Video: Impact vs. ESG Investing

Greg Mausz, chief operating officer at Preferred Capital Securities, sat down with Gloria Nelund, chief executive officer of Trilinc Global, to discuss the nuances of impact investing and environmental, social, governance (ESG) investing.

As more investors seek investment opportunities that align with their values and have a positive impact on the world, without sacrificing returns, Nelund explains the differences between impact and ESG investments, while providing insight into how advisors approach the subject with their clients.

Video Transcript

Greg Mausz   00:08

Welcome to another edition of Focus on Alternatives brought to you by ADISA the Alternative and Direct Investment Securities Association. For more educational content like this please check out the resource library tab on adisa.org. My name is Greg Mausz, I’ll be your host today, and I’m joined by Gloria Nelund she’s the CEO of Trilinc. So, thank you for joining us today.

Gloria Nelund   00:30

Thank you for having me.

Greg Mausz   00:32

So, we’re going to be talking impact investing and ESG, and kind of comparing them. So why don’t you just start off by giving us the basic definitions.

Gloria Nelund   00:41

OK, everybody might not agree with these definitions but I’m going to try to make a nuanced…subject simple and that’s not always easy. So ESG is really looking at how a company runs their company, so the policies and practices of the company. So, E stands for environmental S stands for social G stands for governance. People typically think of governance because you go sure you want a company that’s got audited financials that has good controls. But if you think about it, you also want a company that treats their employees fairly, that pays fair wages, that has benefits for their employees, does training so that’s the social piece of it.

From an environmental piece I think everybody also thinks of that as oh they don’t pollute the soil if they are a manufacturing plant, or you know they don’t dump all their wastewater into rivers or whatever. But there’s also lots of other ways to look at the environmental side of a company. And how any company actually treats the environment just in who they buy their supplies, who they buy from, do they use recycled paper there’s lots of nuances to… to both but ESG, I’m sorry to me is pretty simple because it’s just the policies and practices of how they run their company.

Impact investing is where it gets a little more challenging because it really comes from the perspective of the investor. And you’re making an investment with the intent to create some kind of positive impact in the community that you’re investing in or in the world. And so, you’re investing in something with the intent to create positive impact. So, a good example would be, you’re investing in a wastewater treatment plant… oh that has an obvious impact. Or you’re investing in a company that um, I’m trying to think of a really good one now, that provides clean water to underserved populations those are the easy ones. The ones that aren’t as easy are well if you’re making an investment in a small mid-size business that the business doesn’t really have access to capital, but that company is going to have a lot of impact because they create jobs, they pay higher wages things like that so you have to look at are you making that investment with the intent to create impact. And can you create impact with that investment? And so again they’re a little nuanced but I do think they’re different and people talk about them as if they’re the same.

Greg Mausz   03:37

Right, so thank you for walking us through that. I mean I read about you know different articles about ESG and impact investing and they kind of align with what you’re saying but not necessarily always. why is there a discrepancy there?

Gloria Nelund   03:52

Yes, well I think that there are a group of investors who say… well if I am holding companies accountable by looking at their policies and practices and I’m paying attention doing ESG screens then that in of itself is impact in investment because it is impactful right, and so they call that have impact investment. And I look at it and go well sure it is impactful absolutely because you want companies or investors to pay attention to what the companies are doing that they’re investing in but that isn’t necessarily an impact investment which again it’s a little nuanced but if you think about OK what are the outcomes that you can measure from the impact that you’re having to me that is more of an impact investment. And it’s got to be measurable tangible right. ESG investing if you’re investing in companies to influence their policies and practices or you’re investing in the ones that already are doing good things. Well, we’re not changing anything that’s not measurable. And again, it’s impactful because you want to do that versus investing in bad companies.

Greg Mausz   05:06

Sure.

Gloria Nelund   05:07

But it’s not necessarily an impact investment.

Greg Mausz   05:10

So, I like that it’s the Intent to make an impact and then how are you measuring that impact.

