Investing At The Intersection Of Social Justice And Environmental Sustainability

[With a growing cross-section of investors concerned about social, climate, and other sustainability issues, socially responsible investment managers are creating ways to provide social investors the highest possible impact available through public equity investing. This effort includes an active search for and engagement of companies that operate in a manner that makes clear their commitment to people, the planet, and corporate social responsibility.

The key question though lies in the next steps – How do you specifically go about constructing an investment portfolio designed to create a positive impact for investors and our planet?

To that end, we were introduced to Kristin Hull, CEO & CIO and Andrea Dalton, Portfolio Manager of Nia Impact Capital – an Oakland Ca-based sustainable investment firm with an “activist portfolio” through their Nia Global Solutions Portfolio separately managed account and their Nia Global Impact Solutions mutual fund (NIAGX). They have a strong belief in the need for activism in this vitally important arena and that finance and activism are intrinsically related. We asked them questions about the sustainable investment landscape and how they are focusing on solutions and innovation.]

Hortz: What was your motivation for starting Nia Impact Capital?

Hull: Nia is Swahili for intention and purpose. When we first started Nia we wanted to provide investors with a straightforward and easy way to move their assets out of “the bad” companies and into “the good.”

While there were screened products out there – starting with an index and removing some of the “bad players” – there were no actively managed portfolios specifically investing in solutions-providing companies. I wanted to provide investors a way to invest into the economy they wanted to live in – as a way to actively move us toward a just, inclusive, and sustainable economy.

With a background in angel investing and early-stage impact investing, we chose an investment approach that builds on that expertise – selecting each company, one at a time, based on its overall “baked with purpose” business model and with revenues coming from 1 or more of Nia’s six solutions themes.

Dalton: From the large body of research on the topic, compiled in this GlobeSmart report The Ten Big Benefits of Diversity in the Workplace, we know that each company, and our overall economy, will benefit from increased diversity in leadership positions as well as on the board of directors, as diverse teams are known to make better decisions much of the time.

Knowing that no company is perfect, and having a background as an activist, we knew using our investor voice for change would be an important component of the Nia approach. To that end, we seek to engage with every company in our Nia portfolios.

Hortz: Can you tell us more about the people in your organization who you categorize as a “women-led team of activist investors” and how you came together at Nia Impact Capital?

Hull: We have purposely and intentionally built a diverse team of women in asset management. Women are known for having a long-term view and taking that into account in decision-making. I wanted to make sure that quality and experience were part of our research team and approach.

Andrea Dalton had been a public equity analyst and portfolio manager doing very similar work with an aligned approach for decades. It was not until the pandemic hit –and remote teams became more of a reality – that we combined forces. It is interesting (and maybe it was serendipity?) that despite very different paths, both Andrea and I homed in on a remarkably similar philosophy around the best elements of a sustainable and impact investing discipline.

Hortz: Please tell us about Nia’s six solutions-focused investment themes. How did you come to choose these specific areas and how does that guide your investment process?

Dalton: Rather than utilizing positive or negative screens, we seek innovative, best-in-class business models fitting one or more of our six solutions themes. Our themes were developed through our observations – at the most macroeconomic and ecological levels of objective assessments – regarding the most pressing issues confronting world economies and the resource and ecological threats to them. Current examples include infectious diseases, financial inclusion, freshwater scarcity and quality, as well as the worst effects of climate change. From these, we developed our Nia Solutions Themes:

• Sustainable Planet: Climate change mitigation and adaptation, including renewable energy, energy-efficient technologies, sustainable design, and engineering services.
• Healthcare: Focusing on innovation and access; emphasis on prevention, early detection, women’s health, innovative cancer treatments, and unmet medical needs; addressing the HIV/AIDS pandemic, the Ebola virus, and other infectious diseases.
• Natural and Organic Foods: Promotion of products to support sustainable agriculture with an understanding that organic farming practices contribute to a healthier planet and people.
• Sustainable & Affordable Transportation: Emphasis on products and systems that eliminate or reduce damaging emissions, while also expanding access to clean transportation alternatives.
• Education, Communications, and Financial Services: Basic banking and financial literacy that expand opportunities and level the playing field for underserved populations with historically limited access; services and technologies to improve education and facilitate communication.
• Affordable Housing: Environmentally friendly, sustainable, and promoting healthy, thriving communities.

Working within our six Nia solutions themes, our investment team researches innovative approaches to the technologies, products, services, and business practices best positioned to successfully grow and scale while simultaneously addressing systemic risks by producing and deploying needed solutions.

Hortz: How do you go about searching for forward-thinking companies that provide leadership in these areas? What resources and processes do you use?

Hull: Rather than starting with an index, or cap size, or country of domicile like most asset managers these days, at Nia we begin our research process by asking the question– ”What is needed for people and the planet to not only survive, but to thrive together?” We use the Nia six solutions themes as our guide by researching potential solutions. We begin with the end in mind –the desired state of our economy–and work backward from there.

