With greater perspective on 2020 as we move into future, the performance of impact investments relative to their peers continues to stand out. Environmental, social and governance (ESG) considerations should no longer be considered a “nice to have”; they appear more and more to be a necessity to protect against downside risk and help improve performance in bull markets. As we have noted before, the rapid growth of impact investing has only increased the need for greater accountability for alignment between stated ESG approaches and portfolio management practices, something policymakers and regulators are beginning to scrutinize more closely. Fuller disclosure is a critical first step, but those disclosures must lead to actions to address inconsistencies and conflicts of interest that may be revealed.
In the News
March was B Corp Month, and Wetherby was excited to celebrate along with our fellow B Corps working to build more inclusive and equitable companies, stronger communities and a healthier planet.
While environmentally–focused investments have been available for some time, options focusing on protecting the world’s oceans have been limited. Now, there are various emerging opportunities for investors to put their capital to work in support of the planet’s oceans, including so-called blue bonds, featured here along with input from Justina Lai, Chief Impact Officer and Shareholder at Wetherby Asset Management.
The U.S. Securities and Exchange Commission (SEC) acting chair, Allison Herren Lee, will ask the agency’s corporate finance group to pay particular attention to the accuracy and completeness of climate disclosures when reviewing corporate filings, acknowledging that climate–related risk is “material information” for investors. If this leads to new SEC regulations, it could be a significant win for investors and asset managers looking for greater transparency.
So-called “nature bonds” could represent a new tool for green investors. These sovereign bonds focus on protecting existing nature by funding preservation of wild land and protecting biodiversity, using methods such as purchasing private land with the commitment to keep it wild and generating returns by selling carbon credits and building new public parks and nature preserves.
Wall Street Journal
In a review of more than 160 annual reports filed by S&P 500 companies for 2020, the Wall Street Journal found that about a third included diversity disclosures. While the exact data included varied broadly, nearly all included data on race and about three-quarters included data on gender. A smaller number included information on veterans, people with disabilities, members of the LGBTQ+ community and age. Broader disclosure of this kind of data boosts investors’ ability to gauge potential diversity-related risks.
Wall Street Journal
Rules brought into effect in March, called the Sustainable Finance Disclosure Regulation (SFDR), will require managers of funds that claim to invest in line with ESG considerations to provide a “tangible, measurable plan” for how it will do that. These rules will apply to any managers that raise money within the European Union, whether or not they are based there, including U.S. money managers. Asset managers have an opportunity to get ahead of forthcoming regulations globally such as SFDR and empower investors to make better decisions in light of ESG-related risks and opportunities.
Wall Street Journal
In contrast with many of their peers, BlackRock will investigate the ways its business practices may have contributed to racial injustice in the financial system. Goldman Sachs Group Inc., Citigroup Inc. and Wells Fargo & Co. have been asked to undergo similar audits but are asking shareholders to vote against such proposals. This underscores how even firms that have made diversity, equity and inclusion commitments may resist this kind of scrutiny and the ongoing importance of shareholder advocacy in holding them accountable.
Research & Reports
NYU Stern Center for Sustainable Business
In a meta-analysis of recent studies on ESG and sustainable investing, this study examined the relationship between ESG and financial performance in more than 1,000 research papers from 2015–2020. Among the key findings was that ESG integration as an investment strategy performs better than negative screening approaches. The study also found that ESG investing provides downside protection, particularly during a social or economic crisis. Meaningfully, ESG disclosure on its own does not appear to drive financial performance, underscoring the importance of not only pushing for greater transparency but also using the information gained to demand meaningful change.
Furthering the claim that impact investing provides downside protection, sustainable funds outperformed and mitigated risk relative to their traditional counterparts in 2020. According to an analysis of more than 3,000 U.S. mutual funds and exchange-traded funds, sustainable equity funds outperformed their traditional peer funds by a median total return of 4.3 percentage points in 2020. Sustainable taxable bond funds beat their traditional counterparts by a median total return of 0.9 percentage points, even amidst a slow bond market.