Sustainable Impact: Striving to be Much Better than “Better Than Average”
Tariq Fancy, Blackrock’s former CIO of Sustainable Investing, recently made headlines when he called out Blackrock, along with the rest of the financial services industry, for “duping” the American public with its emphasis on sustainable investing practices. He claimed that ESG was jargon, misleading propaganda aimed at the bottom line, and went so far as to say there is no evidence that any ESG ETF has any social or environmental impact, although he did claim that Blackrock was “better than average” in this respect. We agree with several of his sentiments which is why we take a differentiated approach, selecting investments that strive to deliver impact that is way more than “better than average.”
When it comes to sustainable and impact investing, we have eschewed those investment products that simply invest in companies with high ESG scores. Instead, we seek investment managers who actively engage with companies to improve their environmental impact, their social awareness, and their governance practices. It’s this focus on continuous improvement that can deliver both financial and impact alpha. Active ownership, which many ETFs ignore, may be the most underappreciated yet most significant contributor to meaningful impact.
That impact is why each quarter, in our Investing with Values newsletter, we provide updated metrics and discuss issues where our client capital has helped to influence outcomes. While we are pleased that our sustainable portfolios have less than 0.5% exposure to fossil fuels and include greater minority representation in the workforce, we take greater pride in the positive changes our managers have affected. Whether it’s influencing the world’s largest retailer to adopt energy efficiency targets for its data centers or the world’s largest packaged foods maker to agree to 100% recyclable packaging, or with a large telecommunications company to increase disclosure around gender pay practices, the managers we use have engaged consistently and effectively with the companies that they own.
Additionally, solutions for tomorrow’s challenges require capital. Investors and ETFs that simply exclude bad actors provide incentive for companies to “greenwash” their annual reports, in our opinion. We prefer an approach that pairs avoiding these types of firms with investing in companies providing tangible solutions to identifiable problems. For example, we can exclude traditional carbon-based energy companies while deploying capital into developing energy efficient solutions. Moreover, while avoiding companies with poor waste and pollution practices, we can invest in companies that specialize in waste-treatment facilities or reducing water usage. That’s real impact!
While we agree with Tarek’s proposition that prudent policy is required to force structural change, we believe that private capital needs to play a role too. Investors can produce impact in a thoughtfully structured sustainable portfolio.