ESG proves its resilience in the fastest bear market in history

Financial markets no longer exist in isolation from social or environmental challenges.

ESG outperformed strikingly during the recent market meltdown of equity and bonds issued by companies with high scores within those asset classes. This is the clearest example yet of the ability of the sector to deliver superior financial performance and an indication of a shift int eh institutional asset management community zeitgeist.

According to newly published research from Fidelity International, on the way down in the fastest bear market in US capital markets history – a decline of 27% hit over a period of 36 days, between February 19 and March 23, in the S&P 500 – equity and fixed income securities issued by companies at the top of Fidelity’s sustainability rating scale dropped less than the index while those at the bottom exceeded its decline.

The equity of companies rated A or B on the ESG in the company’s proprietary sustainability scoring model performed on average 3.8% better than the S&P during the market rout, while those rated C to E performed 7.4% worse.

“No asset was pared as the severity of the economic shutdown needed to contain the coronavirus outbreak became apparent to investors. The quickest US bear market in history, from February to March this year, was also the first broad-based market crash of the sustainable investing era.” Says Jenn-Hui Tan, global head of stewardship and sustainable investing at Fidelity International.

“Our thesis, when starting the research, was that the companies with good sustainability characteristics have better management teams and so should outperform the market, even in a crisis. The data that came back supported this view.”

Meanwhile the same ESG-outperformance phenomenon was witnessed int eh fixed income secondary markets, where from the start of the year to March, 23 bonds issued by companies with high ESG scores outperformed their lower rated peers returning -9.23% on average for those rated A, versus a -13.2% return for bonds issued by B-rated companies and -17.14% for those rated C.

“While some caveats remain, including adjustments for beta, credit quality and the sudden market recovery, we are encouraged by evidence of an overall relationship between strong suitability factors and returns, of a fundamental research approach,” says Fidelity’s Tan.

Fidelity’s scores were based on a performance comparison across more than 2,600 companies, and its forward-looking ESG ratings are derived from direct engagement with companies, comprising around 15,000 discrete company meetings per year.

“The recent period of market volatility was shocking in its severity. A natural behavioral reaction to market crises to lower investing horizons and focus on short-term questions of corporate survival, pushing longer term concerns about environmental sustainability, stakeholder welfare and corporate governance to the background.”

“But this short-termism would indeed be short-sighted. Our research suggests that, what initially looked like an indiscriminate selloff did in fact discriminate between companies based on their attention to ESG matters.”

Fidelity’s research comes at a time for mixed signals within ESG. Whereas the EU has taken a step back from implementing its ambitious zero emissions policy, the “S” element of ESG is taking center stage as governments and corporations rush to address the social fallout from Covid-19 and its impact on employment and mental health.

“Covid-19 underlines the importance of sustainability to the investment industry. If they ever did, financial markets no longer exist in isolation from social or environmental challenges. Companies’ fortunes are intrinsically tied to their ability to navigate changes in the societies on which they rely,” says Andrew Howard, head of sustainability research, ESG, at Schroders in London.

“Social and environmental challenges, as investment drivers, are increasingly overlapping. Environmental and social problems are increasingly clear financial risks, moving up corporate agendas to drive long-term strategy and growth plans. As investors, our ability to examine companies and separate winners from losers has improved as corporate sustainability reporting has become mainstream.”

As the Covid-19 onslaught has unleashed trillions of dollars of government, multilateral and corporate capital int eh fight against its devastating economic impacts, not only has there been intense focus on the basic structure of capitalist societies, the role of government and other intermediaries as mitigators of unprecedented economic and social devastation, but it has also brought to the fore the challenge of climate change and sustainable economic development. An alignment with ESG is unfolding on multiple levels.

“This research demonstrates the reality that ESG-oriented investing delivers superior financial returns, and also that the sector has been able to weather the most brutal and fast-unfolding bear market in living memory, a stern test indeed,” says Fiona Reynolds, CEO of the UN-supported Principles of Responsible Investment, which promotes the use of ESG as an investment discipline among asset managers and owners globally.

PRI signatories – which at the last count collectively represent assets worth US$86 trillion – are considered to be a reliable objective indication of the growth of ESG. To the end of March, the PRI’s signatories rose by 6% owners who signed up to the Principles.

“The market outperformance reflects the fact that companies which pay heed to ESG inputs in general have highly engaged management teams as well as underlining in stark terms not only the resilience of securities aligned with ESG against market downside but also the ability of ESG ratings to capture upside potential of these companies in alpha terms against the performance of benchmark indices,” says the PRI’s Reynolds.

