Are ESG Factors Redefining Alternative Investments?

ESG is a term every investor should know, especially within the rapidly changing financial world. As different generations grow older, and new investing tactics are being born, people are beginning to invest their money more consciously.

For those that aren’t familiar, ESG or Environmental, Social, and Governance investing is a strategy you can use to put your money to work with companies that strive to make the world a better place. ESG investing relies on independent ratings that help you assess a company’s behavior and policies regarding environmental performance, social impact, and governance issues.

In fact, there are a variety of pathways to ESG investing, all meeting various objectives. However, one thing is undoubtedly clear: As ESG gains momentum worldwide, investors of all kinds are paying attention, and for a good reason too.

Now, there are people out there who are pointing out all of the ‘warts’ and ‘issues’ with ESG, like a former BlackRock executive that outlined why he believes that sustainable investing is a “dangerous placebo that harms the public interest,” after he once evangelized the trend for the world’s largest asset management firm. And, of course, some believe ESG investing needs more rigorous standards. However, we simply cannot look over the fact of the rapid growth that this type of investing is experiencing.

MSCI once reported that Millennials spurred the growth of sustainable investing throughout the 2010s; investors contributed $51.1 billion to sustainable funds in 2020 alone, compared to less than $5 billion just five years before. This means only one thing, ESG investing is, figuratively and literally, a hot commodity for generations to come.

This led our minds to wonder what happens when you throw commodities into the mix, especially during the age of ESG and inflation? Thankfully, our good friends at Auspice took a deep dive into this topic in their latest research report, Commodity Investing During the Age of ESG and Inflation. Here are four standout points that we think you should know from the report:

1.  The role of commodities in the green transition cannot be understated. The building blocks for many of the technologies used to mitigate or reverse climate change are industrial commodities such as copper, Aluminum, nickel, and silver.

Other, lesser-known commodity markets are also integral. For instance, lithium, graphite, nickel, manganese, and cobalt are used in batteries. Palladium and platinum are key in catalytic converters, used to reduce harmful emissions, and wind turbines use steel, which is produced from iron ore.

2.  The main objective of commodity derivate markets has always been to help producers manage and facilitate risk. This objective aligns with many ESG principles, particularly the need for transparency, risk mitigation, and market access.

Markets serve two main functions: they facilitate price discovery and offer an exchange for risk. As active market participants in derivative (futures) markets, CTAs, who employ managed futures strategies, take on risks that others cannot or do not want to manage. This particularly holds true in commodity markets, where commodity producers generally want to avoid high price volatility and seek risk mitigation through hedging.

3.  Futures do not affect consumption or production – they affect risk exposure, which is fundamentally different. The ability to invest in an instrument that’s valued is affected by nothing other than the underlying price of the commodity itself is undeniably the lowest impact method of attaining valuable commodity risk exposure.

Commodity futures eliminate the ESG company risk and associated reputational risks for smaller institutional investors who cannot engage with companies. Greenwashing is a concern that requires considerable resources to address commodity futures and may offer a more practical solution for responsible investors seeking commodity exposure.

4.  The risk of inflation to investors, from the largest pensions and sovereign wealth funds to local foundations and individual investors, is significant. The sound risk management of these funds is integral in any comprehensive ESG framework. Commodities and managed futures trend following employed by CTAs have historically provided the most effective risk management through diversification in periods of rising inflation.

 

Needless to say, taking ESG factors into account when looking at alternative options is simply just smart long-term investing. We know as a whole that commodity futures and CTA strategies offer compelling attributes and may be preferable to investments in equities and bonds of resource companies. But, then again, at the bare minimum, you should consider adding a trend that is here to say to your portfolio, climate risk.

To better understand ESG, inflation, and commodities, access Auspice’s report by downloading it here. And if you’re interested in learning more about Auspice and their programs, like their new ‘Auspice Diversified Program’ launching May 1 under RCM’s CPO, contact Matthew Bradbard at mbradbard@rcmam.com or 312-870-1500.

 

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

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