08 October 2019
Triodos Investment Management, a fully owned subsidiary of Triodos Bank, has been investing to deliver social and environmental impact for almost four decades. Its chair, Jacco Minnaar, explains how the firm is continuing to raise the bar in a market that is rapidly adopting sustainability as a strategy.
Environmental Finance: What is Triodos IM's approach to impact investing?
Jacco Minnaar: Triodos Bank was established in 1980 by four founders with backgrounds in commercial banking. They wanted to set up something that was exactly the same as existing financial institutions, yet very different – in that all deposits get deployed back into the market as loans to sustainable businesses.
One hundred percent of our activities use the lens of impact, risk and return. This means that, for all the investments we manage, we need to be clear about our objectives for all three of these elements. While every asset manager has systems in place to monitor and report on risk and return, we do the same on the impact side, as well.
EF: How have you seen demand for impact investments evolve in recent years?
JM: There is a wide range of investors, from those who believe that companies' only objective is to make money for investors, to those who are positive, proactive, and impact-focused. In between are investors with minor exclusions, who apply negative screens, or who practice some degree of ESG integration. Most assets are still being invested from the perspective of financial risk and return only, but we do see this slowly shifting more towards investing for positive change. Of course, though, we advocate for the market to move much, much faster.
We see investors taking steps to reduce downside risks – such as those from climate change and stranded assets. But there is also a growing number of investors who want to go further than basic risk mitigation, to invest inline with the type of world they want to live in. For these investors, the driver is changing the world for the better. That bucket is smaller, but it's where we want to play.
EF: What misconceptions about impact investing do you often see from prospective investors?
JM: The main misconception is that investors must choose between a strong financial return or a positive impact. There is a lot of research now that demonstrates this is a misconception. If you try to avoid negative impacts, and seek positive impacts, in the long run you have an investment that performs well in terms of risk and return. That's partly because you avoid downside ESG risks, but also, and maybe even more importantly, because the global sustainability challenges we face create investible opportunities. Companies that develop business models out of solving sustainability challenges – often known as impact investments – will be poised for long-term growth and strong financial performance as they start becoming more and more necessary parts of the economy.
EF: What challenges do you face in demonstrating impact?
JM: To effectively manage an impact fund, you need to define a theory of change – that is, to set your goals, activities, and measurement feedback loops. However, this process can be challenging: you know, the world is inherently complex.
We believe that this is best done using a combination of a limited set of quantitative indicators and framing them within the context of qualitative considerations and on-the-ground know-how, to really understand whether you are achieving your broader objectives. For example, we are a leader in inclusive finance – using microfinance to help individuals and small enterprises improve their economic position and quality of life. We measure the number of borrowers, women, etc. These give us an indication of impact, but they are still just a proxy for the real downstream impact that we enable through our investments.
EF: What effects on impact investing do you anticipate from growing EU regulation and guidance around sustainable finance?
JM: EU regulation is important as it has the potential to drive the market in the direction we want it to go. The EU's taxonomy will define which funds can be marketed as 'sustainable' so, if done well, it can be a great tool to help investors steer capital into sustainable outcomes (or economic activities as the EU calls it). Though, from our point of view, the biggest risk in the regulation is that it is too 'light green' and funds will be eligible for marketing as 'sustainable' even though they aren't really contributing to positive change (maybe they just aren't doing anything wrong).
We would like the EU to go further. We think non-sustainable funds should also be required to disclose their ESG performance. This will help to shed light on some of the negative impact that is financed through conventional investment funds.
EF: What are the next steps for impact investing at Triodos IM?
JM: We have a very interesting product base and we see strong demand for our funds. We are focused on growing our platform and, in deciding which funds we plan to develop, we look at three key impact areas: the energy transition; the food transition and the social inclusion transition. We see these as the challenges of our time, and our ambition is to launch even more investment solutions that can effectively play a role in tackling these challenges. We will continue our journey to deliver important positive impact, and reasonable risk and return to our investors.