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20 Years in ESG: A Dialogue with Industry Pioneers

20 years ago, Larry Abele, an alumnus of Deutsche Asset Management, BlackRock, and Cambridge University, founded his own hedge fund. In just a few short years, Auriel Capital Management had grown to $2.1 billion AUM.  


With a growing interest in ESG investment and a lack of appropriate data models in the market, this hedge fund would soon develop into the foundations of Impact Cubed. We sat down with the three founders, Abele, Antti Savilaakso and Dr Arleta Majoch to learn how that came about, why Impact Cubed takes a unique approach in the sustainable investing space, and how they have seen the industry change over the last two decades. 



Left to right: Larry Abele, CEO & founder; Dr Arleta Majoch, COO & co-founder; Antti Savilaakso, Head of Research & co-founder

 

Sustainability & investment backgrounds


For Head of Research Antti Savilaakso, his interest in ESG concepts can be traced back to his upbringing on a farm in pastoral Finland. Seeing the gross inequality in global resource distribution, he realised that there were two avenues for effecting real change: business or politics.  


“If you want to influence how corporations work, you need to understand how capital flows through the system because that's a massive, massive lever when it comes to instigating change.” 


A similar interest in business ethics drove Impact Cubed’s COO into the field. Following a traditional business administration education in which she found the somewhat cynical discussions around “human resources” unsavoury, Dr Majoch’s PhD eventually centred specifically around responsible investing, and she entered the business world 

 

How Impact Cubed began


Converging on the small world of ESG conferences, Abele, Savilaakso and Majoch found common ground in not just their belief that capital allocation has the power to create impact but also that there existed a vacuum around the data and strategy required to facilitate it.  


With practical, firsthand experience gained at some of the biggest asset management firms, indices providers, private organisations and academic bodies around the world, they understood that while the intentions (and marketing messages) were good, the actual execution of sustainable investment strategies was lukewarm at best. 


Abele recalls, “I was speaking at a PRI conference, and I remember asking my audience: how many in this room are just adding ESG in their portfolio to improve their returns and how many of you are adding it to feel good about yourselves? 98% weren’t even thinking about returns – it was a tick box exercise. 


Devoid of strategy and with data in short supply, the landscape was ripe for ratings. Rather than look to optimise their portfolio’s exposure to carbon or gender inequality, institutional investors were simply constructing products that consisted of “green” securities or “triple A” stocks and considering their ESG box ticked.  

It was clear that factual, quantitative data was going to be key. 

 

Why sustainability data over ratings?


The aim wasn’t to establish just another ESG ratings provider. They wanted to ensure that any data that was produced would be grounded in fact, and factorised in a way that would make sense to investors to utilise it within their day-to-day value chain. The overarching goal of the business was to simply help facilitate the aligning of capital to a sustainable future.  


“If you don't have the right ingredients then it doesn't really matter how genuinely you're trying to build a good fund,” points out Savilaakso.  

Leveraging Abele's expertise in quantitative strategies and factor investing, Impact Cubed devised a machine-learning model. This innovation empowered teams to convert the burgeoning amount of available data into actionable insights. As a result, investors can now advance their responsible investment practices beyond the confines of traditional ratings-based or exclusion-only approaches. 


This move eventually saw them capture the attention of Euroclear, one of the largest clearing houses in Europe, who became a strategic partner in 2022. 

 

Risk vs return vs impact


Abele had noted that for many investors, responsible investment was perceived more as philanthropy than a strategic financial decision, with risk and return often relegated to secondary considerations. 


"Impact investing initially found its roots in faith-based organizations, which aimed to exclude sectors not aligning with their ethical values, such as gambling and arms manufacturing. Such broad exclusions, and the associated increased risk, were simply viewed as the cost of ethical investment," Abele remarks, challenging this perspective as fundamentally flawed. 


Savilaakso concurs, highlighting, "The relationship among risk, return, and impact remains widely misunderstood and ineffectively applied." 


Impact Cubed operates under the core belief that incorporating impact does not necessitate sacrificing returns or assuming undue risk. With the correct measurement and application, impact can serve as a financial lever to construct and refine portfolios. This principle was materialised with the launch of 3D-ESG in 2023, amalgamating risk, return, and impact into a unified model. This three-dimensional approach enables investors to select securities, funds, and managers that achieve an optimal balance among all three simultaneously. 



Figure 1. ESG visualised in 3D with fund impact tracked alongside tracking error and expected returns.


Furthermore, the introduction of SmartESG the previous year demonstrated that portfolios could be engineered to significantly enhance impact without inherently increasing the expected risk. 

 

What comes next for sustainable investing?


On the subject of what comes next for the ESG landscape there is a slight divergence of opinion. While regulation provides the backdrop for much of this next phase across the board, its position as either a help or a hindrance seems to provoke a different response from CEO Larry Abele than it does Savilaakso or Majoch.  


The former suggests that the last 10 years have been laying the foundations for a regulatory takeover. In beginning to create a common language for the industry and a standardisation for the data points on which businesses report, the groundwork has been laid for regulators to step in and make the allocation of capital towards a sustainable future a legislative affair. For Abele, this is likely to manifest as a global tax on externalities, a development he welcomes.  


For Majoch and Savilaakso, the role of regulation is a little less clear cut. In fact, they have concerns that their involvement may be something of a constraint for the industry, establishing a “bottom line” of compliance for which market participants will aim rather than more ambitious or innovative targets.  


“There is a wealth of opportunity for firms that can overcome their regulator fear and find the bandwidth to do something more innovative. The first mover advantage in three years’ time, once we’ve moved past the regulatory shock, will not be insignificant,” says Majoch.  

For all of the founders, one thing is clear: we are on the precipice of change. Regulations are becoming more exacting, the market more sophisticated, and client expectations more nuanced and individualised. These factors will collude to create a fertile landscape for ambitious investors who refuse to compromise on either impact or returns – and Impact Cubed will be at the forefront of this charge.   

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