01 November 2018
The concept of impact investing is gaining traction. But will it overtake ESG, asks Peter Cripps
Impact investing is on a roll. I write this on my journey home from the Global Impact Investing Network (GIIN) Investor Forum 2018 in Paris.
The two-day event attracted some 1,300 delegates from 80 countries to discuss ways in which investments can have a positive effect on people and planet. The last one, less than two years ago in Amsterdam, saw about half that number of delegates.
This rapid growth means the shindig is now giving the Principles for Responsible Investment's PRI in Person annual event a run for its money in terms of being the biggest responsible investment conference in the world. The latest PRI in Person, in San Francisco in September, attracted a record-breaking 1,200 people.
No wonder GIIN has decided to make their event an annual rather than a biennial affair, starting next year, when it will return to Amsterdam, on 2 and 3 October.
One asset manager at the conference told me that they have now integrated environmental, social and governance (ESG) factors into their investment decision making and are now looking to move on to impact investing, which they described as "the next level".
I am interested in this relationship between ESG and impact. Sitting on the Eurostar (drinking a very impactful Heineken) I find myself reflecting on the past two days' events and wondering: what is the difference between impact investing, as espoused by GIIN, and investing in line with ESG criterion, as espoused by the PRI? And why are two separate conferences/movements needed?
Is there a battle brewing between ESG and impact investing? And, if so, who will win?
Well, my thoughts are that ESG and impact investing are different, but by no means mutually exclusive.
ESG investing involves taking into consideration so-called non-financial information when making investment decisions. The PRI's website says the purpose of this is "to better manage risk and generate sustainable, long-term returns".
This ESG information – the demand for which has spawned a ballooning ESG data industry – is varied and diverse. Metrics considered might include carbon footprinting, staff retention rates, executive remuneration, numbers of accidents in the workplace or the number of women on boards.
It can be qualitative as well as quantitative, and potentially cover every asset class and geography. And it is growing increasingly sophisticated in terms of the quality of the data and the approaches taken by investors.
With an eye-bulging $90 trillion of assets having signed up to the PRI, it can make the claim to have 'gone mainstream'.
Impact investing, on the other hand, is subtly different in its approach. It is based on an argument that all investments have a positive or a negative impact, and there is no such thing as an impact-neutral investment.
The GIIN defines impact investments as being those that seek to have a positive impact (it describes this as 'intentionality'), and seek to measure that impact and report on it.
Impact investments aim to generate a positive outcome alongside a financial return, but it is down to individual investor to decide whether they are prepared to accept a below-market return in order to achieve this impact.
At the current point in the market's evolution, it seems to me that these 'impact investments' tend to be primarily focused on asset classes such as private equity, venture capital, real assets or projects. ESG data, conversely, also proliferates in public markets such listed equities and fixed income.
While listening to the discussions at the conference, I was reminded of a quote from former PRI CEO James Gifford. In his latest role, working in impact investment at UBS's mushrooming sustainable finance team, he said: "ESG is what keeps you up at night, impact is what gets you out of bed in the morning!"
However, definitions of impact investing are developing. The conference heard that The GIIN is launching a consultation on a set of principles to define impact investors.
Meanwhile, the IFC (the private sector arm of the World Bank Group) has drafted its own impact principles and aims to launch a final version in April.
Another difference between these two investment approaches could be seen by the fact that the GIIN conference attracted a slightly different crowd to that attracted by PRI in Person. The PRI in Person was heavy on asset managers, pension funds and an ecosystem surrounding them, or so it seemed to me, while the GIIN conference seemed more biased towards foundations and endowments, charities and family offices.
One thing that was similar was the sponsorship both received from asset managers!
Matt Christensen of Axa Investment Managers summed it up humourously when he said that for an environmental, social and governance (ESG) conference you need to wear a tie, whereas for an impact conference you do not!
I think the proponents of ESG would disagree that impact is next iteration for responsible investors, and will succeed ESG.
There are many ways in which ESG data can be used, and while ESG has historically been used more for negative screening (screening out the kind of risks that keep you up at night), there is no reason why it should not be used to identify companies that make a positive contribution to sustainability goals.
And saying that impact investing is the next stop after ESG on the journey of a responsible investor, presumes that the job of ESG integration has been done. And that is clearly not the case - it is just beginning!
As current PRI CEO Fiona Reynolds told this publication at the PRI in Person, there are some signatories that are showing good leadership, but there is also a long tail that still has a lot of work to do.
Most people I spoke to at the GIIN event, thought that these two approaches of ESG and impact would increasingly join together. After all, they are kindred spirits, each seeking sustainable and responsible investments. They are just approaching the issue from different perspectives.
So there is no reason why an investor could not pursue both approaches. Indeed, I suspect that many, including the asset managers who sponsor both the PRI in Person and the GIIN Investor Forum, already are.
I caught up with Amit Bouri, CEO of GIIN, following the event and put this question to him.
He confirmed that he believes ESG and impact are complimentary: "We have seen a migration pattern, with investors that started with ethical investment moving to ESG, whether for risk management or to have responsible operations," he said. "Now, they are looking at impact investment and how they can have a positive contribution, to solutions.
"But this has not been at the expense of their focus on ESG – it has built on the work they have done.
"There's an increasing approach to think about ESG throughout the portfolio, then to make a commitment to impact."
Peter Cripps is the editor of Environmental Finance
"Of course, negative 'inside-out' impact can and does become 'outside-in' risk. Think Deepwater Horizon, or Samarco. The key distinction, at least for mainstream investors, is fiduciary duty vs. discretionary option. Thus defined, lumping ESG and SDG together serves no useful purpose and may even alienatin new-found audiences such as market regulators."
Piet Klop, PGGM