Widening the Scope Through ESG Integration

Hirtle Callaghan is driven by cutting-edge solutions and timeless professional values. We actively seek ways to best represent our client’s values and capture new opportunities that align with our cornerstone investment values of: price discipline, expansive breadth of opportunity, time horizon arbitrage and cost control. One initiative that we are excited about is the integration of environmental, social and governance (ESG) factors into some of our investment programs. Let’s take a closer look at this development and why we think it can be an important piece to the investment puzzle.

Consensus forecasts are pointing to a world of more than 9 billion people by 2050 and an enormous addition to the global middle class (2.5 billion people). We will have more mouths to feed, more advanced infrastructure needs and more efficient energy solution demands – we must be prepared. I believe that the 36 years that stand between today and 2050 will significantly impact the way individuals and organizations conduct business. The challenges will not be dealt with on their own, and as Stefan Heck (who spoke at the 2014 Hirtle Callaghan Investment Conference) states in his book Resource Revolution, "we are standing at the threshold of the biggest business opportunity in a century." Being well positioned for a potential opportunity of that scale is a prudent step for global investment management.

Thoughtful investors should be on the lookout for forward thinking companies that fully appreciate 21st century risk ahead of their competition. The risks and opportunities associated with things like climate change, community impact, and good governance are real. Companies that understand these risks and see associated opportunities may generate solutions that could make for great investments. And yes, this is already happening - up and coming managers are winning assignments due to their ESG model - with large allocations of capital being taken away from incumbent managers who have been slow to embrace this model. Wellington, one of the world’s largest asset managers with $904 billion in assets, has seen this firsthand and they refuse to let the opportunity slip by. Today they have a designated ESG integration team that conducts research, reviews portfolios, and engages potential investments across the entire firm’s operations. Breckinridge, a leading fixed income manager with almost $20 billion under management, has recognized the value of ESG and its potential growth (assets under management invested in sustainable strategies in the US grew almost five-fold from 1995 to 2012). They now apply ESG analysis to all of their funds, and have even launched a specific sustainable strategy to capture best in class corporations and municipalities that are driving long term social and environmental impact.

Research is also beginning to tell an important story. An analysis conducted by Deutsche Bank Climate Advisors and outlined in their report Sustainable Investing: Establishing Long-Term Value and Performance concluded that "firms with strong ESG performance may now be enjoying both financial outperformance (particularly market-based) and lower risk. This theoretical anomaly – achieving higher return with lower risk (from market inefficiencies) may present a significant investment opportunity". The DB report highlights companies that fully appreciate their exposure to environmental, social and governance factors often have a lower cost of capital. Conversely, the report contends that the broad market is not appropriately pricing risks associated with ESG factors.

The shift taking place at the asset manager level has been driven by asset owners (pensions, foundations, endowments and families). These asset owners are acknowledging the importance of a more sustainable world and are pursuing a best-of-both harmonic by looking for strong investment opportunities that are consistent with their own ethical and social values.

Breadth of investment opportunity is critical in capturing high returns while integrating environmental, social and governance factors. Take the traditional foundation investment mission, for instance – maximize investment return in order to generate more capital for philanthropic grants. Can we match the organization’s values with their investment mission, still produce strong market returns and enhance total philanthropic effect? The result would be end to end value alignment and, some argue, enhanced, overall effectiveness. Harvard, and the California Public Employees’ Retirement System (CalPERS) are already moving in that direction by integrating ESG with their investment mandates.

So why is everyone not investing with an ESG framework? As fiduciaries, we are skeptical but never cynical. Discussions we and others have had around sustainable investing include the following:

  • How do you define ESG?
  • Will you underperform by focusing on this potentially narrower mandate?
  • Is this approach more expensive to implement?

Time and creativity will resolve these questions. As we move forward, funds applying ESG will have track records that are more complete. Innovation and simple economies of scale will drive down cost.

Our responsibility is to build total, customized solutions that are sophisticated and globally diversified. The cornerstones of our investment discipline are valuation, breadth, time arbitrage and cost control. ESG capability is a natural component of a customized solution. The idea of combining an opportunity that provides long-term value, helps future generations and, most importantly, may be a huge investment opportunity is compelling.

If you are interested in exploring ESG and would like to discuss the topic further, please reach out to me directly at gwilson@hirtlecallaghan.com.


1) http://esa.un.org/wpp/Excel-Data/population.htm

2) http://www.ussif.org/files/Publications/12_Trends_Exec_Summary.pdf

3) https://www.dbadvisors.com/content/_media/Sustainable_Investing_2012.pdf





















Garrett Wilson

Garrett is an Investment Specialist at Hirtle Callaghan focusing on Environmental, Social and Governance (ESG) investing. Prior to joining Hirtle Callaghan in July, Garrett completed his MBA at the University of Virginia’s Darden School of Business where he was a portfolio manager on the student run sustainable investment fund and worked at DBL Investors, an impact investing venture capital fund. Previously, Garrett spent five years in the Global Markets division of Bank of America Merrill Lynch in New York and San Francisco. He received his B.A. in Government from Georgetown University. 

Garrett joined Hirtle Callaghan this summer and has hit the ground running.  He has had a deep, long standing interest with Environmental, Social, and Governance issues and the growing ESG investment movement.  Please feel free to contact Garrett directly or through your Hirtle Callaghan professional to learn more about what ESG might mean for you.

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