This week, Boardwalk Capital was pleased to welcome a new impact-focused client to the firm. The excitement of working with each new client is always so real and personal. After all, we get to create the vehicle through which our client will be able to make their values felt in the world. It’s a big, exciting deal...
Each client brings both conscious and subconscious desires for sustainability or social impact. Through discussions (and some coaxing), we learn what really matters to them socially along with their financial goals and attitudes towards risk. The markets will play a large part in determining if we hit their return objectives, of course, and if volatility is above or below target, but achieving the client’s non-financial objectives feels like it might be more under our control.
What becomes clear, however, is that it can be impossible to achieve all of a client’s financial and social objectives. The desire for sustainability perfection is met with reality: That impact investing is always a “work in progress” and subject to tradeoffs. With better analytical tools, we now know how achieving one objective can undermine a secondary one – especially when the investor profile dictates the use of pooled vehicles such as ETFs or mutual funds.
One such example was found in this new client’s (highly consistent) desire to have a low carbon footprint and zero exposure to companies with fossil fuel reserves, among other attributes. The two seem similar, but the measurement of a carbon footprint goes far beyond the energy sector to include each company in the portfolio. And a fund targeting "low carbon" might not be fully fossil fuel free, and vice versa. Similarly, a fund emphasizing companies with, say, strong policies towards women might not care about its carbon footprint.
In the end, there are tradeoffs, and misleading fund names. But the pursuit of the perfect shouldn’t stop us from executing strategies that accomplish a great deal.
Declaring a Partial Victory is Okay
This client was able to reduce their portfolio’s carbon footprint (their top priority) by more than half versus their prior asset mix while almost completely eliminating fossil fuel reserves. In the process, they also substantially reduced other types of toxic air and water pollution (-40% and -60% respectively) and increased their exposure to clean energy companies to twice the benchmark weight.
Likewise, if past environmental violations are evidence of lax controls, then the new portfolio is much less exposed (90% less than before) to such behavior. Lastly, if past performance is any indication, their potential for financial appreciation should be unchanged.
The unintended consequences, however, included finding that the new portfolio’s companies have fewer women on their boards. Somehow, we had a backslide on the issue of deforestation, and a small amount of tobacco exposure found its way into the portfolio (a real negative for this client.)
In summary, it was a good result but less than perfect. More work was needed and priorities needed to be confirmed.
What About Changing the World?
Perfection aside, an investor can feel good about aligning their portfolio with their values while also honestly recognizing that this work hasn’t actually changed the world. At least not yet.
When public securities are involved, we are still just transferring ownership of what we don’t like to someone else. (Those shares are still out there -- they just changed hands.)
Real world outcomes don't likely change until, for instance, investors vote to demand a change in company policies. Or when employees choose to work elsewhere (even for less money.) Or when declining sales reflect customers’ rejection of corporate practices.
Things get even more impactful when lenders are resistant to lend. Or when investors are more often sellers of the shares than they are buyers, eroding the share price, and sending the strongest possible message. (The coal industry suffered from most, if not all, of these conditions.)
The good news is that, together, these actions eventually will move the needle. Our collective actions can add up to big impact. And yes, they’re worth doing, even if they are just intended to align our investments with our own values.
Thankfully, over time, they can add up to a whole lot more.