Launching an impact-investment effort at Spouting Rock

What is the history of Spouting Rock and who are its clients?

Spouting Rock began as a single family office. It was founded by our current president, Blakely Page. He had been doing investments for his own family – he has a long career on Wall Street – and then the firm established a merchant bank and broker-dealer side. In 2017 it started an asset management division.

We have a handful of investment products; they’re not necessarily going to be the core of someone’s portfolio, but they might be the growth kicker to their portfolio. Our clients are typically family offices and high-net-worth individuals.

What are Spouting Rock’s assets under management?

Our regulatory assets under management are about $300 million. The one specific ESG product is a small-cap growth strategy, and we’re approaching $10 million for that. One of my jobs is to increase that – I have a large network so that number will really grow.

You joined the firm in February 2019 as its first chief sustainability officer. What does that role entail?

My role is to ensure we take an integrated approach to ESG for the sustainable future of our clients’ investments. That’s what rings true and what I’m really passionate about. I don’t want to be concerned with greenwashing: I’ve seen it at other asset managers and I despise it.

Sustainability for me is about practices, themes, documentation and looking at our own governance. I’ve only been here a few months, but some of the questions I’m asking are whether we want to align with SASB and whether we should sign the UN’s Principles for Responsible Investing.

Why is Spouting Rock looking  to integrate ESG into its decision-making process?

Blakely and his family have always been interested in ESG and impact investing. Impact investing and investing with a purpose has really been evolving over the last 10 years. As we work with families, we find they want to invest in themes they’re quite passionate about. Institutions want to do that, whether they’re public or private, and high-net-worth investors are going to want to do it, too.

How does Spouting Rock currently make investment decisions?

We have a very experienced team of three individuals – led by James Gowen – who have worked together for a long time. They’re classic bottom-up stock-pickers and they’ve made their name looking for companies that operate in structurally attractive markets.

They run a small-cap growth portfolio. Their process is all about looking for companies that are just on the precipice of a positive inflection: these are companies that have everything lined up, without it being reflected in the stock price just yet. [James and his team] have become specialists at finding the companies that are huge innovators in disruptive markets.

Another unique point about James and his team is that they take a high active share and they’re willing to take bets against the benchmark. They are definitely not passive. They will load up on a stock but they have a very strong sell discipline in place.

How are you looking to integrate ESG into the decision-making process?

We’re looking at whether there’s a theme from an ESG perspective in that portfolio. [James and his team] look at ESG as a component of risk assessment. It’s part of their strategy, but it’s not an ESG-driven portfolio. It’s a small-cap growth portfolio first and foremost, though it does have a strong ESG stance.

Since I have come on board with the firm, I have said we need to put our money where our mouth is. We’re now measuring the E, S and G performance of all of the companies we own and tracking that to the UN’s Sustainable Development Goals.

Do you subscribe to any third-party ESG data providers?

We’re looking at all of the major ones: MSCI, Sustainalytics, Bloomberg and ISS. In my previous role [as co-lead of Envestnet’s impact-investing business] we had a strong relationship with MSCI and Sustainalytics. When I was using those tools, I was running the impact-investing business and saw it grow from nothing to $18 billion in assets under management.

A lot of the managers I have dealt with in the past in the small-cap growth space can’t always get data on public companies. Currently at Spouting Rock, I’d say about 10 percent of the strategies we have are so small that you can’t get data, so you have to talk to management to ensure you’re getting accurate information.

The three portfolio managers at Spouting Rock have a huge database and know how to get to the CEOs, IROs and senior management. The data sources don’t have everything, so you can’t just stop at that.

How frequently do you engage with the companies you invest in, and who do you typically speak with at an individual company?

We always interact with a company before making an investment, and we have ongoing interactions, usually a few times a year, beyond quarterly conference calls and conference presentations. The frequency of these interactions depends on the situation.

For smaller companies, the CFO/CEO doesn’t always have full-time, internal investor relations resources for us to connect with. For new companies we don’t know, we usually start with IR and work our way to management as we get a better sense of what the hot buttons are and what might be more important catalysts. Sometimes the IR conversation is all we need to realize the company might not actually be what we are interested in, and in some cases the IR is really good, so talking to management becomes more of a formality. As a general rule, the smaller the company – by market cap – the more often you go directly to management as a default.

In the future, do you intend to ask your companies about their ESG policies as a criterion before you make an investment?

Yes, during these initial conversations, we do try to hit ESG issues, especially key controversies, which we usually know going into the conversation, from the Ks, Qs, proxies and data services. 

What do you think the future holds for ESG investing?

Governance has always been a key part of E, S and G. You often hear people say they’re really focused on the governance part, but you wouldn’t be a fiduciary if you weren’t focused on the governance of the companies you invest in. In the last two or three years, however, there has been so much more data available on the environmental and social aspects that they have become much more crucial to think about.

The social aspect is very important now. So much has changed with human rights, diversity and gender issues. None of that was on the radar five or 10 years ago. With the gun violence in America, people now want to know whether they hold firms that make, distribute or sell guns. People are asking questions they weren’t asking five years ago, and wealth managers need to be able to screen out those securities. I personally believe that in the next 10 years we won’t be looking at this as impact investing – it will just be considered ‘investing’.

This interview appeared in Corporate Secretary’s special report on ESG engagement, reporting and integration​