Our Risk-Factor Methodology
Change Finance's Isolated ESG Risk-Factor Methodology is designed to do what research shows many large fund companies do not: help investors meet their financial goals while leveraging the power of Environmental, Social, and Governance (ESG) data to promote a more just and sustainable world.
Our proprietary Isolated ESG Risk-Factor Methodology seeks to deliver a rare combination of impact and alpha (returns).
We Do ESG Differently
Have you ever looked inside the holdings of a giant ESG mutual fund or ETF? We did, and we didn't like what we saw: firms like Exxon and Coca Cola that probably don't land on your list (or ours) of "best for the world" companies.
How does that happen?
The "best-in-class" aggregate ESG scores utilized by much of the investment industry do two things:
- They score companies relative to others in their industry not relative to the impact those companies have on the world.
- They calculate scores based on a limited number of factors with the importance of each factor to the overall score determined by the rating agency.
Why is this problematic?
- Not all industries are created equal. The overall impact on the world from the very best coal-mining company is probably worse than the overall impact of the majority of tech companies, for example, but when companies are rated relative to their industries, the "best" oil company comes out with the same score as the best tech company.
- Good behavior in some areas can mask bad behavior in others. Do you really want to invest in a company that has lots of women on its Board, but dumps toxic waste into the water? We don't.
How is Change Finance Different?
Our proprietary Isolated ESG Risk-Factor Methodology utilizes more than 100 individual factors related to people, planet, and profit to ensure that we invest in the most responsible and sustainable companies.
Companies we invest in must meet all our standards, regardless of industry. That means we won't invest in a weapons manufacturer, even if it has a strong commitment to net-zero carbon emissions. These standards form the core of our Isolated ESG Risk-Factor methodology.
How Do We Come Up With Our Risk Factors?
Our world is changing. Investors in the 21st Century face new and increased risk from stranded assets, litigation, and reputation loss (social license risk).
Stranded Asset Risk
Stranded Asset Risk: the risk that assets a company owns and which contribute to its value may become worthless or significantly devalued.
Example: in the first three quarters of 2020 oil companies wrote down approximately $145 billion, roughly 10% of their collective market value.*
*https://www.wsj.com/articles/2020-was-one-of-the-worst-ever-years-for-oil-write-downs-11609077600
Litigation Risk
Litigation Risk: the risk that a company will face legal action.
Example: In 2021, Bayer committed $9.6 billion to settle claims that Roundup causes cancer with tens of thousands of claims still outstanding.*
Social License / Reputational Risk
Social License / Reputational Risk: the risk that a company will face reputational harm that significantly impacts its value.
Example: Facebook lost 7% of its value in one day when the Cambridge Analytics scandal relating to its use of personal data broke.*
Guided by the extensive experience of Chief of Impact Hunter Lovins and informed by the United Nations Sustainable development Goals, the Stockholm Resilience Centre's Planetary Boundaries, Kate Raworth's Doughnut Economics, and the Capital Institute's 8 Regenerative Principles, our Isolated ESG Risk Factors seek to mitigate these risks.
United Nations Sustainable Development Goals
Learn More ➝The Stockholm Resilience Centre
Learn More ➝Kate Raworth’s Doughnut Economics
Learn More ➝The Capital Institute’s 8 Regenerative Principles
Learn More ➝United Nations Sustainable Development Goals
The United Nations Sustainable Development Goals (SDGs) are a call to action for all human activity to promote prosperity for all while protecting the planet. The UN SDGs inform the environmental, social, and governance aspects of our approach. We seek to invest in companies that have a net positive impact on meeting the SDGs.
The Stockholm Resilience Center
The Stockholm Resilience Centre defines nine planetary boundaries that represent absolute limits to what our planet can tolerate without fundamental change. These boundaries inform our environmental criteria, especially our conviction that 100% fossil fuel free investing is the right thing for the planet and for our investors.
Kate Raworth’s Doughnut Economics
Kate Raworth’s Doughnut Economics brings together concepts from the UN SDGs and the planetary boundaries to describe a healthy economic system that respects the minimum social foundation required for human dignity and the planetary boundaries essential for the Earth’s continued health. Our Enhanced ESG screens seek to identify companies that operate in the safe and just space for humanity which lies between the Social Foundation and the Ecological Ceiling.
The Capital Institute’s 8 Regenerative Principles
The Capital Institute’s 8 Regenerative Principles define humans as an integral part of the biological system in which we are embedded and a healthy economic system as one which seeks balance and honors that relationship. Our 100+ screening criteria were carefully selected to help us identify the companies that we believe are best positioned to contribute to the regenerative economy of the future.
