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The ESG Investment Opportunity

By Caroline Abramo

Introduction

ESG Investments, inclusive of Impact and SRIs, are the fastest growing sector in Asset Management, presenting trillions of dollars of investment opportunities. Within the broader range of ESG investments, climate investments are among the most prominent and, to the surprise of many, offer some of the best returns.

Pana LCE approaches ESG as a fiduciary. We believe ESG investment is risk management, in that there is a definitive risk to investors if the ESG opportunity is ignored. According to Bruce Graham, VP, Financial Advisor at Captrust, “ESG investing is all about the future and those who commit now will lead in the future, as technology only accelerates the growing movement towards companies with positive ESG characteristics.”

At Pana LCE, we look at ESG as follows:

  • Environment (E) is about Green House Gas (GHG) reductions and sustainable environmental footprints in all real asset supply chains.
  • Social (S) is the diversity of our platform, staff, portfolio companies and business partners.
  • Governance (G) is ruled by transparency and alignment for ourselves, our investors and our portfolio companies.

ESG is the very definition of risk management and the potential for companies to profit from this focus is boundless.

What can ESG/Climate Investments do for Investors?

While ESG/climate investing will ultimately ensure our survival on this planet, climate investments in the present term will help revolutionize the way we look at not only the environment but everything in the economy, from supply chains to consumer goods to real estate to transportation to infrastructure. In the future, we will need to support a growing global population growth that cannot exist with water supplies, sustainable food and energy practices, and waste management, climate investing will help support the technologies and innovations that will support that growth. The monetary effect of climate is rising and the time to act is NOW. The academic work has been done and the technology is being perfected. Now we must supply the capital.

How Can Investment Managers meet the challenges of ESG/Climate Investing?

The questions we are hearing from investors focus on how ESG applies to portfolio construction, manager selection, and performance monitoring. Here are some tips for how to think about such questions.

  1. ESG is a fiduciary duty. Managers should be identified as fiduciaries against other like/kind investments and their “market rates.”
  2. ESG is not voluntary. It is not a charity. ESG represents true business diversity and true long-term impact. It is visible through common stock prices, bonds and futures markets.
  3. ESG is sustainability. It proves that what the manager / company does will endure
  4. ESG is durable assets. It is the businesses that these assets are in, and it is the politics surrounding them
  5. ESG is long term. Its impact is to prove, verify, diversify, and align incentives in the cap markets.
  6. ESG is fundamental. Traditional “quantitative” risk management cannot be the only risk management tool. It is grass roots, bottom-up fundamental work.
  7. ESG is risk management. It is hedging exogenous shocks like Fed policy, weather, management team issues, and liquidity in specific businesses.
  8. ESG is true diversification. The underlying businesses could be positive and negative to the same factors as ESG. ESG may affect an entire portfolio. We cannot just screen on some static variables. It must be dynamic. We must be nimble.