Simply put, ESG Investing is when one utilizes environmental, social and governance (ESG) criterion during the portfolio construction and/or analysis processes. Historically, the term 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, valued based investing, green investing, among others. The important similarity amongst all buzz terms within the field of SRI is that they approach investing through some form of environmental, social, or corporate governance perspective. Even the first commonly dated approach to SRI utilized 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 utilizes 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 (ie. 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. For example, in the Impact Investing in Frontier & Emerging Markets (INFRONT) 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 expanding and retaining the woman salesforce for door to door sales for the Miss Cimory line products, enhancing the jobs and livelihoods of the woman at Cimory. Social successes to date are: The churn rate has lowered from 50-30%, solidifying to more woman that this can be a full-time job and creating a new incentive system for these women.
At the organizational level, the MEDA’s Sarona Risk Capital Fund (SRCF) invests directly into many organizations to creating a greater impact for our organizational 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. Some of the ESG measurable impacts that our investment has contributed to date, are: Delivered 450k cocoa seedlings to smallholder farmers in Ghana and expanded seedling capacity from 100k to 800k seedlings (the seedlings it produces are 60% and 50% larger in height and caliper, respectively, and have a 28% higher survival rate than conventional methods).
At MEDA we see ESG Investing to be a pivotal way to create and sustain change within the regions and clients we work with! To reiterate, it is important to us to highlight the way we apply ESG Investing methods because 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.