The new normal in sustainable investing post-COVID-19

In John Lennon’s last album, in 1980, he released the song “Beautiful Boy,” which showcased his deep love for his son Sean. The song’s lyrics included the prophetic quote “Life is what happens to you while you’re busy making other plans.”

As we struggle to bring into focus the long-term impacts of a post-COVID-19 world, Lennon’s quote is a poignant reminder of the uncertainties that lie ahead for corporate sustainability executives and investors.

We are approaching an inflection point in the crisis where savvy investors are fundamentally reassessing economic, environmental, social and governance factors to adjust to the new normal. Many investment firms are modifying their strategies and valuation models over the long-term in the wake of the pandemic.

“Anecdotal evidence suggests that ESG-attuned funds were sticky and held their value relative to their benchmarks during the pandemic.”

Here’s how astute investors can equip themselves for a volatile future by determining whether the companies they hold are future-fit.

Current state of play

According to Morningstar’s Jon Hale, funds that integrate environmental, social and/or governance (ESG) factors registered record growth of Q1 200 that eclipsed the previous watershed moment in Q4 2019. “Sustainable funds in the United States set a record for flows in the first quarter [of 2020],” wrote Hale. “ETFs, passive funds and iShares dominate as U.S. ESG funds gather $10.5 billion in the first quarter.

What’s more, anecdotal evidence suggests that ESG-attuned funds were sticky and held their value relative to their benchmarks. This early signal bodes well for sustainable investors and could serve as a proof point for how investors can trust ESG funds in turbulent markets.

Many investors are reimagining the future state of investing in the aftermath of the pandemic. Important considerations come into play in preparing for the future such as: What does the U.S. government’s current response to the crisis portend for the economy over the next three years? How do we know if a company is resilient and positioned for growth over the long term? And do we have the information we need to evaluate companies’ long-term performance outlook?

Emerging megatrends in the U.S.

Over the next 12 to 36 months, the following six megatrends promise to reshape the business practices and investing:

1. Deficits squeeze firms relying on government procurement

In 2021, political and financial market pressure for deficit reduction will mount as markets adjust to the economic realities resulting from the stimulus. This will adversely affect companies that rely on government funding as budgets are slashed in an effort to stabilize the economy.

2. Inflation roars as a result of stimulus and quantitative easing

As of April, the first wave of COVID-19 stimulus and quantitative surpassed $2 trillion, three times the amount of the 2008 financial crisis bailout and more than five times the amount of President Barack Obama’s 2009 stimulus. The likely result of the most extensive bailout in U.S. history is that inflation rates will soar, perhaps eclipsing 10 percent, similar to what the nation experienced in the early 1970s. Companies unable to adapt quickly to inflation will be adversely affected in this new economy.

3. Commercial real estate bubble emerges from business closures

One prominent economist reported that bars in the U.S. had on average, enough cash cushion to sustain closure for only 22 days. And as of today, over 50 percent of all stores in the U.S. are closed. Government support will help but will not be enough or come fast enough to prevent a commercial real estate bubble. What’s more, the growth of online shopping will continue to accelerate, exacerbating pressure on brick-and-mortar commerce.

4. Unemployment lingers at around 10 percent

In mid-April, unemployment claims jumped again as COVID-19 virus toll reached 22 million, more than the total number of jobs created over the last 10 years. This translates into an unemployment rate of about 16 percent. This should level off around 10 percent within 12 months, but we are in for a period of sustained high unemployment rates for the foreseeable future.

5. Multiple capitals thinking transforms decision making

The recent $2 trillion stimulus also includes a $500 billion bailout for companies hardest hit by the pandemic. Many progressive thought leaders such as American Prospect’s David Dayen objected to the bailout on the grounds that these corporations wouldn’t need it if they hadn’t “squandered their record-high profits on payouts to CEOs and shareholders.”

As a result, a new way of thinking is emerging that is transforming the way we value company’s relationship with nature, people, society and shareholders. This “Capitals Thinking” approach is championed by the Capitals Coalition and aims to reshape how investors engage on corporate governance and value the relationship between commerce, people and nature.

6. ESG investing becomes the new normal

Within 36 months there will no longer be a discernable distinction between sustainable and traditional investing. As sustainable investing continues to scale and become infused on Main Street and Wall Street, high-quality investment managers will use multiple capitals thinking and integrate financially material ESG considerations in engagement strategies and investment decision-making. This will be the silver lining of the crisis.

