Lauren Taylor Wolfe says it’s just too risky for investors to ignore ESG.
Deloitte states that global ESG assets under the management of professionals could increase by $80 trillion by 2024. The increase in popularity and a global energy crisis have the sector grappling with polarization. Some worry that funds meant for ESG investments will add a single value system at the expense of others. Lauren Taylor Wolfe helped start Impactive Capital, a management company that concentrates on ESG investing in the long term. CNBC’s Delivering Alpha newsletter interviewed her to discuss if Lauren Taylor Wolfe thinks banning ESG investing could be risky. They also checked on how comprehending social, environmental, and governance risks is suitable for operations.
Leslie Picker: Are you amazed that ESG has grown into one of the most controversial sectors in finance in recent times?
Lauren Taylor Wolfe: No, ESG, minus the returns, cannot be sustainable. There have been funds to the tune of hundreds of billions of dollars disbursed in the US. This is to cater to ESG-specific ETFs and mutual funds that are actively managed. On a global scale, trillions have been disbursed, resulting in increased scrutiny of various ESG products. Though it is safe to say not all of them are equal. As stated earlier, without returns, the products will be unsuccessful.
Impactive uses a different approach, showing nobody needs to sacrifice returns to get excellent and robust ESG growth. The company considers two things; whether one can deal with a business problem using an ESG solution and whether the solution can increase profitability and results. There have been many pushbacks stemming from politicians, and this is risky. Comprehending social and environmental risks is suitable for assessment and investing. For states to consider ESG investments illegal is risky. It is bad for constituents and pensioners. This is because of an excellent way to assess a business’s operations in the long term.
Picker: I think the problem is that ESG and profitability are exclusive. Can there be ESG improvements that result in immediate margin growth? Is it reliant on duration when considering the capacity to increase profitability?
Taylor Wolfe: The company concentrates on the impact of the ESG and the capital disbursed. The impact of the capital can have a direct and immediate effect on returns. Social, environmental, and governance changes are cumulative and take longer to transform into returns. Many CEOs, managers, and boards are concentrating on achieving their quarterly or annual targets though as a company, there is the belief that there is an opportunity to concentrate on long-term returns and IRR. At Impactive, three to five-year IRRs are considered since that is when real returns can be accomplished.
Picker: I also want to know how all this combines with the macro backdrop since there are people who consider ESG a bull market sensation. It is only gainful when the market and economy are performing well, which was part of the reason there was a lot of capital flow into the sector. There is inflation, interest rates are high, and there are increased chances of a recession. Will ESG take a backseat in decision-making due to the witnessed macro challenges?
Taylor Wolfe: I don’t think it will, and there is no chance that the company is returning to the times when seeking profits was the goal at the expense of the environment. Smart ESG is good since it makes organizations more competitive, valuable, and profitable in the long run. Millennials and Gen Z populations are careful with how they spend their two most essential assets, time and money, and they do it in ways that integrate with their value system.
This means that a company needs to consider the extent it can attract and retain stickier employees, customers, and shareholders while reducing consumer acquisition costs, human capital costs, and overall cost of capital. This makes an organization more competitive and profitable, thus increasing its value in the long run. Since there is rising inflation and rates and the world may be facing a recession or is heading towards a recession, companies are considering how they can maintain the pricing and strengthen the measures that safeguard their business operations. A sustainable solution will enhance price inelasticity and protect businesses and their outcome.