How can investors catalyse private sector investments for social and environmental good? Part 2 of our content series delves into the key challenges and tips offered by experts to guide interested impact investors.
THE CHALLENGES OF IMPACT INVESTING
Impact investing is not without its challenges in terms of credibility and industry recognition in its nascent stage. Investment experts have referenced its ‘immediate attractiveness’, noting that its lure can detract from some of the issues that it presents in the long term. So, what are industry experts noting as some of the challenges facing interested investors?
According to Andrzej Rapaczynski, a Professor at Columbia Law School, the costs of impact investment are considerable for the “health of the capitalist economy”. He argues that a more “complex corporate objective function…raises the potentially insoluble problem of aggregating the diverse interests of the shareholders and seriously weakens the ability of the shareholders to monitor management performance”.
His argument joins those of fellow impact investor analysts who too, are sceptical of this field. Paul Sullivan, a financial journalist with the New York Times noted that impact investment in the short term, “can be hard for any investor, particularly for those who hew to an exacting standard”.
Yet, fund managers, private foundations, various forms of financial institutions along with NGO’s and individual investors who are currently involved in this field of investment understand many of the challenges facing impact investments but are still increasingly interested in pursuing new and varied investments. This can be linked to those most interested in impact investments; mainly millennial and female investors, who are considered more socially and environmentally conscious in the scope of their portfolios with Forbes reporting that ‘85% of millennials are very interested in impact investing’.
Some other challenges involved in impact investment can be connected to industry wide misperception, with some deterrents involving heavily marketed and publicised campaigns. Some of these activities have irked investors who believe it is still a philanthropic niche. Yet it is correct to assume that at present, while progress has been made it is still difficult for interested investors to quantify, measure and achieve a solid return at present.
MAKING A RETURN: WHY DATA AND FOCUS IS KEY
Blackrock, one of the top global investment manager firms, have advice for investors about how to improve sustainable investment processes to overcome many of the challenges associated with the filed. What is paramount for Blackrock is the influence and necessity of clearer data insights so that investors are ahead for the sustainable investment industry boom.
Their key client insights demonstrate their support for sustainable investments and financial returns. Here is why:
- Blackrock affirm that enhanced data and insights make it possible to create sustainable portfolios without compromising financial goals.
- ESG (Environmental, Social and Governance) friendly portfolios could be more resilient in downturns as their research shows that ‘ESG-focused indexes have matched or exceeded returns of their standard counterparts, with comparable volatility’.
What is certain is that greater data insights in this sector will both evolve and in turn drive greater financial returns for investors. It is Worthing noting the growth trajectory so far as according to data from the International Finance Corporation note that ‘the industry grew fivefold between 2013 and 2017’.
MSCI, through their investor guide for ESG investments have highlighted the most common use cases for sustainable ESG impact metrics. Here are their four key tips for investors:
- Set parameters: Investors should determine their objective and approach and following that their minimum revenue threshold. Investors should then ‘require minimum ESG standards for qualifying companies in addition to revenue and theme requirements.
- Company identification: MSCI note that for investors who wish to achieve a high financial return and minimum ESG standards, ‘relatively few companies will qualify’. The MSCI ACWI 2019 index features companies with revenue exposure to sustainable impact themes. It can be viewed here.
- Portfolio Reporting: The MSCI’s Sustainable Impact Portfolio Snapshot tool will allow investors to calculate portfolio exposure to Sustainable Development Goals. Investors can define potential revenue exposure by theme.
- Universe Definition, Stock Selection, Product Creation: the MSCI index and Blackrock are both examples of investment companies finely tuning key metrics and reporting standards via data indexes to meet the challenges of historical data analysis gaps. Investors can take advantage of these metrics to fine tune their portfolios.
KEY TIPS FROM FELLOW IMPACT INVESTORS (as reported by the New York Times)
Amit Bouri, CEO of the Global Impact Investing Network
“The 3 most robust areas for impact investing were private debt, private equity and real assets like land or rental properties. GIIN have developed themes that people can invest in, like clean energy and affordable housing.”
Andrew Lee, head of impact investing and private markets at UBS Wealth Management
“While there are sets of metrics by sector that are accepted, it is difficult to aggregate across the portfolio,” he said. “You have to keep it by sector.”
Erika Karp, founder and chief executive of Cornerstone Capital Group
“One of the things Cornerstone believes is, to really have impact on the world, we need to move trillions of dollars,” she said. “To do that, you need to evolve the standard of what is the discipline of impact investing.”
Guillaume Mascotto, VP & Head of ESG investment stewardship at American Century Investments
“As one might expect, factors like investment returns and fees remain top considerations when determining how to invest money. The significant increase in the percent of investors factoring societal impact into the decision-making process, particularly among younger investors, confirms our view that investors do not need to choose between impact and returns.”
A FINAL WORD
Corporate governance, and indeed well-established governance is essential to mitigate investment risk. Investors need to be clear that before any kind of sustainable investment be it impact investing or ESG investment, leading indicators of failing governance should be examined. Luis A. Aguilar, Commissioner for the U.S. Securities and Exchange Commission notes that key indicators to track before investment include; exit of the CFO or company secretary, resignation of independent directors or auditors and regulatory inspection or settlement.
