In conversation with John McCartney, Co-Founding Partner & Head of ESG at Artesian, about impact investing in the midst of conflicts and crises.
2022 is off to quite the start. After two years of dealing with a global pandemic, Vladimir Putin’s recent invasion of Ukraine and the resulting refugee crisis has left the world reeling. So how do investors and institutions position themselves to deal with these volatile times? I sat down to talk to John McCartney, Co-founding Partner and Head of ESG at Artesian last week, about how capital markets are being shaped by crises, impact as the third dimension of investing, engagement vs divestment, and corporate venture capital as a lever of change.
In 2008, over-leveraged bank balance sheets and a lacking regulatory environment led to a global financial crisis and a lasting shock to liquidity. “Market participants didn't know where to price things, because we didn't know how the government or the regulators were going to react to what was going on,” John explained. But as a result, regulatory frameworks improved and global monetary authorities and governments opened better channels of communication. The banking sector was more resilient during the COVID crisis and governments were able to better distribute funds to the population. The tools created as a result of the 2008 GFC, dramatically shortened the shock of the COVID crisis.
With Russia’s invasion of Ukraine, John sees a more isolated financial crisis resulting from idiosyncratic risks. Global governments are imposing severe sanctions to punish Russia, “So the person who was the bad actor is now the one who's suffering the liquidity crisis,” John elucidates. “The market is moving from being worried about these universal shocks to being more worried about idiosyncratic shocks.”
But John warns that investors should also take notice and stop looking at investing as purely risk versus return. They also need to consider the impact their capital is making. Now is not a good time to be holding Russian investments, with sanctions having a dramatic impact on Russian financial instruments. “If you are looking at any of those assets in any other autocratic nations, you've got to think that your capital is very much at risk, not only just because it's potentially going to go to zero, but also because it's going to be possibly doing some very bad harm,” explains John.
Responsible investing in uncertain times
Artesian is a barbell business, balancing venture capital on one end with corporate bonds on the other. In order to improve our internal footprint across the business, we’ve had to review our own systems and processes. Artesian has signed up to the United Nations Principles of Responsible Investment and we are targeting fifteen of the seventeen Global Sustainable Development Goals. We are also in the process of becoming a certified Benefit Corporation (or B-Corp) and we are on the path to net-zero carbon emissions across our operations.
But ESG and Impact investing have their own complications to navigate. Artesian has had to give serious consideration to its position on assets in the security and defence industries. “As we went through the process in the ESG Thought Leadership Committee, we realised that you have to have a stance,” John told me. “You can't have a defenceless democracy, otherwise, you will just be run over … we really do have a duty to be able to provide innovation in the space and help it grow in a manner that is responsible.” Putin’s invasion of Ukraine has forced much of the ESG community to pivot on their position regarding defence assets. In fact, according to John, the war in Ukraine will cause European governments to change their ESG taxonomy. The conflict has revealed a clear need for an innovative defence industry and the financing will follow. “We need to fund and defend what we hold dear... and that should be a tenant of ESG investing.”
So how can investors make better choices from an impact perspective? According to John, in order to find impactful investment opportunities, “make sure you know where the proceeds are going — you need transparency.” In the corporate bond market, invest for resilience, provide capital to companies “to help them reduce their externalities or their negative footprints on society,” John explains. “And if they're doing that, they're making their own corporate masthead stronger.” Green, Social and Sustainable Bonds are particularly attractive because investors know they can have an impact on climate change and social issues, and they can do this on a repeatable basis while earning an acceptable market-related return.
On the venture capital side, John believes investors should seek out anti-fragile situations and look to disrupt incumbents with poor ESG performance. Venture capital markets can help startups weaponise ESG issues against larger players. As governments begin to take notice and offer incentives regarding climate change and other ESG issues, the market will follow. As John puts it, “... to invest for the future, you need to be investing and giving resilience to those companies that are doing the right thing. And if they're not, you should be investing in venture capital to help disrupt them and move them on.”
If you want to hear Vicky Lay's full chat with John McCartney, check out the Artesian podcast or watch the video below.