Why ESG Funds Need to do More than Just Provide Capital

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For those of us entrenched in the business of organic, the macro trends could not be more on our side; most notably, an industry that grew 12% last year to $62 billion and a health-conscious population that understands the risks of pesticide-laden, genetically-engineered foods.

In order for organic brands to grow, these companies need access to capital, and one increasingly important investor for later-stage organic brands are ESG funds.

Not surprisingly, ESG funds share a common mission with organic companies, as they take into account Environmental (energy conservation, natural resources, land use), Social (labor standards, community impact, production quality) and Governance (ethical business practices, board diversity, executive pay vs. employee pay) factors. ESG investing is not just for large institutions that have access to private equity firms, but almost any individual will soon be able to invest in this sector with a 401K via an open-end or exchange-traded ESG fund.

Without question, ESG funds play an incredibly valuable role in providing capital to organic companies, but money is no longer enough. Over the years, our industry has been unable to adequately protect organic standards or to enact policy that would benefit our country and our planet.

And this is where ESG investors could play a vital role on behalf of organic — because individuals who control vast sums of money command attention.

Case in point was when BlackRock’s Larry Fink, CEO of the world’s largest money manager, said in January that his firm is “asking companies to disclose how their business model will be compatible with a net-zero greenhouse gas economy” and investors are starting to “tilt their holdings toward companies focused on sustainability,” all of Wall Street and the business community took immediate notice.

More specifically, we need ESG investors to help transition a greater amount of farmland in the U.S. to organic. This would create new jobs and bolster local economies, both of which Republicans and Democrats could get behind.

Right now, less than 1% of the farmland in the U.S. is organic, yet the organic industry is comprised of roughly 6% of the overall food sector. As such, the industry is forced to import a majority of its raw products. Unfortunately, we have experienced massive cases of fraud with imported organic grains from the Black Sea region, and the environmental cost of importing these products cannot be ignored.

Sending enormous shipping containers of organic corn and soy from Turkey is much more damaging to our planet than it would be to grow these crops within our own borders. While some organic goods may need to be imported, such as cacao, bananas and pineapples — and there is nothing wrong with supporting small organic farmers in other countries — it is inexcusable that we cannot produce sufficient quantities of organic grains on U.S. soil to satisfy our domestic needs. Instead, we are forced to rely on foreign countries, several of whom have historically delivered us fraudulent goods.

MORE IMPACTFUL RETURNS

The data surrounding ESG is compelling.

S&P Global Sustainable1, a sustainability intelligence research organization, found that 16 out of 27 ESG exchange-traded funds and mutual funds with more than $250 million in assets outperformed the S&P 500. In the time period of Dec. 31, 2020, to May 17, 2021, those 16 funds rose between 11% and 29.3%, whereas the S&P 500 increased 10.8%.

When measured over longer time horizons, a report from professors at New York University’s Stern Center for Sustainable Business and researchers at Rockefeller Asset Management found a positive relationship between ESG and corporate financial performance 58% of the time.

According to Morningstar, the net flow of sustainable funds in the U.S. in 2020 reached $51 billion, more than double the total for 2019 and nearly 10 times more than in 2018. Additionally, BlackRock reported that from January through November 2020, investors in mutual funds and ETFs invested $288 billion globally in sustainable assets, a 96% increase over the whole of 2019.

“The amount of ESG money is accelerating greatly, and many people do not realize how large it has become,” said Nick McCoy, Managing Director at Whipstitch Capital. “The influence of ESG investors will only continue to grow, and getting them involved in helping to transition more farmland to regenerative organic is not only critical for the long-term financial well-being of the U.S. but for that of the planet’s health as well.”

With gratitude, Max Goldberg, Founder