Collectively these megatrends, each with a distinct but linked role in the emerging investment landscape, will:

  • transform the way corporate sustainability information is used by developing new disclosure expectations for material sustainability information and value-generating strategies based on existing standards;
  • reposition corporate reporting to tell a more complete story of how an organization’s strategy, governance, performance and products lead to the creation of value over the short, medium and long term through a multiple capitals prism;
  • improve the precision, materiality and disclosure of sector-based sustainability KPIs and accounting metrics;
  • accelerate the integration of ESG factors into investment and credit rating decision making.

The time has passed for small commitments, hyperbole and delays in embracing sustainable investing. Now is the time for leadership, investment and action. Companies and investment managers that remain on the sidelines will sacrifice their opportunity to shape their own, and the planet’s, future.

From ‘E’ to ‘S’ and ‘G’ as responsible investors take stock post-pandemic

Issues like fair tax and executive pay will be a bigger focus going forward as funds look beyond environmental factors in assessing performance, writes Mike Scott.

We are living through unprecedented times as a result of the Covid-19 pandemic. The global lockdown has paralyzed economic activity around the world and prompted a level of intervention from governments unheard of outside wartime. So, what does this suspension of the normal rules of engagement mean for ESG (environmental, social and governance) analysis, which was steadily making its way into the mainstream before the pandemic?

Some people argue that consideration of ESG issues will fall by the wayside, just as it did in the years following the financial crisis a decade ago. Certainly, President Trump has rolled back a number environmental regulations on air pollution and fuel economy even as the crisis unfolds, while researchers from the Australian University (ANU) warn that polluting industries are likely to use the pandemic as an excuse to call for weakening of regulations, something we have already seen from European carmakers, for example.

“When industries are hurting, governments will be more likely to manipulate health, safety or environmental standards to benefit those industries,” says Dr Emma Aisbett, of the ANU’s Energy Change Institute and School of Regulation and Global Governance.

“The crisis has shown how interconnected everything is. That’s what ESG is all about.

“We found evidence of this effect for food-safety and biosecurity standards for industries threatened by trade liberalization and increased import competition. But this same effect can be expected across a range of industries. We are starting to see evidence of the same type of manipulation as a response to decreased demand for oil, gas and coal due to the Covid-19 crisis and associated economic downturn.

And yet supporters of ESG as an investment tool are confident that if anything, it will become even more important to shareholders’ analysis than it is already. “The crisis has shown how interconnected everything is. That’s what ESG is all about,” says Fiona Reynolds, CEO of the Principles for Responsible Investment (PRI).

“You can’t separate things that are happening in the real world from what’s going on in the financial world. We’re seeing that in the way that this health crisis has caused an economic crisis. This is only going to drive ESG further.”

Wolfgang Kuhn, director of investor engagement at ShareAction, believes the fundamentals of finance will shift. “Ambition was insufficient before. Is it all going to take a back seat because we can’t really talk to companies about sustainability while they have more immediate problems, or has it made visible issues that were not visible before, like how many companies rely on so many groups of people who are really vulnerable?”

The pandemic and its economic fallout will trigger a “skyward surge” in sustainable, responsible and impactful investing over the next 12 months, claims Nigel Green, CEO of financial adviser deVere which has more than $12bn under advisement.

In part, this will be driven by evidence that ESG investments have performed better during the crisis than other stocks.  Analysis by organizations including Bloomberg, MSCI and Fidelity International, among others, shows that companies with higher ESG ratings have performed better during the crisis than others, confirming pre-pandemic research that investments that score well in terms of ESG credentials often outperform the market and have lower volatility over the long run.

“Big investors believe that if you don’t build these issues into your analysis, you will not do well in future

Green believes demographic shifts will support the trend. “Millennials cite ESG investing as their top priority when considering investment opportunities,” he says. “This is crucial because the biggest-ever generational transfer of wealth – likely to be around $30trn – from baby boomers to millennials will take place in the next few years. ESG investing was already going to reshape the investment landscape in this new decade – but the coronavirus will quicken the pace of this reshaping.

Gerbrand Haverkamp, executive director of the World Benchmarking Alliance, says: “What we see from big investors and groups such as the World Business Council on Sustainable Development is that they believe these underlying issues are not going to go away, and if you don’t build them into your analysis, you will not do well in the future.”

There have been plenty of major announcements and events during the lockdown that suggest ESG issues are not taking a back seat. These include South Korea’s plan to introduce a Green New Deal and become a net-zero economy by 2050, the first economy in East Asia to do so.

