Fennel

There is a growing number of investors who aren’t satisfied with just financial returns, they want to know that their investments are creating a better world. This desire to make change is at the core of impact investing. <a href="https://fennel.com/blog/esg-vs-sri-what-do-all-the-terms-mean">Impact investing</a> refers to when investments are made with the intention of generating positive and measurable social or environmental impacts. Typically, an investor will have an idea of what impact they want to have, and then seek out investments to create that impact. This could mean investing in renewable energy companies to promote decarbonization, investing in minority-led companies to promote the work of underrepresented groups, and so on. But what does this look like in practice? Here are a handful of impact investing examples for interested investors   <h4>Example #1: Impact investing in diverse founders</h4> So many startups rely on venture capital funding in order to get up and running. But where that VC cash flows isn’t always equitable. One study found that <a href="https://www.forbes.com/sites/forbesbusinesscouncil/2022/05/26/diversity-the-holy-grail-of-venture-capital/?sh=5b51cec34178">77% of VC dollars</a> go to startups led by white founders. In 2021, a record year for VC funding, <a href="https://news.crunchbase.com/diversity/vc-funding-black-founded-startups/">only 1.3%</a> of all U.S. venture and growth equity financing went to companies led by Black founders. Harlem Capital hopes to close that funding gap. Harlem Capital started in 2015 as a syndicate of angel investors, and evolved over the years into a fully-fledged VC firm. The company debuted with <a href="https://techcrunch.com/2019/12/02/diversity-focused-vc-fund-harlem-capital-debuts-with-40m/">its inaugural $40 million fund</a> in 2019 and plans to invest in 1,000 diverse founders over the course of 20 years. After using that $40M fund to invest in 23 companies, Harlem Capital raised <a href="https://harlem.capital/harlem-capital-134-million-fund/">a $134 million fund</a> to invest in even more diverse founders. These diverse founders are building an array of diverse solutions, from <a href="https://harlem.capital/portfolio/curu">credit platforms that provide wider access to loans</a>, to a <a href="https://harlem.capital/portfolio/agape">relationship wellness app for couples</a>, <a href="https://harlem.capital/portfolio/jobble">gig marketplace for independent workers</a>, and more.  “We fundamentally believe we are a venture fund with impact, not an impact fund. The way we generate impact is to give women and minority entrepreneurs ownership,” Harlem Capital managing partner Henri Pierre-Jacques told TechCrunch.   <h4>Example #2: Impact investing in the oil industry</h4> In late 2020, a small activist hedge fund called Engine No. 1 <a href="https://hbr.org/2021/01/can-a-tiny-hedge-fund-push-exxonmobile-towards-sustainability">acquired a $40 million stake</a> in oil giant ExxonMobil, worth about 0.02% of the company’s shares. The hedge fund then wrote <a href="https://reenergizexom.com/materials/letter-to-the-board-of-directors/">an open letter</a> to Exxon’s board of directors to explain why. In that letter, Engine No. 1 pointed out the ways that Exxon had been struggling and failed to deliver shareholder returns. It also pointed out a four-part strategy for fixing this: 1) refresh the board of directors with people who has experience in the energy industry 2) become more disciplined in managing long-term capital allocation 3) implement a plan for the business to thrive in a world pushing away from fossil fuels, and 4) realign management incentives with creating shareholder value. Engine No. 1 then nominated four new directors for Exxon’s board, and campaigned for them during proxy season. After gaining the support of some of Exxon’s largest shareholders, three out of four of those directors won seats on the board. After that, Exxon started <a href="https://engine1.com/transforming/articles/exxon-mobil-one-year-later/">making measurable advancements</a> towards its new goals. For example, the company committed $15B towards investing in low-carbon solutions over a six year span, announced new scope 1 and scope 2 greenhouse gas targets for 2030, added a low-carbon solutions business unit and got the former head of General Motors’ Cruise to lead it.   <h4>Example #3: Impact investing in response to apartheid </h4> Word about the injustices committed in apartheid-era South Africa spread across the world. While many South African groups fought for their rights, international organizations also joined in to show support in their own way.  By the 1970s and 80s, students at American universities <a href="https://www.universityofcalifornia.edu/news/how-students-helped-end-apartheid">were protesting in solidarity</a> with South African students. Although these American students were thousands of miles away, they thought they could help by pressuring their universities <a href="https://nvdatabase.swarthmore.edu/content/columbia-university-students-win-divestment-apartheid-south-africa-united-states-1985">to divest</a> from companies that supported the apartheid regime. By 1988, <a href="https://www.investopedia.com/articles/economics/08/protest-divestment-south-africa.asp">155 colleges</a> across the US and Canada had divested from South Africa. And soon this movement spread beyond universities. By the end of 1989, 26 states, 22 counties, and over 90 cities <a href="http://richardknight.homestead.com/files/uscorporations.htm">had also created policies</a> against companies doing business in South Africa. This pressure caused many US businesses to pull out of South Africa. From 1985 to 1990, over 200 US companies collectively pulled out of South Africa, resulting in <a href="https://www.investopedia.com/articles/economics/08/protest-divestment-south-africa.asp">a loss of $1 billion</a> in direct investment dollars. Other countries put pressure on their companies to pull out of South Africa too, and by the early 1990s, the South African economy was <a href="http://richardknight.homestead.com/files/uscorporations.htm">feeling the effects of capital flight</a>.   <h4>Example #4: Impact investing in Chicago</h4> Sometimes impact investing is most felt at the local level. The Chicago Community Trust is a foundation that connects philanthropic donors, local organizations, and generous individuals who want to use their money to create a positive impact within the Chicago community. In 2020, the foundation <a href="https://www.cct.org/press-releases/the-chicago-community-trust-launches-impact-investing-platform/">launched</a> an impact investing platform to help facilitate impact-driven investments. The platform also helps investors measure the impact of their contributions by showing if they help low-income neighborhoods, go to businesses run by minority or women owners, help provide affordable housing, or if they provide capital to sustainable energy initiatives.   <h4>Example #5: Impact investing in agricultural development</h4> Lots of people talk about ending world hunger, what are some ways to actually do that? According to Root Capital, by investing in agricultural enterprises in the developing world. Since 1999, Root Capital has been investing in agriculture businesses in Latin America, sub-Saharan Africa, and Southeast Asia. Not only does the organization supply capital, it also provides training to help these companies grow. In addition to creating more steady sources of food, Root Capital also aims to use its investments to help alleviate local poverty, protect the planet, and advance gender inclusion. To date, the organization has <a href="https://rootcapital.org/about-us/">distributed</a> $1.6 billion to over 750 clients, representing 2.3 million farmers and $4.6 billion in economic activity. Risks: Employing ESG strategies may not result in favorable investment performance. The returns on a portfolio consisting primarily of Environmental, Social and Governance (“ESG”) aware, diversity equity and inclusion (DEI), impact investing, or faith-based investments may be lower or higher than a portfolio that is more diversified or where decisions are based solely on investment considerations. Because ESG criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member <a href="http://finra.org">FINRA</a> <a href="https://www.sipc.org/">SIPC</a>.

Shareholder Activism

ESG

5 Impact Investing Examples: How Investors Push for Change

What does impact investing look like in practice?

