"Indexing has distanced us from what we own": Kristin Hull weighs in on the indexing debate
I spent the first part of 2019 interviewing different industry leaders about whether indexing and impact investing can coexist. Kristin Hull, CEO of Nia Impact Capital read the series and shared her thoughts with me. I asked her if I could interview her for my readers. Enjoy!
Sonya: I always like to ask people about their impact investing “a-ha” moments. You shared yours with me last time we spoke. Any more recent “a-ha”s or shifts in thinking?
Kristin: My focus has always been on working toward social justice and environmental sustainability, and now I am more focused on achieving this by shifting the way we as a society invest. Recently I read the updated Harvard Knight Foundation study looking at the numbers of women and people of color in asset management.
The staggering numbers from that research as far as who is making investment decisions within our economy were another a-ha for me. While I have always known there are few women in finance, and even fewer people of color, I now see just how much we need to shift both who is making decisions about the companies within our portfolios and just who is managing our collective assets. By deduction, the Knight study shows that 98% of our investment capital is being directed by one group. It’s time for more balance and diverse perspectives within our financial industry.
Sonya: You read my recent series on whether you can index with impact, and you offered to share your thoughts. I’d love to hear your perspective.
Kristin: At its core, Impact investing involves selecting companies that are creating a positive environmental or social impact. Indexing “buys the market,” and chooses companies according to their cap size or geography, not by their purpose, leadership, or business practices.
The first index product was invented in 1975 as a way to simplify investment products and diversify an individual’s portfolio with low fees. The concept of indexing became popular in the 90s and democratized access to the public equities market. To own one fund that included 3,000 companies was a financial innovation. Yet this practice of indexing has distanced us from what we own, and has caused serious issues for our economy and our world.
Portfolio construction decisions impact our planet and society. Investing in the incumbent economy has many risks for investors. Investing in weapons producers, coal and fossil fuel companies as a default is no longer acceptable, nor is it smart from a risk perspective. Rather than choose companies according to their cap size or headquarters location, what the world and investors need are ways to invest exclusively in solutions focused companies. Our economy and our planet will be well served when we return to the days when portfolio managers carefully selected companies based on their products and services, and on the executive team’s ability to execute. To the extent we can index the next green, sustainable and inclusive economy, that would serve as a potential impact investment. By selecting companies based on how well they meet sustainability standards and participate in beneficial business practices, rather than how large they are, or where their corporate offices are located we will move impact investing mainstream.
Sonya: Do you benchmark your own fund’s performance to an index? If so- how do you feel about comparing to a model that you believe is broken?
Kristin: This is a great question, Sonya. The financial services industry currently requires a benchmark. And yet the common industry standard benchmarks are set to indices that represent our incumbent economy; full of companies and industries that have caused environmental destruction and which expose investors to systemic risk. I founded Nia Global Solutions to move us away from indexing toward the next, just, sustainable and inclusive economy; we invest into the world that we want to see and actually live in. Every company we invest in addresses one or more of Nia’s six solutions themes; all have products and services that matter in our transition to a sustainable economy, and all include women in leadership.
At Nia, we would rather be asked about our goals and expectations for the portfolio, the impact it has, and how is it performing financially, socially, and environmentally. We are not aiming to mirror status quo measures in either performance or in environmental impact. Our fact sheet shows the SP500 and the MSCI AQWI as points of comparison, as expected by the industry.
Sonya: How do you think impact investing performance and impact should be measured?
Kristin: This is the question of our time. To grow the impact investing movement we need to clearly connect the dots between our investment dollars and the world we live in.
To do so, we’ll need to measure all investments with multiple bottom lines. Financial returns are important and must be considered within the context of whether -and how much- they are extracting from our earth, causing environmental or societal risks, and exacerbating inequalities.
Before thinking about measuring impact, it is important to start with intention and purpose. What are the goals and values of the investor? And what is the core purpose of the company? Investing in companies whose business model is to profit from purpose is an essential first step.
Once investors have made that shift, to being proud to own every company in our portfolios, then we get into tricky, yet necessary territory when measuring impact. Do we count how many jobs created? How many trees planted? How much carbon sequestered? How many women empowered?
The investing industry needs to measure what matters. SASB has taken on this task by assessing each sector to determine what is material to each industry, though we are far from having a well-defined and agreed upon standard to measure impact. Until we have that standardization, t a minimum we must invest in companies that are profiting from purpose, whose revenues are derived from business activities that matter for people and planet.