Beginners’ Guide to Impact Investing — IM(pact)101, if you will entertain me
Walk to Work #5
What does impact investing mean? Why is everyone suddenly so interested? And for goodness sake can we please stop with the acronyms.
Quick crib sheet:
- ESG (Environmental, Social and Governance) incorporating a company’s environmental, social and governance practices, alongside more traditional financial measures, when looking to make investments.
- SRI (Socially Responsible Investing) involves removing or choosing investments based on specific ethical guidelines.
- Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.
- Asset managers are individuals who take money from other people and make investments on behalf of others as part of a financial services institution.
- Private investors are individuals (like me or you) who choose what investments to make on their own.
(Sources: Investopedia, GIIN)
Sustainable investment or responsible investment (blanket terms I will use interchangeably to encompass ESG, SRI and impact investing) are the new “it” topics in the sustainability bubble. Larry Fink’s open letter to CEOs in January 2020 was a signal of impending structural changes towards responsible investment, whilst other new initiatives such as the Business Roundtable Statement on the Purpose of a Corporation, ask business leaders to value all stakeholders equally.
Because of COVID-19, people have more time on their hands to reflect and many are becoming more conscious (and vocal) about what value they can add to society — be it through much needed protests calling out systemic discrimination, contemplating their work-life balance now they are spending more time at home with their families, to educating themselves on what products and services they want to be spending their precious money on now, as we barrel towards another global recession. It is this final point that I want to focus on with this Walks to Work blogpost.
Investing in general is an extremely daunting prospect for me. Considering I came from a university specialising in economics, I should be more comfortable with the lexicon. However, the harrowing experience I had in EC201: Microeconomic Principles means even a gentle parabolic curve on graph paper sends me into a toxic spiral of Marshallian uncompensated demand and failed problem sets.
Nevertheless, I have been working through the fear and really trying to get to the bottom of what sustainable investment is. I am very fortunate that my Volans colleagues are also trying to get a grasp of what is going on, and are bearing with me as I try and piece together what I think is the current landscape on impact investing “for dummies”.
I am most definitely not an expert, and I hope my limited technical knowledge will mean this blogpost can be of help to others out there, who, like me, are not very financially-minded but do want to understand the responsible and/or sustainable investment trend.
As an outline, ESG is the base level of sustainable investment; aligning financial investment metrics that already exist to environmental, social and governance topics for a more all rounded valuation of an investment. SRI is the next action level up; dropping investments that have harmful impacts on people and the planet (negative screening), and impact investment is the top level, where on top of all these criteria, means supporting projects that actively promote good.
I see impact investing as a method of putting money into a project/company where you believe the organisation you are investing in is trying to do good for society. This could be through promoting social well-being, contributing to ecosystem regeneration and/or actively taking measures to stop the bad. Either way it means taking a proactive approach to ensure you know exactly what is happening. And yes, this does sound as complex and time-consuming as you are imagining.
Each cause you invest in “impactfully” means individually stress testing each investment. There is no easy way around it, and there is no universal governing or reporting board that will do all the grunt work for you — although, the Impact Management Project has made considerable progress on this. In general though, the old-school frameworks asset managers use to assess potential investments are not set up to integrate impact investing criteria. This is why there is still a lot contention around the topic, and why impact investing portfolios have difficulty breaking into the mainstream.
At a conference that I attended late last year, the impact investor landscape was succinctly explained as a 3-tiered system. Asset managers assessing companies were classified within different levels of the impact management umbrella of “trying to do good”.
a) The least impactful: Is the company acting to avoid harm?
Does the company care that it is doing something bad? Does the company know, and is doing nothing about it? Or does the company not know, but is not willing to find out either?
b) The middle ground: Going beyond our organisational boundaries.
The company wants to know if it is broadly benefitting all stakeholders. E.g. is the company benefiting the environment, its employees, customers, suppliers and supply chain?
c) The most impactful: Contributing to solutions.
The company looks to actively contribute to the SDGs, building products and services that benefit the world and reach the most underserved markets.
For very clear explanation and materials on impact investing, I recommend The Global Impact Investing Network (GIIN). The GIIN provides resources for traditional asset managers and private investors to educate themselves and gives a clear outline on how to approach impact investing to ensure that the market continues to scale with integrity. The GIIN released their Sizing the Impact Investing Market report last year which they described as the most comprehensive study to date on impact investing, looking into the size and diversity of the market. In this report, they estimated that the global impact investment market is valued at a cool US$502 billion*.
The inevitable economic ramifications of COVID-19 will only create more irregularity and confusion for the investor landscape. However, this could be an opportunity for sustainably invested assets to thrive as they prove to be more resilient in times of economic turmoil, as new research by Blackrock has proven. Moving through this unprecedented time, I anticipate that ethical and impactful investments are where asset managers and private investors alike will continue to place their money.
So, this is where I am up to now on my impact investing journey. I’m sure there is a lot more learning for me to do and maybe in a few months I will be back with my next blogpost instalment IM201 (which hopefully won’t be as scary as EC201).
Outside of the impact investment space, the Volans team are currently working on a selection of financial sector related projects. Our Tomorrow’s Capitalism Inquiry Phrase II is heavily focussing on the financial sector; our project alongside Business in the Community looks into what it means for high-street banks to be responsible retail (customer service focused) banks and our newly launched Bankers for NetZero initiative explores how UK banks can work alongside industry and policy professionals to accelerate a just transition to net-zero emissions.
*) For context, this US$502 billion is 0.71% of the total market capitalisation on the global stock exchange which as of December 31, 2019 was approximately US$70.75 trillion. For broader sustainable investment, JPMorgan currently estimates that US$3 trillion of institutional assets are managed in a way that tracks ESG factors — 4% of total assets under management.
