Pioneering Impact Investing Platform Pushes for Widespread Change

It seems that OpenInvest’s largest backer, Andreessen Horowitz, one of the world’s most well-known venture capital funds, agrees. It led OpenInvest’s …

With the goal of shaking things up on a global level, the Andreessen Horowitz-backed asset management platform OpenInvest has become a signatory to the United Nations-supported Principles for Responsible Investment (PRI), the world’s leading proponent of responsible investment.

Since its founding in 2015, OpenInvest’s mission has been “to democratize capital and give every investor an easy and low-cost way to fully reflect their values in their portfolios, using their investments as a powerful tool to drive social change.”

The company’s platform enables customization, direct indexing and impact investing at scale for financial advisers, institutions and individual investors. It works by asking investors about issues they care about—with examples including climate change, human rights and gender equality—and then automatically creates a customized index fund comprised of companies that do best on those topics. Individuals can join the platform with a minimum $100 investment.

The future of impact investing

“We call it the post-fund future,” Claire Veuthey, director of ESG and impact for OpenInvest, told TriplePundit. “We strongly feel this is where industry is heading. Technology has made possible direct indexing which enables a ton of customization. An investor on our platform can buy individual stocks and maintain a product that looks like an ETF [exchange-traded fund] product but is customized to what they care about. It’s part of the growing conscious consumer trend and a really intense desire for customization.”

Joining the PRI will bolster OpenInvest’s desire to change the asset industry and improve the industry’s technology by giving them a seat at the table with the broader investment community, Veuthey said.

The PRI, launched in 2006, today has over 2,300 signatories. It’s made up of six voluntary and aspirational investment principles that offer a menu of possible actions for incorporating ESG (environmental, social and governance) issues into investment practice.

The OpenInvest platform integrates multi-sourced ESG data and offers a number of causes, such as divestment from fossil fuel producers and major greenhouse gas emitters, as well as investment in corporate women leaders, LGBTQ-friendly companies and companies supporting refugees.

Joining the PRI is “not really a stretch for us,” Veuthey added. “There’s nothing we’re doing that is not ESG, but being under the auspices of a global collaborative organization is a way to keep moving the industry forward.”

It’s not surprising that OpenInvest chose this moment to join the global movement in responsible investment—which, as 3p has reported on extensively, is growing in leaps and bounds. According to a recent survey, global sustainable investment reached $30.7 trillion at the start of 2018, and investors who integrate environmental, social and governance principles into their portfolios now represent about $17.5 trillion, up 69 percent from 2016.

An industry ripe for disruption

It seems that OpenInvest’s largest backer, Andreessen Horowitz, one of the world’s most well-known venture capital funds, agrees. It led OpenInvest’s $3.25 million investment seed round in 2017.

“Their support is a huge testament to what we’re doing,” Veuthey told us. “They see the investment industry as very much ripe for disruption. The large investment institutions have worked the same way for decades. My sense is that venture capitalists like Andreessen Horowitz see the writing on the wall and understand the shift that is taking place.”

The founders of OpenInvest, one of the first venture-backed public benefit corporations, come from the hedge fund industry or large banks (Veuthey is former head of ESG for Wells Fargo Asset Management) and some are civil society leaders. What they have in common “is changing the game of what is possible in public investing,” Veuthey said.

She sees a tipping point on the horizon, where OpenInvest’s vision of mainstreamed ESG investing and a more democratized form of impact investing becomes a standard approach.

“Will it happen in 2019? I’m not sure, but it is starting to happen in smaller networks, [based on] the conversations we’ve seen,” she said. “There’s a real tension between what compliance regulations and control require in large organizations and the customization that technology enables. We think that the transparency we can offer financial advisors—which they can share with their clients—is going to become even more important.”

Image credit: Headway/Unsplash

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3 Sustainable Investing Questions Advisors Need to Be Able to Answer

These shortcomings may explain the recent uptick in separately managed accounts (SMAs) — portfolios of single name equity securities that allow for …

Although not an entirely new phenomenon, values-based investing has undoubtedly seen a surge in popularity in recent years. Twenty-six percent of U.S. assets under management now employ socially responsible investing strategies, a 38% increase since 2016, and that number is only poised to rise as investor interest grows.

Propelling this market growth, in large part, is the millennial generation, who are twice as likely as their older counterparts to seek out sustainable investing opportunities. This is, after all, a cohort that came of age during the Great Recession and witnessed the global effects of poor governance. They’ve seen the #MeToo movement precipitate shake-ups at the highest levels of corporate and political life, been privy to dire warnings regarding the health of our planet, and lived through the longest war in U.S. history. When placed in that context, it likely comes as little surprise that they rank values-based investing among the top three priorities when selecting a financial advisor.

Female investors, too, are a significant driving force behind the growing interest in values-based investing and, as they ascend the corporate ladder and inherit wealth, this demographic’s influence is ever-growing. As of 2015, women controlled 51% (approximately $14 trillion) of personal wealth in the U.S.; they are on track to oversee $22 trillion by 2020.

