The CEO of an impact fund ranks the 5 biggest challenges facing sustainable investing - and offers one big solution
- Erika Karp, founder and CEO of Cornerstone Capital, has a simple mission: Make sure investment dollars are allocated as responsibly and sustainably as possible without sacrificing performance.
- She says "you have to think about the intersectionality of everything" when consulting an ESG investment.
- In an exclusive interview with Business Insider, Karp sat down to discuss complex problems facing ESG investors and a way to mitigate them going forward.
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Over the past decade environmental, social, and governance (ESG) investing has exploded as an increasing population of investors demand their dollars be allocated to companies that are making the world more sustainable.
And at this year's annual World Economic Forum meeting in Davos, Switzerland, the driving topic was turning talk into action, and taking ESG investments to scale.
The companies that make up ESG funds are vetted for things like: energy use and conservation (environmental), employee relations and community impact (social), and diversity and ethics (governance). The goal is simple: Provide a responsible, forward-looking set of companies to invest in without sacrificing performance.
Erika Karp, founder and CEO of Cornerstone Capital, is here to make sure that's exactly what happens.
"You have to think about the intersectionality of everything," she said in an exclusive interview with Business Insider in Davos. "And I don't just mean everything in business."
"You take the business, and then you wrap it with the culture, and you wrap it with the region, and you wrap it with all the things that play into something," she said.
But as the popularity and prevalence of ESG funds continues to grow, it's become increasingly difficult to separate contenders from pretenders. Karp broke down some of the difficulties facing ESG investors along with a potential solution.
The challenges
1. Data
"The biggest challenge to the financial services industry - investments - is data," she said. "It doesn't stop us though."
2. Underperformance
"There still is a myth that you will underperform in investing if you invest sustainably," she said. "It is a myth and it needs to be dead."
3. A breach of fiduciary duty
"Not only is that wrong, it's stupid," she said. "It's the reverse of the truth. If you don't do ESG analysis you're not achieving your fiduciary duty, so you shouldn't be investing."
4. Language use
"The language use shows that there are so many people that really don't kinda get it," she said. "Every time I hear somebody say 'ESG investing' it kinda makes me cringe. There's no such thing as 'ESG investing.' ESG is an analytical discipline."
She added: "ESG investing is nothing. ESG analysis is a thing - and it's a discipline, so the language is still problematic."
5. An onslaught of new products
"We're having an onslaught of new products," she said. "They're just a reiteration slapping on some exclusion, and it's really dangerous because I think that it's hard for most people to sort through the noise and the green-washing."
She continued: "This spate of new products is genuinely a problem."
A solution
Karp says one way forward would be to shake up who makes investing decisions for pension funds, the world's largest class of asset allocator.
While many major funds have stated a desire to get more sustainable with their investing practices, she argues that many are naturally predisposed to one way of thinking that could impede the right kind of choices.
"If we can change the composition of these pension fund boards, to me that would be massively helpful," she said. "I'm thinking, that for the most part, they're 50-plus year old white men, from the financial services industry, and so their minds are closed towards the next era or the next discipline of finance."