Strategy Insight
Sustainable/Impact/ESG Investing: A What, Why, How & Where Review

Our Quarterly Insight publication has covered a variety of topics over the past couple of years; distributed energy, water sector investments, ESG integration, and food systems are just a sample. With a stated mission to address global challenges through the capital markets, Collaboration Capital has no shortage of topics from which to select for the publication. However, as informative and thought provoking as these topics may be, there remains a question for many investors of what, when, where, and how for their individual portfolios. From time to time we will take a step back and offer some perspective on these types of questions and present Insights accordingly. There is no set standard for the classification of a specific approach. Socially Responsible Investing (SRI) has been around for many years and includes strategies that exclude tobacco, firearms, armaments, alcohol, or other socially sensitive criteria; some strategies employ divestment campaigns. Public funds and faith-based organizations are pioneers in the space and have been employing such strategies for decades. ESG investing refers to Environmental, Social, and Governance metrics when considering investments and has become increasingly more popular. Both SRI and ESG approaches commonly refer to public market investments such as stocks and bonds. Sustainable, Conscientious, Values-based and other terms usually contain some variation of these sensitivities and are often interchangeable; however, impact investing often refers to investments with a measurable impact and is most often associated with private placements. The Global Impact Investing Network (1) defines impact investing as follows:

impact investments im·pact in·vest·ments
NOUN: Investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return.

At Collaboration Capital, we use the term ‘Your Values, Invested’ to highlight that the investment considerations are those of the asset owners. Considering that we utilize a multitude of investment options that include all the aforementioned variations, we will leave the terminology to the client. More important is navigating the investments that align with the client’s values and concerns.

The What

As mentioned, there are many terms and adjectives used to articulate a more thoughtful approach to investing. To keep things simple we might put sustainable, responsible, values-based, and ESG in the same bucket, which we may call sustainable, and address Impact separately, despite the fact that many investors use these terms interchangeably. The US SIF Foundation (Forum for Sustainable and Responsible Investment) (2) defines the practice as follows: What is sustainable, responsible and impact investing? Sustainable, responsible and impact investing is an investment discipline that considers environmental, social and corporate governance criteria to generate long-term competitive financial returns and positive societal impact. It can be applied across all asset classes. Figure 1 identifies common ESG issues that SRI practitioners consider.

(Illustrative Purposes Only)


Practitioners (investment managers) have a host of ways to determine the appropriateness of their investments. Some may take a bottom-up, fundamental approach and visit the companies, meet the management, understand the supply chain, and examine financial statements to ascertain whether the company meets the manager’s criteria. Many will use third party reports and analysis from firms such as Sustainalytics, MSCI, Asset4, Fossil Free Indexes, Just Capital, or KnowTheChain to determine appropriateness for portfolio inclusion. Sustainable-style investing is used across all asset classes; however, it is most common in the public equity, public debt, private equity, private debt, and venture capital spaces. According to US SIF, total US domiciled assets under management using SRI strategies (Sustainable, Responsible, Impact) stood at $8.72 Trillion, yes Trillion, at the start of 2016. (3)

The Why

The most obvious reason why investors consider sustainable style investing is the anticipated positive consequences associated with such financial commitments. Whether the investment is in renewable resources, reduced waste, smart city development, or carbon dioxide reduction, the expectation is that the companies are less wasteful, more efficient, and more environmentally sustainable. Most would argue that less pollution, less waste, less workplace injuries, and more efficient production are positive outcomes and a good reason to consider sustainability metrics in their investments.

The E (environment) in ESG is probably the most common consideration when incorporating a sustainability lens, and for good reason. Environmental considerations arguably are universally understood. While there may be debates about the implications of tobacco, alcohol, firearms, or pharmaceuticals, most agree that activities harmful to the environment should not be supported. Climate change concerns appear to be the largest driving force behind environmental considerations because of the potential dire consequences across cultures, businesses, and investments. BlackRock’s CEO, Larry Fink, relayed the sustainability message in his 2018 annual letter to CEOs saying “Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.” (4) When the message comes from the largest asset manager in the world, many operating concerns take notice. Another significant reason for incorporating sustainability metrics in the investment process is the reduction of risk in the portfolio. Below is a graphic from Callan’s 6th annual ESG Survey of US institutions published in May 2018. (5)



The attention to risk doesn’t come as a surprise when you consider the ramifications of potential stranded assets or new disruptive technologies. As we move closer to a low carbon economy, the value of underground assets (oil, gas, coal) may decline considerably with a potential detrimental effect to the entire energy industry. Additionally, there are measurable risks associated with investing in companies with poor labor conditions, human rights abuses in the supply chain, sub-par workplace safety standards, and weak environmental standards, not to mention poor governance practices. Enron’s governance failure and BP’s environmental damage clearly heightened investors’ awareness of risk, even in major companies.

