The rise of the power of ESG investing is indisputable. According to the recently published "ESG Data: Mainstream Consumption, Bigger Spending" report, ESG investing is growing significantly globally, as the responsible investment market reached USD30 trillion in AUM in 2018.
And there is a parallel significant rise in passive investing through ETFs.
Ethan Powell is CEO of Impact Shares, the first non-profit ETF platform, which has teamed up with the leadership of the NAACP, YWCA and UNCDF to help these organisations translate their social values into investable products by defining an evolving set of criteria that ensure ongoing alignment of corporate behaviours.
Powell (pictured) spent 20 plus years in financial services, however, he says: “I knew I wanted to do something different from straight financial services.”
Since 2006, he worked at hedge fund firm Highland Capital Management as head of product and strategy.
“That role made me think creatively how we could deliver our investment acumen in different wrappers and strategies to the investing public,” he says.
Hedge funds are similar to ESG, Powell believes. “They are trying to provide differentiated outcomes to the investing public.”
Since 2008, over USD4 trillion has moved from active to passive investing, while at the same time, the ESG sector within passive investing has grown from USD2.5 trillion to USD12 trillion.
“The challenge with those numbers is that some correctly believe there is greenwashing, which is more of a marketing exercise than real ESG” Powell says. “But even if you poke holes in the numbers it’s still tremendous growth in both passive and ESG investing. What Impact Shares is here to do is to provide more credible solutions for the USD12 trillion of investors wanting ESG. A lot of the USD12 trillion are institutional investors or retail investors looking for the E, environment, and the G, governance, but the messy middle is the S, the social, because everyone has different social priorities.”
Impact Shares’ solution was to construct a portfolio around single social issues. “We create single social issue equity market proxies so you get your financial beta and what we call social alpha. Social alpha is superior corporate outcomes relevant to your specific priorities.”
The ETF with the YWCA, which has advocated women’s rights for 163 years, is an example of this.
“This is not some Wall Street firm coming up with social screens,” Powell says. “It’s this tremendous organisation that has helped women’s issues over centuries in collaboration with Equileap which is a research firm that only deals in gender issues.”
Impact Shares works with the YWCA in the private sector, seeking to empower women by bringing in sexual harassment policies; fair hiring and payment practices; participation on the board and paternity and maternity policies.
Their partner in the ETF is data provider Sustainalytics and Impact Shares also scours the universe for other private data that will help augment the portfolio.
Having created the data pool, Impact Shares then works with Morningstar which creates the indices on which their ETFs are based. “Sustainalytics and Equileap are responsible for the social alpha while Morningstar is responsible for the financial beta.” The ETFs are listed on the New York Stock Exchange.
The financial screens are re-evaluated on an annual basis and the index holdings are reconstituted, giving the private sector incentive to improve and be recognised as a leader in one or more of these social issues. The ETFs currently have USD10 million in them from forward thinking family offices and individuals who want to make a commitment not just with philanthropic dollars but also their investment portfolios to advance their social priorities in the private sector, Powell says.
“We get tremendous feedback and lots of institutional investors are taking a wait and see approach with us. It’s a chicken and egg situation as everyone is interested but wants to see assets grow. We have no trouble getting great meetings – everyone is very positive, it’s just a matter of converting that enthusiasm into assets.”
Impact Shares is a non-profit firm itself so all net advisory income goes into Impact Partners, so that the firm effectively functions as an investment arm of that group.
“It’s all about transparency for us and creating engagement between the private and public sectors and capital allocators. Our goal is to have every social issue reflected by a separately investable ETF and have the platform serve as a barometer for social priorities.”
The Rockefeller Foundation’s Innovative Finance group is currently funding Impact Shares.
“Non-profits are owned by the people of the US,” Powell explains. “Even though I founded it and funded it, I could be fired from it as it is a platform built for the people by the people.”
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