Asset managers have focused too much on providing highly ESG-rated products while ignoring investments that combine socially and environmentally responsible practices with delivering alpha returns, according to speakers 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 cash flows into the sector by 30% over the past five years. A survey administered by Uplifting Capital of 1,000 active individual investors also found that for 71%, access to impact investment offerings would influence their choice of which RIAs to work with.
“It's gaining momentum in all the different buffers,” Assante said.
However, according to Luke Oliver, managing director, head of climate investing and head of strategy at KraneShares, the products most asset managers offer these investors are subpar. 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 a lot of products that lacked all the underlying portfolio theory that we've spent 100 years evolving,” Oliver noted. “And we threw it all away to remove a bunch of names because they had bad results in this new data set that was being mentioned. That was fundamentally broken.”
In Oliver's view, the approach should be to find investment opportunities that take advantage of long-term secular trends that attract capital by offering products and services that can be measured on ESG metrics.
For Oliver and KraneShares, one such trend is the global move towards decarbonisation and government-run carbon capture markets in the UK, Europe and the United States. In their view, investing in carbon credit futures helps deliver returns to investors by increasing the cost of carbon emissions.
For Assante, these trends include the strong need for affordable housing in the US, along with significant regulatory policy incentives, innovative financing structures and a massive supply/demand imbalance that will mitigate investors' risk exposure. She also recommended investing with fund managers from diverse backgrounds, as they may be aware of investment opportunities in historically overlooked communities.
“We need to educate investors, asset managers and financial advisors that this is not a concessionary market; this is not just a controlled market. This is an opportunity to really improve your overall financial portfolio,” Assante said.
This will also help drive investment in assets and companies that help improve the planet, as investors will always allocate a much higher percentage of their money to improve their financial results than they would to what they see as philanthropy, Oliver noted.
However, many fund managers that focus on impact investing will be new to the market and will need to be evaluated on different metrics than funds with more traditional strategies, according to Assante. For example, she noted that with institutional partners, Uplifting Capital requires many years of successful principle investments and high AUM. “But the reality is you may 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 seed capital was. “These are critical elements of their overall investment process,” Assante said. “We see intentionality and discipline around impact metrics (to be) just as important as standard financial metrics. And so, we want to see that in their process because we're evaluating their due diligence and what they do.”