The three dimensions of investing today are risk, return, and impact. Experts say investors concerned about ESG need to 'do their homework'

The three dimensions of investing today are risk, return, and impact. Experts say investors concerned about ESG need to 'do their homework'
"Future of Finance," an Insider virtual event, was presented on June 8, 2021."Future of Finance," an Insider virtual event, was presented on June 8, 2021.
  • When it comes to data on sustainable investing, asking the right questions is key.
  • Execs from Bridgewater and LGIM outlined policies that could encourage better ESG disclosure.
  • The conversation was part of Insider's virtual event, "Future of Finance," presented by Grayscale on June 8, 2021.

As financial institutions grapple with the steep risks posed by the imminent global climate crisis, ESG (environmental, social, and governance) investing has emerged as a potential solution. While these sustainable investment strategies have gained popularity with investors, data and reporting surrounding ESG factors can be opaque and confusing.

Karen Karniol-Tambour, co-chief investment officer for sustainability at Bridgewater Associates, the world's largest hedge fund, said that sorting through that data and making sense of it is part of an investor's job. She said answering questions about an investment's sustainability merits may feel like a new challenge, but is not any different than answering familiar macroeconomic questions about a country's growth rate, for example.
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Karniol-Tambour made these comments during Insider's recent virtual event, "Future of Finance," presented by Grayscale, which took place on June 8, 2021.
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This panel, titled "Sustainable Investing Pays Off?" was moderated by Bradley Saacks, senior finance reporter at Insider, and featured Karniol-Tambour along with John Hoeppner, head of US stewardship and sustainable investments at Legal & General Investment Management (LGIM) America, a division of the $1 trillion global asset manager.

Karniol-Tambour said that the key question for Bridgewater in evaluating ESG investments is what they are trying to get out of the data.

"Don't think about what is presented to you, but [think about] what concept are you actually trying to capture," Karniol-Tambour said.
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Hoeppner said in analyzing sustainable investments, LGIM is trying to "create [its] own points of view and rely less on others."

The firm has two key goals in mind when it looks to ESG investing, Hoeppner said. The first is to raise standards across the board with regard to disclosure and the second is to find an investment advantage by looking at subsets of ESG data that are closely linked to mispricings in the market. Karniol-Tambour said her clients want to make the highest returns with the lowest risk possible. She said that there are many areas in which ESG factors are material to making money in a particular market.
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"For example, if we're going and deciding whether or not we think the price of copper is going to go up or down, you really just can't do that analysis without looking at what's the pace going to be in which it will transition away from carbon," Karniol-Tambour said.

"Investing is not two-dimensional risk and return. It's actually three-dimensional risk, return, and impact -or risk, return, and sustainability. And that third dimension, deserves just as much care, attention, analysis, customization."

Multiple strategies are available to investors seeking to maximize impact. Hoeppner said that divestment, or opting out of investing in certain assets because they are not sustainable, is "overused" as a strategy. He said that LGIM, as a major investor in many public companies, prefers to use its access to have "constructive engagements" with their portfolio companies through discussions and proxy votes on how to navigate risk.
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Moderator Bradley Saacks asked the panelists about the regulatory environment for ESG investing. Hoeppner mentioned that in the US today, if you are participating in a 401k or pension as part of your corporation, it is legally unclear whether or not you can have a sustainability fund in your lineup.

He said he is optimistic that regulators will sort out the issue, which he attributed to an "incorrect assumption" that ESG strategies were deployed for non-financial benefits, whereas he believes most ESG research is actually performed with the goal of reaping financial benefits.

He also expressed the hope that the Securities and Exchange Commission (SEC) enforces some sort of mandatory disclosure for climate risk for all companies, arguing that information is the basis for a free market.
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Karniol-Tambour pointed to Australia's policy of making companies report their potential exposure to modern slavery and eradicate it as an example of sound policy based on a robust data ecosystem.

Without disclosures and data, Hoeppner said, it is difficult to discern companies' credibility on ESG issues.

"All investment managers see ESG and sustainable investing as a commercial opportunity," Hoeppner said.
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"How do you tell one asset manager from another one when everyone says that they have the best sustainability credentials? The hard answer is that you have to do your homework."

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