Moving down the sustainable investing spectrum: SRI and ESG

KM: Let’s talk about the evolution from a siloed approach to investing and philanthropy to a more integrated approach. We’ll start with the first step, which is SRI. How frequently do you see requests for this, and what does its implementation look like?

SB: The first thing I do with clients who express interest in this area is to try and understand their mission. Often, we hear from clients that they want sustainable investments or ESG, and then you ask them what they’re trying to achieve, and they haven’t thought about it in that way. Having those discussions makes it much easier to implement what they want in their investing.

A common request is to build a portfolio that excludes “sin stocks.” This is easy to do. What gets tricky is how far down the value chain you want to go. For example, what happens if a company owns convenience stores that sell cigarettes? Do you want to sell that holding? When clients come to us with requests like this, we go through every company they own and screen based on what percentage of revenue comes from those sin stocks. Typically, because of how we invest, those percentages are very small, so most clients will take out the tobacco company, for example, but live with a fraction of a percentage in a particular sin stock.

KM: Next on our spectrum is ESG investing, where ESG data is incorporated into the investment decision-making process. What does that look like in practice?

SB: Because our investment approach focuses on high-quality companies with increasing cash flows and sustainable growth, ESG factors are one of many factors that our managers consider in their investment decision-making. The evaluation is not new, but the focus on it and the description of it has become much more important. All of these factors are going to help companies be sustainable over time.

More recently, we’ve seen managers releasing written ESG policy statements. That is important because it informs the mind and helps fill in any gaps.

KM: There are some limitations in ESG investing for philanthropists, a big one being it does not incorporate a client’s values. Rather, ESG investing recognizes that companies with effective policies and practices around ESG factors might have less overall risk, resulting in more favorable investing outcomes.

SB: SRI looks at your values. ESG is trying to move into the “right” direction, but it won’t necessarily give you a portfolio of companies that align with your values. The problem with just relying on ESG factors is that you are capturing data that is self-reported by the companies, which I hope changes over time. 

Focusing in on impact investing

KM: What about philanthropists who want to go one step further and make change?

SB: That’s impact investing. Impact investments are made with the intention to generate positive, measurable social and environmental impact alongside a financial return, according to the Global Impact Investing Network. You have to define what type of impact you’d like to make, and then identify funds that can accommodate those needs.

There are a few things to keep in mind with this. First, the most important thing to me is intentionality. You want managers that are doing this to make improvements in the areas they’re focused on. In terms of asset class, impact investments can be across a range of asset classes, though typically we think of them as private investments. I also like to see impact measurement that shows what the manager has accomplished. And the last thing to keep in mind is financial returns – there are impact funds that don’t necessarily provide a market-like return.

KM: The impact investing space has taken off. In 2022, the Global Impact Investing Network calculated $1.164 trillion as the size of the impact investing market globally. Bloomberg estimates that ESG assets could hit $53 trillion by 2025 and comprise a third of global AUM. As more dollars flow into these strategies, what challenges are we seeing?

SB: The challenges are always the same across all investments – finding great opportunities that fit our criteria overseen by intellectually honest and talented managers. I don’t know how much of the market is managed that way. What we need to understand as managers is whether these funds are making the impact that we believe our clients deserve.

There is no one-size-fits-all with impact investing, so another challenge we are facing is identifying the right funds that resonate with our clients.

There seems to be a generational shift, where the next generation is more likely to want companies that make a positive impact. What do you think the future looks like in this space?

KM: The research shows millennials are twice as likely to invest in companies that make a positive impact, so they are embracing this. We are seeing a lot of next generation members asking questions about investments that are integrated in their philanthropy, which may cause the family’s philanthropy to evolve in that direction.

Integrating your investments and your philanthropy requires purposeful planning. You don’t just sit down as a family and say you want your investments and philanthropy to align and that’s it. The first step involves having deep conversations around a family’s unique definition of success.

Once we understand the family’s goals and objectives, we work with them to implement investment strategies as well as philanthropic strategies that are aligned with those goals. We’re seeing deeper, more nuanced conversations around this approach, driven by the next generation.

I also think we’ll continue to see the development of creative strategies that are more integrated in terms of investments and philanthropy. There are strategies we aren’t going to discuss today that are further down the spectrum and closer to philanthropy – for example, a program-related investment (PRI), which is an investment that a private family foundation can make. The primary purpose of a PRI is a social return, but it can also generate a financial return. We’re also going to see the emergence of entity structures that have both investment-oriented returns as well as social returns.