Roots planted to create a culture of responsible investment

Former hedge fund manager says earning a profit and helping a good cause are not mutually exclusive

It’s an age-old investing question. Can you do good and do well at the same time?

Ethan Powell is on a mission to prove that you can.

The 43-year-old former hedge fund manager is using his non-profit finance company, Impact Shares, to create a new way of doing socially responsible investing.

From his office in Frisco, Texas, he is setting up funds that eschew popular one-sizefits-all ESG models – which stands for environmental, social and governance. His fund is not only built hand-in-hand with specific charities, but also forks out the bulk of their fees to those organisations.

Impact Shares’ NAACP Minority Empowerment ETF started trading in July under the ticker NACP, and its YWCA Women’s Empowerment ETF, or Womn, launched last week.

Values investing is hot, as the number of ESG funds has more than tripled over the past four years. Still, total assets are slightly less than $7 billion, a blip in the $3.7 trillion US ETF market.

But assets are not Mr Powell’s main gripe – ESG methodology is. “The way they’re interpreting social responsibility is very suspect,” he says. “And even if it’s not suspect, it’s very difficult to understand.”

In particular, the catch-all nature of ESG strategies can leave some portfolios with strange positions. For example, the second-largest holding in BlackRock’s iShares MSCI KLD 400 Social ETF, known by its ticker DSI, is Facebook, which is in a battle over the types of content posted on its website, from nasty videos to hate speech.

But the real question facing Mr Powell and his competitors is whether investors actually care about doing good. More than half of those recently polled for a study by the low-cost brokerage firm Charles Schwab said performance was among the most important factors when considering a socially responsible investment.

To attract buyers, fund companies have transformed ESG into a broad, money-making entity that allows investors to feel good without sacrificing returns.

“ESG is not ‘don’t invest in oil and gas’ or ‘don’t invest in coal,’” says Aniket Shah, head of sustainable investing at OppenheimerFunds. “This isn’t about totally ‘greening your portfolio,’ whatever that may mean, but are you weighting your portfolio toward companies that are proactively improving their risk profile against the issues?”

In other words, these positions are hedges against bad behaviour. The approach more closely mirrors benchmark indexes and helps with returns. But it risks rendering the term ESG meaningless.

That is something Mr Powell’s approach seeks to avoid.

Impact Shares and a handful of others want to keep the focus on social responsibility while remaining commercially viable. Issuers are starting