Fennel

21 Dec, 2022

5 min read

MBA programs are a breeding ground for future business leaders, so analyzing the trends that pop up in business schools across the country can give us a window into the direction the corporate world is heading. So what’s one growing trend we see? Sustainability. As the demand for sustainable business practices continues to grow, business schools are increasingly incorporating sustainability into their curricula. Teaching sustainable business in higher education equips students with the skills to address environmental and social challenges in their future careers and drive the transition to a more sustainable economy. It is difficult to determine which business school was the first to offer courses in sustainability as many schools have been incorporating sustainability into their curricula for several decades. One of the earliest programs to offer courses in sustainability was the <a href="https://erb.umich.edu/about/">Erb Institute for Global Sustainable Enterprise at the University of Michigan</a>. The Erb Institute was founded in 1996 through a partnership between the School of Natural Resources and Environment and the Ross School of Business. The program offers a dual-degree MBA/MS in Natural Resources and Environment, with a focus on sustainable business practices. Another early program was the <a href="https://aces.kenaninstitute.unc.edu/about-us/">Center for Sustainable Enterprise at the Kenan-Flagler Business School at the University of North Carolina at Chapel Hill</a>. The center was established in 1999 and offers courses and programs that focus on sustainability, corporate social responsibility, and environmental management. <a href="https://www.presidio.edu/about/">Presidio Graduate School in San Francisco</a>  was also an early pioneer in sustainability education and today is recognized as one of the most prestigious institutions cultivating the next generation of changemakers. Presidio Graduate School was founded in the early 2000s and offers MBA programs with a focus on sustainability and social entrepreneurship. Since then, many other business schools have followed suit and incorporated sustainability into their curricula. And in recent years, business schools have seen <a href="https://www.nytimes.com/2021/11/13/business/dealbook/business-schools-esg.html">a growing interest in ESG</a> from students.   <h4 class="p1">Why teach sustainability in business schools?</h4> Today's consumers are increasingly aware of the environmental and social impacts of the products and services they buy, and they are demanding more sustainable options. So a business school degree that emphasizes sustainability can help companies appeal to these consumers. The <a href="https://www2.deloitte.com/content/dam/Deloitte/mk/Documents/about-deloitte/2021-deloitte-global-millennial-survey-report.pdf">2021 Deloitte Global Millennial and Gen Z Survey</a> found that over a quarter of respondents consider a company's environmental and social impact when making purchasing decisions and <a href="https://www.firstinsight.com/white-papers-posts/gen-z-shoppers-demand-sustainability">First Insight’s annual surveys</a> uncovered a rising trend that consumers across all generations—from Baby Boomers to Gen Z—are willing to pay more for sustainable products. Investors are also increasingly looking for companies that have strong environmental and social performance, as some believe that this can be an indicator of long-term financial success. The <a href="https://thegiin.org/research/publication/impinv-survey-2020/">Global Impact Investing Network's Annual Impact Investor Survey</a> found that assets under management in the impact investing industry grew to $715 billion in 2020. On top of that, regulators are tightening environmental and social regulations, which can create new opportunities and challenges for businesses. The <a href="https://www.greenbiz.com/report/2021-state-green-business-report">2021 State of Green Business report by GreenBiz</a> found that 58% of companies surveyed believed that regulation was a driver of their sustainability initiatives. By incorporating sustainability into the curriculum, business schools can prepare students to meet these regulatory demands and help businesses navigate this rapidly evolving landscape. Teaching sustainable business practices can also help business schools differentiate themselves from their peers and <a href="https://www.uab.edu/reporter/campus/sustainability/item/9853-faculty-student-interest-drives-expansion-of-sustainability-curriculum">attract students who are passionate about sustainability as well as faculty who are passionate about teaching it</a>. Additionally, employers are increasingly looking for candidates who have sustainability knowledge and skills, as this can be a competitive advantage in today's job market. In fact, green job postings have increased by <a href="https://www.fastcompany.com/90831379/green-jobs-are-up-237-in-the-last-5-years-here-are-4-ways-to-boost-your-skills-and-get-hired">237% in the last 5 years</a>. To effectively teach sustainable business practices, business schools must take a comprehensive approach that includes both core courses and electives. Core courses should cover the fundamental concepts and principles of sustainability, including environmental science, social and ethical issues, and sustainability frameworks. Electives should provide students with opportunities to explore sustainability in greater depth and develop skills in specific areas, such as sustainable operations, social entrepreneurship, or sustainability reporting. Often, business schools engage with external stakeholders, such as industry partners and community organizations, to build partnerships and collaborative initiatives such as internships and capstone projects. And sometimes those initiatives help partners develop sustainability goals. An example of a group that does this is the Global Engagement Committee of the <a href="https://bacademics.org/">Global B Corp Academic Community</a> (B Academics). This organization works to advance the state of academic study into business as a force for good. The committee recently released a <a href="https://bacademics.org/wp-content/uploads/2023/03/White-paper-B-Academics-2-1.pdf">white paper</a> which presents academic initiatives aimed at accelerating the transition to a new economy, specifically through promoting teaching and research on B Corporations and sustainable business. The aim of the white paper is to share how these efforts have emerged and evolved and their different models, challenges and learning processes. Global initiatives such as B Academics and the <a href="https://www.unprme.org/">United Nations’ Principles for Responsible Management Education</a> are standardizing and legitimizing the way we teach sustainable business in higher education across the world, indicating that business schools will continue to be catalysts for a new class of professionals.     ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member FINRA SIPC.

Business Schools Are Ushering In a New Era of Sustainability

A growing number of future business leaders are learning about sustainability in their MBA programs.

Sultan White

08 Jun, 2023

5 min

You may have heard the terms Sustainable Development Goals (SDGs) and environmental, social, and governance (ESG) mentioned together by responsible businesses or socially-conscious investors, but what are they actually and how do they relate to each other? Besides ESG and SDG both being three-letter acronyms and both originating from the United Nations, the two terms relate to entirely different concepts. However, there are some parallels between the two. So let’s dive into the terms ESG and SDG, what they mean, and what they have in common.   <h4>What are the sustainable development goals (SDGs)?</h4> In 2015, the United Nations General Assembly put together the sustainable development goals (SDGs) as a list of objectives to aim to accomplish by 2030. The 17 SDGs represent aspirational goals that span a range of economic and societal issues, with the intention of providing a better future for all. Here are the 17 SDGs: 1. No Poverty: This goal seeks to end poverty in all forms across the world, providing help to the most vulnerable populations. 2. Zero Hunger: Seeks to end hunger and malnutrition, while promoting access to sustainable agriculture. 3. Good Health and Well-being: Seeks to address the prevalence of certain diseases, as well as provide better and more equitable healthcare. 4. Quality Education: Achieve equitable and quality education, including free primary and secondary schooling for children. 5. Gender Equality: End discrimination against women and girls, which also means increasing access to education, jobs, reproductive health, and more. Also encourages more women to be leaders. 6. Clean Water and Sanitation: Address water scarcity, relieve water stress, and provide safe and clean drinking water to people who lack access to it. 7. Affordable and Clean Energy: Provide access to affordable renewable energy sources, especially as developing nations industrialize. 8. Decent Work and Economic Growth: Promote economic growth, access to well-paying jobs, end forced labor, and decrease economic inequality. 9. Industry, Innovation, and Infrastructure: Build resilient infrastructure, promote sustainable industrialization, and foster innovation. 10. Reduced Inequalities: Reduce global income inequality. 11. Sustainable Cities and Communities: Make cities and urban communities more sustainable, through things like providing access to affordable housing, business opportunities, public transportation and green spaces, and so on. 12. Responsible Consumption and Production: Promote sustainable consumption and production through increasing efficiency and minimizing waste. 13. Climate Action: Take urgent action to combat climate change and its worst repercussions. 14. Life Below Water: Protect coastal and marine ecosystems from damaging human impacts like pollution and ocean acidification, while promoting conservation. 15. Life on Land: Protect terrestrial ecosystems and combat loss of biodiversity. 16. Peace, Justice, and Strong Institutions: Work with governments and communities to address cycles of conflict and violence, while aiming for peace and prosperity. 17. Partnerships for the Goals: Promote cooperation between all communities to achieve these sustainable development goals.   As you can see, the 17 SDGs are quite ambitious. Aiming to eradicate poverty across the world by 2030 won’t be an easy task. But the point of the sustainable development goals isn’t to complete all of these things 100% by a certain deadline. Instead, the SDGs act as guiding principles to work towards in order to improve the well-being of humanity and the planet. Anyone can take these SDGs and use them to inform their plans for the future — whether that’s a government looking to provide better access to jobs and healthcare, a business trying to monitor its impact on marine or terrestrial ecosystems, or an investor looking to promote the growth of renewable energy projects or access to educational resources. The SDGs are broad enough that they are applicable in many different scenarios.   <h4>What is ESG?</h4> <a href="https://fennel.com/fennel101/6">Environmental, social and governance (ESG)</a>, is a broad framework that is used to measure an organization’s environmental and social impacts, as well as its corporate governance structure. Measuring these things involves a lot of data, and under the broad umbrella of ESG there are many different ESG metrics that, when taken together, paint a picture of ESG performance. For example, metrics like carbon emissions released, e-waste recycled, renewable energy used, and so on can help provide an understanding of an organization’s environmental performance. Meanwhile, the amount of charitable donations, employee diversity, and gender pay gaps can tell you more about social performance. Although the metrics are attempts to quantify these impacts, it’s important to note that ESG performance isn’t always black or white. The large amount of things that affect E, S, or G mean that ESG performance will always involve gray areas. For example, a company can be really good about protecting the environment, but may mistreat its employees. ESG scores are often used to quantify or make comparisons, but it may be more useful to think of ESG as a lens to analyze companies and get extra context, more so than it is a ranking system. ESG has different uses. Companies may use ESG as a way to create policies to support their employees, create transparent corporate governance structures, or ensure a positive impact on the environment. Meanwhile, investors may use ESG to align their investments with their vision for the future, or to <a href="https://fennel.com/blog/how-does-esg-relate-to-risk-management">identify potential investment risks</a>.   <h4>What do ESG and SDGs have in common? How are they different?</h4> Coincidentally, both ESG and SDG have their origins tied to the UN. The term ESG was first coined in 2004 by <a href="https://www.unepfi.org/fileadmin/events/2004/stocks/who_cares_wins_global_compact_2004.pdf">a United Nations report</a> titled “Who Cares Wins.” The report states, “in a more globalised, interconnected and competitive world the way that environmental, social and corporate governance issues are managed is part of companies’ overall management quality needed to compete successfully. Companies that perform better with regard to these issues can increase shareholder value by, for example, properly managing risks, anticipating regulatory action or accessing new markets, while at the same time contributing to the sustainable development of the societies in which they operate.” This excerpt from the report shows you that the concept of ESG was created in order to give businesses the perspective they needed in order to position themselves for a globalized future, anticipate regulatory shifts, and work towards creating value for both company shareholders and the world as a whole. The quote above also mentions “contributing to the sustainable development of societies,” which is the exact same thing that the SDGs aim to achieve. This commonality may have to do with the fact that ESG and SDG both come from the UN, and one of the goals of the UN is to create a platform for nations, organizations, and groups to work together to solve humanity’s biggest challenges. However, SDGs and ESG are quite different. This has to do with the purpose of each. The SDGs are an ambitious set of goals that provide a northstar for groups to work together to solve specific problems. ESG is more of a measurement system that’s more specific to how a company impacts the world. Another way to think about it is that SDGs primarily focus on the end goal. Meanwhile, ESG focuses on quantifying where an organization currently stands. SDGs focus more on what an organization is trying to accomplish, while ESG focuses on how it’s performing. Still, businesses and other organizations can use both ESG and SDGs to figure out and measure how they want to impact the world. And investors can use ESG and SDGs to understand which organizations they want to support. If you care about working towards a sustainable future, both SDG and ESG can be useful. ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member FINRA SIPC.