At the corporate level, Shell outlined its own ambition to be net-zero on all its scope 1 and 2 emissions from the manufacture of its products “by 2050 at the latest” and to reducing the net carbon footprint of its energy products by about 65% by 2050 and around 30% by 2035. This is a strengthening last year’s Net Carbon Footprint announcement. (See Shell wants ‘to be at the leading edge, not the bleeding edge’ with carbon plan).

S&P has announced the launch of a range of Paris-aligned and Climate Transition (PACT) indices, initially covering Europe but with aim of creating products for other markets, too.

As these announcements suggest, the ‘E’ of ESG has dominated the field in recent years, which is no great surprise given the growing evidence of how severe the impacts of climate change will be, and also because carbon emissions give a single, easy to measure metric. But the pandemic is likely to highlight the importance of social factors, which have lagged behind for a long time, Reynolds says, in part because reliable data was harder to come by.

If we’re seeing companies fall over at the first sign of a problem that’s not good

Not being able to get good data should not be an excuse for not acting. Issues such as zero-hour contracts and the gig economy will become more important. It was already going to be the focus of our next round of work, but we need to do more.

She adds: “One company may be saving money using these practices, but then you look at the US and see 20 million people applying for unemployment benefit it shows the lack of labor rights in many countries… That causes suffering for the whole economy – people who don’t have any money can’t spend any money.”

ShareAction’s Kuhn believes post Covid-19 there will be a renewed focus on human resilience. “We could see a move away from just-in-time deliveries and stretching everything as far as we can, and a move to having a bit more fat in the system, which has been cut away in recent decades.

No one can afford to have too much cash on their balance sheet because it’s considered inefficient, but if we’re seeing companies fall over at the first sign of a problem, that’s no good. Shareholders need to understand that companies need some kind of a buffer against things going wrong. This kind of thinking should feed in to how they treat their workers, as well.”

Morgan Stanley says that the crisis will change the way investors assess corporate governance in five key areas. The first is in how much money companies return to shareholders, with a rebalancing away from investors towards other stakeholders.

There will also be an increased focus on executive pay, particularly when companies are furloughing or laying off workers: are managers and the board sharing in the pain, and when good times return, will workers share in the gains in the form of shares and bonuses? There will likely be more scrutiny of pay ratios relative to average workers as society reassesses which workers are most valuable in the wake of pandemic. There may also be increased pressure for social metrics to be included in executive compensation structures.

We expect investors to require corporates to demonstrate they are paying their fair share of taxes

Given the heroic efforts of (in many cases) state-funded healthcare services and the massive government bailouts to huge swathes of the economy, “we expect investors to require corporates to demonstrate they are paying their fair share of taxes, whilst governments are likely to remain focused on tax reform,” the bank says.

Less tangibly, people will expect companies to be able to explain what role they play in society, it adds. “At a time when the need for companies to support the economy and help society has never been clearer, we anticipate the concept of purpose becoming a more pertinent aspect of sustainable investing.”

Mike Scott is a former Financial Times journalist who is now a freelance writer specializing in business and sustainability. He has written for The Guardian, the Daily Telegraph, The Times, Forbes, Fortune and Bloomberg.

06.16.2020

With the new day comes strength and new thoughts

— Eleanor Roosevelt

And so it is. 

The Socially Inspired Investor (SII) now focuses our new thoughts around post-pandemic investing. If the trend continues, as we see from the articles we have curated for you at the ESG In Focus section, then for the first time, investors may be liberated from the binary choice of deciding whether to do good, according to their values, or compromising their values for investment returns.

The current strong performance of ESG oriented investments has opened the eyes of many of the titans of the investment world including Morgan Stanley, Goldman Sachs, AllianceBernstein and others. CNBC is devoting significantly more segments to ESG investing and shareholders and consumers are demanding increased accountability on a myriad of social values. Of course, defining personal values is well…very personal. Racial injustice, diversity, preferences around energy sources, cannot be just lumped together and be relevant to everyone. In future SII issues we will look to create a framework on how to “customize” your ESG.

ESG investing seems to align very well with post-pandemic investing. Similarities include more focus on technology, inclusive corporate culture, health orientation and a platform to embrace the personal values that support social interaction.

But there most certainly must be tradeoffs to consider as well. It might be that to achieve size and scale, society may have to become more comfortable with centralism, allowing for very large organizations (Amazon, Tesla, Zoom, Beyond Meat, et al) to lead the way. Of course, that could lead to the possibility of free trade manipulation, data misallocation and even enhanced cyber security exposure. Regulatory efforts clearly have not yet evolved. Becoming aware of the new risks ahead is critical as we better understand the new normal. Just something to keep in mind as we go on this journey together. We will also look to dedicate future SII editions to these risks.

