There has been extensive coverage as to the number of new loans issued being tied to ESG factors, namely greenhouse gas emissions and environmental sustainability, but there is a new dimension as to which companies are securing funding—gender equity. Many companies are signing loans that are tied to increasing women’s share of a company’s workforce from entry-level jobs all the way to executive and board positions. BloombergNEF estimates that these loans make up $19 billion of the market this year, already more than quadrupling 2020’s numbers. Companies improving diversity have better retention, collaboration, decision-making, and a broader talent pool according Tania Smith, leader of a bank authorizing these new loans. If companies fail to meet the diversity criteria they can face interest rate penalties much like the ESG market. Gender equity and diversity loans are a fraction of the total ESG market of $231 billion, yet they are a quick growing segment that will aim to improve gender equity in the corporate world.
FINSUM: This gives companies a new avenue to secure credit at a discount, much like ESG. If companies meet this criterion they can have an edge over competitors in terms of rates and access.
President Joe Biden is expected to nominate Professor Saule Omarova for the office of the Comptroller of the Currency, one of the leadership positions in banking oversight and regulation. Omarova is currently teaching at Cornell University Law School and is a critic of the role fintech is playing in the current financial system, all the way from cryptocurrency to robo-advising. Additionally, she believes regulation should be tightened across the board in banking, calling for a larger role in government supervision. She has also advocated for restructuring the Fed and having them provide consumer bank accounts. This is only the beginning of the journey as both fintech and the banking sector will lobby hard to make sure she doesn’t get confirmed for her position.
FINSUM: This would be a drastic leadership change in regulation compared to the relatively hands-off approach fintech has benefited from so far. The suggested changes to the Fed would pump shockwaves through the financial system.
By Liz Su, CFA and Kevin Hart, CIMA of Boston Common Asset Management
Responsible investors have long believed that investing with embedded consideration of environmental, social, and governance (ESG) factors is a compelling approach to identify investment opportunities: well-run, thoughtfully managed companies built for the long term, ready to foster societal transition and dynamically adapt to our rapidly changing world. This belief is simple enough to justify: identification, application, and integration of ESG risks and opportunities can provide investors with additional, independently derived insight into a company’s management quality, strategic positioning, operational efficiency, and potential risk exposure.
The broader investment community has caught on. In 2020, ESG funds saw greater inflows than in any year prior, a nearly 140% increase over 2019 and nearly ten times greater than in 2018. Corporations have responded to this shift, with a record number of companies appointing their first Chief Sustainability Officer (CSO) in 2020, a year that saw more CSOs recruited than in the previous three years combined.
SUSTAINABLE FUND ANNUAL FLOWS AND ASSETS
Source: Morningstar. Data as of 12/31/2020
Includes Sustainable Funds as defined in Sustainable Funds U.S. Landscape Report, Feb. 2020.
Includes funds that have been liquidated, does not include funds of funds.
The transformative potential in the hands of ESG investors has grown by orders of magnitude. This exponential growth has brought an increasingly crowded field with a variety of approaches to ESG, creating ambiguity in the marketplace over what it means to be intentional as an impact investor. An authentic, intentional, and holistic approach relies on aligning active ownership strategies (e.g., shareholder resolutions, public policy participation, voting proxies) with stated investment goals, an ESG-led research process, and impact-oriented themes and targets.
Dispelling a Persistent Myth
There has been a widespread misconception among investors that ESG factors are non-financial. This is not entirely accurate. ESG factors can instead represent unpriced externalities and unmanaged risks that are uncorrelated with traditional financial metrics. By incorporating ESG factors into security analysis, investors can identify a host of material issues core to business fundamentals, enhancing the ability to recognize patterns that are not already priced in.
In addition to risk-mitigation, businesses that proactively accelerate the adoption of positive ESG practices and the development of solutions-oriented products have a unique opportunity to exceed revenue expectations and thus be rewarded with higher ratings over time. These companies may see an improving competitive position versus peers, while those that are on the wrong side of this transition may see changes in their cost of capital and an accompanying deterioration in their competitive position. Investing in the transition to a more just, sustainable world gives investors access to solutions-fixed revenue streams while altering the trajectory on climate action and racial equity among a host of other vital issues.
Identifying strong business fundamentals and ESG process leadership — underpinned by the belief that businesses with forward-thinking managements are higher quality — combined with insights gained from global, proactive, and sustained shareowner engagement can together form a positive feedback loop for better investment decision-making. Managers with the knowledge and experience to employ this holistic approach understand the need to incorporate the product dimension into impact and support companies whose products and services are solutions for societal, environmental, and human rights problems.
ACTIVE OWNERSHIP STRATEGIES
The Way Forward
We are at an inflection point where ESG is transitioning from niche to mainstream. True to the original spirit of the movement, we should hope not to build a new investment establishment in the image of the old, but instead to forge a dynamic, holistic, evolved approach, generating positive impacts by holding companies accountable as stewards of people and planet. As investors, holding ourselves to the same high standards we demand of portfolio companies will go a long way toward making these impacts sustainable.
We hope that you will join us on the journey.
Past performance is not a guarantee of future results. Investing involves risk including possible loss of principal.
This does not constitute investment advice or an investment recommendation.
This represents the views and opinions of Boston Common Asset Management. It does not constitute investment advice or an offer or solicitation to purchase or sell any security and is subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes.
Applying ESG investment criteria to investments may result in the selection or exclusion of securities of certain issuers for reasons other than performance, and may underperform investments that do not utilize an ESG investment strategy. The application of an ESG strategy may affect an investment's exposure to certain companies, sectors, regions, countries or types of investments, which could negatively impact performance depending on whether such investments are in or out of favor. Applying ESG criteria to investment decisions is qualitative and subjective by nature, and there is no guarantee that the criteria utilized or any judgment exercised by an investment manager will reflect the beliefs or values of any particular investor.
AMG Funds LLC (“AMG Funds”) is a wholly-owned subsidiary and U.S. retail distribution arm of AMG. AMG Funds offers long-term investment strategies through a unique platform that includes a family of funds and separate accounts managed by a selection of AMG's investment managers.
N.B. This is sponsored content and not FINSUM editorial.
Annuities have a long and complicated past that ultimately created a less-than-stellar reputation. However, over the last few years, the asset class has undergone a transformation of newer and better products, combined with better sales practices. Now, two big elements are creating a major tailwind for the product: growing demand from retirement plan inclusion, and aging demographics. According to TIAA, TIAA “nearly nine in 10 plan sponsors who do not offer in-plan guaranteed lifetime income annuities are at least somewhat interested in offering them” (from ThinkAdvisor).
FINSUM: Baby boomers are in peak retirement years and many don’t have as much saved as they would like, so annuities have a role. Further, Gen X is aging and likes annuities more than the Boomers, so they are presenting a very fertile market as well. Accordingly, many firms are seeking more annuities participation.
Some of the biggest names on Wall Street have been calling for a correction recently. Morgan Stanley is chief among them. The bank’s chief equity strategist, Mike Wilson, says he thinks there will be a 10% correction in the near term. According to Wilson—who predicted the last two market sell-offs—we are in a mid-cycle transition phase of a market cycle, which is an environment where equities getting very choppy.
FINSUM: This makes a lot of sense, but feels a little too bearish for us. If earnings can hold up, and inflation continues to moderate, we don’t think a full correction will occur. Flat and/or choppy, fair, but not a full 10% fall from here.