By now SRI/ESG/impact investing has been around a long time (yes, really.) Assets managed against ESG/impact mandates have grown at 14% CAGR since 1995. In 2020, US-domiciled ESG assets were estimated at $17 Trillion, or ⅓ of all managed assets. Ladies and gentlemen, we are past the tipping point.
As with so many other trends, 2020 was an accelerant. Particularly in the US, the asymmetric impacts of the pandemic paired with the coarse manifestations of systemic racial injustice forced many to reckon with the true impacts of business and of investing.
What are the implications? First, the wall of ESG money is going to get bigger — you’ve all seen the stats about the great wealth transfer and millennials’ interest in ESG. Add to that an increasingly sophisticated understanding of the risks climate change poses to the economy (and therefore to investments — not to mention society more broadly) and the mushrooming opportunities to leverage technology to use resources more efficiently, and you get capitalism’s favorite song: do more with less.
Second, ESG assets are becoming more discerning. As ESG investment strategies become commoditized, expect more scrutiny of wealth and asset managers’ ESG claims, and growing pressure to measure the impacts of these investments.
Third, ESG assets demand customization. “ESG” is an awkward catch-all term for “issues that matter but aren’t yet reliably found in the financial statements.” Despite many efforts, its definition and implementation are still quite subjective and fairly inconsistent — it’s likely that the precise boundaries of ESG shift for every account, every investor. In parallel, separately managed accounts continue to grow in popularity.
What’s a money manager to do?
- Look at an ESG-driven revamp of your investment process as an opportunity to better serve your clients, both by knowing them better, and by knowing your investments better. ESG isn’t (only) about compliance; there are very few hard-and-fast rules, which means that there is space to differentiate your approach in a way that builds your brand and your business.
- Get with the ESG program if you haven’t yet. This isn’t a phase; in fact, it’s increasingly table stakes. Those RFPs with ESG questions are going to keep coming, so you’re going to want to have a better answer to them than “N/A” or a vacuous version of “We totally believe in full compliance with the law and oh btw we’ve always done ESG”
- Once you do take on the responsibility of figuring out how to integrate ESG into your investment processes, don’t expect an off-the-shelf, standardized solution, and come prepared to do the work. I know this is frustrating, but understand that ESG requirements for companies and investors are still crystallizing. There is no comprehensive checklist. Do your homework and then get down to business. If you wait for the dust to settle it will be too late.
- Don’t forget to cast that inquisitive gaze on your own operations. I hope this isn’t news to anyone, but launching a gender-lens fund with an investment team composed of only men is not a great look. Similarly, don’t say you are serious about Diversity, Equity and Inclusion if you only recruit CFAs from Ivy League schools.
Rhizomes (‘rizoma’ in Spanish) like ginger, bamboo, and ferns, are plants with special reproductive abilities. They all have stems that run underground, like roots. These underground stems can strike new roots and push new stems up to the surface, growing a young plant directly as well as enabling new ones to grow. They’re both scouts and builders, explorers and masons.
I work with clients who want to own and operate ESG processes that are fit for purpose. I do so by taking on the initial design work, from stakeholder discovery, market research, idea generation, prioritization, synthesis, prototyping, test-driving, and the first cycles of iteration. I bring the expertise, focus, and dedicated time to sift through the chaos, weigh the trade-offs, and make informed decisions. I help financial services firms — usually investment firms — nurture home-grown solutions that work for them.
- I work with asset managers to 1) identify and document their approach to ESG, 2) adjust their practices to reflect this new ESG approach consistently, 3) dive into their portfolio to unpack their ESG policy into, for example, new business initiatives, data collection, and reporting tools.
- I support startup/innovation ecosystems by building light, scalable processes. I assembled an ESG curriculum for a global accelerator, and am working on a playbook to guide early-stage companies on DEI. I’m also developing a platform strategy encompassing partnerships and community for an alt VC fund.
- I partner with VC firms to collect ESG data on their portfolio companies, and help them set up portfolio services leveraging this newfound insight into their investees.
- I help investors identify, measure, and communicate the impact of their portfolios. For example, I’ve worked with capital allocators creating pioneering impact-focused funds of funds by stitching together the data and stories they receive from their managers, and weaving together their first fund impact report.
My clients are often at the forefront of their industries, and turn to me because they need something built to measure. Interested in collaborating? Drop me a line.
Thanks to Matt Moscardi, Sean Li, and Suprita Makh for providing critical feedback on earlier versions of this post.