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A Conversation With Impact Investing Visionary Robert Brown
For more than 30 years, Robert Brown has been recognized as a leading economist and Wall Street investor. In recent years, he has taken his extensive experience in macro research to advance the impact investing sector, most recently as co-founder and senior partner of Atlas Impact Partners, a long/short hedge fund.
In his next chapter, Brown joins the Sorenson Impact Institute as a Senior Fellow, where he will continue his path of pushing impact investing into the mainstream, working closely alongside faculty and staff at the University of Utah David Eccles School of Business.
In this candid interview, Brown shares his unique perspective on impact investing, shaped by his decades-long career in Wall Street research. He offers his viewpoint on the misperceptions of ESG, Wall Street’s trust issues when it comes to impact investing, and why he considers impact measurement a public good.
Can you share details of your career trajectory? You started as an economist and had a career as a global macro research analyst.
I started my career after studying international economics and doing my graduate work in econometrics in Belgium. My thesis was to estimate the minimum variance portfolio of currencies for international investors. To do that, I had to hand-scribe weekly currency prices for 12 countries from 1980 to 1985 for the data to run the regression model! That experience taught me quickly the importance and power of empirical methods, as well as cultural understanding and collaboration. Most importantly, it taught me about perspective — specifically, the validity of someone else’s perspective. This launched me into a career in global finance at an exciting time when the world was first opening up to globalization.
Throughout my career, I’ve been blessed to work at some of the world’s foremost institutions with exceptional colleagues and formidable mentors during periods of rapid change. My first job was at Bankers Trust, which at the time was a leading commercial bank with cutting-edge risk management systems and a world-class derivatives business — a great spot for my academic training. I then spent the majority of my career at Morgan Stanley, mainly in macro research, before moving to head up equity research at Nomura. From there, I went to AllianceBernstein before leading the research team at JUST Capital and then starting the hedge fund Atlas Impact with exceptional partners.
There were a few pivots over 35 years, but the consistent threads throughout my career have certainly been research and a global focus, and very importantly, applying a clear-eyed unwavering dedication to leading research processes through empirical analyses.
How did these various roles inform your perspective on impact investing?
First, an insistence on quality data, which is always central to a research process, but not always easy to obtain in the world of impact. It often means the creation of new data sets, which is fun for a nerd like me. That work was a main focus for our team at Atlas Impact and my research team at JUST Capital.
Related to that is a dedication to developing metrics that measure clearly and directly the outcomes we intend to assess. It sounds straightforward, but it’s not always easy. You can have a lot of clean data which contains no information, or a lot of quality data used to measure the wrong idea.
One of the more qualitative disciplines I’ve adhered to is that in the development of impact and ESG metrics, we can never assume “we” are right. Measurement and development of impact metrics is, in some very real ways, a public good. We owe it to the users of the metrics to capture as many points of feedback as we can, whether that is companies themselves, investors, or asset owners. Of course, you need a point of view, but that should be informed with as much perspective as possible. And then we need to follow the directive of my good friend Michael Weinstein, who was the Chief Program Officer at Robin Hood Foundation: Pull out Occam’s Razor.
What needs to be done to improve the quality of data in the sector?
We need to release ourselves from the idea that there’s a single standard for measuring impact and instead focus on the integrity of the process. The key issues are authenticity and rigor. If your investment strategy brings an authentic mission and executes that mission with properly defined empirical analyses, we will get where we need to be. More investors and asset managers will begin measuring impact that is relevant to their process, which means they will care about the results, and the results will be more robust — a virtuous circle.
During your career, you also spent time as a hedge fund manager. Why are there so few hedge funds in the impact and sustainable investing spaces? What is the opportunity for hedge funds?
In my experience, most hedge fund PMs typically are not interested in impact because it’s an additional complexity they don’t need. The vast majority of hedge fund assets today are managed with a singular focus on very short-term returns — they are traders. To be clear, that’s not a critique, that’s what the asset owners have hired them to do. Mission alignment is just not in the mandate for most hedge fund investors.
