Asset managers have focused too much on offering products rated highly on ESG while ignoring investments that combine socially and environmentally responsible practices with delivering alpha returns, according to speakers on Tuesday at Inside ETFs+, part of Wealth Management EDGE at The Diplomat Beach Resort in Hollywood Beach, Fla.
Today, the global impact investing market is valued at over $1 trillion and is expected to grow to $4.5 trillion by 2030, noted Linda Assante, CIO of Uplifting Capital. She added that “non-mission-oriented investors,” including pension funds and insurance companies, increased their money flows into the sector by 30% over the past five years. A survey administered by Uplifting Capital to 1,000 active individual investors also found that for 71%, the access to impact investment offerings would influence their choice of which RIAs to work with.
“This is picking up momentum across all different swabs,” Assante said.
However, according to Luke Oliver, managing director, head of climate investments and head of strategy at KraneShares, the products most asset managers offer these investors are sub-par. As ESG became a buzzword in the industry, he said asset managers rushed to launch new offerings in a space they didn’t fully understand and tried to compete on price instead of developing sound strategies.
“That was really the big issue in lots of products that lacked all the fundamental portfolio theory that we’ve spent 100 years evolving,” Oliver noted. “And we threw it all out to just chop off a bunch of names because they had bad scores on this new set of data that was being mentioned. That was fundamentally broken.”
In Oliver’s view, the approach should be to find investment opportunities that benefit from long-term secular trends that attract capital while delivering products and services that could be measured in ESG metrics.
For Oliver and KraneShares, one such trend is the global move toward decarbonization and the government-driven carbon capture markets in the UK, Europe and the United States. In their view, investing in carbon credit futures contracts helps deliver returns for investors while raising the cost of carbon emissions.
For Assante, these trends include the dire need for affordable housing in the U.S., coupled with substantial regulatory policy incentives, innovative financing structures and a massive supply/demand imbalance that will mitigate investors’ exposure to risk. She also recommended investing with fund managers from diverse backgrounds, as they might be aware of investment opportunities in historically overlooked communities.
“We have to educate investors, asset managers and financial advisors that this is not a concessionary market; this is not just a check-the-box market. This is an opportunity to really enhance your overall financial portfolio,” Assante said.
That will also help drive investment into assets and companies that help improve the planet, as investors will always allocate a much higher percentage of their money to improving their financial outcomes than they do to what they view as philanthropy, noted Oliver.
However, many fund managers focusing on impact investing will be new to the market and will need to be evaluated with different metrics than funds with more traditional strategies, according to Assante. For example, she noted that with institutional partners, Uplifting Capital looks for multiple years of successful principle investing and high AUMs. “But the reality is you might not have that” with newer fund operators, she noted.
Instead, the firm will examine how these emerging fund managers developed their GP expertise, who their mentors were and what their starting capital was. “Those are critical elements of their overall investment process,” Assante said. “We view intentionality and discipline around impact metrics [to be] as important as standard financial metrics. And so, we want to see that in their process because we are evaluating their due diligence and what they do.”