The Where

Although the idea of sustainable and impact investing is appealing to many investors, they often do not know where in their portfolio they should focus such considerations. Since these investment styles have been around for some time, we believe sustainability lenses can be utilized across the entire asset class spectrum, including cash. Collaboration Capital has relationships with investment professionals that provide sustainable solutions in the entire spectrum of investments: debt and equity—both public and private—and venture capital. Given the many options available, the difficult question is to what degree to employ ‘sustainability.’

Although there remains in many quarters a preconceived notion of a performance penalty associated with employing a sustainability approach, there is increasing research suggesting that it is not the case (6,7,8,9,10). Some investors will have a specific sustainable or impact related target of interest when considering an investment, such as education, healthcare, poverty, or agriculture. In such cases, they may find it more tangible, satisfying, and measurable to make a direct investment in a specific private company. Collaboration Capital has found many bespoke investments on behalf of their clients in this manner. Increasing availability of public company data on sustainability concerns has made it much easier to be more sensitive to these criteria in the public equity and fixed income markets, resulting in a large increase in assets managed in the space. A quick search on Morningstar results in approximately 1,000 funds classified as socially conscious while the US SIF reported similar findings in their 2016 report. (3) Consequently, we find more investors interested in utilizing a sustainability lens in the stocks and bonds of their portfolios.

The How

When an investor decides to engage in a more sustainable investment style, the question becomes to what degree. Since historically investors have allocated a small portion of their total portfolio to something they cared deeply about, performance was not of much concern. The investment was considered quasi-philanthropic. When one considers the sustainable style as a meaningful percentage of the portfolio however, we believe the risk/return consideration must play a part. A model allocation may contain several styles in each asset class whereby Sustainable/ESG approaches may be interspersed or 100% represented. Below is an example of a Collaboration Capital allocation. Within each asset class are dedicated funds/strategies aligned with an investor’s objectives. Should the investor wish to have 100% sustainable portfolio, every component within each asset class would be selected accordingly.


Example of a Collaboration Capital Allocation Model For Illustrative Purposes Only


Once a determination is made about what percentage of a portfolio should be dedicated to the sustainable style, an examination of the opportunities in each asset class can be made. There is a large range of choices: an investor may decide whether they are more concerned with a focus on climate change, animal rights abuses, human and labor rights. Most advisors have access to all or most of these issues at the fund level and can tailor the investments to the desires of the investor. In parallel to the actively managed strategies, Collaboration Capital has designed a passive equity strategy that is mapped to serve our stated sustainability theses of renewable resources, energy efficiency, parity, food and food systems, and financial inclusion. The move to a more sustainable investment portfolio is not difficult but should be taken with care. When shaping a portfolio or replacing existing investments, it is vital to ensure the portfolio is structured to meet the risk/return objectives of the investor. Additionally, the transition should be executed in a measured fashion to avoid undue tax consequences or risks associated with market timing. We believe the decision to align an investor’s portfolio with their values is often extraordinarily rewarding. Collaboration Capital has learned that investors are generally more engaged and interested in the investments when they pursue such a path. It can be inspiring to learn about how many lives might be positively affected by one or more of your investments. It is fascinating to discover how some of the world’s greatest challenges are being addressed by the capital markets. Whether it is health and well-being, improvements in impoverished nations, educational advances in underprivileged communities, alternative technologies in energy generation and distribution, or improved agricultural efficiency, investment opportunities that intersect with social and environmental improvements often provide the investor with a unique and meaningful experience.

Chief Investment Officer
Collaboration Capital, LLC


  3. US SIF Foundation. US Sustainable, Responsible and Impact Investing Trends 2016
  4. BlackRock. 2018. Larry Fink’s Annual Letter to CEOs A Sense of Purpose
  5. Callan Institute Survey: 2018 ESG Survey, May 2018
  6. 6. Khan, Serafeim, and Yoon. 2016. Corporate Sustainability: First Evidence on Materiality, The Accounting Review, Vol. 91, No. 6, pp. 1697-1724
  7. Sjostrom.  2011. The Performance of socially Responsible Investment – A Review of Scholarly Studies Published 2008 – 2010
  8. Koehler and Hespenheide. 2013. Finding the Value in Environmental, Social, and Governance Performance, Deloitte Review Issue 12
  9. Peiris and Evans. 2010. The Relationship between Environmental, Social, Governance Factors and Stock Returns
  10. US SIF Foundation 2016 Report on US Sustainable, Responsible and Impact (SRI) Investing 2016