The SII SPOTLIGHT ON and the SII PODCAST in this issue focus on a deep dive into the UNCDF activities and their partnership with Impact Shares, an ETF from Brookmont Management. This partnership offers an easy, affordable and accessible way for investors to invest in the ESG space, and in turn donate part of the management fees that they charge to the UNCDF. Esther Pan-Sloane, head of partnerships, policy and communications at the UNCDF and Ethan Powell Principal and CIO from Brookmont discuss their partnership. We also take a deeper look at UNCDF and Esther’s background in the SPOTLIGHT ON section as well. 

You can find more information on Impact Shares at https://impactetfs.org/sdga-etf/.   

For socially inspired investors, where investment returns are simply not enough, we hope we continue to inspire you and invite you to bring others along. Thank you for joining us on this journey.  

If You Must Negotiate Your Bills – Here’s how

Some creditors have already set up relief programs – you may just have to request help

For those looking to reduce expenses in the current downturn, renegotiating your bills is one way to do that.

Right now, most creditors are expecting your call and many are willing to work with you. Some have already put in place relief programs – you may just have to ask.

Here are some things to keep in mind going into these financial negotiations.

Before calling a lender, review your financial situation, the terms of your account and what competitors are offering in terms of interest rates or relief, says Bruce McClary, vice president of communications for the National Foundation for Credit Counselling. Look up any unfamiliar terminology.

Script a few bullet points of what you would like to say so you can keep the conversation professional. For example, you could state that you lost your job due to the coronavirus and that you would like to work something out with them so they can get some of their money.

Then ask for how they might help, be silent and let them make an offer he says.

Don’t necessarily take the first offer. Politely ask what else is available as you may then get a more favorable deal.

What if the customer service representative isn’t helpful?

If your first call isn’t successful, call back on a different day as you may have more success with a different representative, says Mr. McClary.

The creditor’s goal is to get paid and to keep you as a customer. Ask to speak with the customer loyalty department or a manager. Inquire what discounts and promotions are available and what else they have offered other customers.

While it is frustrating to wait on hold and difficult to recount your situation to a stranger, losing your cool with a representative rarely leads to a more favorable outcome, says Ed Brodow, a negotiation expert and author of “Negotiation Boot Camp: How to Resolve Conflict, Satisfy Customers, and Make Better Deals.” Try to stay calm, and they’ll likely be more motivated to help you.

If you can, make your request through the lender’s website or mobile app to save some time and frustration.

What risks should I consider when negotiating?

Common trade-offs include negative information added to your credit report, higher interest costs in the long run and increasing the time it will take to pay off your debt, says Sophie Raseman, head of financial solutions at Brightside, a company that provides financial guidance to workers.

Ask up front how your relief option will be reflected on your credit report. Watch out for surprise payments, such as a large lump sum that is due on a specific date. Instead, ask to pay in even installments, she says. Get whatever you agree to in writing.

Beware of scams. If you receive an inbound call supposedly from your servicer, ask to call back at the toll free number on their public website, Ms. Raseman says.

How should I approach my landlord?

Landlords want to keep their building full and cash flow steady. And since they typically know how long and difficult ti can be to take someone to court to collect overdue rent even when the economy is good, renters may have more leverage than they realize.

Offer a deal that is mutually agreeable for the landlord. For example, you might ask for a 30% rend reduction for 3 months and in turn, offer to extend your lease, says Alexandra Carter, a Columbia Law School professor and author of “Ask for More: 10 Questions to Negotiate Anything.”

If your landlord doesn’t agree to your initial offer, you might be able to negotiate something else such as free utilities or parking, Prof. Carter says.

What do I say to my credit-card company if I am having financial difficulties?

Begin by briefly explaining your circumstances and what you’re looking for. For example, if you’ve lost your job due to the economic shutdown, tell them your situation. Remind them if you’ve been a good longstanding customer who always pays on time, but you’re going through a temporary rough patch.

Then, ask if it possible to skip this month’s payment without interest being added (also known as a deferment), says Ted Rossman, industry analyst, CreditCards.com.

Some companies have already established relief programs. For example, Apple Card is allowing customers, upon request, to skip March and April payments without additional interest. Do some research to see if your company is offering relief to other customers.

Lender-approved payment modifications shouldn’t hurt your credit score, but clarify and document this, he says.

Besides skipping a payment without interest, you could also ask to skip a payment with interest still accruing (also known as forbearance), getting other fees (such as a late fee or an annual fee) waived or get a lower interest rate.

“The bottom line is that it can’t hurt to ask,” he says.

How can I get help with my car loan?

