It is no surprise that massive amounts of capital have flowed towards ESG-focused companies and investment funds on both sides of the Atlantic in recent years, based on greater awareness of sustainability issues, growing recognition from organizations like McKinsey that ESG factors can have a positive material impact on a company’s performance, regulatory pressures, and investor preferences.
Barron’s reported that $3 billion in capital had moved into these funds in the US in 2022. For the year, assets under management at US sustainable funds stood at $286 billion. In the EU so-called “Article 9” funds (the EU’s highest classification for investment products claiming to deliver ESG-focused results) brought in € 30 billion in new money last year, now standing at € 330 billion in total AUM according to a report from Bloomberg.
A big question for investment managers (ranging from Registered Investment Advisors in the US to institutional investors, family office managers and financial analysts) is often: “What is the smartest way to select the best ESG-focused investment opportunities?” Many financial professionals are seeking to use this information to help maximize financial returns, reduce volatility and / or to achieve specific environmental or social goals.
There have been two leading choices in this area until recently in the form of simple aggregate ESG scores from – Morningstar’s Sustainalytics (expressed as risk rating categories) and MSCI ESG Ratings – which measure a company’s management of ESG risks and opportunities – ranked as “Laggard” (B,CCC), “Average” (A, BBB,BB) or “Leader” (AAA, AA).
While both services cover a large universe of companies their scoring methodologies may not fully capture the nuances of each company’s ESG performance. They also simply offer ESG scores and don’t differentiate between the various components of ESG. Finally, there is limited transparency in terms of the various datapoints used to create their ESG scores.
This situation has been compounded by an uneven and evolving regulatory landscape, sparked in part by the need to combat “greenwashing” – when companies or investment funds make false or exaggerated ESG-related claims. The EU and US also have different standards around ESG consideration. The EU has SFDR (Sustainable Finance Disclosure Regulations) which require financial market participants to disclose information on how they integrate ESG factors into their investment decisions.
In contrast, in the US the SEC (Securities and Exchange Commission) and Biden Administration are taking a wait-and-see approach as there are no federal regulations or directives that require investors to take ESG factors into account. Even well-respected credential granting organizations like the CFA Institute are evolving their ESG investment standards and criteria, having issued the first voluntary global standards for how ESG-related investments issues are considered back in November of 2021.
An additional age-based bias appears to be at play as well. The Wall Street Journal reported that a Stanford University study showed that investors 58 years old and older were the least likely to support ESG objectives in general, and those between 18 and 41 were most likely.
Many C-level executives and older investment advisors are apparently still committed to the old-school definition of fiduciary responsibility which focuses exclusively on optimizing quarterly financial performance. This mindset puts a blind eye towards longer-term ESG related evaluative criteria, and more obviously places the well-being of the planet and society at risk.
New Data-Driven ESG Investment Evaluation Platform
Enter Physis Investment – a new data driven impact investing platform founded by Stefania DiBartolomeo at Harvard University back in 2019. The company employs a SaaS business model that provides detailed ESG-related data, allowing investment managers to directly compare their investment choices at a company or portfolio level, all with complete data transparency.
This web-based service provides the user the ability to type in whatever ESG-related information they desire and get real-time data back immediately. The offering is designed to deliver a new level of data transparency to help answer the next “big” question in ESG-driven investing – how can the impact of investments on the planet be measured?
Company founder Stefania describes herself growing up as a “tree-hugger” who loved to spend time in nature, which evolved into a strong passion for preserving the natural eco-system. This drive helped her become the youngest impact investing fund manager in Europe, in turn making her a “Quant Humanist” – a professional with a strong quant-oriented financial orientation focused on common human needs and finding solutions for them.
The company name comes from the Greek word for “Nature” – reflecting the fact that everything on Earth is alive. The company mission is to help guide investment decisions that respect all life on Earth, by using machine learning, algorithms, and AI to analyze and then leverage the value of millions of relevant ESG-oriented data points.
Stefania has built her company with the belief that data-informed impact investing can both generate positive ESG impact and create competitive, if not superior financial returns. In short – Physis Investment is empowering their clients to do well by doing good. Investment managers can now dive deep into the impact of any given investment and then answer the question “If I make an investment in one specific company or fund – how will that investment impact people, the environment, and the planet? “All of this is designed to help shape a better tomorrow.
While this may sound like a lofty ambition, the business model is grounded in delivering the kind of customized, relevant, and timely information that allows investment managers to make decisions based on very specific ESG criteria or benchmarks. It goes beyond giving them the simple feeling they are pointed in the right direction so to speak – by using the one ESG-related evaluative factor provided by the competitors in this sector.
We can only hope that Ralph Waldo Emerson’s adage “Build a better mousetrap, and the world will beat a path to your door” takes hold with the investment management community when they consider using Physis Investment to source ESG-focused data to help build and manage their portfolios. Nothing less than the viability of our planet and well-being of future generations is at stake.
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