Hello from Impact Delta.
Enjoy our periodic newsletter, containing insights and news related to ESG and impact investing. In this edition, we look at the growing body of evidence that ESG correlates with better operational performance and better returns, and Vanguard’s exit from the Net Zero Asset Manager alliance, apparently to avoid confrontation with Republicans now controlling the House. Also, the UN Biodiversity COP 15 conference is underway, beginning a month after the COP 27 for climate.
The data indicating good ESG choices are neutral-to-positive to returns is not entirely new - We'd start by saying that the historical data has tended toward ESG being positive, to at worst neutral. The real benchmark for this was a 2015 meta-study that sought to evaluate the impact good ESG choices had on returns. The paper looked at over 2,200 studies over a 30-year period, and found that 8% of the articles found that ESG was negatively related to performance, while 63% had positive findings and the balance found no conclusive evidence. This was updated in a paper that looked at the period 2015-2020 by NYU Stern, where the authors found:
1 - Improved financial performance due to ESG becomes more marked over longer time horizons.
2 - ESG integration, broadly speaking as an investment strategy, seems to perform better than negative screening approaches. A Rockefeller Asset Management study finds that ESG integration will increasingly be demarcated between 'Leaders' and 'Improvers' with the latter showing uncorrelated alpha-enhancing potential over the long term.
3 - ESG investing appears to provide downside protection, especially during a social or economic crisis.
4 - Sustainability initiatives at corporations appear to drive better financial performance due to mediating factors such as improved risk management and more innovation.
5 - Studies indicate that managing for a low carbon future improves financial performance
6 - ESG disclosure on its own does not drive financial performance
LBS study slightly differs - This last point that ESG disclosure on its own does not drive financial performance is not a controversial statement. However, a group of LBS professors recently released research looking at ESG disclosure in private equity with a slightly different conclusion. They examined whether PE firms’ ESG disclosures match their investment activities, finding, for example, that PE firms with high environmental disclosures target portfolio companies with lower environmental toxic releases. Further, the funds of PE firms with highest quality ESG disclosures appear to be related to better returns, even if the causation is not watertight. To quote directly: “We refrain from making causal claims given the potential selection issues around voluntary ESG disclosures. However, we note that our results are robust to controlling for the performance of peer funds, time-varying market-wide PE firm ESG disclosures, fund ages, PE firms’ macroeconomic exposures and a host of fixed effects that hold constant country-trends as well as time-invariant PE firm and fund strategy characteristics. Thus, while suggestive, our findings are consistent with the interpretation that a stronger focus on ESG issues in PE firms’ investment strategies, as proxied by website-based ESG disclosures, pays off for PE firms and their investors in the form of successful exits and, thus, superior fund performance.”
Gender matters – Recent research from Investment Metrics finds that diverse teams, specifically those led by or co-managed by women, have outperformed male-led or -comanaged portfolios. Investment Metrics’ initial research on this was published in August 2021, which looked over multi-year time periods at teams that had female portfolio managers or co-managers. Despite the small number of firms with senior female portfolio leadership (13% of the active equity peer groups had a woman in the lead position or the co-lead portfolio manager position and only 7% had a woman CEO), the performance was no different than that of male only firms on a proportional basis. This seems to underscore that talent is equally distributed, while opportunity is not. Research published last month found that female led or co-led portfolios outperformed their male only counterparts over the last year. Further backing this up, Fidelity looked at the performance by gender of their retail clients and found that women routinely were outperforming the men.
The big institutional investors get it - With the recent backlash against ESG from more conservative politicians, billions of dollars are being pulled from asset managers that are deemed 'woke'. However, the most sophisticated institutional investors have found that ESG (when applied well) can help with risk management and returns. This was recently highlighted by Marcie Frost, the CEO of CalPERS, the largest US pension plan at roughly $500 billion. "Applying the lens of ESG is not a mandate for how to invest. Nor is it an endorsement of a political position or ideology," she said. "Those who say otherwise are actually advocating for investors like CalPERS to put on blinders ... to ignore information and data that might otherwise help build on the retirement security of our 2 million members.”
Vanguard left the Net Zero Alliance??? - Fund management firm Vanguard announced last week it was leaving the Net Zero Asset Manager Initiative(NZAM). This is material: Vanguard represents $7 trillion of the $66 trillion of capital associated with NZAM. However, the motivation may be more political than giving up on the benefits of net zero to the long-term investment performance of their clients. With Republicans now in control of the House, several Representatives have indicated they will investigate companies that have joined associations for ESG reasons as potentially violating anti-trust legislation. Vanguard stated that it remains committed to addressing climate change but feels it will have more independence outside the NZAM. We will be watching to see if their actions match prior climate commitments. If so, this seems to be a way to avoid political risk, and other firms may be following this model.
UN Biodiversity COP 15 started on Wednesday December 7th - In our last newsletter, we highlighted the challenges that the Climate Change COP 27 was facing with geopolitical tension making cooperation less likely. Claims of loss and damage by the majority of countries against the US and Europe for their emissions did indeed get more focus. We now shift to how the world will focus on biodiversity. Although climate change dominates dystopian projections, biodiversity deserves growing attention, as a growing body of research has identified that biodiversity loss is directly correlated with the depredation of ecosystem services needed for humanity. What we have found interesting is that the most sophisticated institutional investors that were focusing on carbon and climate risk 10 years ago are now focusing on biodiversity in their portfolios. Linking this back to the articles on ESG performance correlating with investment performance (including our own, in September), Paul Polman and Andrew Winston highlighted one of the challenges investors face is looking at individual investments over the short term, versus investing in systems over a longer time horizon. This is where some of the most sophisticated institutional investors seem to be focusing.
As this is our last newsletter of the year, we wish you a wonderful holiday season and Happy New Year!
The Impact Delta Team
contact@impactdelta.com
About Impact Delta
A secular shift towards a more responsible capitalism is underway. Impact Delta is a specialist consultancy founded to help investment firms capitalize on this shift. We believe good environmental and social thinking helps investment firms raise capital
