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6 A Case Example of Business Investment A leader from U.S. Trust, Bank of America Private Wealth Management, was invited to share an example of business-sector investment with an orientation toward health and well- being. Jamie Rantanen of U.S. Trust at Bank of America shared his perspective as an institutional client advisor. The session was moderated by Catherine Baase of the Michigan Health Improvement Alliance. (Highlights of this session are presented in Box 6-1.) BOX 6-1 Key Points Made by Individual Speakers* â¢ Data on the environmental, social, and governance (ESG) activities of companies are now more readily available to investors, but many do not realize they can be intentional in their investments. (Rantanen) â¢ Intangible assets contribute significantly to a companyâs value and âthe best way to understand the values and risks of those assets is to use ESG data.â (Rantanen) â¢ Investment firms have an opportunity to guide investors in deploying significant capital into ESG-directed portfolios that are both high impact and high yield. (Rantanen) â¢ In place-based impact investing, recognizing the difference between outputs and outcomes/impact is important. (Richter) * This list is the rapporteurâs summary of the main points made by individual speakers and participants (noted in parentheses) and does not reflect any consensus among workshop participants, or endorsement by the National Academies of Sciences, Engineering, and Medicine. U.S. TRUST AT BANK OF AMERICA: IMPACT INVESTING âBank of America is one of the largest financial providers to the health care industry,â Rantanen said, extending more than $35 billion in capital to the U.S. health care sector. U.S. Trust is the wealth management arm of Bank of America. Founded in the mid-1800s, U.S. Trust is the oldest and largest private bank in the United States and was acquired by Bank of America in 2007 to serve its ultra-high net-worth investors. A specific team is dedicated to serving institutional nonprofit clients, endowments, and foundations. There is also a team of specialists who work with health care organizations both on aligning their mission and investment portfolio, and on organizational development (e.g., sustainability, impact measurement, donor development). 33 PREPUBLICATION COPY: UNCORRECTED PROOFS
REORIENTING INVESTMENT PRIORITIES TOWARD HEALTH AND WELL-BEING Bank of America developed its first environmental, social, and governance (ESG) manual in 2008, Rantanen continued. The ESG is the companyâs responsible growth strategy and stems from the lessons learned in the 2007â2008 financial crisis. It is updated annually and is now more than 100 pages, he said.1 Rantanen noted that U.S. Trust has served some families for eight generations, and he observed that impact investing is of particular interest to the younger generations. The older generations are also taking notice of impact investing because of the strong interest of their heirs in ESG issues. By working with multigenerational clients, Rantanen said, firms like U.S. Trust have a âgreat opportunity to shepherd significant capital into very high-impact and well-run fiduciary portfolios for the future that are both doing well and good.â Investing in Health Rantanen said each of the ESG categoriesâenvironmental, social, and governanceâis grounded in health. When considering where to invest in health care in the public markets, Bank of America looks to companies engaged in healthy food, fitness, medical research and diagnostics, disease prevention, disease treatment, access to health care, employee benefits, agricultural technology, air quality, water quality, and product safety, for example. Bank of America chooses not to invest in companies that he said are ânegatively impacting environmental and social-related health care issues.â These would be companies that deal in unhealthy food, alcohol, tobacco, gambling, or adult entertainment, for example, or those that are toxic polluters or do not pay a living wage or provide standard employee benefits. Baase asked whether those companies that Bank of America chooses not to invest in based on the companyâs portfolio or actions are aware they have been passed over, and why. âImpact investing and mission alignment investing are a growing force in the market,â Rantanen said. Data on the ESG activities of companies has become more readily available to investors over the past decade. Still, he said, many investors do not realize that they can be intentional in their investments. From the corporate perspective, many large companies are focused on ESG. First, Rantanen said, these companies embrace a fiduciary responsibility to âdo no harmâ and reduce their exposure to marketplace risks. Second, many seek to become known as a mission-driven brand (e.g., sustainable practices, healthy outcomes). Third, many companies are taking climate change into consideration in their actions (e.g., adopting sustainable agriculture practices to produce healthy food for an expanding population). Socially Innovative Investing Platform Socially Innovative Investing is a platform created by U.S. Trust for impact investing in the public markets. The platform, launched 6 years ago, incorporates ESG criteria and sustainable development goals when designing public market equity and bond portfolios. There are currently portfolios centered around low carbon, religious views and values, global equality, women and girls, and community health, and new portfolios are being developed. Over the past 5 years, most of these portfolios have outperformed the benchmarks, Rantanen said. Portfolio 1 For the most recent ESG report (2017), see https://about.bankofamerica.com/assets/pdf/BAC_2017_ESG- Update_online_ADA.pdf (accessed February 8, 2019). 34 PREPUBLICATION COPY: UNCORRECTED PROOFS
