What is Going on with "ESG"?

All right guys, in this video, we're gonna be talking about what is going on with ESG right now and why you need to pay attention, frankly. So ESG's been in the news a lot lately. We'll give a quick recap on, you know, what it is and why it's important and why it's a part of our world right now. So let's get into it. So ESG, you know, it obviously, you know, came out within the past decade. It's become more and more of a hot topic. What is it? Environmental, social, and governance, right? It's a different way to measure the impact or a company other than from a monetary perspective, right? Take the fiscal component out of it. You know, what is your company doing for society? You know, how is it governed? What social impact does it have? How is it treating the environment? And it's, it was really originally created to, you know, kind of grade companies side by side from an ESG perspective. Again, non-monetary incentive. So E, environmental, you know, that's How is your company impacting the environment? So that can be, you know, your electricity, that can be waste management, that can be trees, like, you know, or your carbon footprint, you know, all of those things of how does your company actually impact the environment at play. Social is, hey, how are you treating your customers? How are you treating your workers? Are you well represented of minorities? Do you give everyone a voice? And then governance is, Basically, to simplify it, is, is your company run ethically? Do you have good corporate governance? Do you manage your people well? Do you make good choices? Do you make good decisions? Are you moving humanity forward? Right. As part of our kind of mission at Fund Launch, we empower people to start and scale funds that move humanity forward. The G component is basically like, what's your ethics? So why is this important? All of these asset managers in the world who are managing millions and billions of dollars and even the little guys, right, investors, they're saying, you know, if I'm investing in this company or fund or opportunity, You know, it's great that I might get a 10% return, but am I doing good for the world, right? Am I doing good for others? And that's where ESG comes into play. So a lot of these larger allocators, they're now being held socially responsible to make good ESG investments. And so this includes like state pension funds allocators. And so they're feeling pressures from legislations in their states that, hey, you need to invest in good ESG companies. So, you know, over the past decade, we've seen this emergence of different financial products that are ESG. BlackRock, for example, will come out with an iShares ESG fund. The problem is all those things I talked about, it's very subjective about which ones you care about, how you quantify it. And there's all these different kind of scales out there to kind of measure the ESG impact that a company really has. Because, you know, as they open it up, you know, they launch, you know, an ESG product, they pull back the curtain and they're holding an oil company. Company, you know, and that doesn't align with somebody's interests, right? And then maybe they're, they're having a McDonald's in there. McDonald's fits because they donated a certain portion of their products to charity, right?

But, you know, people are saying, well, how does a hamburger company actually move humanity forward?

So, you know, it becomes this, you know, really gray area, right? A lot of rebuttals about what actually constitutes an ESG investment. So we're starting to see the emergence of different companies that are saying, hey, we're the company, we're the actual ESG, you know, scale.

This is how you can quantify it.

And it's really just becoming, in all reality, a burden to a lot of these managers and companies. And you're seeing that, you know, maybe an oil company that from an energy perspective is not doing good, but they're saying, hey, look, but we're clean, we have green energy, we have—

we recycle everything, right? Like, you know, we're doing good.

It becomes very difficult to quantify the actual impact that these companies are having. So how does that apply to you as an emerging investment manager? And how should you be thinking about this? I've talked with one of the largest sovereign wealth funds in the world. I've talked with one of the biggest private equity funds in the world, several family offices about how they fit into ESG and what they think about. And the advice I would have for you, if you are, if you are starting a fund and you're thinking about an ESG component, if you say you're an ESG investment, you're all of a sudden restrained. It's restrictive in your ability to go out and generate a return because that's, that's truly your pinnacle objective Of a fund, right? Is you're going to take money, you're going to go make money, generate return, return that back to your investors. And if you say you're an ESG product, yes, there are certain people that are setting aside reserves or certain amounts of their capital just to allocate to ESG. In reality, as a manager, you're constraining yourself in a lot of ways because now you're beholden to all these rules about allocating. So there's been this kind of narrative that oh ESG.

Investments don't actually generate as high returns.

And a lot of people will fight against that. I actually worked at an impact VC fund for a while. It was awesome where we only invested in companies that had a positive impact on humanity. And it was great. You know, it was awesome. And I could argue against that. So it's really a conversation of, you know, if you have investors that are wanting exclusively ESG investment, you know, maybe the right path for you, but for the majority of people out there, again, this isn't investment advice. Use your own discretion, right? This is my opinion from the conversations I've had with some of the world leaders in this industry, but it's often in your best interest to look at investments independently of ESG factors. And then you can have an emphasis or, you know, you pride yourselves in having an impact on these focus, right? We take it into consideration. But if you label yourself as an ESG product, you all of a sudden have to follow all these rules. Another way that you can navigate around this is we get a lot of people in our communities that, you know, want to start funds that, you know, have a positive impact. I love it. I really do. And they're like, well, I want to set up this nonprofit and this organization and, you You know, da da da da da da da. And I want to have my LPs allocate to this nonprofit, and that's great. But when you are starting out, you need to keep it simple, right? You you really just got to keep it simple. And the simplest and best way that I've seen a lot of our clients start funds: you can pledge a portion of your general partnership profits to a charity of your maybe they're predetermined or voted on by the board or whatever. But maybe it's 2%, maybe it's 10%, maybe it's 20%, right? But of the general partnership profits, right? You don't want to go to your LPs, at least from what I've seen, because I've had a lot of people say like, invest in this fund because you're providing all this impact. And that can definitely be a kicker. But again, it comes with more constraints. So it's in your best interest to only dictate, you know, what is going to happen to general partnership money so you don't lose potential investors. But you say, hey, look, as a general partnership, We're going to be allocating 5 or 10% of our profits to this charity of our choice. And we would encourage you to do the same, or we would invite you to do the same. But I get a lot of managers that want to come in and they, you know, hey, I want to take 10% of all profits and I want to affect LP money and have it go to this charity. And it just gets messy and you're going to turn off some potential LPs. Yes, some LPs are going to love it, right? They're going to be all over it and they're going to be all about it. But it's going to be harder to raise, you know, that core amount of funding that you're looking for to effectively execute on your thesis. That's what I've seen the best way for emerging managers to do it. Now, once you get up and going, once you're up and running, and maybe you want to start your own nonprofit or you have a particular one that you're partnered with, great, by all means. Like, I would encourage that. But in your infancy stages, like, let it be an emphasis, but don't let it define your investment objectives. This is something you guys need to be watching for, right? Like, I was just watching, you know, Larry Fink talk at a summit a few weeks back, and he was asked about this very thing. He said when he gets asked about all these short-term objectives. He's like, look, I do not follow populism. I follow my long-term investment objectives. Populism is always going to try and pressure me to not do or do different things today, but I am going to stick to my long-term investment objectives. And as long as you do that and you, and you start with the end in mind, it's going to be hard to get you off that path. Be aware, right? You need to be following these trends. There's different rules. I was talking with a A treasury consultant the other week, and you know there's actually hundreds of millions of dollars being divested out of ESG products right now because it turns out they pull back the curtain and they're not that ESG. So you need to follow what's happening, right? Know where these allocators are looking for, and it might help you raise more money, might help your business be more impactful, and you know will just help your business. So you need to be aware of these things. Hope you guys learned something from this video today. I want to hear your thoughts sincerely. Like let me know you know what your thoughts are on ESG, and if you think it's an important. Important factor that we should be watching. But we'll see you guys next time.