What Are the Sustainable Development Goals (SDGs) and What Do They Have in Common With ESG?

The 17 SDGs represent aspirational goals that span a range of economic and societal issues, with the intention of providing a better future for all.

Fennel

11 Sep, 2023

5 min

Sam Altman’s childhood hero was Steve Jobs, who after co-founding Apple in 1976, got fired from his own company nine years later. Just like his hero, Altman was <a href="https://www.theverge.com/2023/11/17/23965982/openai-ceo-sam-altman-fired">just fired</a> from the company he co-founded, except this time it only took eight years. For those who aren’t dialed into the latest drama unfolding in Silicon Valley (or too preoccupied with their Thanksgiving holiday), the board of directors of OpenAI (the company behind ChatGPT) fired its CEO Sam Altman (a well-known tech entrepreneur and investor). Why would OpenAI want to fire its CEO? Although the dust is still settling and all the details aren’t clear yet, the board of directors <a href="https://openai.com/blog/openai-announces-leadership-transition">gave the following explanation</a>: “Mr. Altman’s departure follows a deliberative review process by the board, which concluded that he was not consistently candid in his communications with the board, hindering its ability to exercise its responsibilities. The board no longer has confidence in his ability to continue leading OpenAI.” Now, CEOs get fired, resign, or get politely asked to resign every so often, so that part isn’t too extraordinary. But what makes OpenAI’s case unique comes down to governance. OpenAI was <a href="https://techcrunch.com/2015/12/11/non-profit-openai-launches-with-backing-from-elon-musk-and-sam-altman/">started</a> in 2015 by Altman, Elon Musk, and a handful of other tech leaders as a nonprofit. Why make the company a nonprofit? Even back in 2015, the people involved with the company saw artificial intelligence as a game-changer, but they were worried that it could spiral into something harmful — especially Musk, who <a href="https://www.forbes.com/sites/forbestechcouncil/2017/11/21/why-elon-musk-has-fears-of-skynet-coming-true/?sh=55bc37724eb7">fears</a> that AI could turn into something like Skynet from the Terminator franchise. For this reason, OpenAI’s mission from the start was to create an artificial intelligence that could <a href="https://openai.com/blog/introducing-openai">benefit humanity</a> as a whole. And to do this, it built out its company with certain guardrails in place, including appointing an independent, nonprofit board of directors who controlled the company. These directors also held no equity in the company, in order to prevent conflicts of interest. Then in 2019, Altman became the CEO of OpenAI and <a href="https://www.wired.com/story/compete-google-openai-seeks-investorsand-profits/">created</a> a for-profit arm of the company. The rationale behind this was that the operational costs to create groundbreaking tech was expensive, so it would seek outside investors to fund this innovation. That plan worked, and soon investors were pouring money into OpenAI. Perhaps the most high-profile of these investors was Microsoft, which <a href="https://www.bloomberg.com/news/articles/2023-01-23/microsoft-makes-multibillion-dollar-investment-in-openai">invested around $13 billion</a> into OpenAI over the course of a handful of funding rounds (one in 2019, another in 2021, and the most recent in 2023). This cash infusion was likely a big help in creating ChatGPT, which was launched in 2022 and is, as you may know by now, <a href="https://www.reuters.com/technology/chatgpt-sets-record-fastest-growing-user-base-analyst-note-2023-02-01/">a huge commercial success</a>. This is where the governance thing gets a little messy. Essentially, there are two sides of OpenAI, there’s the for-profit arm that brings in lots of cash from its products and institutional investors, and there’s the nonprofit company that owns that for-profit arm and is controlled by an independent board of directors. The tension between these two sides may have escalated into the firing of Altman (there’s also the chance that <a href="https://www.theguardian.com/technology/2023/nov/18/earthquake-at-chatgpt-developer-as-senior-staff-quit-after-sacking-of-boss-sam-altman">something else</a> led to his firing). But his expulsion is not without collateral damage. There were talks about <a href="https://www.theverge.com/2023/11/18/23967199/breaking-openai-board-in-discussions-with-sam-altman-to-return-as-ceo">taking Altman back</a> as CEO just days after he was fired, the CEO that was picked to replace him was <a href="https://www.cnn.com/2023/11/20/tech/openai-ceo-emmett-shear-twitch/index.html">then immediately replaced</a> in turn, OpenAI investor Microsoft <a href="https://www.nytimes.com/2023/11/20/technology/openai-altman-ceo-not-returning.html">poached Altman</a> and a handful of other execs during the chaos, and almost every OpenAI employee <a href="https://www.wired.com/story/openai-staff-walk-protest-sam-altman/">signed a letter</a> saying they would leave unless the board resigns. Again, governance risks can send a company spiraling. But after a few days of chaos, it seems like the drama ended thanks to a bizarre turn of events. On Wednesday, OpenAI <a href="https://twitter.com/OpenAI/status/1727205556136579362">revealed</a> that Sam Altman <a href="https://www.nytimes.com/2023/11/22/technology/openai-sam-altman-returns.html">was back as CEO</a>, and that all of the board directors (except for one) would step down. OpenAI said that it was electing new board members that had a vision more aligned with Altman. Here we see the culmination of the schism at OpenAI. Leadership differences between Sam Altman and the company’s board of directors seemingly festered over the years, which led to Altman’s removal, a strange reversal, and then a reshuffling of the company’s board. Although the series of events were unusual, it should act as a warning to company leaders and executives as to what can happen when a disagreement between competing company leaders goes unaddressed. In the case of OpenAI, one of these parties had to go. Does this mean that the governance drama at OpenAI is over? We’ll have to wait and see how the recent events pan out for the future of the company, but either way, this serves as an important reminder that governance risks shouldn’t be underestimated.   <h4>Questions for Retail Investors to Consider:</h4> ∙ What’s the job of the board of directors? ∙ At the end of the day, who controls a company? Executives, investors, or directors? ∙ How can an investor tell when there are rifts within a company? ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member <a href="http://finra.org/">FINRA</a> <a href="https://www.sipc.org/">SIPC</a>.

