Cambridge Associates is keen to “manage and mitigate” the risk posed to its clients by asset managers guilty of “impact-washing or green-washing” their funds, according to an executive at the firm.
The investment firm, which offers consulting, OCIO and other investment management services, launched its impact investing and ESG capabilities in 2008, and now advises around 150 clients on the topics, with at least 100 more having an expressed an interest.
“I definitely see additional demand from our clients across the board. We are glad to see it, but we are also cautious about fund managers saying they’re integrating ESG,” Liqian Ma, head of impact investing research, told Fund Intelligence. “They might say they’re investing in these impact themes but when you unpack it, it’s not as intentional, or not as thoughtful as we would like. Impact washing or green-washing is happening in the marketplace; we’re very aware of that and keen to manage and mitigate that risk for our clients.”
Although Ma said that green-washing has always been an issue, he is having to turn more managers away now as investor interest fuels their targeting of the space.
His team advises clients on everything from applying an “ESG lens” to a whole portfolio, to specific impact briefs, which could involve direct investments.
“We’re seeing significant capital deployment into these areas, and also there are existing portfolios becoming more ESG aware and integrated,” he said. “Existing capital is more and more focused on it.”
As well as a database of around 1,000 public and private self-identified impact funds monitored by his team, Ma is also involved with providing ESG research across all the funds CA covers. That work is carried out so that ESG-related risks and opportunities can be considered across all clients, even those not explicitly targeting ESG objectives.
He added that while every client is different, family offices tend to be more interested in impact-investing and direct investments with an impact objective, given that they often have more entrepreneurial backgrounds. There are also some foundations conducting targeted direct investments.
“In the endowment world as you probably know there’s been a lot of talk on [university] campuses around climate change and fossil fuel divestment, so there’s been more talk about that issue on the environmental side, versus the social,” he said.
CA operates no hard screening criteria in terms of performance, track record or assets under management when seeking asset managers for ESG and impact-investing briefs. The firm looks at a portfolio’s history of stock selection “to give us comfort that they can be strong stewards of capital as a foundation, and that they can overlay material ESG analysis to their thinking and their approach.”
Beyond judging firms by their investment credentials, Cambridge Associates targets asset managers with strong reporting capabilities and transparency.
“We look for partnership driven, highly transparent managers, and that means that if we ask them for the rationale on investing in XYZ, they’ll be happy to share that, they’ll report on the attribution, and the performance, not just at a high level but at the company level, including both financial and ESG and impact metrics,” he said. “Those would be best in class reporting behaviors that we look for.”
Ma’s team generally works in partnership with asset class specialists from the business when assessing new opportunities.
“We help and support our broad research platform to integrate ESG in all their work, so we provide leverage and scale and tools for the broader research organization to apply ESG in their thinking. So we’re a resource internally for that purpose, but for example, we wouldn’t necessarily lead a diligence on a traditional long only manager that’s now starting to integrate ESG,” he said.
“We’d support our long-only research colleague to do that analysis … And we also help our portfolio management teams work with clients on these issues, oftentimes in the background helping them provide the pipeline and the ideas and being a sounding board. But our team in general does not work directly with clients on their portfolios.”
Going forward, Ma is pleased by the rapid institutionalization of the ESG and impact space and says that the recent trend of clients’ objectives becoming more sophisticated and specific is likely to continue.
“If you were to look five years ago, it would be more of the screening approach — we’re not going to do tobacco or gambling, for example. Today it’s much more, ‘Let’s lean in where there is material upside opportunity from some of these major megatrends, like solutions to climate change solutions, education, and healthcare,’” he said.