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Devaluation of the word impact investing – three questions

By Masja Zandbergen, Head of ESG Integration for Robeco 

 

With the introduction of the Sustainable Development Goals (SDGs), so began the rise of impact investing in listed equities and credits. I still believe that this is a good thing. However, there are certain aspects of impact investing that are less clear in the listed space. What now keeps me awake at night is the prospect of genuine impact investing being undermined or demeaned by those who claim to be participating in it for their own public relations purposes, or those who simply misunderstand what it is. And with those I also include our own organization. We need to be awake and aware of this issue.

How impact investing differs from sustainable investing

Impact investing is defined as investments made into companies, organizations and funds with the intention of generating a social and environmental impact alongside a financial return. It is an increasingly popular means of pursuing objectives on the ground such as the SDGs. These seek to make a difference in areas such as eradicating poverty (SDGs 1,2) and reducing inequalities in society (SDGs 5,10) through investment capital rather than charity.

 

This differs from sustainable investing, where the use of environmental, social and governance (ESG) factors is intended to minimize the negatives that come with all corporate activity. This can be done by avoiding companies with poor environmental records or involvement in corruption. But it doesn’t necessarily have to make an impact on the ground; finding the companies with the highest ESG score compared to peers won’t directly contribute to education or health in Africa. Most notably, a tobacco company (which we exclude) can have a very high ESG score, but clearly contributes negatively to SDG 3 for good health and well-being.

 

The Global Impact Investing Network (GIIN), which was historically the realm of traditional impact investors, is now slowly seeing more and more traditional asset managers becoming members. The GIIN is an important resource for, among others, defining the core characteristics of impact investing and giving access to a database of impact measures. [1] It is currently working on providing guidance for impact investors in listed equities and explaining how this differs from sustainable investing. Keep following this space!

How to attain additionality in listed impact investing

As equity investors and bond investors, most of the time we are not providing additional capital to companies. This is different for traditional impact investing, where capital is directly invested in projects with clear impact in areas such as water, renewable energy, microfinance and agriculture in developing countries. Of course in the listed space, allocating capital can have an impact through increasing a firm’s cost of capital (which becomes important when money needs to be raised), or by signaling to stakeholders that the company should change its behavior. Empirically there, is not a lot of evidence yet that this is particularly effective. [2]

 

However, we are seeing the latter becoming more important as certain areas of business are becoming less and less acceptable to invest in (tobacco, controversial weapons, coal). At the same time, some businesses have become more attractive to investors in areas such as energy efficiency products and electrical vehicles. This sends a clear signal to companies active in this space. Combined with engagement, we could argue there is an impact to be made by investing in listed securities.

 

But there is also a second way to create additionality – namely by researching to what extent companies produce products and services that make a clear contribution to some of the sustainable development challenges, and to what extent they develop new business models and expand their businesses into otherwise underserved markets, countries or regions. Some examples are innovative companies that are reducing their footprints via recycling, and pharmaceutical companies that work on pricing models based on the efficacy of the product, who develop cheaper access to health care via digitalization, or give access to medicine in underserved markets.

 

These companies create an impact versus the status quo. Investing in them will provide them with a shareholder who supports their mission and long-term orientation, which helps the company achieve both the financial and impact goals.

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