GGI Business Review is a new business series, capturing snapshots of the GGI Harvard Case Style Masterclass by CEOs and Industry Leaders.
This particular piece is a snapshot from Gary Whitehurst's GGI Masterclass.
People all around the world are gradually becoming more aware of sustainable living as a way of life to ensure a safe future for their coming generations. This has led to an increased awareness of the impact that their actions are making. These actions include many things and vary from their daily way of living to the investments that they make.
With the different problems prevalent around the world, people want to help solve those problems and uplift society, but in many cases, they don't know how they could achieve this. Now, governments and various philanthropy can solve these major problems and are actively working towards it as well, but to really solve the issues at scale today, private capital is required. Through the infusion of private capital, solving various worldwide issues becomes significantly scalable.
This is where impact investing companies come into play, as they help bridge the gap between private capital and impact creation through problem-solving by making investments into ventures that are working towards creating an impact while providing significant returns to the investors as well. This area of investing is further explained by Gary Whitehurst, CEO of Bright Investing, who through his years of experience in the impact investing space takes us on the journey of understanding “Sustainable investing and impact investing”.
THE PHENOMENON OF SUSTAINABLE AND IMPACT INVESTING
Many people believe that sustainable and impact investing is a new phenomenon. But in reality, it's been around quite some time and attracts a significant amount of annual investment. Worldwide around $35 trillion is invested in this sector, which amounts to roughly 36% of the total investment market.
As people invest in areas that guide them to a more sustainable way of living and lead to impact creation, the phenomena of impact investing and sustainable investing come into play.
Earlier the type of investments available in this sector was usually affordable for big investors only, but gradually as the products started to come down more to the retail level that individuals could invest in, then the number of investors in this sector increased gradually and the growth of this sector started to spike. The impact sector has seen significant growth since the pandemic, and this has been driven by the world events like the COVID-19 pandemic, post which more people have started to pitch in and help as much as they can.
SUSTAINABLE INVESTING FOR THE FUTURE
Meeting the needs of the present without compromising the ability of future generations to meet theirs, or to put it another way, sustainable investing is “Investing today, thinking about the future”. Sustainable Investing is usually clubbed with ESG, whereas in reality, ESG is a subset of sustainable investing.
Sustainable Investing has a set of functions which help the investors drive impact in this sector.
Functions of Sustainable Investing:
Solving Real Problems: It helps investors to fund companies that are actually working to solve real problems.
Shareholder Activism: Sometimes by purchasing a certain amount of shares, the investors are able to direct the businesses on how they need to operate and drive the businesses towards more sustainable solutions.
HISTORY AND GROWTH OF SUSTAINABLE INVESTING AND ESG
Sustainable Investing has been around in its basic form for hundreds of years, but it started to hit the investment markets with the concept of Socially responsible investing. This phase came around the 1960s and 1970s when certain religious groups approached their investment advisors/portfolio managers to remove certain stocks from the portfolio, for eg, weapons, tobacco and alcohol. This decision was based on their identity, i.e. who they were and what they stood for.
Gradually, the portfolio managers started to understand the role of sustainable investing and started measuring the businesses based on their ESG ratings while investing and ultimately they came to the understanding that companies with better ESG ratings would be good investment options for the long-term.
MEASURING IMPACT USING ESG
What is ESG? ESG stands for Environmental, Social, and Governance. These are metrics which the companies report on about how they run their business.
On the Environmental side, it shows how products and practices impact the environment. It may include issues like energy management and climate change policies, which could be calculated using carbon footprint as a metric. A good environmental score suggests that the business is prone to fewer risks due to environmental issues.
On the Social side, it is about how companies manage relationships, employees, suppliers and communities. It can include issues like employee health and safety or consumer data security. Gender diversity in a business can be a sample metric for measuring the social score of a business. A good social score helps a business in attracting better talent.
On the Governance side, it is essentially how a company is run and what are the prevalent business practices. It deals with issues such as business ethics, board structure, and other policies. Executive pay can be used as a metric for measuring and scoring the governance aspect of a business. A strong governance score indicates that the business is well-run and has strong governance and high-level risk controls.
CREATING A WINNING PORTFOLIO
Impact investing companies actively do Risk Assessments while creating their client’s portfolio, as it helps drive the “asset allocation” for their portfolio using the following criteria:
Financial capacity of the clients
Tolerance and emotional comfort: how much risk a client can tolerate
The use of United Nations SDGs helps clients define to their portfolio advisors what type of businesses they want to invest in, based on the SDGs those businesses are working on and it essentially helps to align the client with their sustainability missions. This also helps the impact investing companies measure the impact of the businesses and how they are helping their clients achieve their goals.
After looking at financial capability and the mission alignment of the clients, impact investing companies are able to direct the client investments in the right direction.
INNOVATION AND IMPACT
In private markets, an investor can easily invest in a company that they know is making an impact in society, for example, any sustainable fashion brand. But in the public markets, there are many ways to invest for impact.
A straightforward investment philosophy: Don't invest in companies that cause global systematic risks; instead, invest in the solutions.
When talking about impact, most people first consider renewable energy like solar power. But actually, impact investing expands to lots of other sectors as well, for eg healthcare, electric vehicles, and sustainable manufacturing.
The most important thing to do when working in the impact investing sector is to make the problems personal, and connect with problems while working on providing the solution to those problems. Only when the investors connect to the people and their problems personally, only then they can work towards bringing real change.
Lastly, it is important to understand that Impact and Returns go hand in hand in impact investing, as Impact investing is essentially about generating competitive returns while making an impact on society.
Gary Whitehurst, CSRIC™ is CEO & Co-Founder of Brighter Investing. Gary is also a Chartered SRI Counselor. With more than two decades in the wealth management business, Gary has devoted his career to building exceptional client experiences. He held nearly every role from financial advisor to operations to head of advisory services and corporate leadership for a local firm that grew to $1.4 billion in assets under management during his tenure.
Gary holds a Bachelor's degree in Business Administration (BBA) from the University of Georgia.