For the purposes of this column, sustainable investing involves the integration of environmental, social and governance (ESG) criteria to subsequently allocate capital toward companies that consciously treat their resources — whether it’s human capital, their surrounding communities or the planet — with respect. This philosophy certainly represents a tremendous opportunity for investment advisors to establish a competitive advantage and grow their practice, yet many struggle to reconcile that burgeoning client interest with commensurate adoption of sustainable investing strategies. From concerns about companies’ true alignment with personal values, to ambiguity regarding nomenclature, there is a largely untapped chance for financial advisors to educate themselves — and their clients — about the benefits of investing in sustainable companies. That’s why, as client demand for sustainable investing expands, we believe there are some key questions investment advisors should expect, welcome and be prepared to answer:

1. Performance: “Does sustainable investing mean I have to compromise returns?”

One thing holding advisors back from embracing sustainable investing is confusion around financial performance. According to Cerruli Associates, more than a third (35%) of advisors who do not currently employ ESG strategies cite concerns about its potential impact on performance as a deterrent, with 75% noting that it is at least a moderately important factor in their decision-making process.

We believe that companies that prioritize responsible and equitable business practices — including environmental safety, workplace diversity and strong corporate governance — will, in the long run, outperform those that do not. And we’re not alone in our thinking: Data from financial institutions such as JPMorgan, BlackRock and Goldman Sachs also suggests that the consideration of ESG factors can provide investment advisors with full context on the risks of investing in a company without compromising returns — and, in some cases, even exceed the benchmark.

We suggest that, where possible, advisors reference empirical data and leverage any available strategy backtesting tools to enhance investors’ confidence in sustainable investing. There is a growing body of research that uses backtesting simulation to illustrate the impact of ESG integration on various investment strategies. One such report from MSCI found that integration of ESG criteria into passive strategies generally enhanced risk-adjusted performance over a decade-long period, tilting the portfolio toward higher-quality and lower-volatility securities.

2. Product: “How can I align my investment portfolio with my values?”

Developing a robust understanding of your clients’ values can be a complex process that involves multiple considerations and trade-offs, often not so simply distilled to “reducing carbon emissions” or “investing in clean energy.” For example, many clients will approach an investment advisor with the goal of divesting from oil and gas while simultaneously investing in companies that are the largest supporters of clean energy. However, the inconvenient reality around clean energy is that some of the largest oil companies have invested heavily into renewables. That’s why, before embarking on a sustainability journey with your client, it’s important to first engage them in a candid conversation to clarify their expectations and explain the trade-offs inherent to investing for environmental and societal impact, while concurrently discussing traditional metrics such as returns, index tracking error and risk tolerance.

Once you’ve thoroughly explored clients’ needs, there is no shortage of sustainable investment products in the marketplace — per EY, the number of available sustainable investing funds has nearly tripled since 2008. However, not all products are created equal, and clients have little visibility into whether these “off-the-shelf” mutual funds or exchange-traded funds (ETFs) don’t match a client’s specific priorities or offer enough flexibility to accommodate them.

These shortcomings may explain the recent uptick in separately managed accounts (SMAs) — portfolios of single name equity securities that allow for much greater portfolio customization than ETFs. SMAs represent a natural fit for sustainable investing, as they may be adjusted to include or exclude specific stocks based on an individual’s preferences — whether it’s screening out private prison operators, penalizing wasteful manufacturers, or favoring companies that promote equitable labor practices.

SMAs can offer the same diversified index-like exposure as ETFs, but with fewer restrictions around the equities that can be held and their allocation levels. They therefore enjoy greater tax benefits, such as gain deferral and security-level tax-loss harvesting, that may be attractive to clients.

Advisors should be prepared to engage in conversations that places the client’s needs at the forefront. They should assess the strategy’s historical performance, underlying data sources, exposure to various factors, ability to withstand various market conditions, alignment with their overall allocation model, reporting capabilities and more. Moreover, they must ask themselves whether a product reflects the client’s ethical convictions and priorities.

3. Reporting: “Can you show me the impact my investments are having?”

According to a survey by the Chartered Alternative Investment Analyst (CAIA) Association and Adveq, the most significant hurdle to ESG adoption is a dearth of standardized, comparable data on material sustainability issues — which is essential to understanding impact performance. Although there have been efforts in recent years to bring more uniformity and cohesion to sustainability terminology and reporting, there is still work to be done.

That said, the entry of major players into the sustainable investing space makes one thing clear: this is no longer a fringe interest, and is steadily moving from the margins to the mainstream. Now, there are numerous reputable third-party vendors offering quality data that communicates companies’ performance against key metrics such as governance, environmental impact, human rights issues, fraud, tax evasion and more. Equally, there are a number of NGOs that are further empowering investors by actively collecting metrics on a broad swath of sustainability issues. And, thanks in part to efforts by organizations such as the GRI (Global Reporting Initiative), the IIRC (International Integrated Reporting Council) and UN PRI (United Nations Principles for Responsible Investment), and their efforts to develop clear reporting frameworks and standards, approaches to sustainability data collection and use are improving by the day.

