ESG, Impact, and More: Understanding the Spectrum of Socially Responsible Investing

"To me, impact angel investing and the impact of angel investing are inextricably intertwined." – David A. Katz

When we talk about impact investing, we consider cleantech, efficient solutions, recycling, and essentially any business idea that secures a greener earth and turns in decent revenue. However, there needs to be a broader discussion on the impact of angel investing, where investor involvement helps the product and the team grow together. So, how can you be an angel investor who creates a positive impact? We answer this question in our blog with David Katz's insights on socially responsible investing and the true role of an investor.

Different Flavors of Socially Responsible Investing

Socially Responsible Investing (SRI) comes in several distinct approaches, each catering to different investor priorities and values:

1. Negative Screening

This is the oldest and most straightforward approach to SRI. Investors exclude specific industries or companies from their portfolios based on ethical concerns:

• No investments in weapons manufacturers
• Avoiding fossil fuel companies
• Excluding tobacco or alcohol producers

1. ESG Integration

The most common modern approach focuses on environmental, social, and governance (ESG) factors. This strategy assumes companies excelling in these areas will likely outperform in the long run:

• Environmental: Climate change initiatives, waste management, energy efficiency
• Social: Labor practices, human rights, community relations
• Governance: Board diversity, executive compensation, shareholder rights

ESG investing aims to identify "best-in-class" companies within their sectors rather than excluding entire industries.

1. Positive Impact Investing

This proactive approach seeks to generate measurable positive outcomes alongside financial returns:

• Investing in renewable energy projects
• Supporting affordable housing initiatives
• Funding education and healthcare in underserved communities

Impact investing often involves more hands-on engagement, such as angel investing in mission-driven startups. By understanding these different "flavors" of SRI, investors can align their portfolios with their specific values and impact goals while still pursuing financial performance.

ESG Investing and Financial Performance: Debunking Misconceptions

There's often a perception that Environmental, Social, and Governance (ESG) investing negatively impacts financial performance. However, recent data and studies suggest this assumption may be unfounded.

A widely cited meta-analysis by Friede, Busch, and Bassen (2015), Journal of Sustainable Finance & Investment, examining the relationship between ESG performance and financial performance at the corporate level reveals an interesting trend. Over the years, there appears to be no significant negative correlation between ESG practices and long-term economic outcomes. The data indicates a positive relationship, indicating that strong ESG practices may contribute to improved financial performance.

Successful application of ESG investing principles at the portfolio level is certainly possible. The Parnassus Endeavor Fund serves as a prime example. As one of the largest mutual fund positions in many ESG-focused portfolios, it has consistently outperformed its peers in both socially responsible and traditional funds. Historical data shows the fund ranking in the top percentile across various periods, demonstrating that ESG investing can deliver stable and favorable returns.

However, it's important to note that performance across different ESG funds varies as with any investment strategy. A sample of socially responsible mutual funds reveals that, like their traditional counterparts, the majority do not outperform a simple S&P 500 ETF. This underscores the importance of thorough research and careful fund selection in ESG investing.

For investors interested in exploring ESG options, tools like Morningstar provide valuable information on sustainability ratings and specific metrics such as carbon utilization. These resources offer detailed insights into the ESG performance of various funds and individual equity instruments, helping investors make informed decisions that align with their financial goals and values.

The Foundations of Impactful Angel Investing: Discipline, Diligence, Individuals, and Impact

Angel investing can be a powerful tool for both financial growth and positive societal change. David's approach to angel investing is based on four key pillars: two D's and two I's - Discipline, Diligence, Individuals, and Impact.

Discipline: Disciplined investing is crucial in the world of angel investing. Investors must have a clear plan and stick to it rather than making random investments. A well-structured portfolio approach helps manage risk and maximize potential returns.

Diligence: Thorough due diligence is essential before making any investment. Investors must begin their journey with one question: what do they expect the performance to be? Due diligence helps answer this question. Deeply assessing the opportunity, market potential, and business model will reveal valuable insights and contribute to informed investment decisions.

Individuals: Investing in entrepreneurs is at the heart of angel investing. This pillar involves identifying individuals with the characteristics for success and mentoring them to enhance their chances of success. Building relationships with founders and providing guidance can significantly impact the outcome of your investments.

Impact: Impact is a cornerstone of David's angel investing philosophy, which focuses on three main themes:

• Human health product development (aligning with my technical expertise)
• Solutions to the global climate crisis
• Initiatives to reduce wealth inequality

Addressing wealth inequality also involves promoting diversity among entrepreneurs. David's portfolio consists of 21% of companies with a BIPOC founder and 29% female founders.

Besides the four points above, entrepreneur mentoring is vital to impactful angel investing. Mentoring both peer entrepreneurs and founders of companies you have invested in contributes to their success and enhances the overall impact of angel investing.

By adhering to these four pillars - Discipline, Diligence, Individuals, and Impact - angel investors can create a portfolio that aims for financial returns and drives positive change in the world. This approach allows us to leverage our resources and expertise to support innovative solutions to global challenges while fostering a more diverse and inclusive entrepreneurial ecosystem.

About the Speaker

David A. Katz is a healthcare entrepreneur and investor with 30+ years of industry experience. He pursued his Bachelor of Arts in Chemistry from Pomona College and Ph.D. in Molecular Biophysics & Biochemistry from Yale University. His experience as a strategic advisor and entrepreneur in residence in various organizations helped him establish Sparrow Pharmaceuticals and develop therapies for conditions of glucocorticoid excess.

Watch his keynote at Keiretsu Forum here .