In the following Q&A, IR Magazine talks with Ethan Powell, CEO of Impact Shares, to get an insight into the ESG-ETF convergence, trends within the impact investing space and its benefits for the investor relations community.
Can you explain the drivers behind ETF-ESG investing?
ETFs have largely been credited with the proliferation of indexed-based strategies, which reached more than $10 tn in assets in 2017, eclipsing the combined hedge fund and private equity markets. Meanwhile, the Forum for Sustainable and Responsible Investing reports that ESG strategies have grown from $2.5 tn in 2008 to $12 tn today.
An ESG-ETF is a convergence of these two trends. This investment vehicle is driven in part by the technological innovation of ETFs, which simply reduces cost and increases access to investment strategies, and by an acknowledgement that Wall Street can consistently generate superior risk-adjusted returns by emphasizing and being more intentional with the social implications of capital allocation.
What type of trends are you seeing in investment?
We are seeing more and more products emphasize their ESG philosophy. These products range from very basic governance screens to having a localized issue-specific private fund –for example, direct investment in the rehabilitation of a brownfield site to serve an underrepresented population.
In terms of demographic trends, more than 90 percent of millennials and 76 percent of women want social considerations incorporated into their investment portfolios. It is estimated that millennials will inherit $30 tn over the next two decades – the largest wealth transfer in history. And women are controlling an increasingly large portion of investable assets.
We also see the growing incorporation of ESG strategies within Employee Retirement Income Security Act (Erisa) qualified plans (including 401(k) and IRA plans). This is in part due to the Labor Department’s updated guidance under the Obama administration, which explicitly stated that the consideration of ESG criteria is in the best interests of investors.
In addition, the most recent tax reform increased standard deductions, while capping the deductibility on state and local taxes. The Congressional Budget Office estimated that 46 mn people itemized deductions in 2017, and it expects half that in 2018. This is important to social advocacy organizations that depend on charitable giving for funding, as the tax advantage of gifting only works if the gift-giver itemizes deductions.
How is ESG-ETF investing beneficial to the IR community?
Increasingly, corporate trade secrets and other sources of competitive advantage are eroding, in part due to a fickle consumer base and an accelerated product development cycle stemming from technological advances.
Investment and consumption patterns are increasingly reflecting the public’s perception of a company’s citizenship. It behooves investor relations professionals to intentionally craft and publicize the corporate character of their organization to appeal to their stakeholders and position the organization as a leader in relevant social topics.
What should IROs do to make use of this trend?
They should show their organization that a strong ESG philosophy is another form of competitive advantage that should be incorporated into marketing and public filings. Most ESG investors look to public filings as the source for ESG initiatives, so PR programs are not sufficient.
Additionally, there are efforts in Congress to pass the Paycheck Fairness Act and board diversity disclosure requirements. IR professionals should be in front of these legislative trends to be recognized as a leader before the new legislation is mandated.
In what region is ETF investing in ESG popular?
ESG investing is more popular in Europe than the US. But ETF adoption rates are higher in the US, in part because the country has a more decentralized system of investment decision-making.
Finally, what does the future hold, in your opinion?
Deutsche Bank recently had the most successful ETF launch in history. It was also the most successful ESG fund launch, raising close to $1 bn in the first week of trading. The majority of the investment came from a Finnish pension fund, but the launch is still illustrative of the increasing interest in low-cost, credible ESG investment options.
Ethan Powell is CEO and founder of Impact Shares, the first 501(c)(3) nonprofit exchange-traded fund platform