However, investors can’t trust what they don’t understand, and advisors have an opportunity to help them cut through the noise. One way they can add value and forge deeper client connections is by reframing the way they approach portfolio reviews — by augmenting discussions about quarterly returns with insights on how a client’s holdings are contributing to pressing global issues, advisors have the potential to ignite clients’ passions. While this may be as simple as communicating the ways in which the client’s investments have bolstered companies that are exploring green technologies, or reduced exposure to executive misconduct scandals, diligent advisors can go the extra mile by using data to quantify impact (e.g. a portfolio’s carbon emissions or executive gender parity).

Embracing ESG

Education is paramount when it comes to engaging clients around the issues that matter to them, and there exists a plethora of useful materials that advisors can turn to as they seek to expand their sustainability practice. The Forum for Sustainable and Responsible Investment (US SIF) offers online and in-person training services, to help advisors get a handle on key sustainability concepts. The more authoritative advisors can be in discussing these concepts with clients, the more prepared they will be.

The upcoming wealth transfer between baby boomers and millennials, which will see some $30 trillion change hands in North America alone, presents a compelling business case for advisors to become sustainability thought leaders. To do so, they must feel confident answering the questions outlined above and guiding their customers toward a flexible solution to their values. Advisors have the opportunity, if they choose to take it, to engage existing and prospective clients alike in exploring the issues that matter to them. Most of all, they should not shy away from these conversations — because that’s when the potential for a deeper, richer client relationship presents itself.

Jay LipmanJay Lipman is a co-founder and president of Ethic, a tech-driven asset manager that powers the creation of custom sustainable investing portfolios for advisors and institutional investors. Born in the UK, he now lives in San Francisco. Previously, he managed the capital of ultra-high-net-worth investors in Deutsche Bank’s cross-asset capital markets structuring and sales team.

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Dorothea Baur: «UBS May As Well Finance Coal and Oil»

Most banks and many financial technology firms have various sustainable products. The hurdles for even retail clients to invest in them have fallen.
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Dorothea Baur helps pension funds hone their sustainability strategies. The ethicist tells why banks like UBS should keep financing coal producers.

Dorothea Baur, you recently won a mandate to advise one of Switzerland’s biggest pension funds. Why do they need an ethics expert?

Interestingly, we encountered each other at an investor conference where a speaker had said that his pension fund is directed by Swiss democracy. I asked for the microphone and said, ‘how half-baked is that?’

Why half-baked?

Because it cannot possibly be thought through – for example with last year’s self-determination initiative which sought to set Swiss law over foreign laws and thus impacted human rights law which applies the world over.

And they hired you on the spot?

A representative of the other pension fund was also in the audience that day and they contacted me. They wanted to develop a sustainable investment policy and were looking for independent advice in order to clarify for themselves what sustainability means.

You also find the term murky?

For some people, it means calculating carbon emissions. For others, it includes governance and gender diversity initiatives. For yet others, sustainability is a PR joke.

«If the world is destroyed by climate change, your monthly pension doesn’t mean much anymore»

There’s a lot of confusion among pension funds what sustainability means. My job is to help clients get clarity on what they want to discuss with each other in this respect.

How’s that worked out?

I conducted one-to-one interviews with my clients in order to find out where their consensus was. By that, I mean what they hoped for from sustainability – and what they feared. Many of them are fearful of breaching the duty of care guidelines.

Those who aren’t considering sustainability aren’t fulfilling their duty of care to their policyholders?

This is a huge debate outside of Switzerland too. Here, pension funds need to maintain the standard of living for their beneficiaries. It’s primarily a monetary obligation. But in a world that destroyed by climate change, a monthly pension payout doesn’t have much value anymore.

What does that mean?

Those who invest in firms which foment climate change are putting the value of their pensions at risk. In the U.K. for example pension funds have to actively justify why they aren’t investing along sustainable criteria.

Swiss finance will probably adopt the EU sustainable finance action plan. The price of clear standards and rules?

We urgently need standards. If the EU establishes them, Swiss pension funds won’t be able to get around also being subject to them.

«Today’s young climate strikers are the banking clients of tomorrow»

Personally, I would like pension funds to define and internalize their own values – instead of having these forced on them.

Is finance underestimating the youth climate strikes as well as victories for environmental-focused parties in Europe?

The climate youth have a long-term perspective – ironically, they have that in common with the pension fund world. That’s why I see synergies here. By contrast, the finance industry is frequently short-term focused, so the protests are a challenge for them. We need to clearly recognize that today’s climate strikers are tomorrow’s banking clients and employees.

What Swiss firms are role models – except Alternative Bank, where you are an independent ethics expert?

I don’t want to advertise individual firms. Most banks and many financial technology firms have various sustainable products. The hurdles for even retail clients to invest in them have fallen.

UBS has pledged to double its assets in these strategies by 2020. How sustainable are these industrial-style promises?

Scale is key in order to have an impact, but we need to ask ourselves what exactly we are scaling.

«It gets hypocritical when companies try to conceal these transactions»

That’s why it’s important to clearly delineate what sustainable investing is – and I’m not accusing UBS of anything here.

NGOs like Greenpeace have singled out banks like UBS for financing the fossil fuel industry. Are banks hypocritical?

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