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AIMs Focused on Socially Responsible Investments

Investors in sustainable assets are changing the way investment models and markets work, by challenging previous assumptions and priorities. By making more frequent use of environmental, social and governance (ESG) factors in their decisions, they have ensured socially responsible investing (SRI) is no longer a novel or unfamiliar concept but instead a strategy capable of producing positive long-term benefits to society and for traditional, sustainable financial returns. Consequently, investment firms are increasingly incorporating ESG criteria into their investment analysis across a range of asset classes.

Alternative investment managers (AIMs) applying SRI criteria will take into account a wide range of ESG factors, including a) corporate governance issues covering political contributions, executive compensation, board diversity and independence, and anti-corruption policies; b) social activities such as human rights, community development, employee diversity and anti-discrimination concerns, workplace benefits, labor relations, health and safety at work, and the need to avoid investing in tobacco and other harmful products; and c) environmental topics encompassing sustainable construction, climate change, clean technology, pollution, preservation of natural resources, agricultural effects, water use and conservation.

Historically, AIMs have played a key role in the development of SRI.

Over the past decade, private equity and venture capital funds investing mostly in alternative energy and clean technology companies have attracted considerable sums from mainstream investors. In 2014, a survey by the US SIF Foundation identified 212 such funds with collective assets under management of $135 billion that considered ESG factors. Of these, 130 specialized in clean technologies.

Sustainable, environmentally focused investors have contributed to the growth of responsible property investment (RPI), an application of ESG analysis to real estate purchases that by their nature have tangible social and environmental effects. This trend represents a natural extension of SRI to long-term wealth creation, which is vital for longer term fund performance and risk assessment. To date, many real estate investment trusts (REIT) have issued green bonds to fund sustainable projects. They include Regency Centers, which in 2014 became the first US REIT to issue a corporate green bond, raising $247 million to fund pro-environment projects such as the renovation of Leadership in Energy and Environmental Design (LEED) – certified properties.

Further, as their SRI strategies require large endowment, pension and other government funds to invest in Minority Business Enterprises (MBE) and Women Business Enterprises (WBE), their managers must consider the latest developments involving responsible, environmentally friendly enterprises. However, the highly labor-intensive and time-consuming work and extensive systems and processes necessary to identify companies that satisfy ESG criteria or SRI requirements of fund and investment managers exert considerable pressure on researchers, leaving fewer resources for deal execution.

At Phronesis Partners, we provide cost-effective one-stop solutions for fund managers that enable them to identify those companies that satisfy their ESG criteria, and help build an asset portfolio commensurate with their financial return targets and social objectives.

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