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Sustainable Investing Opinion Briefs: June 2018

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Recent Article by Theodore Kupfer in the National Review Asks the Question “Does Socially Responsible Investing Work as Advertised?”
June 28, 2018 – A recent article by Theodore Kupfer in the National Review, asks the question “Does Socially Responsible Investing Work as Advertised?” He believes that because sustainable investing “impose relevant constrains” on fund managers, it should be expected that ESG funds underperform and result in “less efficient” returns. Consequently, the returns on “sinful stocks” will be pushed down and those investing in them will eventually experience “higher returns”. We think this ignores the very real possibility that by channeling their investors’ dollars away from such stocks, ESG funds may incentivize these companies to adjust to the more efficient utilization of factor inputs not to mention adopting a more transparent competitive stance.

Morningstar’s John Hale, According to Barrons, Reported that Net Inflows into ESG Mutual Funds and ETFs Have Gotten a Boost Since President Trump’s Election
June 23, 2018 – According to research by Morningstar’s John Hale as reported in Barrons, net inflows into ESG mutual funds and ETFs have gotten a boost since President Trump’s election. Net inflows since November 2017 for ESG funds, have averaged 3 times that for the 12-months prior to the election. In part this is considered to be “a backlash against the president’s policies on the environment and other issues,” notably threatening to pull out of the Paris Accord. Other long-term macro-trends such as low-interest rates and the growing millennial populations may also be factors. We think that this is true, but would add factors such as the increased availability of ESG funds and their “newness” in the marketplace, combined with a general growing awareness of high-profile socio-economic events by the U.S. population. We would caution, however, that these occurrences and their associations should not be construed, given their short history, as causal relationships.

Morgan Stanley Survey on “Sustainable Signals” Reviews 118 Public and Private Corporate Pension Plans, Endowments, and Foundations in the US and Europe
June 20, 2018 – A survey by Morgan Stanley on “Sustainable Signals” as reported in Investment Week, reviews 118 public and private corporate pension plans, endowments, and foundations in the US and Europe. The survey finds that fully 84% of the respondents were currently considering using ESG factors in their investment processes. It also found impedances to incorporating ESG factors including: “proof of financial performance”; questionable quality of ESG data; and the lack of “quality” ESG managers. Third-parties are seen as important to “supporting sustainable investing,” especially when reporting ESG-related performance and providing investor education on sustainable investment processes. We have seen this concern expressed before and believe it has merit. Further, we think that it is largely a technical hurdle as opposed to being a philosophical one. This viewpoint while optimistic – philosophical differences often tend to be tougher to overcome than technical one – does not mean the hard work toward ingraining ESG fund investing is done.

The “Biggest Challenge to ESG investors” According to Matt Patsky the CEO of Trillion Asset Management is ESG Data Standardization
June 18, 2018 – The “Biggest Challenge to ESG investors” according to Matt Patsky the CEO of Trillion Asset Management is ESG data standardization. In a recent Barron’s interview, he viewed standardization as getting asset managers and investors to agree on “material issues” related to ESG for an industry or company, and then the specific metrics or indicators to use when measuring them. Next in importance he feels is to agree upon “core business” and “geography” or domicile of a company’s operations. No small challenge are these, and one could argue that in establishing such standards and metrics is an area of expertise in themselves. We think that this doesn’t lessen the importance and need to do so if sustainable funds are to grow beyond basic exclusionary processes. In fact, it may be the very basis of asset manager’s expert credibility in the ESG arena, and what sets them apart.

There is Evidence that Women Tend to be More Open to Investing for Environmental and Social Impacts, According to an Article (“The Allure of Sustainable Investing”) by Carol Clause in Barron’s
June 11, 2018 – There is evidence that women tend to be more open to investing for environmental and social impacts, according to an article (“The Allure of Sustainable Investing”) by Carol Clause in Barron’s. Further, a study by Eaton Vance finds that more female than male financial advisors think that “ESG investing is an important part of their practices.” These findings and others suggest that some advisors could miss out on growing female and broader Millennial markets, if they don’t recognize ESG issues. We agree, but we also think that advisors need to have a clearer and “universally accepted” definition and understanding of what constitutes sustainable funds and their investment strategies.

WealthManagement’s Editor-in-Chief David Armstrong Asks “Is Sustainable Investing Sustainable?”
June 11, 2018 – WealthManagement’s Editor-in-Chief David Armstrong asks “Is Sustainable Investing Sustainable?” This question arises as he finds the rate of new sustainable funds being brought to the market exceeds new asset flows. Mr. Armstrong notes that increased investing by Millennials are expected to change this equation, but it will take time. We think that this is true, but we also see that the sustainable fund sector of the industry is still at its beginning stages of development, and sales flows typically lag during this phase of any industry’s growth curve. We believe that sustainable fund flows will benefit as investment strategies move beyond basic exclusionary processes and adopt more integrated financially-based ESG strategies.

John Sullivan Asks in the 401(k) Specialist: “Is ESG Investing Bunk?”
June 8, 2018 – John Sullivan asks in the 401(k) Specialist: “Is ESG Investing Bunk?” He reviews a paper by Prof. Kalt and Dr. Turki which concludes that there is “no evidence” that environmental shareholder “proposals enhance shareholder value.” They also feel that additional disclosure does not “add materially” to helping shareholder make “appropriate portfolio decisions” for their retirement plans. We believe that these conclusions fail to recognize that the fund industry offers other services addressing diverse investor needs and desires. We do agree with the researcher that the investment industry’s role is not to set public policy. However, asset managers can play an important role toward addressing public ESG concerns through the placement of investor capital.

ESG Funds Performance: Impact & Alpha
June 6, 2018 – Brad Zigler addresses the ESG performance issue in a WealthManagement magazine research report “ESG Funds: Impact & Alpha.” He finds that ESG-focused investments tend to have “more reliable earnings” and “can outperform the market.” In his research, he compares the performance of 6 ESG ETFs for the 12-months ending with the 1Q18. These broad-based” ETFs outperformed the market as represented by the SPY Index. They also had betas at or less than 0.0 and positive alphas. This is encouraging but it represents a very short period and we think much caution should be taken when interpreting such findings.

Hedge Fund Managers Show Less Interest in ESG Investing In Spite of Increased Investor Interest Per Survey Reported by Mark Gilbert in Bloomberg
June 6, 2018 – Hedge fund managers show less interest in ESG investing in spite of increased investor interest according to a survey reported by Mark Gilbert in Bloomberg. The survey was conducted by the London-based trade association Alternative Investment Management Group, and states that hedge managers cited a lack of interest from financial intermediaries, cost and return considerations for their low enthusiasm for ESG investing. We ask; but aren’t these managers supposes to have specialized expertise and knowledge that address and hopefully overcome these concerns?

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