On Our Radar: Deals we are paying attention to, for their impact on industry.
When Goldman Sachs in 2015 approached John Goldstein with an unsolicited bid for his impact advisory firm, he took it as a sign that sustainable investing, once a niche industry, could scale fast with support of Wall Street. His hunch was right.
Since the acquisition of the San Francisco-based Imprint Capital Advisory, Goldman Sachs has accelerated its impact investing efforts for high net-worth and institutional clients. The bank’s environmental, social and governance assets under management quintupled to $19 billion this year from $3.8 billion in 2015, spurred by growing demand for investment approaches to better manage risk and find opportunities in a changing world.
“It’s a sign of how far the field has come and now it’s a matter of course,” Goldstein, now a managing director at Goldman, said in a podcast interview with ImpactAlpha last week. “Now you see large institutions entering this in a real way.”
Assets in sustainable, responsible and impact investing strategies reached $12 trillion in the beginning of 2018, up from $8.72 trillion at the beginning of 2016, according to a US/SIF Foundation report on investing trends. Meanwhile, a Morgan Stanley survey found that 75% of individual investors are interested in impact investing and that the figure is 86% among millennials.
“There is a whole lot of factors related to ESG — policy, technology, infrastructure, risk — that I think increasingly mainstream investors realize have to be integrated into their investment philosophies,” Ian Monroe, president and CIO of Etho Capital, a mission-driven investment management company, told Karma Network. “But there is still a big gap between what large investors are saying and actual substantial changes and where the capital is flowing.”
Imprint, with 15 employees and $550 million in assets at the time of acquisition, had helped find impact deals and design strategies for some of the largest foundations, including the W.K. Kellogg Foundation and the McKnight Foundation. The firm also co-invested with Goldman’s Urban Investment Group on a $20 million early-childhood education initiative, which included a “social impact bond” to fund high-quality preschool for at-risk kids in Utah, according to ImpactAlpha report.
Under Goldman, the Imprint team now has more than 40 people and continues developing and managing ESG and impact investment programs and portfolios across themes and asset classes. One of the tasks “is to help Goldman’s investors do better at doing what they do by incorporating environmental, social and governance into how we invest for all our clients,” said Goldstein.
“We like to say this is about playing impact chess, not checkers,” he said. “Sometimes people want a binary bright line: ‘This counts, this doesn’t; we do this, we don’t do that.’ Versus, thinking, “How do I meaningfully engage across all my assets to meet my range of goals?”
For clients who want “to lean a bit more into those themes” Goldman can offer a customized approach. For New York State Common Retirement Fund, for example, Goldman developed a low-emissions strategy to reduce investments in companies with relatively high carbon footprints, while keeping performance in line with the pension fund’s benchmark for U.S. large-cap equities.
The strategy, which sought to lower carbon emissions intensity by about 70% compared to the benchmark, paired with the pension fund’s advocacy efforts, including promoting emission disclosure and supporting policies such as the Paris climate accord.
The ESG metrics could also help investors identify new growth opportunities for private equity portfolios. Real estate managers, for example, now look for properties in need of energy and water retrofits, seeking to unlock additional value, Goldstein noted. Meanwhile, other private equity firms turn to human capital, seeking to boost operating margins by investing in employee engagement initiatives, he said.
‘Bumps on the Road’
Impact investing, once mostly accessible only to institutional investors, has been gaining momentum amid rising demand from mainstream clients, who want to reduce risks and align portfolios with social and environmental goals. The trend is also in line with ongoing conversations among business leaders and policymakers on the evolving role of business and the state of global capitalism.
Last year, Laurence Fink, founder and chief executive of the investment firm BlackRock, declared that companies “must not only deliver financial performance, but also show how it makes a positive contribution to society.”
More business leaders have also taken public stands on issues like gay rights, immigration policy and environment in recent years.
Wall Street has responded with a slew of services and strategies that promote sustainable investing without sacrificing returns. Returns tend to be “neutral to positive”, Goldstein said, citing a combined study on the relationship between ESG and financial performance across companies, securities and portfolios.
Even so, industry experts say wider-spread adoption of impact investing may be years away amid debates over the benefits of such an approach and lack of quality reports from companies on their practices.
“One specific challenge is a lack of standardization — every ratings system prioritizes different factors when defining a ‘good’ ESG company,” be it social and environmental track record, carbon emissions or transparency and disclosure, wrote Emily Dwyer, a research analyst focusing on ESG issues at Brown Advisory. “Depending on which ratings service you choose, you may see wildly different results.”
Imprint’s Goldstein acknowledges some “bumps on the road” as many investors still have “cognitive bias,” dismissing ESG investing as hype. He advises them to take another look as the industry has been evolving fast in the last decade. And while financial markets are relatively efficient with most factors of risk and return priced in, investing with a focus on ESG factors could offer an extra edge.
“The low-hanging fruit is gone. You’ve got to climb a little higher up the tree,” he said. “ESG is not a magic ladder that’s gonna teleport you to the top of the tree, but it’s one way to find sources of value that hasn’t been picked yet.”
Seeking to capitalize on the trend and broaden its impact offering, Goldman also rolled out its first exchange-traded fund focused on ESG last year. The bank teamed up with JUST Capital to launch the ETF that tracks the JUST U.S. Large Cap Diversified Index of 500 U.S companies aligned “with the American public’s priorities for just business behavior.”
In March, the Wall Street Journal reported that Goldman pulled its seed capital from ETF, reducing the fund’s assets under management by nearly half. Goldman’s departure may signal that the fund is viable on its own, wrote Todd Shriber, a senior ETF analyst at Benzinga. Year to date, JUST is up more than 13%, according to MarketWatch data.
There are now 221 U.S. mutual funds and ETFs that invest based on ESG metrics compared to 130 in 2012, the Wall Street Journal reported in March.
“From funds’ perspective we are seeing more supply of products that are trying to tap into potentially growing demand for strategies based on ESG characteristics,” Todd Rosenbluth, head of ETF & Mutual Fund Research at CFRA, told Karma Network. “We still have a ways to go. This is increasingly something investors are becoming aware of, but I don’t think we are going to see this becoming more mainstream.”
Anastasia Ustinova is a freelance business writer based in Seattle with more than 10 years of experience reporting around the world. Her stories were featured in Bloomberg News, Businessweek, the San Francisco Chronicle and the Houston Chronicle.