LEVATUS Q & A | Top 5 Impact Investing Questions with Keith Savard
Keith Savard, Chief Research Officer, answers your questions about ESG and Impact Investing
Photo by Zhimai Zhang on Unsplash
ESG and Impact investing are terms that are used to describe certain investing strategies and products that are becoming increasingly popular. However, it can be hard to distinguish a clear definition of these terms and how it could effect your portfolio. Our Chief Research Officer, Keith Savard, has been studying this type of investing for the better part of his career so we asked him some of of the most frequently asked questions on the topic.
What is ESG and impact investing and why is it such a hot topic right now?
Impact investing is investment in companies and select financial vehicles like ETFs and mutual funds for the purpose of generating beneficial social and environmental outcomes alongside monetary returns. This form of investing has gained tremendous visibility in recent years as concerns regarding the environment and other prominent social issues have been elevated from a stage of inspiration and education to a point of activation. In essence, this has resulted in unleashing the power of capital for good.
How do ESG investments perform financially?
From a statistical perspective the track record of Environmental, Social, Governance (ESG) focused investing is often viewed as mixed. In part, this reflects definition and measurement issues. However, it is fair to say that companies which aspire to more than simple profit maximization have been better able to stand the test of time and adapt to changing social circumstances, priorities and values.
how big is the impact investing market and do you expect it to see further growth?
The precise size of the ESG/impact investing market is difficult to quantify because of the variety of marketing terms used to promote this type of investing. Nevertheless, according to a recent report from Morningstar, both the number of “sustainability-focused” index funds, and their asset size, doubled over the past three years. As of mid-year 2020, there were 534 index funds focused on sustainability, overseeing a combined $250 billion in assets. In the United States, which has lagged Europe in ESG investing, assets in sustainable index funds have quadrupled in the last three years and now represent 20 percent of the total. ESG investing is likely to continue to grow at a rapid pace for the foreseeable future.
what are some of the challenges of impact investing and things to think about before investing?
In the current environment, it is sometimes difficult to disentangle the hype of marketing language used to promote ESG investing from the actual beneficial or not so beneficial effects of ESG investing itself. Without being too cynical, it is important to look past the virtue signaling in some marketing material and discover the real business behavior of companies and investment funds seeking to attract your capital.
What is the one thing you think people most frequently miss with regard to impact and ESG investing?
Although investors increasingly recognize the importance of environmental, social and governance factors as drivers of value, they should not overlook the fact that the key to effective investment is to integrate these factors across the investment process. ESG investing is more than just an ethics-based approach involving negative screening. It is about maximizing risk-adjusted returns where ESG factors are incorporated according to desirable and achievable investment goals.
Where should an investor begin when thinking about impact or ESG investing?
A good place to start when considering ESG investing is to contact an investment advisor who has a deep understanding of the subject not only from an investment perspective, but also from the point of view of how ESG is integrated into companies’ operations in various sectors. There is no one size fits all when it comes to ESG and impact investing. Be suspicious of advisors who try to dazzle you with a lot of jargon, but are unable to explain their ESG investment process in practical terms. Look for an approach that makes sense and feels comfortable to you and that has a track record of long-term success.
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August 2024 started with a swift drawdown in markets. As with many such corrections, a major contributor was leverage.