Investing Well by Doing Good: A CIO Benefits from the VC-ESG Connection

Media Coverage February 21, 2019

Full article available on Chief Investment Officer
By Christine Giordano

First story in new series examines how one CIO sourced his VC investments that just happened to be ESG.

Summary 

Environmental, social, and governance (ESG) investing is not always an easy tightrope to walk. As environmental concerns, labor laws, shady government practices, and women and children’s rights take center stage at the world symposia and the United Nations, some believe that it’s institutional investors and their influential dollar-power that may be the key to change. Some consider ESG a strategic portfolio hedge for the years ahead. On the other side of the argument, however, is the risky amount of money that portfolios can lose in the short term by divesting from sin and dividend stocks that might fall on the wrong side of public relations.

And so, ESG remains a cautious subject for chief investment officers (CIOs) who find themselves grappling with best practices and avoiding being the target of lawsuits that search for lucrative, low-hanging fruit at large funds. CIOs also must ensure that investment standards are in alignment, regardless of whether there are multiple missions. Despite their personal beliefs, the main question most CIOs must always answer is how he/she made good investments decisions, not how he or she helped to save the planet.

But what if there is a way to do both?

Investors are starting to see the positive effects of ESG investing in their returns: companies with high ESG scores in the Eurozone generated annualized returns of 6.6% from 2014-2017, up from an annualized loss of 1.2% the prior three years, according to an Amundi SA study released in January.

Truvalue Labs issued a report studying how ESG considerations will impact 2019 Uber and Lyft’s potential IPO valuations. In comparing the negative and positive exposure events, material factors, and social capital of Uber and Lyft, the firm found a correlation to market share trends in the United States, and fundamental performance. The long-term insight score of Uber is 53/100 and Lyft is 58/100, (with 100 being the highest score. )

The data privacy problems at Facebook have taught the market to be more careful and less tolerant of sloppy development practices, noted Hendrik Bartel, Truvalue Labs’ CEO.

“Our system tracks about 15,000 equities, and a few thousand of those are privately held… we’re getting out of the era of build and break things and fix it later. Venture capitalists and more so, the markets, are expecting companies to think about what they’re building,” Bartel told CIO.

Consumers seeking sustainable products are helping the VC-ESG trend. Larger mega cap companies in the consumer space often don’t have the in-house capabilities to develop those products and find it easier to acquire startups than create them from scratch.

“From an M&A standpoint, if you’re building something with a purpose and a clear sustainability angle to it, there’s actually a clear, robust exit opportunity,” said Andre Shepley, researcher and product manager at Truvalue Labs.