ESG and impact investing are becoming ever more popular foci for those with substantial capital, and while I believe the intention behind this movement is beautiful and valuable, I am also concerned the approach is often misplaced. What I am a proponent of is conscious investing: aligning heart and mind.
What are ESG (environmental, social, and governance) and impact investing? They are not particularly well-defined, but generally speaking, it means investing with an eye toward making the world a better place, specifically by considering the impact of an investment on the environment, society, and diversity. While these are, of course, excellent things to consider, if you look at the track record of ESG/impact investors, you’ll find that it’s often poor—both in terms of producing returns and generating the desired positive impact.
Since 2007, non-ESG hedge funds have outperformed ESG funds, according to the Eurekahedge ESG Fund Index. Consider the research from Abraham Lioui, professor of finance at Edhec Business School. He believes the ESG market is reaching maturity and will likely not perform as well. Performance of top-rated and low-rated ESG funds is reaching an inflection point and starting to converge. Even the best ESG investors recognize that their returns could be higher if they focused on companies with solid fundamentals.
Additionally, it can be difficult and arbitrary to measure the ESG impact that many of these investments have actually made. The ratings agencies that decide what constitutes sustainable business practices have very low thresholds. If a company like Phillip Morris, one of the world’s largest manufacturers of cigarettes, can join the Dow Jones Sustainability Index, something is clearly broken in the system. Phillip Morris is not exactly the type of company that investors are thinking of when they invest in an ESG fund.
This perceived tradeoff between returns and impact is a result of people investing in these areas with their hearts instead of their minds. If you combine the two, it is possible to produce phenomenal outcomes for humanity and the planet, and outsized financial returns. In fact, in my opinion, this is the best way to contribute massively to humanity through our current economic system. What does this require? Conscious investing.
What is conscious investing? It means being aware of not just the outcomes we target, but also the path we take. This starts at the moment-to-moment level with how we treat our potential investments, our partners, our clients, and our team. This means radiating not just wisdom and prudence but also loving kindness to all those we interact with. This is the power of an aligned heart and mind in our day-to-day interactions.
Additionally, it means being conscious of the pros and cons of every investment, not just in terms of risks and rewards to produce returns, but also risks and rewards to make life better for humanity over the long-term using specific metrics around environmental impact and contributions to target communities. This is the power of leveraging that beautiful heartfelt intention to make the world a better place, directed by the power of our minds to plan and evaluate tradeoffs.
For example, our fund invests significantly in climate technology, spanning solar, geothermal, wind, fusion, storage, and transportation. However, we are not simply carte blanche investing in climate technology—in fact, we have no specific mandate to do so, we have simply looked at the best economic opportunities in energy-related technology and it happens that these align with renewables at the moment. In a prior wave of ‘clean tech,’ investors wanted certain things to be true and ignored the hard-nosed economic reality. In the early 2000s, investors poured billions of dollars into clean energy startups that many hoped would be the next Google. However, they weren’t able to make the unit economics work, leading to massive losses and no impact. By 2012, the value of climate technology companies was a measly $1.1 billion.
Today, only a few firms are completing rigorous techno-economic analysis on every energy-related investment. This analysis has led us to conclude that these investments are a great way to make the world a better place because they will produce phenomenal returns and actually scale to profitably deliver the desired social or environmental impact.
I believe that as the investing world wakes up to the important role it has to play in creating a better future for humanity, we must all become more conscious of how we invest and leverage the powerful alignment of heart and mind.
Dakin Sloss is the Founder and General Partner of Prime Movers Lab, the world’s leading partner of breakthrough scientific startups.