Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

One of the world's most famous hedge fund managers is the latest to throw his hat into the ring of socially responsible investing.

Paul Tudor Jones, the founder of Tudor Investment Corp., is backing a nonprofit organization called JUST Capital. He said the group has created what it calls America’s Most Just Index of 32 companies based on how they treat their employees, consumers, communities, shareholders and the environment.

The icing on the sustainably sourced cake, according to Jones, is that the group of companies has significantly outperformed the stock market this century. (We'll have to wait until after Thanksgiving to get a look at the index, which will eventually be turned into an exchange-traded fund, but there seems to be plenty of evidence elsewhere suggesting that investing with a conscience may not necessarily mean sacrificing returns.)

Jones also envisions companies placing the JUST seal of approval on their products. Imagine having the choice of two boxes of cornflakes, one with the seal of approval and one without, he told Bloomberg’s The Year Ahead Summit on Tuesday. (Not to digress, but can you imagine billionaire hedge fund managers shopping for cornflakes? Wow, times really are getting tough!)

Anyway, there's no doubt Jones's heart is in the right place. And his history of efforts to fight poverty as one of the founders of the Robin Hood Foundation burnishes his bona fides in this area, even if his once-dazzling star as a hedge fund manager has lost some of its luster in recent years. So kudos to him for the effort.

Still, it is becoming increasingly difficult to stand out in what's known as social-impact or environmental, social and governance (ESG) investing because the area is starting to get crowded. Firms are sensing an opportunity to get their hands on the elusive assets of millennials and others looking to do good while still making money (Jones cites an estimate of $4 trillion in investments at stake), so it's hard to find one that doesn't have some sort of fishing line in the waters of clear conscience. 

Some fund offerings don't seem to offer a huge distinction from regular market-cap weighted indexes except for higher costs, while others may make you scratch your head wondering what exactly qualifies a stock for exclusion. Consider, for example, some of the the top holdings of FlexShares STOXX US ESG Impact Index Fund, which are arguably more famous for bad ESG headlines than good ones: Apple Inc., Exxon Mobil Corp., Amazon.com Inc. and  Wells Fargo & Co. 

Conscience Decision
The FlexShares STOXX US ESG Impact Index ETF, launched in July, is tilted toward companies that score better on a small set of environmental, social, and governance metrics
Source: Bloomberg

Ultimately, creating a one-size-fits-all product may be a questionable approach because investors most likely have widely disparate priorities on where they'd like their money to make an impact, including the environment, gun control, workers' rights and curbs on excessive executive pay, just to name a few.  

Then there's the question of whether the cart is being put before the horse. While much progress has been made, ESG metrics and reporting aren't yet consistent or high-quality enough to suit most quantitative funds, according to a New York Hedge Fund Roundtable survey cited by Bloomberg Brief. The CFA Institute's curriculum next year will include more material on environmental and social issues, which is a good way to keep the ball rolling in the right direction.

Quant's Eye View
A survey of hedge funds revealed what ESG metrics are believed to be most important in identifying promising companies for long-term investments
Source: New York Hedge Fund Roundtable survey

JUST Capital is taking the question directly to the people. It surveyed more than 45,000 Americans to find out which issues are most important to them. It plans to rank Russell 1000 Index companies across a range of issues  -- 75,000 or so line items in all, according to Jones, including factors such as fair pay, quality of benefits, workplace treatment, customer satisfaction, ethics, supply chain standards and environmental performance.

In any event, it seems undeniable that millennials -- who could easily be nicknamed "the Most Surveyed Generation" -- will continue to make sustainable investing a hot topic going forward. (A Morgan Stanley survey said 84 percent of them are interested in sustainable investing.) 

In past generations of idealists, the catch phrase was "don't trust anyone over 40." It will be interesting to see whether the millennials trust the 2-and-20 set and whether hedge funds can find a way to distinguish the brightness of their halos. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net