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Move over ESG – impact investing is important too

The covid-19 pandemic has succeeded in bringing the case for impact investing to the fore, according to a report from a Paris-based team at asset manager Candriam.

It argues that if anyone doubted the investment needs for public health, food security, the environment, and the creation of secure jobs and a living wage, then the pandemic has forced a rethink.

Produced by Candriam’s Maïa Ferrand, co-head of external multi-management; and Mohadeseh Abdullahi, investment analyst for Impact Investments, the report stresses that impact investing refers to both social and environmental investments.

“The damage from covid continues to be most severe for the most vulnerable, across all nations. News headlines are demonstrating that social impact business models are in demand across the globe,” the report noted.

“After the governmental or charitable responses in the teeth of the crisis, infrastructure will need to be maintained, restored, or newly built. Remote teaching, tele-health, and increased use of remote access to courts and other citizen services are examples of social needs with rising demand and unequal access.”

It adds that impact investing can play an important role in these areas, in all countries.

“Over the last 50 years, there has been a transformation in thought about the purpose of the company, and the role of shareholders versus other stakeholders. Covid is an extra push to an evolution already underway.”

Need for action

In terms of opportunities for impact investing, the authors point to the fact that the UN Trade and Development conference estimated a $2.5trn (€2.1trn) need for initiatives to avert threats of food insecurity, pandemics, energy supply and climate change.

As taxes, fines and pricing pressures increase for companies or sectors that are seen as unhelpful to ESG progress, then other areas could become profitable impact business opportunities – especially if they are eligible for grants offering a cushion to seed investors.

‘Environmental impact’ still leads in total dollars of ‘impact investments’, but the report finds that ‘social’ investments are growing rapidly. It suggests covid has highlighted not just the necessity but the opportunities for businesses which target social needs.

Media coverage has also helped the extent to which the broadly-defined sustainable investing world has puts much emphasis on the ‘social’, in ESG factors – and this conversation has become louder since the pandemic.

Performance

Of course, a cynical response to a continued growth of interest in impact investing is that the numbers need to stack up, in terms of performance, to gain any long-term traction.

In the past, impact investing has been viewed as investors willing to accept a trade-off – that the impact takes precedent over the investment return.

But there now appears to be a change in mood and expectation. According to the Global Impact Investing Network (GIIN), 67% of impact investors target market returns or better.

The GIIN noted that the motivation to make impact investments was increasingly because of, not in spite of, the financial return potential.

Candriam agrees with this view – to accept a compromise in either impact or financial returns

Fund of funds option

In terms of access to the best opportunities in this space, the Candriam report suggests that most of the pure impact business models are still in the private equity stage. Direct investment, and venture capital funds, require intensive due diligence and that analysis demands very specific skills and resources.

The report argues that, for the next few years, the best structure for investor participation in impact business models is through a fund of funds – essentially a portfolio of impact private equity funds, direct company co-investments, and impact bonds.

So, what does a fund-of-funds approach offer?

According to Candriam, the challenge of impact investing demands entrepreneurial and financial skills, as well as business-specific operational skills.

Venture capitalists involved in impact business models, therefore, tend to include partners with these operational skills, to the benefit of the investments, and tend to invest in businesses in related areas according to their expertise.

This specialisation, says Candriam, leads to a lack of diversification within any single well-staffed impact VC fund. With a fund of funds strategy, this diversification challenge can be addressed.

ESG v Impact investing

The differentiation between ESG, SRI (or other ethical related strategies) and impact investing, is a point the report is keen to stress.

Impact is not ESG investing, according to Candriam – rather than be about ‘screening’, impact investing is about a founding intent.

It takes a step beyond ESG analysis, by investing in private equities whose business models have clear and measurable targets, either environmental or social.

However, one of the challenges in this area is there is no standard definition of ‘impact’. There has been a proliferation in the number of platforms and databases, and ‘impact washing’ (like ‘green washing’ for climate change investment) is becoming a concern.

A study carried out this year by SciencesPo and sponsored by the European Investment Bank (EIB) made three proposals to improve this situation.

Firstly, to support a more comprehensive taxonomy for impact investing; to improve existing investor databases; and finally, promote an EIB definition to rate impact investors.

A recent paper in the Stanford Social Innovation Review, entitled ‘How to mainstream impact investment in Europe’ echoed many of the EIB’s findings.

It suggested regions, as a whole, needed to integrate impact measurement and management into the tools used by major social institutions, including corporations, large investors, and public funders.

It also proposed that networks and associations share data and best practices so that less advanced countries could avoid starting their impact investing sector from scratch.

David Burrows

For more than 25 years, Dave has written for a wide range of newspapers and broadcasters including The Times, The Financial Times, The Independent, The Wall Street Journal, The Mail on Sunday, Reuters...

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