Sustainable Investment – Doing Good and Getting Richer can be synonymous

Impact Investing

April 13, 2021

How has the pandemic driven more demand for sustainable investments and impact investing
What are the key differences between sustainable or socially responsible investing and ESG?
What are the key considerations for Investment Funds when trying to attract this burgeoning class of socially and environmentally conscious investors

As we battle through this evolving pandemic investors are increasingly drawn to invest in ESG. According to Bloomberg ESG assets may be worth over US$50 trillion by 2025 which would be approximately one third of global Assets Under Management (AUM). According to JP Morgan, in the US it was classed as the top asset class for increased allocations with almost half of investors intending to increase their ESG exposure. Which markets are most interested in ESG investments – the US, Europe, Japan, Canada and Australia/New Zealand.

Governments are committed to a “Green Recovery” after the pandemic and are changing their legislation to reflect this as well as increasing their spending in this area. Millenials and Gen-Z investors are now taking up more and more control over global wealth and they are committed to using this new-found wealth and power to invest in a more conscientious manner -respecting social and environmental goals.

Fund managers, wealth and investment advisers can no longer add ESG and impact investing as an optional talking point when meeting with their high net worth individual (HNWI) clients and prospects, it should now be top of the agenda.

Sustainable Investing

Sustainable investments are centred around the operations of the business and assesses whether they have a positive Environmental, Social and Governances (ESG) impact. ESG in itself is not a strategy but a framework that businesses use to measure the risk factors of their investments and ensure that they are aligned with their sustainable investment strategy, measuring across the aforementioned three key areas.

A Socially Responsible Investment (SRI) strategy will apply screening and exclusion to ensure they don’t invest in companies with a detrimental social or environmental exposure such as fire arms, weapons, animal cruelty or substance related product. Other was to achieve sustainable investment goals is through positive reinvestment and shareholder activism in social and/or environmental realms.

Key Types of Sustainable Investments

Green Stocks/Equities
Green Bonds (Energy Efficiency, Pollution Reduction, Innovative Green Tech)
ETFs
Exchange-traded funds

Why is Socially Responsible Investing becoming more important now?

There has been a notable uptake in investment funds and companies putting socially responsible investing at the forefront of their priorities. They are considering their numerous stakeholders including the local communities they operate in and the environments in which they have an effect on. The rise of social media and the accessibility of information has meant that companies now have greater social accountability. They need to protect their brand, reputation and viability by ensuring they are managed in a socially responsible manner.

After the 2008 crash, American investors put ESG and impact investment on the back burner as they struggled through the aftermath of that financial crisis but in recent years this has become much more of a priority. Similarly European regulators have also noted the growing appetite for ESG and highlighted its importance.

The ongoing pandemic has since 2020 exposed how vulnerable economies and communities are to the environment in which they exist. So it has had a powerful impact sustainability and environmentally conscious investments, they are becoming less of a trend and more of a main-stay priority for investors.

Impact Investing

Impact investment instead is related to the actual solutions being sold and assessing whether these will support global sustainability goals. Impact investing involves selecting targets for investment that have the intention to improve or effect a sustainable social or environmental goal, the investment must have a measurable outcome for the investee which must be measurable.

The key distinction between sustainable investments/socially responsible investing and impact investing is that impact investment is more common in private equities markets (PE funds and VC funds). Also, instead of screening out negative social or environmental risks (which is what ESG does) impact investing has a more direct approach and ensures that all of its investments have a good public outcome whether its social, community or environmental.

Key Types of Impact Investing

Green Bonds
Socially Responsible ETFs
Private Sector Impact Investments

Key Considerations for Investors interested in Impact Investing

Impact investors are advocates that their capital can improve global issues from pollution to gender discrimination, climate change to racism, inequality to poverty. Therefore, any funds they devote to Impact Investing must have a veritable outcome, a measurable and noticeable improvement in the investee’s capability to achieve the sustainable goal it is after.

The key question to ask is – had it not received the capital would it still have been able to achieve this outcome?

Otherwise, there is the risk of ‘impact washing’ which is when investors take credit for social and/or environmental outcomes that would have resulted with/without their investment. Investment managers that abide by the Operating Principles for Impact Management – launched in April 2019 as a framework for impact investors, will normally ensure that they are selecting investments that truly serve their investors motivations and goals.

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