Governance

Sam Altman’s Firing from OpenAI Is a Clear Example of Governance Risk

What can we learn from Sam Altman's firing from OpenAI?

Fennel

28 Nov, 2023

3 min

How many times have we followed a trend just to fit in with the “cool kids” even if meant being untrue to ourselves? The reality is, many of us have fallen prey to peer pressure at some point. But individuals aren’t the only ones who conform to a trend to stay relevant. Businesses do too, and because ESG (Environmental, Social, and Governance) and sustainability are the hot topics of today, many companies partake in something called “greenwashing.”    <h4>Why greenwash?</h4> <a href="https://earth.org/what-is-greenwashing/">Greenwashing</a> is defined as the process of making misleading statements, in order to market a company or its products as being environmentally sustainable. <a href="https://corporatefinanceinstitute.com/resources/knowledge/other/greenwashing/">Some examples of greenwashing are</a>:  <ul> <li aria-level="1">Making vague or false environmental claims that are not backed up by hard evidence or third-party certifications </li> <li aria-level="1">Placing emphasis on irrelevant issues (for example, saying a phone is “CFC-free” when CFCs are already banned by law) </li> <li aria-level="1">Hiding “trade-offs” — essentially, highlighting small environmental victories in order to mask a larger, potentially more concerning issue (for example, banks advertising their issuing of sustainable bonds while financing companies that harm the environment) </li> </ul> Greenwashing is <a href="https://www.nasdaq.com/articles/are-companies-as-green-as-theyd-have-you-believe-2021-06-21">on the rise</a> as companies that boast of high ESG scores and sustainable practices are gaining traction in both financial and non-financial aspects. We’ve seen the S&P 500 ESG Index beat the S&P 500 Index <a href="https://www.spglobal.com/spdji/en/indices/esg/sp-500-esg-index/#overview">since the first market slump in early 2020</a>, <a href="https://www.reuters.com/business/sustainable-business/global-sustainable-bonds-see-record-issuance-jan-sept-2021-2021-10-12/">record issuance</a> of sustainable bonds in the year 2021, <a href="https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx">studies</a> that show ESG factors drive consumer preference, and customers <a href="https://www.forbes.com/sites/gregpetro/2022/03/11/consumers-demand-sustainable-products-and-shopping-formats/">willing to pay a premium to go green</a>. As a result, many companies may try to emulate this success by exaggerating how environmentally sustainable they really are. Some companies resort to greenwashing as they come under pressure to comply with environmental industry standards or regulatory requirements. One such example is when <a href="https://www.bbc.com/news/business-34324772">Volkswagen admitted to cheating</a> government-required emissions tests by fitting various vehicles with “defeat devices.”   <h4>The rewards of being truly sustainable are sustainable</h4> What companies sometimes forget is that greenwashing is not sustainable (pun unintended). Those who greenwash risk getting exposed by an informed consumer or a gatekeeping group, which can backfire on the company’s reputation. A recent example would be when <a href="https://www.dezeen.com/2019/08/02/hm-norway-greenwashing-conscious-fashion-collection-news/">H&M launched its “green” clothing line called Conscious</a>. In this instance, the retailer claimed to use organic cotton and recycled polyester, but didn’t provide enough evidence to back up its marketing. The company then faced criticism for misleading claims In the case that the truth behind an organization’s greenwashing claims goes uncovered, it is still at a loss as it only enjoys the superficial benefits of being a “responsible” business. It doesn’t reap the added value that actual sustainable business can receive — like <a href="https://www.bain.com/insights/sustainability-your-brands-next-cost-saving-weapon/">lower operational costs</a>, <a href="https://www.globenewswire.com/news-release/2019/01/10/1686144/0/en/CGS-Survey-Reveals-Sustainability-Is-Driving-Demand-and-Customer-Loyalty.html">loyal customers</a>, or <a href="https://www.cfachicago.org/wp-content/uploads/2020/10/Blog_-Managing-Risk-with-ESG-Investing.pdf">positive shareholder returns</a>.   <h4>Greenwashing faces legal implications in the future</h4> Most importantly, responsible ESG practices minimize regulatory and legal interventions, which in turn means less negative publicity and fines. This is exemplified in Volkswagen’s case, wherein the car manufacturer was fined $125 million for its emissions scandal, and saw further losses as a result of having to recall close to 12 million of its cars worldwide. The spiral translated into <a href="https://fortune.com/2020/10/06/volkswagen-vw-emissions-scandal-damages/">business losses</a> and <a href="https://fortune.com/2015/09/23/volkswagen-stock-drop/">negative shareholder returns</a>. The greenwashing crackdown will continue with new environmental laws being written. The <a href="https://research.hktdc.com/en/article/MTAzNDU1OTc0Nw">EU has decided to amend its new consumer rules</a> to address greenwashing concerns, requiring producers to provide greater transparency on product information to avoid misleading claims. The UK is also targeting greenwashing with the Competition and Markets Authority’s <a href="https://www.whitecase.com/publications/alert/uk-clampdown-greenwashing">Green Claims Code</a>. Organizations are driven towards greenwashing because of peer, consumer, or legal pressures. However, by doing so these businesses miss out on the true benefits of being sustainable.They also might expose themselves to the threat of legal action as more legislation is being drafted against greenwashing. As a result, these companies risk reputational damage, financial losses, and negative returns for stakeholders. Until regulators catch up to all the companies engaging in greenwashing, it’s up to us to be on the lookout for common greenwashing tactics, and stay fully informed about the purchases and investments we make.   ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member <a href="https://www.finra.org/">FINRA</a> <a href="https://www.sipc.org/">SIPC</a>.

ESG

Environmental

What Is Greenwashing?

Greenwashing is a superficial and sometimes misleading way companies claim sustainability.

