74&W Exclusives Extra

We spoke with Gabe Rissman, co-founder of Real Impact Tracker, about the origins of his company and how their fund impact rating system works.

How did Real Impact Tracker get started?
I recently graduated from Yale. After graduation, my cofounder and I ended up doing a deep dive into the impact of public equity investing. We set out to do a literature review comparing the impact of all of the different activities one could take in public equity investing: engagement with companies, with policymakers, with the public, public signaling, the actual impact of ESG integration and positive screening and negative screening on the stock price of the company and the cost of capital. We had to [conclude] that people were not necessarily taking the most effective paths to impact, and that by focusing more on the public signaling effect, the engagement, the public advocacy, public policy work, one might expect to have more impact than a lot of what [calls] itself “impact,” which is just positive screening and ESG integration. We wanted to figure out a way to communicate that, and thought that a rating would be actionable and tangible.

Morningstar, MSCI and others already offer ratings; how is yours different?
Other fund ratings that are focused on social issues are more [like] sustainability ratings. [They] take a holdings-based approach and look at the average environmental and social and governance performance of those companies, and that’s how good the fund is. As a concept, aggregating and understanding the ESG ratings of underlying holdings makes sense if you’re concerned about ESG risks and you want to invest in a fund [whose] ESG thesis you believe in and think will lead to positive performance. The difference is that they’re not looking holistically at the other activity. We are taking a different approach, looking at the contribution that the manager brings to the table and what the manager adds to the impact equation. So that is less looking at just the content of the holdings and more looking at the signaling effect of the manager, the research and promotion of impact investing as a field, the positive or negative light that the manager is able to shine on impact investing; the engagement work that a manager does with the companies; and the policy advocacy and public perception effects that managers have.

So, to be clear, are you only providing ratings at the fund level, or is there a piece that looks at the holding level as well?
Just at the fund level, mostly because there has been data on the company level that’s not terrible. We wouldn’t have a comparative advantage by applying our framework to that.

That's different from the traditional approach in which people are inclined to scrutinize the holdings of a fund.
Yes. We chose that [approach] because we found as we were doing our literature review that those activities are more likely to have impact than investing in the companies that are doing good. The investor doesn’t bring as much to the table and isn't contributing as much [by] just investing in good companies from an environmental and social standpoint. The scale needed to affect the companies’ cost of capital and actually incentivize behavioral changes, purely through market forces – investing in the good and not the bad – is really large. That’s not necessarily to say that institutions that are going for divestment should stop. It’s tough to know where to draw the line on figuring out whether you’ll have more signaling effect through divestment or more impact through engagement. But it was clear to us that if you don’t have that institutional power and voice, then you likely will have more impact through the improvement work as opposed to just the content of your investment.

Can you describe your methodology?
We’re basing everything on publicly available data. We’re looking at the number of companies and the commitment to the engagement and the persistence and intensity and success of the engagements. All of those are considered. Our process involves coming up with a profile of all the raw data that we collect on a firm and then allowing the firm a chance to correct any inaccuracies. We send the firm the profile and allow for updates and corrections. We are working on certification similar to a B Corp-style certification at the institution level.

Does the return profile of a fund affect its rating?
We’re not looking at pure returns, but we are looking at some metrics of manager skill. There’s been a negative perception that SRI underperforms, and that has scared a lot of people away and is actually holding the field back a fair amount. So the fund managers that have not done well financially are penalized and the ones that are more successful get rewarded. And an important conclusion that we found from our first set of rankings is that a lot of the top-scoring funds are not sacrificing returns.

Do you use different methodologies for different sectors?
Our approach is both sector-agnostic and issue-agnostic. So if you are doing equal amounts of work and having equal success on human rights versus carbon reduction, you get the same score. We’re working on coming up with a tag system so that people who really care about a particular issue could know the impactful funds of a particular issue.

How do you envision investors and advisers using Real Impact Tracker?
The really big thing we’re going for is getting the ratings into financial data portals or platforms, so when advisors are having conversations with their clients, they're looking at and talking about the Real Impact ratings and using that to help guide conversations. There’s also a second part of the work that is unified by our goal of trying to increase the voice of the individual retail investor in impact investing. We’re working on building an engagement button that would allow individuals to send feedback to the funds and companies that they own and kind of do the engagement work on their own. So if there’s a company that is seeing a lot of investors asking about its climate risk, individuals would be able to add their voice to the conversation.

Right now, Real Impact Tracker only offers ratings for public equity investing. Any plans to expand?
We are midway through the development of our fixed income methodology and then hope to keep expanding out after that.

Broadly speaking, what are your hopes for sustainable investing as a field?
My vision is for people to not see their investments as separate from their other behaviors and to really think about whether the impact of their investments is what they want it to be. I think people are primed and ready to take impact investing as a part of their strategy for making the world a better place. And of course I hope Real Impact Tracker is able to raise awareness and help people better assess what investments will actually lead to that.


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