Often our research process takes us down rabbit holes looking for solutions that may not yet be available in public equities. We may follow a particular solution, product, or service in a privately held company knowing there could be a merger, acquisition, or IPO at some point. We seek interesting IP, patents, and the ability to build and maintain a wide moat in companies that are participating in growing a healthy and sustainable economy.

Dalton: We are particularly interested in company culture and ensuring that each of the Nia companies hold employees on the asset side of the balance sheet, investing in building and growing a diverse and inclusive company culture.

To get our arms around the risks and opportunities we consider a range of what may be the most critical ESG factors for the company and its sector. Some, like employment practices, could be seen as overlapping with traditional investment analysis’ consideration of governance. Other factors, like Green House Gas (GHG) footprints, give us a sense of a company’s external impact, which may or may not pose an immediate risk to the business.

Hortz: How do you determine if a company is playing a key role in the transition to an inclusive, just, and sustainable economy? What criteria do you employ in your selection process?

Hull: We start with revenue sources. How a company earns its profits is a key determinant of how it is “baked.” We want to see each of the Nia companies walking the talk. Beyond a “green” or “sustainably focused” website, or CSR report, we need to see revenues coming from one or more of Nia’s six solutions themes.

Additionally, we want to see policies and practices leading to greater levels of diversity among the board of directors, executive teams, as well as management teams and beyond.

Hortz: Can you give us examples of companies you isolated in a few of your six focus themes?

Hull: While they have faced recent headwinds, we invested in Etsy (ETSY) early on. Etsy was a B Corp prior to its IPO, illustrating its commitment to disrupting “business as usual” and doing business for good. Etsy sellers are over 80% women and we liked the Etsy commitment to offering education to each of their sellers, to improve and expand their business practices. We saw Etsy’s unique ability to capture market share from other online retailers.

First Solar, Inc. (FSLR) – This solar module and systems company experienced a challenging first half year in 2022, encountering issues that ranged from supply chain disruptions, to cost inflation. In late July, revelations around legislation emerged right as the company released better than expected results for the June quarter. With three fully integrated solar panel factories in the U.S., First Solar stands to benefit from both the domestic manufacturing incentives in the Inflation Reduction Act, as well as the long-term trend towards renewable energy. In late August, the company announced plans to build a fourth domestic manufacturing facility. Despite posting a disappointing earnings report in late October, the increased bookings, strong pricing, and announced investment in a next-generation solar facility provided much to bolster the company’s positive outlook.

Dalton: Some other examples include:

Hologic (HOLX) Hologic is a manufacturer of innovative diagnostic products, medical imaging systems, and surgical products that support a wide range of women’s healthcare needs, many of which are critical to fighting disease through early detection. Hologic’s primary impact falls within Nia’s Healthcare Solutions theme. With corporate leadership’s gender representation at 33%, and higher still for broader diversity in corporate leadership and on the board, Hologic meets Nia’s diversity criteria. Across environmental, social, and governance issues, Hologic has identified areas that it believes are most critical to measure and track. For some of these, it sets targets and reports progress toward meeting these goals. Performance on these metrics is used to support Nia’s internal financial model estimates, which in this example would be reflected in top-line growth, expenses, the discount rate, as well as the valuation multiple. These and other issues are considered when evaluating Hologic with an ESG lens.

Autodesk (ADSK) Autodesk’s software and services support the design of a wide variety of projects so that they are more efficient, economical, and environmentally friendly. For example, the company’s architectural and engineering design software can improve how infrastructure is designed and used, reducing environmental impact. Other software products support manufacturing and can help solve operational challenges, leading to reduced material and energy use. For example, in applying this to their own firm, in measuring GHG emissions by source, Autodesk identified procurement as the company’s largest source of GHG emissions. Subsequently, the company implemented a strategy to work throughout its supply chain to reduce emissions, all part of the company-wide goal to reach net-zero carbon emissions. With a wide range of applications, the impact of Autodesk’s software solutions falls within Nia’s solution themes (1) Sustainable Planet, (2) Sustainable & Affordable Transportation, and (3) Education, Communications, & Financial Services. With the board’s gender diversity at 50% and even higher in corporate leadership, Autodesk also meets Nia’s diversity criteria.

Hortz: Any recommendations for advisors on how they can apply your socially active investment strategy to their client’s portfolios?

Hull: More and more advisors are using the Nia portfolio as a core equity holding. Advisors use Nia for its global equity exposure and for its exposure to innovation and forward-looking, “pointing positive”, next-economy positioning. For advisors with female clients, the Nia gender lens brings a nice component to an overall strategy, given all of the Nia companies include women in leadership positions and many are key providers of products and services beneficial to women.