ESG investing is when one uses environmental, social and governance (ESG) criteria during the portfolio construction and/or analysis processes. ESG investing came out of the field of socially responsible investing (SRI).
Arguably, SRI can be used as an umbrella term for many buzz terms: ESG investing, impact investing, ethical investing, values based investing, green investing, among others. The important similarity is they approach investing through some form of environmental, social, or corporate governance perspective.
Even the first commonly dated approach to SRI used social criteria within their investment decisions. In 1758, the Religious Society of Friends (Quakers) prohibited the participation in the slave trade - the buying and selling of humans.
The practice of considering environmental, social, and governance (ESG) issues in investing has evolved significantly from its origins in the exclusionary screening of listed equities based on moral values. A variety of methods are now being used by both income-motivated and values-motivated investors in considering ESG issues across asset classes.
Best-in-class methods, positive screening, sustainability-themed investing, shareholder action and direct investments (normally referred to as impact investing) are a few approaches being applied. Best-in-class or positive screening are investments in sectors, companies or projects selected for positive ESG performance relative to their industry peers.
Shareholder action uses proxy voting as a way to create change, getting companies to integrate more ESG approaches within their operations. Lastly, impact investing is investing in companies, organizations and funds in the private markets with the direct intention to make measurable social or environmental impact, i.e., sustainable agriculture, financial inclusion.
Here at MEDA, ESG investing is applied at the project and organizational level in a few different ways. At the project level, an example of how we apply ESG investing is through our matching grant offerings.
In the INFRONT (Impact Investing in Frontier & Emerging Markets) project, we deployed a positive screening/best-in-class approach by selecting grant recipients who are creating the best environmental or social initiative amongst their applicant peers. These applicants all came from the Sarona Frontier Markets Fund 2 (SFMF2) that the project invested in.
One grant recipient, Cimory, is the leading local dairy manufacturer in Indonesia. The grant focuses on expanding and retaining the woman salesforce for door-to-door sales for the Miss Cimory line products, enhancing the jobs and livelihoods of the women at Cimory. Social successes include lowering the churn rate from 50-30%, signalling to more women that this can be a full-time job, and creating a new incentive system for these women.
At the organizational level, MEDA’s Sarona Risk Capital Fund (SRCF) invests directly into many organizations to make a greater impact for our organization-wide mission of creating business solutions to poverty. An example of a company that has received direct investment is Tree Global. Tree Global is an international nursery business providing high-performance seedlings to large-scale projects focused on agriculture, environmental restoration, and sustainable timber. Its main activities are currently centered around cocoa tree seedlings in Ghana. ESG measurable impacts that our investment has contributed to include the delivery of 450,000 cocoa seedlings to smallholder farmers in Ghana, and the expansion of seedling capacity from 100,000 to 800,000 seedlings. These seedlings are 60% taller, 50% larger in caliper, and have a 28% higher survival rate than conventional methods.
At MEDA we see ESG investing as a pivotal way to create and sustain change in the regions and clients we work with. It is important to us to highlight how we apply ESG investing methods as our results focus on measuring the alleviation of poverty with cross-cutting themes of environment and gender.
1 Hutton R.B., D”Antonio, L., & Johnsen, T., 1998, Socially Responsible Investing: Growing Issues and New Opportunities.
3 Reference SRCF Values Report. Page 25.