FA Magazine May 2023 | Page 52

“ Some politicians of late have been rallying against ‘ woke ’ capitalism , whatever that means . I frankly don ’ t think limiting choices available to investors is a market-based approach at all .”
— Joe Keefe Impax Asset Management it is today . It ’ s not at all about feeling virtuous . “ Our primary focus is on delivering above-market returns ,” he says .
“ ESG issues or factors are increasingly considered by most asset managers for the simple reason that they are increasingly deemed as material to how companies perform , and therefore to how investment portfolios invested in those companies perform ,” he says .
interest in sustainable investing is increasing for some investors ,” says Laura Cope , a Vanguard spokesperson , “ and [ we ] aim to provide ESG investment choices that meet their preferences .”
That interest is rising is indisputable . In 2021 , total ESG investments in the U . S . grew 55 %, as measured by Morningstar , with more than $ 500 billion flowing into ESG mutual funds alone ( as opposed to individual companies that are considered ESG-friendly ). Last year , when U . S . mutual funds had a net outflow of more than $ 370 billion , the nation ’ s ESG funds still brought in roughly $ 3 billion in new money .
Last October , PricewaterhouseCoopers projected that total ESG investments in the U . S . would grow from $ 4.5 trillion in 2021 to $ 10.5 trillion in 2026 . Globally , the PwC report concluded , “ ESG-orientated funds are set to grow much faster than the market as a whole .”
In another study , Capital Group found that 89 % of investors consider ESG issues a part of their investment approach .
Investors of many stripes agree good governance is desirable , and they have long sought to influence corporate policies in ways that align with their personal values — either by putting money into companies that have proved themselves to be good corporate citizens or by withholding it from those that aren ’ t .
Over the years , niche funds have emerged that adhere to specific religious values or that pursue particular social justice issues such as diversity , equity and inclusion ( DEI ) or environmental priorities . Meanwhile , the advent of direct indexing has allowed managers to customize portfolios to meet the preferences of individual investors .
Even some ESG skeptics see potential here . “ There is no universal measure of goodness ,” says Constrained Capital ’ s Neuman . “ Everyone ’ s opinions of the most important ESG characteristics are personal . Therefore , investors must choose their investments based on their own views .”
Sustainability Is The Future
Joe Keefe is the president of Impax Asset Management , a Portsmouth , N . H ., asset manager specializing in environmentally focused equities . Keefe says there ’ s already a transition underway for a more sustainable economy in the decades ahead , and his firm builds portfolios “ best positioned to benefit from this transition and away from sectors , industries and companies that we believe are likely to fall behind .”
This is part of his firm ’ s fiduciary duty , he says , because these investments have the best promise for the future , and ESG investing makes sense in the economy as
Not ‘ Woke ’ Capitalism
That , in part , is why political attempts to rein in ESG investing make Keefe angry . “ Some politicians of late have been rallying against ‘ woke ’ capitalism , whatever that means ,” he says . “ I frankly don ’ t think limiting choices available to investors is a market-based approach at all .”
He ’ s not alone in being outraged at political interference . In early March 2023 , both houses of Congress voted to reinstate restrictions on the use of ESG considerations in retirement and pension plans . The US SIF , a nonprofit research organization in Washington , D . C ., that advocates for socially responsible investing , swiftly urged President Biden to veto the measure ( which he subsequently did ), saying in a press release that it would interfere with plan sponsors ’ fiduciary duty “ to focus on relevant risk-return factors and not subordinate the interests of participants and beneficiaries .”
Kiley Miller , principal director of sustainable investing at Envestnet PMC , a popular investment platform for advisors , agrees . ESG investing , she says , incorporates relevant but hard-to-quantify factors related to corporate culture , corporate reputation and brand value . These are “ dimensions that increasingly drive valuations ,” she says . “ We cannot ignore this information and continue to fulfill our fiduciary duty .”
True ESG Costs Money
If environmental , social and governance funds appear to mimic the S & P 500 , Miller says , it ’ s simply “ because of the rapid adoption of ESG-aware ETFs that were specifically designed to have relatively low tracking error to a stan-