Many lenders are offering auto relief programs to help customers alleviate some of their financial burden, such as deferred payments, waived late fees or loan extensions in response to coronavirus, says Rory Joyce, head of auto at Credit Karma.

Most lenders have outlines of options, potential requirements (i.e. if you need to show proof of job loss) or the best way to get in touch on their websites. Others will just direct you to call, as they handle relief agreements on a case-by-case basis.

When you get in touch with your lender, explain your situation. If you’re asking for a loan deferment, make sure you’re clear on the terms and conditions. It is common that interest will likely accrue during the deferral period. Confirm with your lender what that interest amount will be, so you know what you will owe, and get the agreement in writing.

Another option to consider is refinancing your auto loan, taking advantage of low rates, says Mr. Joyce. It’s also worth considering extending your loan term, which then allows you to make smaller monthly payments.

What if I can’t pay my medical bills?

If you can, inform your provider of your financial situation before treatment, this could help you negotiate a smaller bill.

Don’t pay any medical bill until you receive an explanation of benefits (EOB) from your insurance company, says Caitlin Donovan, spokeswoman for Patient Advocate Foundation, a nonprofit billing advocate.

It is especially important for now for patients for their EOB as their provider’s office may not be aware of what insurance companies are covering related to the coronavirus, she says.

When you do get the explanation of benefits, try to get your insurance company to cover more of your costs.

You can work with your Insurer and your provider to try to prove, for instance, that an out-of-network provider was your only option or that you weren’t given a choice. If this is the case, you can ask your insurer to cover your provider at the in-network rate.

Don’t assume the amount you owe the medical provider is non-negotiable, she says. If you can’t pay because you lost your job, call your provider’s billing office to see if they can lower the total amount due, accept the Medicare rate or work out a payment plan.

Helping Others Globally

I have always been fascinated by foreign languages. My first language was Mandarin Chinese, I learned English at school, and I eventually studied French, Latin, Russian, German, Hawaiian, Spanish, and Arabic. While I can use only a few of these to communicate, I always felt that languages were a superpower that could open new worlds and perspectives. 

I became a U.S. diplomat because I felt that my interest in languages and foreign policy would help communicate the U.S. story to the world. I was proud to represent America overseas and show citizens of other nations the qualities that I love about the United States: its openness, creativity, meritocracy, diversity, willingness to take risks, and belief that all people are equal and deserve a fair chance to make their lives better.

I served on the U.S. team that negotiated Agenda 2030, the groundbreaking UN development agenda that established the Sustainable Development Goals in 2015. After that experience, I decided I had spent enough time discussing poverty, and wanted to do something that more concretely improved the lives of poor people.

The United Nations Capital Development Fund (UNCDF) is a UN aid agency that focuses on making finance work for the poor in the world’s 47 least developed countries (LDCs). UNCDF uses finance to fight poverty by expanding financial inclusion, helping local governments deliver services to their citizens, and working with private sector companies to extend goods and services to marginalized and underserved communities. I joined UNCDF in 2016, attracted by its pragmatism, technical expertise, and focus on the poorest and most vulnerable.

UNCDF has been a leader in creating new ways for impact investors to support the UN’s work. In 2018, we launched the first UN-affiliated Exchange Traded Fund on the New York Stock Exchange, ticker SDGA (https://impactetfs.org/sdga-etf/). UNCDF partnered with Geneva-based impact investor Bamboo Capital Partners to create the BUILD Fund (https://www.uncdf.org/article/5305/the-build-fund), a blended finance investment vehicle that will channel growth finance in the form of debt and equity to impactful small and medium enterprises sourced by UNCDF in the LDCs. And later in 2020, UNCDF will launch a municipal bond fund to help developing country cities to finance climate-resilient infrastructure projects.

In response to the Covid-19 pandemic, UNCDF is leveraging a range of technical expertise and investment instruments to reduce and limit economic and social hardship for poor communities. UNCDF is supporting governments and businesses on digital payments to enable key financial flows; boosting the capacity of local governments to accept and deploy funding quickly to meet local needs; and injecting targeted investment funds into small and medium enterprises (SMEs) to stabilize local economies, preserve and create jobs, and accelerate recovery.

As an example, UNCDF recently supported SafeBoda, a Ugandan motorcycle ride-sharing company, to shift its business model to include food and medicine delivery. This has saved the jobs of 18,000 drivers, linked 800 merchants to the marketplace, and allowed 30,000 customers in the greater Kampala region access necessities while maintaining social distancing.  This is just one example of how a targeted infusion of capital can have a disproportionate social and financial impact in poor countries.

