Sophisticated investors are increasingly asking about ESG in discussions with their financial professionals, many of them motivated by research showing sustainable investing improves returns. Many others — especially very wealthy individuals — want to make sure their investments are improving the world.
Erika Karp, founder and CEO of Cornerstone Capital Group, specializes in environmental, social and governance analysis. She expects socially responsible investing will "grow enormously" in 2020 in the U.S., in part because of the presidential election.
Liz Skinner: Why should ESG factors be integrated into investment analysis and don't investors have to give up some performance to align their investments and values?
Erika Karp: The material environmental, social, and governance factors that relate to the economic and profit outcomes of companies absolutely have to be, and they are, a fundamental part of investment research.
Investors absolutely do not have to give up financial returns to get social and environmental returns. That is a myth. It's a myth of underperformance. In fact, when you do environmental, social and governance analysis, you sacrifice nothing except indifference.
LS: Is it hard for investors to really know what kind of impact the companies they're investing in are having on the planet?
EK: It is challenging for investors to understand what kind of social and environmental impact their investments are having. That said, we're making progress, it's not impossible. What I would suggest is that to be roughly right is more important than to be precisely wrong. We do have challenges in getting the data that we need. That said, if you start thinking about the sustainable development goals at the U.N., you can start thinking about what your personal investment policies are. Is it water? Is it a gender equity? Is it poverty? Whatever you want to affect and improve, you can.
LS: What's the hardest part of convincing someone that they can and should be investing their money in ways that support supports their values?
EK: The hardest part is to get people to know that their money can make a difference, that their money can be aligned with their values. It is complex to do it properly. That said, firms like mine, Cornerstone Capital, are thoughtful about democratizing sustainable and impact investing. We've explicitly built a fund to do that. Everyone can invest for impact.
LS: What needs to happen to move ESG really into the mainstream?
EK: First, we have to have an understanding of exactly what it is. ESG analysis is a tool. It's a discipline. SRI, or impact or sustainable investing, are a viewpoint. Doing ESG analysis effectively takes enormous skill, so we have to simplify for the world exactly how it's done, and we can do it.
LS: Do you think the elections will have an impact on ESG Investing?
EK: I definitely think that the elections will have an impact on ESG analysis and socially responsible investing or impact investing. And that impact really should be a mobilizing force for money moving towards impact.