Socially responsible investing has been problematic for some institutional asset managers because of its implicit judgments about a company's environmental, social and governance policies. While managers may hold strong views on ESG issues, they need to base their investments on bottom-line considerations, and squeaky clean companies aren't always the best investments.
A newer carve-out on the buy side is sustainable investing, which has some overlap with SRI but is essentially a different animal.
"There's still a perception out there that sustainable investing is socially responsible investing," said Bruce Kahn, portfolio manager at Sustainable Insight Capital Management (SICM), an asset manager focused on delivering risk adjusted returns to pension funds, endowment, foundations, high net worth individuals and family offices by investing long-only in publicly-listed equities.
"We are very distinct from that. We are not SRI investors; we're not making values-based investment decisions," Kahn continued. "The principals of the firm have values, but we're not making investment decisions from some moral perspective.”
SICM integrates sustainability into its investment process, such as ESG factors as they are material to pricing, "which is distinct from saying, 'we're a clean energy fund, or we're an SRI fund where we don't invest in tobacco,'” Kahn said, “We're looking at how environmental, social and governance factors have moved from the moral to the material."
Sustainability issues are increasingly relevant to investors as they seek to integrate environmental and corporate responsibility factors in both current and future investment practices, according to PwC.
“Our research sought to gain insight from investors about how they are incorporating issues of climate change, resource scarcity, extreme weather events and evolving corporate responsibility expectations into their investment decisions and strategies,” said Kayla Gillan, leader of PwC’s Investor Resource Institute. “We found significant evidence that an effect is occurring today—and that it is likely to increase in coming years.”
In the past, many investors have been exposed to a morals-based approach to investing and many have been disappointed with the financial return of SRI investors. “One of the reasons for that is it's a very disparate community, because one firm screens this out, another firm screens that out,” said Kahn. “Some firms will take investment positions simply to do shareholder engagement. So investors are interested in seeing how the ESG factors play into the investment process.”
SICM employs a proprietary process where it captures and harnesses “the brainpower of a broad universe of market professionals,” Kahn said. “Then we use that, coupled with environmental, social and governance performance, to help make our investment decisions. These are actively managed strategies.”
Prior to joining SICM, Kahn served as an investment strategist on sustainable investing for Deutsche Asset Management. He also managed a sustainable investment portfolio at Citi Smith Barney.
SICM started in February 2013. CEO Kevin Parker has been in the industry for more than 30 years, and the senior investment team has an average of over 27 years of investment experience.
Unlike most SRI managers, SICM does not use macroeconomic factors in its stock selection process. “We spend a good amount of time trying to avoid risk from other factors that are not with the company itself, so any of these common factors, macro global equity market factors, we attempt to diversify out of,” Kahn said. “What we don't want to diversify out is the actual company risk.”
He continued, “Our goal is to have the majority of the risk in our portfolio come from asset selection, the actual stock that we're picking, not whether it is a large cap company, or a growth company or it is in an emerging market. We try to diversify all those factors out. We don’t want to make macro calls.”