Impact investment has become a very trendy concept. But I think it’s much more than a temporary fad. It’s an investment philosophy that can be applied to the mainstream.
Investing often has a material, but underestimated, impact. For example, when Greece was under extreme pressure a few years ago, choosing whether to take part in their government bond auctions impacted their borrowing cost, feeding directly into the domestic banking system and ultimately the stability of the government. While this is an extreme scenario, allocating capital always has some impact on the entity you are funding.
However, the term 'impact investing' is more often associated with a narrow type of investment, frequently private in nature, with specific and targeted objectives, such as funding a wind farm or new affordable housing.
The next big step is to shift the debate from being around risk mitigation to being one around opportunity
Such impact purists find it hard to reconcile a couple of key principles. How can you invest in public securities, as this is not providing new capital to parts of the economy that desperately need it? How can you generate market beating returns while targeting an impact objective like alleviating poverty?
On the first principle, impact purists are concerned that institutional managers will simply re-brand what they do and dilute the field. I understand their concern but if we’re really going to move the dial in the global allocation of capital to change the future world, it cannot be a niche area. It really has to change the behaviour of the largest global investors and ultimately the policies of the world’s largest corporates. There’s no doubt that investing $50 million in a green energy fund has a very direct impact. I would also argue that investing $5 billion in an index-based methodology incorporating a climate rules-based approach that puts pressure on the world’s largest emitters has a different but equally important impact. For impact to really succeed, you need both approaches.
This leads on to the second principle around generating returns. We’ve discussed this at length amongst ourselves and with many other investors, incorporating broader definitions of ESG investment. Sceptics demand to see the data. They want to know if the spectacular failure of German utilities to embrace the transition to renewable energy over the past decade was a failure of E or G, or just simply poor strategic thinking? For us, it’s a moot point. It cost badly positioned investors billions of euros and could have been avoided with a better investment philosophy.
My feeling is the next big step is to shift the debate from being around risk mitigation to being one around opportunity. Let’s continue with the example around the transition to renewable energy. There will be losers, of course, but there are also going to be big winners who can adapt and deploy new clean energy technology. This kills the meaningless argument of having to sacrifice returns.
We believe that companies which embrace long-term sustainable themes of global demographics, the enormous power of robotics, transformational AI, electric vehicles and the third energy revolution will be the winners of tomorrow. Consumers want to own goods and services produced by companies that embrace diversity and take their impact on the environment seriously.
Sure, we should avoid stranded assets and we should understand the devastating effect climate change can have on the long-term viability of a sector or a company. But integrating ESG and impact into your investment process is more than that. We want to engage with companies that haven’t yet adapted to the global long-term trends. By doing this, we will help accelerate change.
For me, impact and investing are connected at the hip. It’s about understanding the DNA of a company.
The rise of populism is driving a new political paradigm. But what does this mean for markets? Could more volatility and higher risk premia across asset classes be round the corner?