Impact investing, on the other hand, requires a strategy that is old-school, focused on fundamentals, and desires longer-term return profiles for positions. At Atlas Impact, we were deeply committed to our mission. We started by developing an impact thesis that defined a cohort of potential investments. Then we set out to develop a hedge fund strategy to generate returns from that cohort of ideas.
Do we need hedge funds in impact?
I would turn it around and say that first, impact investors who are committed to a wholly integrated approach need impact hedge funds. And, yes, I do believe hedge funds — all investors, in fact — can enhance their process by including ideas of impact and sustainability.
There seems to be a “failure to launch” problem in the hedge fund space. Jeff Ubbens just announced that he is shuttering his fund. After its initial success at Exxon, Engine No.1 announced that it was stepping away from activism and sold off its ETF business. Is there a systemic issue that’s threatening the viability of these strategies?
Flat-out no. You’ve highlighted two high-profile examples that suffered from specific idiosyncratic failures or deficiencies related to the strategies and the management teams of those strategies.
How do you think about measuring impact when it comes to long/short trading strategies?
Impact measurement doesn’t change by the strategy. The intention is to measure the change in the world created by the company’s product or service and to compare that change relative to a counterfactual. That framework applies to companies we hold as long positions and to companies we invest in through short positions.
However, I would never own a company that generated negative impact, and would not short a company with positive impact, but that’s a different issue than how you measure the impact itself.
What is your take on the relationship between ESG and impact investing?
Impact strategies and ESG strategies are often conflated under the giant umbrella of “doing well by doing good.” Although they are distant cousins from a large family, they are very different, but also necessary if we want to redirect capital at a sufficient scale toward solutions for the world’s problems. So, first, some clarifying definitions:
ESG investors own portfolio companies after an examination of the company’s operational footprint and managerial practices. The investors are interested in “how” the company operates. For example, does the company treat workers well, does the company attempt to reduce their emissions over time, are they managing supply chains to reduce the influence on the communities in which it operates? These issues typically do not directly influence the earnings of a company, but they are important systemic issues. If all companies behaved with a focus on those ideas, we would, in the aggregate, motivate systemic change.
Impact investors, on the other hand, are focused on the outcomes generated by the products and services that the company produces. The investors are focused on “what” the company does to generate revenue. Impact investors examine the change made in the world by the product a company sells. The outcomes and the impact are, therefore, directly related to the earnings of a company.
Impact and ESG are thus related in a practical way — products that have impact typically enable companies to operate with behaviors desired by ESG investors. For example, a company producing solar panels enables a data center to operate with minimal emissions.
What are some of the common misperceptions that Wall Street has about ESG and impact?
My sense is that Wall Street is not the source of misperception these days. Wall Street, especially the sell-side, has actually gotten quickly educated and fairly astute about issues of impact and ESG. The biggest and most frustrating misperception by the public is that ESG and impact are the same thing.
Regarding impact investing, the biggest misperception that we see frequently in the press and in certain areas of Wall Street is that impact investments produce returns that are relatively lower. It’s a glib statement that politicians and pundits like to make and that investors sometimes use as an excuse for avoiding the space. It’s true that one end of the impact spectrum is defined by philanthropic or first-loss investments – but that is intentional. Thirty years ago, that was the beginning of impact investing. But the other end of the impact spectrum today is defined by for-profit companies that are at the nexus of innovation and change. As an investor, that’s typically the best place to start — innovation.
Regarding ESG, I think the biggest misperception out there is that some group, some regulatory agency, is forcing companies into “ESG behavior,” whatever that means. As a technical matter, let’s first understand that the new SEC rule is not forcing companies to change their behavior or even to report on certain information. The SEC rule essentially says that “if” a company is going to make claims, they have to do so with credible information. What’s actually happening in practice in the real world is exactly what should happen in a capitalist, democratic society with free speech. A group of interested people wants change, has found a voice, and is using legal pathways to insist on change. In the case of ESG, that’s better information. That’s a dynamic that is rarely criticized in other venues of commerce. It’s what firms hire lawyers to do on K Street.
