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Hortense Bioy, Morningstar

Hortense Bioy, Morningstar

By Charlotte Moore

Directives requiring companies to disclose ESG data should enable investors to make better-informed choices and drive positive change 

The year 2023 is likely to become a crucial one in the history of a still nascent impact investment movement. The twin catalysts of European regulation and introduction of data are driving the development of this approach towards a deeper acceptance in the mainstream investment industry.

Since January 5, the Corporate Sustainability Reporting Directive (CSRD) has required all listed companies – except micro enterprises – to disclose information on their risks and opportunities arising from social and environmental issues. They will also have to report on the impacts of their activities on people and the environment. 

 “In other words, these companies will have to disclose more impact-related data with the first reports expected in 2025 on 2024 data,” says Hortense Bioy, global director of sustainability research at Morningstar. 

Lisa Beauvilain, global head of sustainability and stewardship at sustainable investor Impax, which manages £34.4bn ($41.5bn), goes even further: “Data which shows the real economy effect of a particular company’s environmental or social solutions will be very welcome.”

The provisions of the directive are far-reaching. Any firm operating within the EU, even if through a local subsidiary, will have to comply. Commentators say this will make it easier for European fund managers to see if their actions have improved corporate behaviour, even if it does not help investors to compare company performance around the globe.

The other major reform to the growing sector is the emergence of the International Sustainability Standards Board (ISSB), established at the UN COP26 summit in Glasgow in 2021, to create a global benchmark for sustainability disclosures in capital markets. Crucial to these developments  is enabling  investors to compare global companies, with data playing a central role.

Global standards

In other parts of the investment industry, regulation is often hotly debated by fund managers and private banks. But the impact investing community broadly welcomes both the CSRD and the ISSB. Participants would prefer a system which allows complete global comparability. In its absence, data providers such as Morningstar and MSCI are expected to step into the breach, filling in the gaps created by differing regional and global data standards.

As more data is generated, runs the argument, it will become easier to see which companies are creating more positive impact. “With more data, managers will be able to build more robust strategies and measure impact,” believes Ms Bioy.

Investment managers say the data will create more transparency benefitting consumers and help them make investment choices.

“Impact data can give the consumer of financial products a better idea of what is the real economy effect of a particular investment,” states Impax’s Ms Beauvilain.

This broad acceptance of the need for data to sharpen propositions is evidence of the maturing of the fledgling industry, in which some players have already been active for two decades. Data should also help managers build more ambitious strategies.

The notion of creating long-term net positive change through impact investing forms part of the evolutionary story of broader sustainable investing disciplines and enjoys some regional nuances. 

“In general, this style of investing is much more common in Europe than in North America and Asia,” says Meggin Thwing Eastman, editorial director for environmental, social and governance (ESG) and climate research at MSCI. In the US and Asia, sustainable investing is more often focused on financial benefits of looking at a company’s ESG characteristics rather than wanting to create positive change, she adds.

Indeed, several different styles of impact investing have developed. Some investors select those companies which aim to create a long-term positive impact as part of their business model or strategy. 

“Financing beneficial activities is the most common approach to impact investing in liquid equities,” says Ms Eastman. Rather than trying to change individual company behaviour, they are trying to shift capital allocation to more impactful stocks.

Other investors take a more activist approach, investing in companies which might not have strong ESG credentials and work with them to improve these metrics. For this style to be successful, however, fund managers need to demonstrate their actions have changed corporate behaviour. Otherwise it looks like managers talk a good game, have little to show for their efforts and can be accused of ‘impact washing’.

“Impact investing is more established in primary markets,” says Morningstar’s Ms Bioy, with a closer relationship between private market investors and companies making it easier for investors to demonstrate what she calls “additionality”.

In this context, additionality means if private funds had not invested in these companies or projects, positive change would not have been created. Those managers which aimed to create additionality but failed to do so would be guilty of “impact washing”.

“Impact washing could also [involve] claiming you created positive impact, [when] it was in fact generated by someone else,” adds Ms Bioy.

Creating long-term positive change is easier to demonstrate if a company is, for example, investing in a small local project. “As managers have become more ambitious, wanting to create more systemic change, the definition of impact has become broader and that requires more tools and data to measure change,” she states.

The key dynamics of impact investing are also crucially influenced by the underlying asset class. A private equity manager, for instance, has many tools with which it can influence the company in which it has invested. It can leverage its closer relationship, as well as embedding best practice into transaction documents and company charters as a pre-condition for investment. Private equity managers also have greater access to company data than their listed counterparts.


But if investors and fund managers want to create systemic change, then managers of listed securities also need to create ‘additionality’. A listed equity manager can engage with a company to improve behaviour, but to ensure these programmes create positive change, managers will need high quality data to demonstrate their outreach is effective.

This is why today’s ongoing industry-wide data initiatives are vital, with impact currently difficult to demonstrate in liquid markets, typically starved of quality data. 

 “In Europe, the data is coming with the double materiality framework,” says Ms Bioy. This is the fundamental underpinning to the CSRD initiative.

But even a massive influx of data about companies’ behaviours and standards will not solve the industry’s challenges overnight. While Ms Bioy believes impact data will make it easier for those managers “wishing to target good companies and build an impact-aligned fund”, asset managers acknowledge data alone does not guarantee a fund is creating impact.

“Impact investing is not just about looking at a data matrix, it is also vital to understand which business models will aid the transition to the green economy,” says Thomas Höhne-Sparborth, head of sustainability research at Lombard Odier Investment Managers. The Geneva-based firm says SFr32.4bn ($35.2bn) of the assets in its funds are invested in strategies that integrate sustainability factors and metrics in their investment process, beyond exclusions. 

While data will play an important role to allow both the development of impact funds in listed securities as well as providing greater consumer confidence in these types of products, he thinks data is not the only tool investment managers need to achieve systemic change. It is also important to grasp how the ecosystem as a whole will need to adapt in order to transition to a green economy. Moreover, relying on data alone could mean a manager who wishes to generate systemic change might end up focusing only on those parts of the economy where there is data available at scale.

“A fund manager might then miss opportunities where capital needs to be deployed to achieve this systemic change,” warns Mr Höhne-Sparborth. For example, if a company has developed technology which improves waste recycling, it is hard to measure the impact of that particular process.

“You can find data on the efficiency of a recycling plant but it’s hard to determine the benefit provided by that tech unless you have full transparency across all the recycling plants which use that piece of kit,” he says.

“Even with more data, there will still be a tension between what impact and change can be credibly attributed to a manager’s actions, particularly in listed equities,” says MSCI’s Ms Eastman.

The more dedicated impact investors want to know their investment is making things happen which would have not otherwise occurred, and many observers will continue to view this relationship with a degree of scepticism, she adds: “This is always hard to demonstrate in liquid equities.”  

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