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Promethos Capital Managing Partner, Ivka Kalus explains the relevance of ESG in today’s environment

GGI Business Review is a new business series, capturing snapshots of the GGI Harvard Case Style Masterclass by CEOs and Industry Leaders.

This particular piece is a snapshot from Ivka Kalus's GGI Masterclass.


A big question that always comes to mind when we hear ESG is, “WHY ESG?”. But in reality, we aren’t asking “WHY” anymore because people around the world have started to recognize that ESG is here to stay and it will soon be the new normal for evaluating investment risk and return.

Environmental, Social, and Governance (ESG) is a critical part of every investor’s decision to invest or not invest in a security today. It has become essential because rapidly people around the world are realizing the need to look beyond profits in order to make sure that companies are involved in fair dealings that are impacting not just the internal employees or customers of the company but also all the relevant stakeholders of the company.

Ivka Kalus, the Chief Investment Officer and Managing Partner of Promethos Capital helps us understand ESG and its related concepts in-depth to enable us to become better investors.

ESG 1.0

ESG 1.0 is when people used to judge companies based upon certain factors and label them as Good or Bad investment options leading to big GOOD vs BAD debates around the many companies in the world. Identifying which company is good and which is bad based upon certain factors like their area of operations or their ESG rankings or some other rankings.

This is why many investors and capital providers avoid taking an ESG or an Impact stance in their portfolio because the conversation they end up having is a debate about their virtues rather than the investment fundamentals of what is a good or bad company to invest in. However, nowadays usually the capital providers have their own preference of what type of companies they do not want their portfolio, for example, weapons, tobacco, or alcohol. This helps portfolio managers in crafting portfolios easily, but this also raises the cost of capital for many activities.

ESG 2.0

It’s safe to say that we are no longer debating about good vs bad companies, but rather what impact we want to achieve through a particular investment, and how much return we can derive from it. Here we can move the needle in favor of the capital providers very easily in terms of portfolio impact and returns on the impact we wish to generate for them.

Investing is always about the voyage since improvement relative to expectation is what drives returns. So by moving beyond value judgments, investors can instead focus on deriving returns from the evolution of corporate practices and their impact on the world and allocate capital based on how a company is set on the journey to improvement and this is ESG 2.0.

ESG 2.0 is about capturing and valuing mispriced eternality risks, like pollution, CO2 emissions, diversity risks, human rights risks, or climate change risks. These risks are not contemporaneous with quarterly financial reports but they do ultimately influence the financial outcomes. ESG 2.0 is about judging how companies manage and mitigate the externalities they create and how they contribute to improving themselves in the world. Essentially, ESG 2.0 is all about how we can use data for improvement and measuring outcomes.

Investing is like science, where we stand on the shoulders of those who came before us and learn from their contributions


In terms of portfolio management, ESG governance is managing negative externalities + making measurable improvements. The goal is to build a portfolio that has a probability of outperforming the market against the ESG metrics along with standard goals.

ESG 2.0 deals with how we can manage negative externalities and use capital to drive measurable improvement in outcomes. For this purpose, a lot of ESG frameworks can be used to identify the correct areas of investment based on the different criteria a fund is operating with. Some frameworks like Sustainability Accounting Standards Board (SASB) ESG Frameworks, or the United Nations SDGs help in measuring impact easily. A lot of organizations are working towards impact around the world, and using the frameworks from SASB and SDGs we can create a framework that would unlock the sweet spot for impact and return. But these are just frameworks, so without metrics, we are still stuck with just anecdotes.

In ESG, it's relatively easy to measure the environmental factors, which are contemporaneous indicators of current practices yielding higher returns, for example, water waste and CO2 emissions are directly related to resource use and the cost of an organization. But still, it is challenging to measure and manage climate change risk and every company around the world has to adapt to mitigate.

In the world of ESG 2.0, the “S” which stands for “Social” is the most difficult to measure and manage, because it is all about people, what people do and how their actions impact other people.


There is an ESG super factor that is correlated to performance on other ESG metrics, and that factor is Diversity. Diversity matters a lot because it is critical for innovation and adaptation and becomes most imp during times of crisis because, during such times, all organizations need as much innovation and diverse thinking as possible to survive and thrive. It is easy to measure as it is idiosyncratic, so it is not correlated to any region or sector, or any other macroeconomic factor.


The real power of ESG 2.0 is that it allows for measurable impact and outcomes at the portfolio level and helps managers provide truths in labeling to their clients which implies that the ESG investments are backed by solid analyses and testing. Capital providers need proof that portfolios are actually delivering the goods while significantly generating returns and the availability of comprehensive data and tools enables portfolio managers to measure and manage portfolio exposures to the externalities that we want to manage and mitigate like climate change and social justice.

Moreover, this helps the portfolio managers in identifying the intentions of clients with the investment and implementing them effectively.

In this way, ESG 2.0 is the catalyst for allowing capital to drive change in public market investments.


Creating a winning portfolio is all about seeing the market for what it is and seeing the massive opportunity to invest and then construct that in a framework where we can capture the risk/return opportunity along region, sectors, factors, and exposures and build in the intentionalities that we want to show at the portfolio level.

Building a portfolio is like building a boat, where we need to figure out what kind of seas we are in, and if we are looking to just navigate along the coast or go out exploring the open oceans, and this impacts what kind of vessel we want to build.

Each and every component in building a boat is relevant to the type of boat we intend to build and similarly in an ESG fund, each stock serves as similar blocks and has a different role which impacts the type of portfolio we want to create, thereby helping portfolio managers navigating the waters while delivering the climate resilience to manage the clients.


Nowadays, everyone buys data and then manipulates it to figure out which company is doing better in which domain in order to make investment decisions.

The main reason for looking at different tools and metrics which measure the performance and impact of an organization and its securities is to eliminate any biases because bias is the enemy of investing because we can learn to love or hate something in a company to an extent where we might ignore the real picture in front of us. For example, a person might be negatively or positively influenced by Elon Musk due to his behavior on social media or in the real world, but his behavior should not be taken into account by an investor while deciding whether to invest in Tesla or not.

While investing with a data-based/centric approach takes away any forms of biases, it also takes away the art of investing, which may include relying on instincts or experience to invest in securities.


Ivka Kalus is the Chief Investment Officer and Managing Partner of Promethos Capital, an institutional asset management boutique firm that she co-founded. She is an accomplished investor with 24 years of experience managing global and international equity portfolios for retail and institutional clients.

Before co-founding Promethos, Ivka was lead portfolio manager of International Strategies at Boston Advisors. Prior to joining Boston Advisors in 2015, Ivka was a senior portfolio manager at Pax World Management, where she managed the Pax World International Fund and the Pax World Global Women's Equality Fund. Before Pax World, she managed international and global portfolios at State Street Global Advisors and Baring Asset Management and was a global equity analyst at Independence Investments and at Putnam Investments.

Early in her career, Ivka worked as a management consultant to large corporations in the U.S., Europe, and Latin America, including three years in Prague working on projects to privatize state-owned Czech companies.

Ivka earned a B.A. degree in biology from Harvard University, a Master's degree from the Fletcher School of Law and Diplomacy, and an M.B.A from INSEAD. Ivka currently serves on the boards of the Boston Economics Club, United Planet, and American Boronite Corporation.


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