Women-Led Hedge Fund Bets on ESG Reforms in Emerging Markets

Cartica Management LLC (“Cartica”) is a Washington D.C.-based investment firm that is thriving at global investing while utilizing a trending activist approach. Cartica utilizes an environmental, social, and governance (“ESG”) investment approach, which has become increasingly popular in 2020. (Kim, Bloomberg). In addition to seeking socially responsible opportunities, ESG investing has proven to be a lucrative method as 88% of indexes utilizing this sustainable method did better than their non-sustainable counterparts during the first quarter of 2020. Id. Companies, such as Cartica, are demonstrating that social progress and financial gain can coexist.

In addition to seeking opportunities for financial gains, Cartica assesses “the integrity of management, board and shareholders, and [they] review the treatment of minority shareholders.” (Cartica). Two pillars of Cartica’s mission are encouraging companies to elect female board members and encouraging policies that benefit minority shareholders. (Kim, Bloomberg). Cartica primarily seeks investment opportunities in emerging markets that often lack regulations enforcing good business practices. Id. In this regard, the ESG approach maximizes Cartica’s ability to fuse its investments with its promotion of social missions.

Since its establishment in 2009, Cartica has successfully boosted companies’ stock prices through improving their corporate governance and their treatment of minority shareholders. (Wernau, Wall Street Journal). The D.C. firm effectively influences these relatively stagnant aspects of corporate operations by targeting companies that many other investors neglect: family-controlled businesses with filings that are not in English and with stocks that are not widely traded. Id. This approach has proven effective for Cartica. For example, in 2010 Cartica invested in a family-controlled business in Peru called Graña y Montero. Id. Through its sustainable approach, Cartica created a dividend policy that benefited minority shareholders, attracted foreign investors, and doubled Cartica’s investment in less than two years. Id.

While Cartica’s investment methods are creative and effective, ESG investing comes in many different forms and is becoming increasingly common. (Stevens, CNBC). A Morningstar report from the second quarter of 2020 shows that there are 534 index funds focused on ESG investing in the U.S., and these funds oversee a combined $250 billion. (Morningstar). While these index funds make up less than 1% of the overall economy, experts anticipate ESG investing will continue to grow rapidly in the near future. (Stevens, CNBC). Companies like Cartica have demonstrated that investors can embody ESG principles without sacrificing investment performance. (Morgan Stanley). In addition to its proven effectiveness, ESG investing is expected to increase, in part, due to the fact that 95% of millennials are interested in sustainable investing. (Morgan Stanley).

With an increasing interest in ESG investing, there is also an increasing opportunity for investors and firms to enact societal change. ESG principles have interacted with major social movements, like #MeToo and Black Lives Matter, to seek more accountability for how businesses are run. (Fleischmann, Fortune). For example, some U.S. focused ESG investors are aligning ESG principles with social movements in the following ways: seeking environmental reparation in communities like Flint, Michigan; promoting women for corporate boards; and investing in Black-owned businesses. Id. By focusing on these practices, many ESG investors are actively promoting diversity in the workplace. In addition to its numerous societal benefits, increased diversity has a statistical correlation with better financial performance. (Hunt, McKinsey).

Although ESG investing is gaining traction, not all investors are going to abandon traditional investment methods. Unlike Cartica, many investors create a dichotomy that splits the focus of ESG investing and ask, “should I save the world or make money?” (Gillers, Wall Street Journal). In this vein, the growing potential of ESG investing is limited by investors that continue investing in profitable ventures that have demonstrated a negative impact. Many public funds, such as state pension funds, are hesitant to shift from investments that have proven to be consistently profitable. Id. For example, New Jersey’s state pension fund continues to invest in fossil fuel companies that avoid cleaning up environmental damage at their respective project sites by declaring bankruptcy. Id. Legislation was introduced last year to divest the pension dollars from said companies, but Democratic Governor Phil Murphy (D) vetoed the proposal. Id.

In a time of financial and societal unrest, many investors are starting to apply their business knowledge to enact positive changes. Companies like Cartica are continuing to apply ESG investing to integrate sustainability and profitability. Although ESG investing currently constitutes a small portion of the economy, it shows the potential for massive growth in the future. Despite a global pandemic and an array of national crises, ESG investors are increasingly outperforming their competitors while actively promoting environmental, social, and governance improvements.