UNCDF has always supported the LDCs to build stable and resilient economies. As we look to invest in a post-pandemic world, UNCDF will continue to work to drive finance in more dynamic ways for poor people and excluded populations.  I am proud of the work we do and invite interested investors to join us!   

For more information about UNCDF go to www.UNCDF.org

Five Questions to Ask Before You Invest

Whether you’re a first-time investor or have been investing for many years, there are some basic questions you should always ask before you commit your hard-earned money to an investment.

Questions 1: Is the seller licensed?

Research shows that con-artists are experts at the art of persuasion, often using a variety of influence tactics tailored to the vulnerabilities of their victims. Smart investors check the background of anyone promoting an investment opportunity, even before learning about opportunity itself.

Researching brokers: Details on a broker’s background and qualifications are available for free on FINRA’s BrokerCheck website.

Researching investment advisers: The Investment Adviser Public Disclosure website provides information about investment adviser firms registered with the SEC and most state-registered investment adviser firms.

Researching SEC actions: The SEC Action Lookup – Individuals allows you to look up information about certain individuals who have been named as defendants in SEC federal court actions or respondents in SEC administrative proceedings.

If you are not sure who to contact or you have any questions regarding checking the background of an investment professional, call the SEC’s toll-free investor assistance line at (800) 732-0330.

Question 2: Is the investment registered?

Any offer of sale of securities must be registered with the SEC or exempt from registration. Registration is important because it provides investors with access to key information about the company’s management, products, services, and finances.

Smart investors always check whether an investment is registered with the SEC by using the SEC’s EGAR database or contacting the SEC’s toll-free investor assistance line at (800) 732-0330.

Question 3: How do the risks compare with the potential rewards?

The potential for greater returns comes with greater risk. Understanding this crucial trade-off between risk and reward can help you separate legitimate opportunities from unlawful schemes.

Investments with greater risk may offer higher potential returns, but they may expose you to greater investment losses. Keep in mind investment carries some degree of risk and no legitimate investment offers the best of both worlds.

Many investment frauds are pitched as high return opportunities with little or no risk. Ignore these so-called opportunities or, better yet, report them to the SEC.

Question 4: Do you understand the investment?

May successful investors follow this rule of thumb: Never invest in something you don’t understand. Be sure to always read an investment’s prospectus or disclosure statement carefully. If you can’t understand the investment and how it will help you make money, ask a trusted financial professional for help. If you are still confused, you should think twice about investing.

Question 5: Where can you turn for help?

Whether checking out an investment professional, researching an investment, or learning about new products or scams, unbiased information can be a great advantage when it comes to investing wisely. Make a habit of using the information and tools on securities regulators’ website. If you have a question or concern about an investment, please contact the SEC, FINRA, or your state securities regulator for help.

Esther Pan Sloane and the United Nations Capital Development Fund (UNCDF)

Originally published: June 17, 2020

QUESTIONQuestions by:
The Socially Inspired Investor Digest

ANSWERInterview with:
Esther Pan Sloane – Head of Partnerships, Policies and Communications at the United Nations Capital Development Fund (UNCDF)


QUESTIONEsther, can you explain briefly what the UNCDF is, and what it’s designed to do?

ANSWEREPS: The United Nations Capital Development Fund is a UN aid agency that was founded in 1966 to fight poverty using finance. It focuses on the 47 poorest countries in the world which are known as the least developed countries and we work mainly in three areas:

ANSWERFinancial inclusion, which is about bringing individuals into the market by giving them access to savings or credit. For example, in many African countries we work to build savings groups for rural women where they each save a small amount of money and lock it in a box. Every week they pool their money, count it, and make loans to each other. Once they’ve done that for a year, we connect them through digital financial services to a bank. For these women who have never had assets before, suddenly they have a savings pot, credit, and they have a different stature in the community because they control assets. That’s one of the examples of what we would do in financial inclusion.

ANSWERIn that area, we also support private sector companies to create goods and services for the poor, to make sure that people at the bottom of the procurement have access to financial services. For example, we’ve worked in eight African countries with banks, to create digital wallets for poor youths to save money in very small amounts. Most of these banks did not think that was a viable profit-making scheme until they saw that in these eight countries, the young people saved 20 million dollars. That’s an example of how we show there is a market for serving the poor.

ANSWEROur second main area of work is local development finance which is about helping local government officials manage their public finances effectively, collect taxes and deliver services to their citizens. In this area we would do something like co-finance a bus station in a town in Tanzania that has a bus station that sends buses all around Africa. Before we helped build this project there was a muddy field and when it rained people would miss their buses and buses would get stuck. After the project was finished, there’s a nice paved area where the buses can pull in and people can find their buses in an orderly way.

