsidering disinvestment and instead deliberately choosing to retain their shares of “problematic” companies. Although this may seem counterintuitive to some, there is a growing thinking That active shareholder engagement is the key to achieving socially and environmentally friendly outcomes. Support for the deal, particularly when it comes to catalyzing climate action, is picking up steam in the wake of high-profile shareholder campaign Done in 2021.

The main idea behind shareholder engagement is that, as a partial owner of a company, an investor has the right to have a say in how he conducts his business. This usually takes the form of voting on shareholder resolutions (or proposals) that press the company’s leadership to take a specific action or disclose certain information. These proposals are then put to vote at the company’s annual general meeting, in which most investors choose not to appear in person, but instead complete a proxy ballot that allows another party to vote on their behalf. authorizes.

Advocates of shareholder engagement might argue that the disinvestment movement does little to address the underlying economics of “dirty” industries like Big Oil. That is, for every fossil fuel stock an investor throws in, there is more than likely a less climate-conscious investor. snap it For a bargain price. In effect, it means that the environmentally conscious seller has given up his seat at the table and can no longer use it to urge the company to more responsible behaviors. and it’s really exciting Evidence That shareholder engagement can drive more positive corporate actions, as companies are responding to targeted, specific demands, rather than broader societal pressure.

Institutional investors, who own the majority of the company’s shares and therefore exercise outside influence, are more active in proxy voting than individual investors. But these institutional investors often manage assets on behalf of retail investors, and are increasingly coming under pressure. aligned Voting activity with its public commitments on hot-button issues like climate change. Indeed, in 2021 investors prove Record support for environmental and social shareholder proposals, demanding more transparency around companies’ political donations and lobbying, diversity and inclusion initiatives, and efforts to tackle greenhouse gas emissions.

where do we go from here?

There is also much to be said for the role of regulatory oversight when it comes to tackling issues as consequential and far-reaching as climate change. However, in the absence of actual government intervention, it is up to investors to weigh the merits of the options available to them: directing more capital toward influence leaders, calling out bad actors outright, and/or using their voices. Issues intended to have an impact on the key as shareholders.

Given the lack of compelling evidence that any singular method represents a panacea, we see impact-minded individuals adopt a multi-pronged, “carrot and stick” approach to sustainable investing. Investing in just “good” companies can be difficult because while a business can do “good” on carbon emissions, for example, they can be full of other questionable practices. Separating only from “bad” companies negates the potential improvements an industry could make, and silences an investor’s ability to express his or her opinion. One thing is clear, though: Sustainable investors of all stripes are pushing companies to evaluate their impacts on people and the planet.

We are at a critical juncture in our fight against serious issues like climate change, and the gravity of this time demands that we employ all the tools available to us. While the jury is out on the most influential view, what we do know is that we can’t hold back from laziness and doing nothing.

Alex Lippel is Head of Business Development, and Emma Smith is Director of Communications, at Policy, Ethik is an independent provider of custom direct indexing solutions. Its scalable platform enables financial advisors to deliver passive equity portfolios that meet investors’ growing demand for personalized, value-aligned solutions.

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