Impact Investing Tipping Point

After a decade in the trenches, signs of progress

by Adam Seitchik, CFA, CIO of Arjuna Capital

I went to Minneapolis this winter and something remarkable didn’t happen.

I had accepted an offer to speak at a conference on impact investing for local investment professionals. The sponsor was the CFA (Chartered Financial Analysts) Society of Minnesota. The event was sold out and the room was full despite a high temperature of 0o F on the day. We convened at the Minneapolis Club, which feels more like a place to drink brandy and clip bond coupons than discuss innovations in sustainable investing.

Just a few years ago a group of wonky CFAs like this (it takes one to know one) would mostly be asking skeptical questions about the dangers of mixing social purpose with wealth building. But somehow we seemed to have reached a tipping point and that tired old elephant was nowhere to be found in the room.

Instead, to my delight and amazement, one of the keynote presentations was from Wellington Management, a former employer of mine. Wellington is one of the largest institutional global money managers in the world, with almost $1 trillion (!) in assets under management. Their clients include pension plans, insurance companies and giant pools of state-owned assets from around the world. And at least when I was there, the client list included sultans, kings and princes.

I left the world of institutional money management over a decade ago precisely because places like Wellington were completely uninterested in, and indeed often hostile to, the idea of impact investing. Yet we heard in Minneapolis that Wellington now has a dedicated team of analysts helping portfolio managers understand the Environmental, Social and Governance (ESG) risks and opportunities that are embedded in their portfolios.

I was asked to speak because many of the investment advisors in the area are getting inquiries from their clients about socially and environmentally impactful approaches to their investments. The money managers are scrambling for solutions.

We sometimes refer to what we do at Arjuna as “total portfolio activation,” and I described how we empower client impact across asset classes. Like Wellington, we integrate ESG analysis into our equity investment strategy, but more consistently and comprehensively. As innovators focused solely on sustainable investing, we have created multiple avenues for our clients’ money to have real, tangible impact in the world. The arrows in our quiver range from shareholder engagement with publicly traded companies, to investing in a host of financially promising private enterprises with demonstrated social and environmental impact. We don’t have the conflicts of interest inherent in the big firms, whose clients often include the very companies in which they invest. We work for the enlightened shareowners of corporations, not corporate managements themselves.

When it was my turn to speak I noted how struck I was that Wellington was there in the first place. I spoke of the impact investing field in generational terms. Gen 1 were the pioneers, emanating mostly from Boston in the early 1980s, who built the foundational infrastructure measuring and monitoring corporate environmental and social performance. I am part of Gen 2. My bias as an institutional investor coming into the field of sustainable investing was that the Gen 1 firms combined an admirable idealism with a fairly rudimentary approach to investing. The niche was small and underdeveloped.

Gen 2 worked to create a performance-oriented approach to impact investing. We were learning about sustainable investing while modernizing it with state-of-the-art tools and practices. The field began to mature and to grow. Perhaps a broader perspective on investing would enhance shareholder value, not put it at greater risk.

Gen 3, which represents established institutional money managers exploring sustainable investing, was for years largely reactive and inauthentic. With strong encouragement from important, mostly European clients who were signatories to the UN Principles for Responsible Investment (www.unpri.org), the big players have been pressured over the last few years to report on their ESG investment strategies. Eventually, what gets measured gets managed, and now we are seeing some nascent attempts by mainstream managers to do this work seriously, properly and comprehensively. Mainline firms for the most part haven’t fundamentally re-engineered themselves, but for the first time I’m seeing the early shoots of something real.

What nearly brought me to tears at the Minneapolis Club on a winter’s day was imagining Gen 4: the millennials who, as study after study reveals, want meaningful work within humane organizations that positively impact our world. Unlike all those who came before them, Gen 4 investment professionals, even in places like Wellington Management, will not know of anything other than ESG-integrated investment approaches. These young men and women whom I work with and teach give me hope. Soon they will be in charge.

For baby boomers like me, they are a defense against critiques that we’re nothing but greedy, selfish narcissists. If the most important test of a generation is the quality of its offspring, then maybe we aren’t so bad after all.