ANSWERThe last area that we work in is innovative financial instruments. We make loans and guarantees to small businesses in least developed countries, to help them grow and prosper. 

QUESTIONHow do you get the point across to individual investors from your standpoint that it makes sense to include investment vehicles in their overall strategy?

ANSWEREPS: Many investors are facing the questions, “How do I participate?”, “How do I support the issues that I care about?”, “How do I work to make a better world?”, and “What tools are at my disposal?”. 

ANSWERI think many institutional investors are hearing pressure from their shareholders and participants about how their money is invested. The nurses’ union in Sweden for example, mandated that the investments made by that union had to support gender equality and many pension funds are hearing that around the world. People who support family offices are hearing it from the next generation of wealthy individuals, who are very committed to social causes and are looking now at the corpus of their funds and saying, “What can I do with my investments that also reflect my values?”. You are seeing foundations move in this direction as well with PRI investments and looking at how do they invest their endowments.

ANSWERIf you are an individual investor and you care about issues like gun control, minority empowerment, or women’s economic empowerment, this is a new way that you can make decisions with your investment funds that reflect your values. We know for example, that it’s hard for many people to feel like they are engaged with the UN, we are working in many countries around the world. You may not have a direct connection to a woman microfinance entrepreneur in Myanmar, but you could buy certain funds on the stock market, get a market return for your money and know that that fund is supporting our work – UNCDF’s work, directly in the poorest countries. It was a way for us to try to pilot a vehicle that would allow people to connect their investment funds, get a return because we know that’s important for investors and that it’s a fiduciary duty of many fund managers, but also to support social organizations that are working to make the world better.

QUESTIONA part of your job must be raising money, talking to the big people who have the money and convincing them, it must be a big part of it?

ANSWEREPS: As the UNCDF is a UN agency the main focus of my fundraising is with governments. We are funded by donations, by grants from governments and we have a  responsibility to use that tax money effectively. What we are trying to do with these new vehicles, like with this one with Impact Shares is to pilot new instruments that can use taxpayer dollars that we are receiving to catalyze or attract private sector dollars, to areas where they otherwise would not go and have achieved a sustainable development outcome. For example, our biggest donor at UNCDF is Sweden and Sweden has been very creative in their use of grant funding where they will allow us to use their grant money to make loans to small businesses. We are doing that at concessional rates that help small businesses survive but then when the businesses pay their loans back, which they do, we are allowed to keep the income to make new loans. It’s essentially a smart way to do philanthropy because you’re creating a self-regenerating source of finance. 

QUESTIONWith the rise in interest in socially responsible investing in recent years do you think that the COVID-19 experience will actually speed up that trend a bit?

ANSWEREPS: I hope so and that’s been topic of discussion at the UN and in a lot of multilateral forums lately which is the clear evidence that societies that had stronger social safety systems have responded better to the COVID crisis. If you had a strong health network, good access to healthcare and a strong social safety net, businesses would not over-leverage. They had good access to reliable sources of finance and were able to withstand the shocks better. Even in this first stage where governments are really focusing on their response to the health crisis and trying to mitigate the health impacts, it’s very clear that the economic impacts that have come along with things like social distancing and shutdowns are hitting poor and less equal communities harder. And that will be doubly true of poor countries.

ANSWERI heard this morning there are 150,000 confirmed cases of COVID in all of Africa but that’s not because that’s how many cases there are, it’s because that’s their capacity to test. Once it becomes evident that you know that this disease has really hit, you are in societies where there is no reliable access to clean water, the food supply is disrupted, 80% of the economy works in the informal sector, there are weak social safety nets so imagine the health and economic pain we’re going through in the United States or a developing country and then magnify it by a thousand for a poor county.

ANSWERI think many investors and policymakers are realizing that the impacts of a crisis like this really show the effects of the policy choices we’ve made in the past. As societies have chosen to invest in certain aspects of our infrastructure or business cycles or access to public services at the expense of others and now we are seeing the impacts of that in some very negative ways. I think it will accelerate the move towards sustainable development investing or investments that are aligned with ESG principles because It is a terrific opportunity to build a better society, build back better. The fiscal stimulus that has been released now to deal with COVID could go into clean energy investments or water investments or technology of the future, that will really help us get on the right pathway to achieving both the sustainable development goals and the Paris Agreement. It also highlights that choices we’ve made in the past have really negative impacts. 

ANSWERFor more information about UNCDF go to www.UNCDF.org