Shivani Hemnani

15 Aug, 2022

3 min read

With financial markets around the world still reeling from muddled efforts to curb a global pandemic, one financial notion seems to be gaining fresh support: ESG. However, much about ESG remains unexplored. Are ESG and risk management practices related? How can ESG be used to benefit organizations and investors from a risk standpoint? Does one of the three ESG pillars play a bigger role in terms of generating financial returns, utility, and risk management?   Some investors have a hypothesis that ESG investments generate stronger, more sustainable returns over the long term, and this has been exemplified in the past couple of years. ESG investments, indices, and companies that keep considerations of the three factors at the forefront of their culture have bounced back higher than unbothered counterparts; for example, the S&P 500 ESG Index has beat the S&P 500 Index <a href="https://www.spglobal.com/spdji/en/indices/esg/sp-500-esg-index/#overview">since the first market slump in early 2020</a>, sustainable bonds have seen <a href="https://www.reuters.com/business/sustainable-business/global-sustainable-bonds-see-record-issuance-jan-sept-2021-2021-10-12/">record issuance in the year 2021</a>, and organizations with good ESG ratings <a href="https://www.cfachicago.org/wp-content/uploads/2020/10/Blog_-Managing-Risk-with-ESG-Investing.pdf">have displayed strong financial resilience</a> since the economic downturn. How can this phenomenon be explained? The answer lies in the fact that <a href="https://www2.deloitte.com/ie/en/pages/financial-services/articles/esg-risk-management-framework.html">ESG can work as a risk management strategy</a>; not just in financial terms, but also in view of management conditions and meeting regulatory requirements. A <a href="https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx">report published by McKinsey</a> tells us that good ESG practices could potentially lead to positive cash flows, as well as hedge financial and reputational risks due to the following reasons: <ul> <li>ESG drives consumer preference as some customers are <a href="https://www.forbes.com/sites/gregpetro/2022/03/11/consumers-demand-sustainable-products-and-shopping-formats/">willing to pay a premium to go green</a>. McKinsey also found that companies that use sustainable practices in their supply chain are able to cut costs.</li> <li>Responsible reporting minimizes regulatory and legal interventions, which generates less negative publicity for an organization.</li> <li>Having generous social policies in place helps motivate and retain staff, as well as increase employee productivity, which has been found to <a href="https://www.sciencedirect.com/science/article/abs/pii/S0304405X11000869">positively correlate with shareholder returns.</a></li> <li>ESG practices help optimize investments and capital expenditures. One way to get ahead of the curve is to consider making investments into assets that take advantage of sustainability tailwinds. For example, China’s efforts to curb air pollution is estimated to create <a href="http://www.chinadaily.com.cn/a/201804/18/WS5ad69dc6a3105cdcf6518f2c.html">over $3 trillion in investment opportunities across various industries</a> through 2030.</li> </ul>   <h4>Integrating ESG in business practices doubles as good risk management, which goes on to generate brand equity for companies and attract investors.</h4> Research has <a href="https://www.mdpi.com/2071-1050/12/1/254">found a positive relationship</a> between ESG scores and brand equity value of S&P 500 companies. Good ESG incorporation mitigates reputational risks for an organization, and that is where investor confidence is built. In turn, investors manage financial risks by keeping exposures to ESG investments in their portfolios, which also helps them derive utility as they are inclined to feel that their investment decisions are part of a bigger movement to do better for the world.   <h4>It's the Social and Governance factors that actually push away the risks.</h4> We constantly hear a lot of buzz surrounding the Environmental aspect which dominates sustainable investment allocations, but the value of the Social and Governance aspects which have a determining impact on sustainable practices, and as a result, risk management within an organization, are rarely ever given recognition. Taking a deep-dive into how the “S” and “G” areas are equally at play as the “E” in contributing to sound risk management within a company and yielding positive returns for investors, we delve into some research on how the three factors impact financial performance on an absolute basis. A <a href="https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwi9kr_i48b3AhWTQc0KHfB2DUAQFnoECAYQAQ&url=https%3A%2F%2Fjournals.vgtu.lt%2Findex.php%2FJBEM%2Farticle%2Fdownload%2F12725%2F9980&usg=AOvVaw1dAd8rRWX31GFeB0IY3x9v">recent study</a> examined the overall and individual influences of corporate E, S, and G conduct on economic performance of S&P 500 firms. A breakdown of the scores for each aspect across companies from different industries and their correlation with the respective companies’ economic performances were looked at. The results may be surprising at first look: Corporate “E” conduct does not have any significant effect on firm economic performance, while conduct for “S” and “G” significantly influences firm economic performance. The Social and Governance components are key to the general practices of risk management; aiming to do justice to these elements in the day-to-day course of running a business ensures responsible and skilled management structures, risk ownership, and compliance with regulatory requirements. Here we covered reasons to explain these occurrences in the market — that ESG is an exceptional risk management tool for organizations internally, and also for investors in financial terms. More importantly, we saw that “S” and “G” are crucial to building optimal risk practices within a firm, which when combined with “E”, enhance the attractiveness of businesses and generate solid returns over the long term for investors.   References Ajour, E. et al. (2020). The Role of Sustainability in Brand Equity Value in the Financial Sector. MDPI. Retrieved April 29, 2022, from <a href="https://www.mdpi.com/2071-1050/12/1/254">https://www.mdpi.com/2071-1050/12/1/254</a> BNP Paribas SA Group (2021). BNP Paribas recognized by EcoVadis and FTSE4Good extra-financial ratings. BNP Paribas. Retrieved May 06, 2022, from https://group.bnpparibas/en/news/bnp-paribas-recognized-by-ecovadis-and-ftse4good-extra-financial-ratings Cek, K. & Eyupoglu, S. (2020). Does environmental, social and governance performance influence economic performance? Scopus. Retrieved April 29, 2022, from <a href="https://www.scopus.com/record/display.uri?eid=2-s2.0-85087457813&origin=inward&txGid=4864f78cdc725470874f18fec147c309&featureToggles=FEATURE_NEW_DOC_DETAILS_EXPORT:1">https://www.scopus.com/record/display.uri?eid=2-s2.0-85087457813&origin=inward&txGid=4864f78cdc725470874f18fec147c309&featureToggles=FEATURE_NEW_DOC_DETAILS_EXPORT:1</a> Cheasty, G. (2019). Asset Management: Integrating ESG Risk into a Risk Management Framework. Deloitte. Retrieved April 22, 2022, from <a href="https://www2.deloitte.com/ie/en/pages/financial-services/articles/esg-risk-management-framework.html">https://www2.deloitte.com/ie/en/pages/financial-services/articles/esg-risk-management-framework.html</a> Dorobantu, S., Henisz, W. & Nartey, L. (2022). Spinning gold: The financial returns to stakeholder engagement. Wiley Online Library. Retrieved May 09, 2022, from <a href="https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.2180">https://onlinelibrary.wiley.com/doi/abs/10.1002/smj.2180</a> Edmans, A. (2011). Does the stock market fully value intangibles? Employee satisfaction and equity prices. ScienceDirect. Retrieved May 09, 2022, from <a href="https://www.sciencedirect.com/science/article/abs/pii/S0304405X11000869">https://www.sciencedirect.com/science/article/abs/pii/S0304405X11000869</a> Henisz, W., Koller, T., and Nuttall, R. (2019). Five ways that ESG creates value. McKinsey Quarterly. Retrieved May 09, 2022, from https://www.mckinsey.com/~/media/McKinsey/Business%20Functions/Strategy%20and%20Corporate%20Finance/Our%20Insights/Five%20ways%20that%20ESG%20creates%20value/Five-ways-that-ESG-creates-value.ashx Lawrence, E., & Zlatkova, S. (2020). Managing risk with ESG investing - CFA society chicago. Northern Trust Asset Management. Retrieved April 26, 2022, from <a href="https://www.cfachicago.org/wp-content/uploads/2020/10/Blog_-Managing-Risk-with-ESG-Investing.pdf">https://www.cfachicago.org/wp-content/uploads/2020/10/Blog_-Managing-Risk-with-ESG-Investing.pdf</a> Murugaboopathy, P., & Dogra, G. (2021). Global sustainable bonds see record issuance in Jan-Sept 2021. Reuters. Retrieved April 26, 2022, from <a href="https://www.reuters.com/business/sustainable-business/global-sustainable-bonds-see-record-issuance-jan-sept-2021-2021-10-12/">https://www.reuters.com/business/sustainable-business/global-sustainable-bonds-see-record-issuance-jan-sept-2021-2021-10-12/</a> S&P Global. (2022). S&P 500 ESG Index. S&P Dow Jones Indices. Retrieved April 22, 2022, from <a href="https://www.spglobal.com/spdji/en/indices/esg/sp-500-esg-index/#overview">https://www.spglobal.com/spdji/en/indices/esg/sp-500-esg-index/#overview</a>   ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member <a href="https://www.finra.org/">FINRA</a> <a href="https://www.sipc.org/">SIPC</a>.

ESG

Investing

How Does ESG Relate to Risk Management?

Some investors have a hypothesis that ESG investments generate stronger, more sustainable returns over the long term.