Gloria Nelund   05:15

Yes.

Greg Mausz   05:15

So perfect so practically how do these both play out when making an investment, ESG and impact investing?

Gloria Nelund   05:23

So, it depends on how you’re looking at it and if you’re doing a public investment or a private investment. If you’re doing a private investment, it’s so much easier because you actually do have access to information. You can tell that company if you don’t give me that information then you’re not getting my money. So, you do have a lot more influence when you are doing private investments. But I would say you know the whole investment industry has gone a long way to get public companies to report on

environmental social and governance kinds of policies and practices. And so, from an ESG perspective I we would argue that you would first do a screen and say OK do I want to invest in this company? So what are their policies and practices? And can I even influence those positions those policies and practices with my investment. And so that would be the ESG side of it. Then impact you would track overtime and you would do a baseline assessment and say if I’m investing in this wastewater treatment plant then I want to know how many tons of wastewater is are being treated and turned into clean drinking water for example. And there are metrics that you can use to then track and report that out over time.

Greg Mausz   06:44

So let me throw another term in the mix here so SRI, social responsible Investing. How does that play into this?

Gloria Nelund   06:52

(Laughing)

Greg Mausz   06:53

Because I’ve I’ve heard of SRI for like decades yeah yeah but you know it’s newer then ESG but so how does SRI fit in all of this?

Gloria Nelund   07:00

Right so Sri is socially responsible investing, and I would say it’s not too different from ESG investing except in its history. And so socially responsible investing has been around for a long time, and it originally started more as values based negative screening. So, I am not going to invest in these things tobacco, firearms, alcohol whatever things were your values. And that was a way to reflect your values in the way you invested. And so again historically socially responsible investing meant screening out and then I would say probably in the last decade maybe maybe it’s been shorter than that, but now socially responsible investors have started looking at it as well wait a minute we can also use that as a positive screen and say we’re going to use those values to pick companies that meet my values. And so that’s oversimplifying it, but it is really an easy way to think about it. SRI is more values based both negative and positive. And then it could also be like…. what’s the word to use?… proactive using your investment to get up some kind of a proxy out for a public company to change your behavior. Right?

Greg Mausz   08:33

Activism investing, yeah yeah.

Gloria Nelund   08:35

Shareholder activism, thank you.

Yeah so, I think that falls under the umbrella of socially responsible investing as well. But again typically it’s from the values perspective.

Greg Mausz   08:46

So, I’ve seen that investors are more and more interested in ESG investing and impact investing. How… how do advisors you know engage with clients on these topics?

Gloria Nelund   08:59

That’s a great question, and I think a lot of advisors, particularly ones that are part of the ADISA are asking themselves that same question, like how do I engage? And I think the easiest way to do it Is for the advisor to get educated themselves. To… to really understand the differences in the nuances and then understand what investments are available. So that once they sit down and talk to a client about you know what are your… what’s important to you? What do you care about? And then they can look at can I align this person’s investment portfolio without giving up investment return. Can I align that what that person cares about their causes you know the the things that are important to them with their investments, their traditional investments. And I think more and more it’s easier because there are more companies that are paying attention to those things. And you know I personally imagine a world where investors all get together and say OK, we’re only going to invest in good companies right ones that are doing bad things. And that’s when everybody you know realizes the power they have as an investor. If you think about getting everybody together and doing the same thing, then you could change the world. Because you if you hold companies accountable to a certain behavior then that’s what’s going to bring about change. But it is…. I heard actually Michael Underhill this morning say it’s a it’s an evolution not a revolution and I go oh I think that’s true, unfortunately right? I’d like it to be a revolution.

Greg Mausz   10:48

I appreciate that too, Gloria thank you for walking us through these various nuances in these definitions I appreciate it.

Gloria Nelund   10:54

You’re welcome, thanks for having me.

Greg Mausz   10:56

And thank you for watching another episode of Focus on Alternatives. To view the rest of the series please visit adisa.org, thank you.

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