New Kids on the Block & Alphabet Soup – Investing for Impact
There is a degree of alphabet soup when it comes to metrics that matter when we talk about the new kids on the block, or “Investing for Impact”.
A growing number of investors want to see both a financial and now social return that heavily aligns to their principles. We see three styles of investing that deliver on this: Environmental, Social and Governance (ESG) Investing, Socially Responsible Investing (SRI) and Impact Investing. An overall metric that governs these three disciplines are the Sustainable Development Goals (SDGs).
The SDGs are a set of seventeen global goals designed to be a blueprint for a sustainable future set in 2015 by the United Nations General Assembly and intended to be achieved by the year 2030 which form part of UN Resolution 70/1, the 2030 Agenda. I was honoured to be one of a few delegates at the United Nations invited outside of government upon the inception of the next global development agenda centred around sustainable development that moved forward from the Millennium Development Goals (MDGs). The MDGs were eight international development goals from 2000- 2015 established following the Millennium Summit of the United Nations in 2000, following the adoption of the United Nations Millennium Declaration.
Sustainable development, a core principle within the SDGs is an integral element to investing for impact. Sustainable development rests on three principle elements that are interconnected for the well-being of society: economic growth, social inclusion and environmental protection. As such, poverty eradication is a key requirement to sustainable development as it promotes sustainable, inclusive and equitable economic growth. It reduces inequalities, fosters equitable social development and inclusion to promote integrated sustainable management of natural resources and ecosystems.
ESG is seen as a rules-based approach (negative screening) to selecting companies based on their commitments to positive environmental, social and governance business practices alongside more traditional financial measures.
While ESG appears to attach different meaning across various stakeholders, there is an industry need to push for standardisation. Funds that fail to follow through on their sustainability claims could diminish their own credibility and the wider industry.
Social Responsibly Investing (SRI)
Socially responsible investing involves actively removing or choosing investments based on specific ethical guidelines. A good start is by unravelling the Principles of Responsible Investment.
The Principles of Responsible Investing (PRI) is the world’s leading proponent of responsible investment. The PRI works to understand the investment implications of environmental, social and governance (ESG) factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions.
The PRI acts in the long-term interests of its signatories, of the financial markets and economies in which they operate and ultimately of the environment and society as a whole. It is truly independent and encourages investors to use responsible investment to enhance returns and better manage risks, but does not operate for its own profit; it engages with global policymakers but is not associated with any government; it is supported by, but not part of, the United Nations.
“We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole. The PRI will work to achieve this sustainable global financial system by encouraging adoption of the Principles and collaboration on their implementation; by fostering good governance, integrity and accountability; and by addressing obstacles to a sustainable financial system that lie within market practices, structures and regulation.”
The PRI Principles (PRI):
- Principle 1: Incorporate ESG issues into investment analysis and decision-making processes.
- Principle 2: Be active owners and incorporate ESG issues into ownership policies and practices.
- Principle 3: Seek appropriate disclosure on ESG issues by the entities in invested within
- Principle 4: Promote acceptance and implementation of the Principles within the investment industry.
- Principle 5: Work to enhance effectiveness in implementing the Principles.
- Principle 6: Report on activities and progress towards implementing the Principles.
Impact Investing (II)
Impact investing looks to build an organisations or funds strategy to incorporate a measurable, beneficial social or environmental impact alongside a financial return.
More tangible aspects of impact investments are used to address issues around climate change, hunger, living below the poverty line, health epidemics or investments more broadly centred around delivering on the Sustainable Development Goals (SDGs).
Impact Investments require “additionality” alongside this suggested three pronged approach where:
- There is a Financial Return on Capital
Impact investing is a business activity expected to yield a financial return on capital or, at least a return of capital. It differs from philanthropy or grant funding as there is a commercial return involved
- It Spans a Broad Array of Sectors and Regions
Impact investing is inclusive across asset classes, from cash equivalents and microfinance, to private equity and clean technology. It does have negative screening involved where often an Impact Statement is attached and the EDFI Exclusion Lists are adhered to.
- It Measures Social/Environmental Impact Regularly & Reports
The impact investor regularly assesses and reports internally and externally on social and environmental performance of existing investments to promote and ensure transparency and accountability.
Impact investing is now approaching more mainstream investors with heated debate over whether Investment Managers are engaging in “impact washing” to attract investors while making investments that do not address environmental, social, or governance (ESG) issues. In a cover letter for the 2018 Annual Impact Investor Survey, Global Impact Investing Network (GIIN) research director Abhilash Mudaliar included “industry integrity” as one of the noteworthy topics illuminated by the survey’s findings.
Asset managers have expressed concern about the possible misuses of ESG marketing, too. “We are very concerned about impact washing,” Mark Haefele, global Chief Investment Officer of UBS Wealth Management, told the Financial Times. “We have to make sure that the end-client has a clear understanding about what impact investing is, and that is why we have been very keen to have a definition.”
I resonate with the editor of ImpactAlpha, David Bank who candidly remarks in an interview: “you can’t just fake it through marketing. . . . You have to really reach those markets, deliver those products and services, and improve those lives and ecosystems to grab the impact alpha.”