Shivani Hemnani

25 Aug, 2022

4 min read

Are you an investor who cares not only about the performance of your portfolio, but also how your investments affect the environment, society, or humanity as a whole? If you do, you’re not alone. There are many investors who invest based on their own morals, what they think is ethical, or to achieve a certain social goal. In fact, this type of investing is so popular that there are a handful of different terms that refer to the practice of aligning your investments with your values. You may have heard of impact investing, sustainable investing, socially-responsible investing, or ESG, but what do all these terms actually mean? And how do they differ?   Let’s define some of the commonly used terms:   ESG — Stands for <a href="https://fennel.com/fennel101/esg">Environmental, Social, and Governance</a>. A framework for assessing companies beyond solely financial data, by looking at that company’s impact on the environment, its impact on society, and how that company is organized. ESG is about better understanding a company by taking into account this information.   ESG investing — Involves incorporating ESG data in order to make investment decisions. Traditionally, ESG investing is <a href="https://fennel.com/blog/how-does-esg-relate-to-risk-management">viewed as a form of risk management</a>, where ESG is used to identify companies that are managed sustainably and avoid those that could face regulatory scrutiny. However, ESG investing is often grouped together with socially responsible investing or sustainable investing — even though technically those refer to different strategies.   Ethical investing — Using your personal code of ethics to determine what to invest in. This differs from investor to investor. One person may think ethical investing involves divesting from companies that test on animals, while another person may not care about animal testing and instead focus on avoiding companies that benefit from child labor.   Impact investing — According to the <a href="https://thegiin.org/impact-investing/need-to-know/#what-is-impact-investing">Global Impact Investing Network</a>, impact investing refers to making investments “with the intention to generate positive, measurable social and environmental impact alongside a financial return.” Impact investing is a broad term, but in order to qualify as impact investing the investor should have the desire to create a positive, the ability to measure that impact, the evidence to inform that investment decision, and the goal of also generating returns in the end.   Socially responsible investing (SRI) — Involves investing in something based on how that investment impacts the environment, society, or the greater good. The concept of SRI has been around for decades (at least) and is sometimes used interchangeably with ethical investing and sustainable investing.   Sustainable investing — According to <a href="https://online.hbs.edu/blog/post/sustainable-investing">Harvard Business School</a>, sustainable investing refers to “a range of practices in which investors aim to achieve financial returns while promoting long-term environmental or social value” — emphasis on long-term. Sustainable investing often is associated with investing in green energy or environmentally-friendly practices because the word “sustainable” is often used in that setting   Values-based investing — Similar to ethical investing, values-based investing involves making investment decisions based on a person’s own set of values. Sometimes those values reflect a person’s morals or religion, and other times they reflect a more generalized set of beliefs. Regardless of what those beliefs are, a values-based approach depends on the individual investor.    <h4>Which approach is best for you?</h4> After going through all of these terms, you may have noticed that there are a lot of similarities. Sometimes the differences between these approaches depend on the intention or end goal, other times it just comes down to semantics. Hopefully, next time you hear one of these terms get tossed around you’ll have a better understanding of what it means. This understanding may help you make your own investing decisions going forward.   * * * The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member <a href="http://finra.org">FINRA</a> <a href="https://www.sipc.org/">SIPC</a>.

ESG

Investing

ESG vs SRI: What Do All the Terms Mean?

There are a lot of terms used in the world of impact investing, what do they all mean?

Fennel

01 Nov, 2022

2 min read

There are several different ways to incorporate <a href="https://fennel.com/fennel101/esg">ESG</a> into your portfolio, because ESG investing isn’t a one-size-fits-all approach. ESG investing involves using a company’s environmental, social, and governance data to guide investing decisions. But a lot of information falls into those three buckets, and which data points to focus on and how to use that data may vary from investor to investor. On top of that, different investors may have different reasons they’re using ESG. Maybe they hope to <a href="https://fennel.com/blog/how-does-esg-relate-to-risk-management">use ESG as a form of risk management</a>, by looking for long-term business viability and avoiding businesses that may face regulatory liabilities. Or maybe they want to use ESG to invest in companies that align with their personal values. One of the popular ways investors incorporate ESG data into their portfolios is through <a href="https://fennel.com/blog/how-does-esg-relate-to-risk-management">ESG screening</a>, which involves including or excluding companies based on their ESG performance. However, this approach differs from a technique many impact investment funds do — active ownership. Let’s examine these two different ESG investing approaches to better understand the pros and cons of each. <h4>The Positives and Negatives of Screening</h4> ESG screening comes in two different forms — positive screening and negative screening. Both approaches are relatively straightforward. Positive screening involves investing in companies based on certain ESG factors, while negative screening involves excluding companies from your portfolio or divesting. Positive and negative screening are really just two sides of the same coin, and can be done in tandem. In order to incorporate screening into your portfolio, all you need is relevant ESG data and a personal strategy of what you want to invest in or avoid. For example, if you want to construct a portfolio of women-led businesses, you need access to the gender breakdown of a company’s board of directors or leadership team. That way you can positively screen women-led companies into your portfolio. If you see that some of the companies already in your portfolio have no women in leadership positions, then you may want to negatively screen them out. Provided that you have the proper ESG data, it’s relatively easy to incorporate ESG into your portfolio this way. Screening can help investors who are using ESG from a risk management perspective. If they believe the global transition to renewable energy will benefit green energy companies and hurt traditional fossil fuel companies, they can use ESG screening to make sure their portfolio aligns with that hypothesis. Screening can also help investors who want to make sure their investments are aligned with their personal values. This sort of investing happens all the time, whether it’s <a href="https://fennel.com/blog/why-are-students-pushing-universities-to-divest">universities divesting from oil companies</a> after student pressure, protesters <a href="https://michiganintheworld.history.lsa.umich.edu/antivietnamwar/exhibits/show/exhibit/military_and_the_university/dow_chemical">divesting from napalm manufacturers</a> during the Vietnam War, or <a href="https://www.robeco.com/en/key-strengths/sustainable-investing/glossary/sin-stocks.html">religious investors divesting from “sinful” industries</a> like gambling or drug use. Screening is popular in <a href="https://financebuzz.com/values-based-investing">values-based investing</a> and <a href="https://www.nerdwallet.com/article/investing/ethical-investing">ethical investing</a>, which have both been around for a long time. But what if you’re an impact investor who wants to use their investment to promote some sort of change? Sure, positive screening may help promote the companies you do invest in, but negative screening can leave you out of the conversation for the companies you may want to change, which could create an echo chamber effect. That’s why some impact investors are turning to a more hands-on approach known as active ownership (or active engagement). <h4>What Is Active Ownership?</h4> Active ownership involves using one’s position as a shareholder to push a company towards positive change. This can be done through things like <a href="https://fennel.com/fennel101/shareholder-voting">shareholder voting</a>, attending annual shareholder meetings, putting forward shareholder proposals, and so on. A famous example of active ownership at work is Engine No. 1’s <a href="https://www.reuters.com/business/little-engine-no-1-beat-exxon-with-just-125-mln-sources-2021-06-29/">board takeover of ExxonMobil</a>. In 2020, Engine No. 1, a relatively unknown activist hedge fund, acquired a small stake in the oil giant ExxonMobil. Although Engine No. 1’s shares only represented about 0.02% of the company, the hedge fund was able to use its shareholder status to put forward a handful of shareholder proposals and nominate new members to Exxon’s board of directors. After getting support from large asset managers like BlackRock, Vanguard, and State Street, Engine No. 1 was able to win <a href="https://engine1.com/transforming/articles/exxon-mobil-one-year-later/">three of Exxon’s board seats</a>. Why did Engine No. 1 care about winning board seats? The hedge fund had three main goals: to bring independent directors with energy experience to Exxon’s board, to promote better long-term capital allocation, and to implement a strategic plan for Exxon’s business in a world that is rapidly moving towards sustainability and decarbonization. Since Engine No. 1’s board takeover, Exxon has <a href="https://engine1.com/transforming/articles/exxon-mobil-one-year-later/">made several commitments</a> to lowering its greenhouse gas emissions and invested billions of dollars into low carbon solutions.   <h4>Implementing Active Ownership Into Your Portfolio</h4> Okay, so all you have to do to implement active ownership into your portfolio is target a multinational company, wage a months-long shareholder campaign, and get some of the largest asset managers in the world to support your cause? Well, not exactly. Screening may seem easy to incorporate into your portfolio because it just involves including or excluding companies based on ESG data. Active ownership may take a little bit more work, but it could be as simple as using your shares to vote. "If you're a shareholder of a company, you should be active. Active ownership is really important,” Yusuf George, Managing Director of Engine No. 1, said at <a href="https://medium.com/fennelapp/a-recap-of-socap-2022-875a0cc53fb">a recent SOCAP event</a>. “Part of the reason [Engine No. 1] talks so much about the energy sector, the transportation sector, and agriculture is because they account for about 75% of greenhouse gas emissions. We want to go where the problems are, because if we don't, nothing will change. And so we believe that it's really important to use any tool you have — it can be voting your shares, showing up at an annual general meeting, whatever tool you have to be an active owner is really important." As Yusuf George points out, leaning into the problem is important because it could help lead to change. While exclusionary screening may work for a risk management approach, active ownership may lead to a greater impact on the company. If your goal as an investor is to have an impact, then it could be worth it to use ESG data to identify opportunities for impact within a company. Then you could use your position as a shareholder to push for change with whatever tools you have — whether that’s voting, putting forward proposals, or just spreading awareness of issues.   Risk Disclosure: Responsible investing incorporates Environmental Social Governance (ESG) factors that may affect exposure to issuers, sectors, industries, limiting the type and number of investment opportunities available, which could result in excluding investments that perform well. ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member <a href="http://finra.org/">FINRA</a> <a href="https://www.sipc.org/">SIPC</a>.

