ESG INVESTING: A DUE DILIGENCE FRAMEWORK THAT KEEPS ON GIVING
By Alexander Golding, Skytop Contributing Author March 11, 2021
Alexander’s educational career started at NYU’s Stern School of Business, where he earned his baccalaureate degree in Finance. While at Stern, Alexander specialized in entrepreneurship, starting a cannabis business that did $3 million in sales. He took this knowledge on entrepreneurship to Florida Atlantic University, where he taught “Topics in Social Entrepreneurship” in the fall of 2017, where he taught undergraduate students how to prepare a business plan for a social enterprise.
Professionally, Alexander is the founder and CEO of Helped Hope LLC, a conference
production firm that specializes in impact investing for institutional investors. As a convenor, he attracted over $100 billion in AUM to the ‘Transformation2030’ event series held in New York City and San Francisco. Helped Hope LLC also boasts a well-managed contact list of over 7,000 members, from corporate sponsors, to speakers, and audience members. Tech industry standouts such as Andrew Yang, Brittany Kaiser, and Adam Draper all keynoted at his events.
Following ‘Transformation2030’s success, Alexander originated, analyzed, and advised on over 400 direct and fund investments, accepting only 3% of proposals. After presenting in front of several different institutional CIO’s, he executed on 7 deals, totaling $2,875,000, one of which will IPO in 2021.
Currently, Alexander is working on his Masters of Business Administration from The George Washington University School of Business, where he was awarded the Marvin L. Kay Fellowship in Finance.
ESG into the Mainstream
With all the buzz around Environmental, Social and Governance Investing’s (ESG Investing) stunning performance in the public markets during the pandemic, savvy investors are now adopting a two-part due diligence methodology to which they formerly gave little thought: ESG risk factor analysis combined with “impact investing” (a form of trend analysis in the public markets). Fortunately, while applying this process can help an investment “take off,” learning it is not rocket science. Accounting for company-specific ESG criteria and “values-inspired” growth trends is now a must-have alongside traditional metrics such as risk/reward profile, macroeconomic considerations, and industry analysis.
When presented with an opportunity, an ESG-conscious investor will first draw up his or her universe of securities according to specific criteria that influence the underlying firm’s success. Basic yet indispensable research questions must be answered. Among them: “How willing am I to lose part or all of this money?”, “What is the company’s ability to meet its liabilities?”, and “What type of interlocking activities does the firm engage in to give it a competitive advantage?”
ESG as a Values Play
Additionally, wise investors now ask questions that were outside the purview of traditional financial analysis. These range from: “Has the firm worked to improve the environmental and operating efficiencies of its plants, properties, and equipment?”, to “Based on the results of the firm’s employee survey, what percent of [its] employees are ‘satisfied’ or ‘engaged’?”1 Several impact advisory firms, such as Tideline and Blab, and investment advisors such as Flat World Partners and Cornerstone Capital Group, can help with the process of identifying relevant material questions.
At the same time, an investor may identify personally meaningful issue areas. Using one’s values as a source of inspiration can be a terrific way to identify opportunities for growth, especially when this ‘intuitive hunch’ is verified by properly sourced data. A trend in one direction may represent a broader macro movement. For instance, the push into cleantech hardware in the mid-2000s presaged today’s cleantech boom, as reflected by Tesla’s 100x stock price increase over the last ten years. Similarly, the US shift towards health and wellness is best seen in the food and beverage industry, where “sustainability-marketed products accounted for 50% of consumer packaged goods (CPG) growth from 2013 to 2018” and “sustainability-marketed products are responsible for more than half of the growth in consumer packaged goods from 2015 to 2019.”
However, when using values to guide investments, there are two controversial points that warrant further consideration. First: do not let the search for the perfect get in the way of the good. Change often comes incrementally. Just because Beyond Meat is now a publicly traded stock does not mean that one should divest from PepsiCo because PepsiCo has some unhealthy legacy products. Truth be told, PepsiCo expends an enormous amount of resources on its ‘better for you’ division and that business unit strongly contributed to Pepsi’s better-than-expected fourth quarter results in 2019.
Second: don’t let personal conservatism prevent the exploration of ESG questions. Some have criticized ESG investing as coinciding with “liberal” ways of thinking. Such complaints posit a false dichotomy. Consider: is eating a healthy diet a ‘liberal’ value? No, of course not. Is having strong corporate governance a liberal value? No, of course not. While there will be disagreement over what constitutes an acceptable motivating factor, part of the value-add of a person using his or her values to identify opportunities is that there will be an infinite number of perspectives on a firm’s growth potential and the risks to its competitive advantage. Some will lean left and others will lean right. The best ones will provide solutions that improve this world and make money at the same time.
ESG and ROI are Inextricably Linked
Making money is crucial, and it is the reason why there has been such a strong focus on ESG this year. Not only did ESG funds outperform conventional funds in 2019 and 2020 according to Morningstar researcher Jon Hale, they also outperformed them when the market dove in March 2020 in response to COVID. In fact, “24 of 26 environmental, social, and governance-tilted index funds outperformed their closest conventional counterparts” during the first quarter of 2020. In other words, they outperformed during the bull years (2019 and 2020) and the bear dive (March 2020)! Their success in 2020 is succinctly illustrated in this figure:
For the investor who wants to make savvy investment decisions, in today’s world he or she must include ESG factors and values-inspired growth trends into the due diligence process. Doing so opens new questions that can provide key business insights that might otherwise never come to light—potentially lowering the investment’s risk level. It also suggests the practice of interfacing with other ESG investors to learn how values guide their investment philosophies. Sharing research promotes smarter investing, and sharing values provides the benefit of connecting with someone else on a fundamental human level, which is especially important during the current global pandemic.