INTRODUCTION development starts with a financial analysis, but then takes into account ESG information that most investors are not considering. A recent quantitative equity strategy report on ESG by Merrill Lynch (another division of Bank of America) found that up to 68 percent of the value of S&P 500 companies is based on intangible assets, and Rantanen said that âthe best way to understand the values and risks of those assets is to use ESG data.â2 Having established the financial and ESG analytics-based arguments for such thematic portfolios, investment firms can work with endowment, foundation, or individual investors to be more intentional and mission aligned in their investing. Case Example As a case example of impact investing in the public markets, Rantanen described how U.S. Trust and Avivar Capital helped a regional community foundation develop an investment portfolio around the theme of community health impact. The community health foundation sought to create a platform for local, place-based community health impact investments. Rantanen noted that these types of investment opportunities can be difficult to identify and access. A challenge was trying to use traditional public market asset classes to mission align their portfolio, and no existing platform had the right blend of broad perspective on health and environment with local, place-based investments for health. Together, U.S. Trust and Avivar Capital, a private place-based investment advisor, created a broad custom portfolio of national and international investments across asset classes that still maintained a community impact- driven focus on health. The main lessons thus far, Rantanen said, are that community organizations are very focused on making community-level investments that can improve health locally, and that investing in the âbigger pictureâ can be aligned with this goal. For example, large national public companies are often the biggest employers in a community, and their actions can significantly affect employee and community health. The Expanding Focus on Impact Investing Interest in impact investing is growing. Rantanen said many large investment firms have, like Bank of America, created platforms to support the increasing scale of impact-directed investments. He added that there are also many small organizations as well. âThe impact investing ecosystem is very young,â he said, but it has great potential. In addition, there is potential at the intersection of philanthropy and impact investing. He said that professional advisors, like himself, are being engaged to help develop impactful portfolios. He said investors, both individual and institutional, should challenge their current advisors to be attentive to ESG factors when recommending or making investments for them. He personally speculated that, in the coming 5 to 10 years, ESG due diligence would be a fiduciary requirement. He added that the Department of Labor now mandates that trustees of Employee Retirement Income Security Act (ERISA) plans assess ESG as part of their fiduciary responsibility. 2 See https://newsroom.bankofamerica.com/system/files/2019_Environmental_Social_Governance.pdf (accessed February 8, 2019). 35 PREPUBLICATION COPY: UNCORRECTED PROOFS
REORIENTING INVESTMENT PRIORITIES TOWARD HEALTH AND WELL-BEING DISCUSSION Measuring Impact Recalling Rantanenâs comments on the expanding interest in impact investing and the increasing number of advisors and firms involved, Magnan asked him to comment on measures of success to determine whether these investments are impacting health, well-being, and equity over the next 5 to 10 years. Rantanen said âthe revolution of ESG in portfoliosâ has peaked, and the focus for the coming decade is improving impact measurement and reporting of outcomes. Some firms that offer impact investments are already measuring and reporting outcomes. He suggested that impact measurement and transparent reporting of outcomes at the company level will be factored into a companyâs marketplace value. An âimpact performance track recordâ could be used to de-risk investments, he said. Mary Pittman asked about the types and sources of data that are used to inform impact investing, in particular, whether sources such as public health databases and information on hospital community benefits are being used to identify areas of need and potential investment. Rantanen said there are specialist advisors who âbegin with the end in mindâ and consider the outcomes desired and the measurements of success at the forefront when planning to invest. Lisa Richter of Avivar commented that they often work backward, first defining the outcome they hope to achieve, determining whether capital is needed to accomplish it, and how the end result will be measured. She noted that, in place-based impact investing, it is important to recognize the difference between outputs and outcomes/impact. For example, units of housing are an output, but the outcome indicator is who is living in the housing (e.g., have low-income residents been displaced/priced out?). Richter emphasized the value of partnerships, which can bring together complementary expertise, for example, bringing together community-level knowledge with the ability to bring initiatives to scale through investment initiatives. ESG-Informed Investing in Practice Bobby Milstein suggested that, over the coming decade, ESG could evolve to become routine institutional practice in investing. He asked about training the next generation of ESG advisors, and the incorporation of population health science. He suggested that a fuller understanding of the evidence needs could help to inform the research agenda and, correspondingly, the investment agenda. Rantanen said the United States Forum for Sustainable and Responsible Investment offers training to advisors in the market. The CFA Institute (which administers the Chartered Financial Analyst program) now includes ESG in its required curriculum. Within organizations there is ESG training for interested portfolio managers, but he described it as âopt-in.â However, he asserted, portfolio managers who do not adapt to the ESG movement over the coming decade are not likely to retain many clients. âOutcomes and the impacts are the next big chapter, and our platforms are going to just get better and better,â he said. Bank of America is actively conducting due diligence to be able to expand the number of investment options on its impact platform. He added that due diligence process will need to evolve to be able to evaluate the risk and return of these impact investment products as they can be constructed differently. 36 PREPUBLICATION COPY: UNCORRECTED PROOFS
INTRODUCTION Milstein also asked if working with multigenerational investors changes the investment strategy because there is the potential for a very long-term outlook, and whether those families might be more directly engaged in the screening of potential investments. Rantanen responded that perhaps a long-term platform could be developed based on the familyâs interests, perhaps making angel/seed investments or providing venture capital to family-owned businesses that align the familyâs thematics. Marc Gourevitch asked what proportion of investments are currently informed by ESG. Rantanen responded that it is easier to take ESG into account when investing in large companies in the public market because their track records are more available to compare. Trying to take ESG into account is more challenging when investing in small-cap stocks. A companyâs ESG information is also becoming easier to access in the private market. 37 PREPUBLICATION COPY: UNCORRECTED PROOFS