ESG

Shareholder Activism

Screening vs Active Ownership: Different Ways To Incorporate ESG Into Your Portfolio

Active ownership could help ESG investors push for more impactful change.

Fennel

28 Nov, 2022

4 min read

There is a growing number of investors who aren’t satisfied with just financial returns, they want to know that their investments are creating a better world. This desire to make change is at the core of impact investing. <a href="https://fennel.com/blog/esg-vs-sri-what-do-all-the-terms-mean">Impact investing</a> refers to when investments are made with the intention of generating positive and measurable social or environmental impacts. Typically, an investor will have an idea of what impact they want to have, and then seek out investments to create that impact. This could mean investing in renewable energy companies to promote decarbonization, investing in minority-led companies to promote the work of underrepresented groups, and so on. But what does this look like in practice? Here are a handful of impact investing examples for interested investors   <h4>Example #1: Impact investing in diverse founders</h4> So many startups rely on venture capital funding in order to get up and running. But where that VC cash flows isn’t always equitable. One study found that <a href="https://www.forbes.com/sites/forbesbusinesscouncil/2022/05/26/diversity-the-holy-grail-of-venture-capital/?sh=5b51cec34178">77% of VC dollars</a> go to startups led by white founders. In 2021, a record year for VC funding, <a href="https://news.crunchbase.com/diversity/vc-funding-black-founded-startups/">only 1.3%</a> of all U.S. venture and growth equity financing went to companies led by Black founders. Harlem Capital hopes to close that funding gap. Harlem Capital started in 2015 as a syndicate of angel investors, and evolved over the years into a fully-fledged VC firm. The company debuted with <a href="https://techcrunch.com/2019/12/02/diversity-focused-vc-fund-harlem-capital-debuts-with-40m/">its inaugural $40 million fund</a> in 2019 and plans to invest in 1,000 diverse founders over the course of 20 years. After using that $40M fund to invest in 23 companies, Harlem Capital raised <a href="https://harlem.capital/harlem-capital-134-million-fund/">a $134 million fund</a> to invest in even more diverse founders. These diverse founders are building an array of diverse solutions, from <a href="https://harlem.capital/portfolio/curu">credit platforms that provide wider access to loans</a>, to a <a href="https://harlem.capital/portfolio/agape">relationship wellness app for couples</a>, <a href="https://harlem.capital/portfolio/jobble">gig marketplace for independent workers</a>, and more.  “We fundamentally believe we are a venture fund with impact, not an impact fund. The way we generate impact is to give women and minority entrepreneurs ownership,” Harlem Capital managing partner Henri Pierre-Jacques told TechCrunch.   <h4>Example #2: Impact investing in the oil industry</h4> In late 2020, a small activist hedge fund called Engine No. 1 <a href="https://hbr.org/2021/01/can-a-tiny-hedge-fund-push-exxonmobile-towards-sustainability">acquired a $40 million stake</a> in oil giant ExxonMobil, worth about 0.02% of the company’s shares. The hedge fund then wrote <a href="https://reenergizexom.com/materials/letter-to-the-board-of-directors/">an open letter</a> to Exxon’s board of directors to explain why. In that letter, Engine No. 1 pointed out the ways that Exxon had been struggling and failed to deliver shareholder returns. It also pointed out a four-part strategy for fixing this: 1) refresh the board of directors with people who has experience in the energy industry 2) become more disciplined in managing long-term capital allocation 3) implement a plan for the business to thrive in a world pushing away from fossil fuels, and 4) realign management incentives with creating shareholder value. Engine No. 1 then nominated four new directors for Exxon’s board, and campaigned for them during proxy season. After gaining the support of some of Exxon’s largest shareholders, three out of four of those directors won seats on the board. After that, Exxon started <a href="https://engine1.com/transforming/articles/exxon-mobil-one-year-later/">making measurable advancements</a> towards its new goals. For example, the company committed $15B towards investing in low-carbon solutions over a six year span, announced new scope 1 and scope 2 greenhouse gas targets for 2030, added a low-carbon solutions business unit and got the former head of General Motors’ Cruise to lead it.   <h4>Example #3: Impact investing in response to apartheid </h4> Word about the injustices committed in apartheid-era South Africa spread across the world. While many South African groups fought for their rights, international organizations also joined in to show support in their own way.  By the 1970s and 80s, students at American universities <a href="https://www.universityofcalifornia.edu/news/how-students-helped-end-apartheid">were protesting in solidarity</a> with South African students. Although these American students were thousands of miles away, they thought they could help by pressuring their universities <a href="https://nvdatabase.swarthmore.edu/content/columbia-university-students-win-divestment-apartheid-south-africa-united-states-1985">to divest</a> from companies that supported the apartheid regime. By 1988, <a href="https://www.investopedia.com/articles/economics/08/protest-divestment-south-africa.asp">155 colleges</a> across the US and Canada had divested from South Africa. And soon this movement spread beyond universities. By the end of 1989, 26 states, 22 counties, and over 90 cities <a href="http://richardknight.homestead.com/files/uscorporations.htm">had also created policies</a> against companies doing business in South Africa. This pressure caused many US businesses to pull out of South Africa. From 1985 to 1990, over 200 US companies collectively pulled out of South Africa, resulting in <a href="https://www.investopedia.com/articles/economics/08/protest-divestment-south-africa.asp">a loss of $1 billion</a> in direct investment dollars. Other countries put pressure on their companies to pull out of South Africa too, and by the early 1990s, the South African economy was <a href="http://richardknight.homestead.com/files/uscorporations.htm">feeling the effects of capital flight</a>.   <h4>Example #4: Impact investing in Chicago</h4> Sometimes impact investing is most felt at the local level. The Chicago Community Trust is a foundation that connects philanthropic donors, local organizations, and generous individuals who want to use their money to create a positive impact within the Chicago community. In 2020, the foundation <a href="https://www.cct.org/press-releases/the-chicago-community-trust-launches-impact-investing-platform/">launched</a> an impact investing platform to help facilitate impact-driven investments. The platform also helps investors measure the impact of their contributions by showing if they help low-income neighborhoods, go to businesses run by minority or women owners, help provide affordable housing, or if they provide capital to sustainable energy initiatives.   <h4>Example #5: Impact investing in agricultural development</h4> Lots of people talk about ending world hunger, what are some ways to actually do that? According to Root Capital, by investing in agricultural enterprises in the developing world. Since 1999, Root Capital has been investing in agriculture businesses in Latin America, sub-Saharan Africa, and Southeast Asia. Not only does the organization supply capital, it also provides training to help these companies grow. In addition to creating more steady sources of food, Root Capital also aims to use its investments to help alleviate local poverty, protect the planet, and advance gender inclusion. To date, the organization has <a href="https://rootcapital.org/about-us/">distributed</a> $1.6 billion to over 750 clients, representing 2.3 million farmers and $4.6 billion in economic activity. Risks: Employing ESG strategies may not result in favorable investment performance. The returns on a portfolio consisting primarily of Environmental, Social and Governance (“ESG”) aware, diversity equity and inclusion (DEI), impact investing, or faith-based investments may be lower or higher than a portfolio that is more diversified or where decisions are based solely on investment considerations. Because ESG criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria. ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Securities offered through Fennel Financials, LLC. Member <a href="http://finra.org">FINRA</a> <a href="https://www.sipc.org/">SIPC</a>.

