Veteran impact investor Finance in Motion won this year's 'Asset manager of the year - large' award. Its managing director Sylvia Wisniwski explains its approach to impact investing
Environmental Finance: Finance in Motion has been pioneering the impact investment market since 2009, and now has €3 billion ($3.2 billion) in assets under management and advisory. How has investor interest in your approach evolved?
Sylvia Wisniwski: We've benefited from developments across three verticals. The first is the new policy agenda, particularly around climate but also around biodiversity. Second, this is being matched with regulatory initiatives, particularly in the EU with its sustainable finance strategy. And third, we're seeing increased awareness within the investment community: there's growing concern about sustainability issues, and an understanding that we don't want our pensions paid on the back of child labour, for example.
We're also seeing a graduation process. Investors who invested in our earlier funds, and who benefited from their risk protection elements while learning about the asset class, are now prepared to move into higher-risk tranches, or even to make direct investments alongside us.
EF: How do the Sustainable Development Goals (SDGs) inform your approach?
SW: The SDGs are a very good, broad framework that is clear, stringent and very well-communicated – it has a high level of recognition. It provides very good anchor points to integrate in our investment monitoring and reporting. We therefore have reflected the SDGs in our monitoring systems, which are tailored to the respective investment objective and also consider investor interests.
However, the SDGs were defined for governments: investors often want to have much more specific targets or calculation methods applied. For example, take carbon emissions: the SDGs utilise total GHG emissions as an indicator for SDG 13, whereas investors like to drill into Scope 1, 2 and 3 emissions, and apply science-based targets for benchmarking of results.
EF: You have developed a new Impact Scoring Tool. How does it work?
SW: When you go out with an impact claim, you need to put robust metrics behind it together with an integrated assessment approach. Our tool is designed to capture the multidimensions of a systematic impact measurement approach. It translates our theory of change and the respective targeted impacts into something that is measurable and can be systematically compared across different investments.
The tool builds on the 'Five Dimensions of Impact', a commonly used concept in the impact investing industry. Among others, we assess how relevant the investment is for the given country, sector and target group; what the expected positive impact of the investment is; how likely it is that the investee will deliver on that impact; and then finally what our investor contribution to that impact is.
So, for example, in a fund aiming at supporting economic development, we would measure our contribution to job creation in the context of a country's unemployment rates; our contribution would be greater in a country where unemployment rates are high.
Also, we look at outreach. We work a lot with financial institutions so, for example, we will look at the number of clients they reach with our investment and how many of them would be female, young or in rural areas. We look at the capacity of our intermediaries, whether they have well-trained staff, high internal standards, and systems to report on impact. Finally, we assess – our additionality, the extent to which we are offering something that our clients can't get from elsewhere.
EF: You talk about your funds' contribution to strengthening financial systems in emerging markets. How does that support your returns and your impact?
SW: We look at this triangle of impact, risk and return. On the impact side, financial institutions are the prime movers of capital in a given country. If you can work with them in increasing their capital flows to underserved target groups or green measures, and thereby build their capacities to manage such portfolios, you can have greater systemic impact beyond the individual investment.
From the risk point of view, we often see that sustainable investments are often lower risk. In the agriculture sector, for example, producers with sustainability certification offer a differentiated premium product that is less exposed to global commodity prices. Also, sustainable certifications often require climate adaptation and resource management measures, which increase the resilience of the business and support environmental impact. We also love working with banks because they have a diversified risk profile: the unit of investment is basically a portfolio in itself.
In terms of returns, by working with financial institutions as long-term partners, with a continuous relationship, we can earn a premium from that. For example, we might start off with senior loans but, at a later point with a tested partner, we can also provide subordinated debt and hybrid capital, and earn a higher return.
EF: What is the secret to successfully delivering impact in emerging markets?
SW: You need to be on site, and near the assets and the investment opportunities. You need to have a specific approach to each country and understand the specific market conditions: emerging markets are very diversified. You need to be prepared for long-term engagement, and to accompany your investees on their sustainability journeys. You need to be able to combine investment with technical assistance. Finally, you need to understand the underlying business models and know how you can connect them with positive impact.
For more information, see: www.finance-in-motion.com.