Impact investing has emerged as a possible solution to many of the problems highlighted by the global pandemic
There are three main motivations underlying positive momentum in sustainable and impact investing and increased interest among wealthy families this year, says Adam Rein, president and chief operating office of CapShift, a US impact investing firm.
First is financial risk management, as many ESG funds have proved their strong risk mitigation capabilities during market volatility.
Second, Covid-19 has accelerated the growth of some structural trends, and many wealthy families look to “double down” by investing in companies that have macro tailwinds behind them, as well as a positive impact on society and the environment. These may include investments in firms delivering healthcare to poor communities, providers of virtual and online education, or investments in green and sustainable technology such as electric vehicles. Governments’ commitment to making green finance a core pillar of their economic recovery packages is creating great investment opportunities in the space.
The third growth factor is impact itself. “This is the year where the problems of the world are front and centre for many people with wealth, driving these individuals to act with urgency, and look for investment opportunities that not only meet their financial goals but also address issues raised through the crisis.”
Covid has magnified systemic inequalities that persist in the US, disproportionately affecting racial and ethnic minorities, reinvigorating investors’ interest in funds that are aligned with values of racial justice, as well as targeting investment returns. The crisis has led many investors to pay more attention to domestic issues, adds Mr Rein.
Many wealthy families emphasise the value of private and alternative investments in generating impact because the “story telling” is stronger, he says. For example, this could be a case of a financial inclusion private equity fund investing in technology, helping a million new customers get access to banking.
There is no lack of high quality products in the space. In the past couple of years many firms with strong financial track records launched new impact funds, such as KKR and TPG in private equity, and Avenue Capital in private credit.
In public market funds, the integration of ESG factors in the investment process can play a large role in driving financial performance, but rigorous due diligence on the methodology of the fund manager is crucial. It is important to distinguish high quality, innovative products, which are more concentrated, less focused on tracking benchmarks and aimed at generating real impact, from those simply looking to benefit from surging demand, says Mr Rein.
“We have seen a number of funds simply changing their name to ESG, while their underlying strategy and holdings look very similar to the past,” he says, warning against widespread impact washing or greenwashing.
Measuring impact
Impact investing has made significant strides in recent years in harmonising measures of impact and building community standards. However, the industry still has a way to go to achieve the elusive goal of measuring impact. This remains a difficult task due to the lack of standardisation, as well as poor data in certain market segments, notably smaller companies and emerging economies.
A move towards standardisation will surely be helpful, says Matt Slovik, head of Global Sustainable Finance at Morgan Stanley, but there are already valuable ways of measuring impact and providing transparency in portfolios, with several industry initiatives well under way.
Increased focus on transparency has contributed to drive investors’ interest in sustainable investing this year, says Mr Slovik, noting clients’ greater engagement with the bank’s Impact Quotient. The app, launched in 2019, helps clients identify values and areas of focus they care most about, allowing them to assess and visualise their portfolio’s current alignment with impact preferences, while providing their financial advisers a tool to better help them achieve their sustainability goals.
Amit Bouri, CEO of the GIIN, the global community of impact investors, stresses that “it is very important to recognise the multi-faceted nature of impact and build standard metrics that capture those different aspects”. He points to tools such as Iris +, a free system available to help companies and investors to measure, manage and optimise their impact, allowing the translation of impact intentions into impact resolve.
In the environmental space, carbon emission is an important, single metric to measure the impact of activities on the environment, but other metrics such as land, water and biodiversity conservation are also critical. In the social sphere, the system measures specific industry metrics like progress in housing solutions, employment or agricultural yield, as well as thematic themes such as diversity and inclusion, which cut across sectors.
Many corporate leaders have stepped up and expressed their intentions to play a positive role and helping drive the Covid-19 recovery, as well as addressing issues like racial justice or the climate crisis. But it will be important for them to demonstrate “real resolve” and that is where impact investing and impact thinking can be powerful, says Mr Bouri. Focus on impact provides them with an opportunity for competitive differentiation. “It can enhance brand value, strengthen the relationships with stakeholders, and ultimately position leaders to drive longer term value creation.”
Helping investors identify projects in the impact and non-profit investing space, and tracking positive change is a key area of focus for start-up firms, and technology can be extremely helpful. Maanch, a technology early stage B-corporation based in London, helps asset managers, investors and donors to allocate capital towards achieving the UN sustainable development goals (SDGs), visualising portfolio impact through data, intelligence and dashboards, while also allowing companies to identify and visualise the impact they are having across their operations.
“There is a big increase in terms of interest from all stakeholders to build back a better and fairer system, and to make sure that capital is allocated to the organisations and people who deserve and need it,” says David Stead, chief strategy officer at the firm.
“Companies are under huge pressure from their investors, customers and employees that they are not just taking into account environmental, social and governance factors in the way they manage and invest, but increasingly going further than that and generating net positive benefit to society.”
The future, he says, will belong to firms who have a long-term orientation and understand the importance of treating all stakeholders fairly.
Impact reporting is an area where existing solutions may not be perfect, but it is not a “true barrier” to the industry growth, believes CapShift’s Mr Rein. The bigger barrier is the existing information and research gap, which is an area CapShift aims to address by matching solutions to capital holders.
Many of the impact funds available are relatively small, have limited fundraising staff, and investors looking to deploy assets may be smaller, independent wealth management teams or family offices, which may lack research or impact assessing capabilities, adds Mr Rein.
“While there are a lot of impact funds raising $50 to $100m, which are too small scale for institutional investors, they are really a good fit for family offices and wealth managers who not only look for strong, outsized returns, but also seek to invest around theses that very much fit the ethos of specific family clients they are working with.”
