AMG Acquires Parnassus, the Last Big ESG Firm. What This Means for ESG Investors

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Sustainable investing is red-hot. For the most recent evidence, look at last week’s acquisition news:

Affiliated Managers Group

paid $600 million for a majority stake in privately held Parnassus Investments, which sent Affiliated’s stock (ticker: AMG) up as much as 7% on the day the deal was announced.

“We see ESG investing as one of the fastest-growing segments in the industry,” AMG chief Jay Horgen tells Barron’s, “and one of the fastest-growing segments of AMG.” ESG refers to investing that includes environmental, social, and governance criteria, along with traditional financial metrics.

“Parnassus is really ahead of that trend, given its authenticity and length of history in that space,” Horgen adds. Parnassus, founded in San Francisco in 1984 by star investor Jerome Dodson, has grown swiftly in recent years, as interest in sustainable investing has strengthened and as the firm has developed a reputation for reliably good performance. It has $47 billion in assets, including five mutual funds.

While manager changes often follow acquisitions, investors in Parnassus funds can take heart from the fact that CEO Ben Allen and chief investment officer Todd Ahlsten both have long-term contracts with the firm, as will key portfolio management personnel, AMG says. Dodson, 78, stepped down from his fund management duties at the end of 2020. Dodson was one of just a handful of managers who consistently beat the market, for decades.

Says Allyson McDonald, CEO of Boston Common Asset Management, a sustainable investment shop 15% owned by AMG: “AMG will let Parnassus continue to be Parnassus. That’s a good sign.”

The addition of Parnassus will bring AMG’s ESG-dedicated assets to $80 billion, and assets incorporating ESG factors in their investment process to $600 billion, AMG says. The company, which buys stakes in active management shops, oversees $738 billion through its affiliates.

Matt Patsky, CEO of Trillium, another sustainable investment firm, says that the acquisition is proof of concept for sustainable investing. “There will be a lot more acceptance that it’s a perfectly reasonable way to manage money, and you’re going to have to have an option that checks that box,” Patsky adds.

Parnassus was the largest independent firm in the space, and the last major independent to hook up with a larger partner. Some of the most venerable names in U.S. sustainable investing have been purchased by larger entities in recent years. Calvert Research & Management was bought in 2016 by Eaton Vance, which was purchased by

Morgan Stanley (MS)

this year. In 2018, Pax World Management was acquired by

Impax Asset Management

(IPX.London). Trillium Asset Management was purchased last year by Australian financial services firm Perpetual.

“Sustainable investments are increasingly being run by large asset managers for whom sustainable investing is a relatively recent focus,” Jon Hale,

Morningstar’s

sustainability research chief, says in an email.

Allen predicts that Parnassus is likely to tap Boston Common’s expertise as an activist investor as it deepens engagement with companies in its portfolios. Indeed, greater engagement is a hallmark of active management.

“This is one of the fastest-growing segments of AMG because of the role of active management,” Horgen observes. “Clients have a greater desire to drive outcomes, and when you see that capital being deployed through Parnassus, it requires an active approach. You really need engagement and you need to continue to have an approach that’s forward-looking.” In addition to Parnassus and Boston Common, AMG’s other investments in responsible investing include a stake in Inclusive Capital Partners, which is led by Jeff Ubben, a well-known activist investor.

Hale said he expects new investment firms to keep popping up to cater to the appetite for sustainable investments. Consider Engine No. 1, an activist investment firm founded just last year by hedge-fund veterans. This year, Engine No. 1 won three seats on the board of

Exxon

Mobil (XOM).

Write to Leslie P. Norton at leslie.norton@barrons.com