5 Impact Investing Examples: How Investors Push for Change

What does impact investing look like in practice?

Fennel

21 Dec, 2022

5 min read

By now, you may already know that some investors use <a href="https://fennel.com/fennel101/esg">environmental, social, and governance (ESG)</a> data to understand a company’s impacts outside of purely financial measurements. But companies pay attention to ESG too, and many try to shape their own ESG impact through something called an ESG policy.   Note: The returns on a portfolio consisting primarily of Environmental, Social and Governance (“ESG”) aware, impact investing, or faith-based investments may be lower or higher than a portfolio that is more diversified or where decisions are based solely on financial considerations. Because ESG criteria exclude some investments, investors may not be able to take advantage of the same opportunities or market trends as investors that do not use such criteria.   <h4>What is an ESG policy?</h4> An ESG policy is an official commitment that companies make in order to manage their ESG impacts. A company with an ESG policy will often set goals for how it wants its business to perform across environmental, social, and governance categories. Sometimes, a company will make several official commitments that fall into its ESG policy, like a “sustainability policy,” “sustainable development goals policy,” “corporate social responsibility policy,” or “governance policy.” Although these can be narrow in focus, commitments made in those guidances often affect a company’s overall ESG impact.   <h4>Why have an ESG policy?</h4> In the eyes of ESG advocates, adopting an ESG policy is simply good business practices. But there are a handful of reasons why a company may want to consider instituting an ESG policy. One reason is that it communicates to investors that the company is serious about ESG. Earlier this year, Bloomberg Intelligence analysts <a href="https://www.bloomberg.com/company/press/esg-may-surpass-41-trillion-assets-in-2022-but-not-without-challenges-finds-bloomberg-intelligence/">predicted</a> that global ESG assets could surpass $41 trillion in 2022. Although that number may be off due to this year’s downturn in the market, the report also predicted that number could grow to $50 trillion by 2025 — showing a growing interest in ESG by investors. A company may want to show its ESG worthiness to ESG conscious investors, so adopting an ESG policy could help do that. Another reason to adopt an ESG policy comes down to risk management. Traditionally, good performance across ESG categories <a href="https://fennel.com/blog/how-does-esg-relate-to-risk-management">has been linked</a> to minimizing a company’s exposure to business risks. How? Reducing exposure to fossil fuels can be useful in a rapidly decarbonizing world, adamantly avoiding polluting can help a business steer clear of government fines, appropriate employee management can help companies attract new talent and stay away from scandals, and proper governance can help prevent fraud. Scenarios like these show tangible business reasons for adopting ESG policies — beyond simply “feeling good” about one’s impact.   <h4>What does an ESG policy look like in practice?</h4> It should be no surprise that many of the largest publicly traded companies have already instituted ESG policies. Let’s take a look at some of them to understand what an ESG policy looks like in practice. (Note: the companies included in this list have been picked due to their large market capitalization. This should not be seen as an endorsement of whether or not to invest.)   Microsoft Instead of outwardly calling out a singular ESG policy, tech giant Microsoft discloses <a href="https://www.microsoft.com/en-us/corporate-responsibility">its several commitments to corporate social responsibility</a>. These commitments include <a href="https://www.microsoft.com/en-us/corporate-responsibility/sustainability">a policy on environmental sustainability</a>, which outlines plans to be carbon and waste neutral by 2030, replenish more water than it uses by 2030, as well as a handful of other environmental actions. Microsoft’s CSR strategy also <a href="https://www.microsoft.com/en-us/corporate-responsibility">highlights a handful of social policies</a>, including commitments inclusive to economic growth, protecting fundamental human rights, and earning trust from Microsoft’s customers, employees, and communities. And lastly, Microsoft’s governance policy <a href="https://www.microsoft.com/en-us/Investor/corporate-governance/framework.aspx">establishes a framework</a> for the company’s board of directors to operate under. When all of these commitments are looked at in tandem, they represent a pretty comprehensive ESG policy.   Apple Apple puts together an ESG report every year for its investors. Although an ESG report isn’t exactly the same as an ESG policy — ESG reports detail past progress, while ESG policies are guidelines that are future-facing — the company’s annual report includes many commitments to ESG factors. Apple calls out its specific values in <a href="https://s2.q4cdn.com/470004039/files/doc_downloads/2022/08/2022_Apple_ESG_Report.pdf">the 2022 ESG report</a>, which include accessibility, education, environment, inclusion and diversity, privacy, and supplier responsibility — stating that these values are central to its “ESG approach.” More specifically, the company has also published its policies on things like <a href="https://s2.q4cdn.com/470004039/files/doc_downloads/gov_docs/2020/Apple-Human-Rights-Policy.pdf">human rights</a> and <a href="https://www.apple.com/supplier-responsibility/pdf/Apple_SR_2022_Progress_Report.pdf">doing business with suppliers</a>.   Alphabet Alphabet, the parent company of Google and YouTube (among others), details its ESG policies on its <a href="https://abc.xyz/investor/other/sustainability-and-related-information/">investors relations site</a>. Among these policies are commitments to data security, employee diversity, environmental sustainability, supply chain responsibility, as well as reports disclosing ESG data across its businesses. Alphabet also made a splash when it issued $5.75 billion in sustainability bonds, and in 2022 it <a href="https://www.gstatic.com/gumdrop/sustainability/alphabet-2022-sustainability-bond-impact-report.pdf">outlined</a> how this money will be spent — on things like clean energy, circular economy, affordable housing, and commitments to racial equity. Amazon Amazon has <a href="https://sustainability.aboutamazon.com/">a website</a> dedicated to its sustainability efforts across the environment, society, and its governance. On this page, it calls out several of the commitments it has made. This includes its plans to <a href="https://sustainability.aboutamazon.com/environment/renewable-energy?energyType=true">use 100% renewable energy by 2025</a>, its efforts to <a href="https://sustainability.aboutamazon.com/environment/packaging">create more sustainable packaging</a>, the <a href="https://sustainability.aboutamazon.com/society/employees">benefits it offers to employees</a>, and more.   <h4>What do these ESG policies have in common and how do they differ?</h4> After going through the ESG policies of a handful of companies, you may notice how some of them are similar while others are unique. ESG policies are designed based on the individual operations of a business. That’s why Amazon has a policy about making its packaging more sustainable, while Apple has a policy about how it chooses suppliers for its hardware. These policies help businesses develop more sustainable practices and help set themselves up for success over the long term. They also tell investors and the world that these companies are being proactive about ESG.   ∙ ∙ ∙ The views expressed are those of the author at the time of writing, are not necessarily those of the firm as a whole and may be subject to change. The information contained in this advertisement is for informational purposes and should not be regarded as an offer to sell or a solicitation of an offer to buy any. It does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of specific investors. Investing involves risk, including the loss of principal. Past performance is not indicative or a guarantee of future performance. We do not provide tax, accounting, or legal advice to our clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment. The information and any opinions contained in this advertisement have been obtained from sources that we consider reliable, but we do not represent such information and opinions are accurate or complete, and thus should not be relied upon as such. This is particularly true during periods of rapidly changing market conditions. Employing ESG strategies may not result in favorable investment performance. Securities offered through Fennel Financials, LLC. Member <a href="http://finra.org/">FINRA</a> <a href="https://www.sipc.org/">SIPC</a>.

ESG

What Is an ESG Policy? How Are They Used?

Proactive companies prioritize ESG in their business practices.

Fennel

11 Jan, 2023

4 min read

Public Widely Supports Worker Protection Amidst Labor Strikes, Study Shows

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