Exclusive: Impactive's Lauren Taylor Wolfe says it's just too risky for investors to ignore ESG

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In This Issue

The Delivering Alpha investor summit is next week — Sept. 28 — with the world's top investors
Impactive's Lauren Taylor Wolfe responds to ESG pushback
Hedge funds increased bets by the most in five years
Jeff Gundlach calls on the Fed to slow down rate hikes

The Sharpe Angle Interview: Lauren Taylor Wolfe

Impactive Capital's co-founder making the case for ESG investing

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ESG – environmental, social, governance – has gone from being all the rage in investing to being three of the most-polarized letters in America.

ESG-mandated assets are projected to make up more than half of all professionally managed assets globally – $80 trillion worth – by 2024, according to Deloitte. But this recent boom in popularity, coinciding with a global energy crisis, has been met with an onslaught of critics – many concerned that ESG-dedicated capital will only further a certain value system at the expense of others.

For this special-edition Delivering Alpha Newsletter ahead of next week's in-person event, we chatted with Lauren Taylor Wolfe, co-founder of Impactive Capital, one of the pioneers of activist ESG investing. I asked her what she makes of the increasingly noisier controversy, and she said, "not every ESG product is created equally."

"ESG without returns is not sustainable," Taylor Wolfe said. "Like all trendy things, sometimes the pendulum swings too far in one direction. And so now there's been a lot of scrutiny on a lot of ESG products."

At Impactive, Taylor Wolfe said they seek to take a different approach. Her team will look at publicly traded companies where they can address a business problem with an ESG solution, while also ensuring that the solution can drive profitability.

An example she gave was Asbury Automotive Group, one of the largest car retailers in the U.S. Impactive is the third-largest shareholder, after BlackRock and Vanguard. And she said that amid the labor shortage, her firm spoke with management about attracting and retaining women mechanics, through benefits like maternity leave, additional women's restrooms and flexible work weeks. She said by making investments like these, Asbury can drive higher utilization, which will drive higher overall enterprise value.

"It doesn't happen overnight, but it can have a huge impact, long-term, on the overall returns of that business," she said.

As for the ESG pendulum, Taylor Wolfe said she's studied the wants of younger employees and customers, and they care about how they spend their time and dollars and continually do so in ways that align with their value systems.

"I don't think we're going back to the days where the pursuit of profits, full borne at the expense of the environment or society is where we're headed," said Taylor Wolfe. "And I think smart ESG initiatives are simply good business. It makes companies more competitive, more profitable and more valuable over the long run."

Leslie Picker | Reporter, CNBC

@LesliePicker

Hedge funds ramp up market bets as volatility brings the asset class back into favor

The extreme market volatility is not causing hedge funds to back down.

Hedge funds' total gross trading flow, including both long and short bets, rose for five weeks in a row and had the largest notional increase since 2017 last week heading into the Federal Reserve's rate decision, according to Goldman Sachs' prime brokerage data. In other words, they are putting money to work in a big way to capitalize on this market volatility for clients, likely mostly from the short side.

The industry was dialing up exposure at a time when the Fed rushed to hike interest rates aggressively to tame decades-high inflation, raising the odds for a recession. Bank of America's Michael Hartnett even called investor sentiment "unquestionably" the worst since the financial crisis.

"Uncertainty over inflation and tightening policy may spur more volatility. This speaks to hedge fund strategies," said Mark Haefele, global wealth management CIO at UBS. "Hedge funds have been a rare bright spot this year, with some strategies, like macro, performing particularly well."

Hedge funds gained 0.5% in August, compared to the S&P 500's 4.2% loss last month, according to data from HFR. Some big players are excelling in the market chaos. Citadel's multistrategy flagship fund Wellington rallied 3.74% last month, bringing its 2022 performance to 25.75%, according to a person familiar with the returns. Ray Dalio's Bridgewater gained more than 30% through the first half of the year.

On the short side, hedge funds didn't turn overly bearish despite the tough macro environment. JPMorgan's prime brokerage data showed the community's shorting activity has been less active than in June, and shorts added have been more focused on exchange-traded funds than single stocks.

"In terms of how much HF shorting we see, it's not reached the extremes of June and it has been more in line with the magnitude of longs added," JPMorgan's John Schlegel said in a Wednesday note. "It seems there's a lack of willingness to get as extremely bearish as funds were earlier this year."

Yun Li | CNBC Markets and Investing Reporter
@YunLi626

Delivering Alpha Headlines

Big thoughts from the big money

Jeffrey Gundlach says the Fed should slow down rate hikes

DoubleLine Capital CEO Jeffrey Gundlach said the Federal Reserve should ease the pace of rate hikes as the economy is on the brink of a recession. "The Fed should've done more earlier," Gundlach said. "The monetary policy has lags that are long and variable. But we've been tightening now for a while. And the impact of these tightenings is going to cumulate into a recession. … I do think the Fed should be slowing down on these rate hikes."

Alex Karp believes some companies will be wiped out

Palantir co-founder and CEO Alex Karp believes this period of "deadly" macroeconomic uncertainties will crush many companies with shaky fundamentals. "Bad times are incredibly good for Palantir ... bad times really uncover the durable companies, and tech is going through bad times ... interest rates are the reason," Karp said. "Will this deadly tidal wave wipe out some companies? Yes it will."

Leon Cooperman is finding a lot of cheap stocks

Leon Cooperman said he's having a "decent" year relative to the major stock indexes, despite the latest market turmoil. The chair and CEO of the Omega Family Office said he's keeping his expectations low as investors are still stuck in a bad environment. "It's a very strange market, the indices themselves have no destination for me but I find a lot of individual stocks that are attractively priced," he said.