What are some of the common misunderstandings that the ESG and impact communities have about Wall Street and finance, and how is that holding them back?
There are two related issues, and they both make me cringe. The most common misperception is that Wall Street people are heartless adherents to Milton Friedman’s (misunderstood) philosophy that profit is the only motivator. The second is that Wall Street doesn’t care about a better world. Most of the people I have worked with for the last 35 years are hard-working, empathetic, and intelligent professionals who care about their families, communities, and the future of the world.
The third misunderstanding is that nothing has changed. We are not where we need to be, and there is much work to be done, but over the last 20 years, both Wall Street and the business sector have evolved from a state of severe skepticism about (at that time) fringe ideas promoting ways to motivate change, to today, where there is legitimacy — a broad acceptance of the idea that capitalism has to incorporate a more thoughtful perspective on the world in which we operate and that companies are responsible.
How does all that hold us back? The misperceptions lead to a lack of trust, and without trust, you can’t build things together.
The majority of investors in the public markets today are exposed to sustainable investing through indexed ETFs. Is this the most effective way to achieve impact? Do investors, both retail and institutional, fully understand how to evaluate the impact that their portfolios are having?
That’s a complicated question. I do think index investing is the right solution for the majority of investors, broadly. For sustainable investing proponents, indexed ETFs are important for those wishing to express a point of view in theory. But unfortunately, as constructed, they are also probably the least impactful financial product available to investors today. Theoretically, it is an efficient way to express your personal values in your portfolio, and I am a strong proponent of that concept. What it usually means in practice is that you wind up owning a portfolio of stocks that have been “tilted” toward companies that are “relatively better” on certain ESG issues. That concept of “better” is defined by third-party vendors. What does it mean to have the least polluting chemical company in your portfolio? What does it mean to have a consumer-packaged good company that treats its workers the “best”? I don’t really know, but it does mean you’re still owning a chemical company producing pollution and you’re still owning a beverage company promoting poor diets and dangerous health outcomes.
Investors generally do not understand how to evaluate issues of sustainability, which is why our work at Sorenson is so important. The biggest flaw is that most of these ETFs are managed with data created by third-party vendors who produce metrics that reflect ideas that may or may not be aligned with the investor’s values. You’re essentially investing in the vendors’ definitions of “good.” That’s why at JUST Capital, when we created the ranking methodology, we rejected the idea that we knew the right answer. We felt it was an obligation to understand what the public believed, which was Paul Tudor Jones’ incredible insight: If you want to know what is important to people, ask them. We asked for the meaning of “just” through a series of highly rigorous surveys of the American public.
In the specific case of impact portfolio management, the understanding of impact success is even less robust. My colleagues at Sorenson Impact Institute and I are working on something to address that.
As part of the University of Utah, Sorenson Impact Institute is dedicated to training the next generation of impact leaders. How do you think impact investing should be taught in business schools, if at all? Should it be a core part of curricula, or is the field still too nascent to make it an essential part of an MBA program?
An introductory course on socially responsible investing should be mandatory for all business school students. The next generation of business leaders and investment professionals will better serve their industries with a base understanding of these issues of measurement for starters. There should also be a major for those students compelled by the field of impact investing. The ideas are actually very well formed by the thought leaders in our industry and ready to be taught formally.
What do you hope to accomplish as a senior fellow with the Sorenson Impact Institute, and how?
I look forward to advancing the integration of impact investing into the broader worlds of investing and business and to developing the next generation of high-quality professionals for the field of impact investing.
How? That’s a great question — by working closely with the faculty and students to conduct high-quality research in impact investing and to mentor students as they enter the field. I believe the Sorenson Impact Institute and the broader Eccles School of Business is the perfect place for this work for so many reasons — the quality of the faculty, the mission of the institute, and the ethics of the school. Most important to me is the ethos, which is summed up on a sign as you leave the Eccles building on the University campus. It reads, “Now Go Do.” That’s the perfect inspiration for an impact investor.
Follow me on Twitter or LinkedIn. Check out my website.
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