03 Aug Impact Investing- An Imperative for Today and Tomorrow
Responsible allocation of capital is high on many agendas. Environmental, social, and governance (ESG) factors are becoming high priorities for countries, institutional investors, family offices and individual investors. The designation, however, encompasses several objectives, each with very different strategies and results. Many asset managers claim to take ESG criteria into account alongside traditional parameters in the investment process. However, this type of analysis may not be adequate given the nature of contemporary societal issues.
The ESG criteria help determine whether a company is working towards reducing harmful practices, but do not indicate whether an organization has a positive effect on society. Thus, a company can achieve a high ESG score and yet fail in contributing positively to sustainable development. As Diane Bérard points out in her article on ESG analysis, this is the case with Unilever, one of the safest stocks in the Dow Jones Sustainability Index (DJSI).
A bolder approach to sustainable investment is to find companies that build a competitive advantage by introducing a specific sustainability goals into the core of the investment process. Unlike socially responsible investing and ESG investing, which mainly consist of excluding undesirable investments, impact investing aims to actively generate a measurable positive impact.
Taking this approach, investors seek not only financial return on their investment, they become agents of positive change.
Impact investing is a way of accounting for both ESG risk reduction efforts (through good practices) and a company’s positive contribution to sustainable development (SD). Broadly, sustainable development is encapsulated in the United Nations 17 Sustainable Development Goals (SDGs). A company whose products and services contribute to the achievement of one or more of the SDGs accumulates points towards their impact score.
The sustainable development goals developed by the United Nations provide us with a blueprint for achieving a better and more sustainable future for all. They address many of the global challenges we face, particularly those related to poverty, inequality, climate, environmental damage, prosperity, peace, and justice. As the goals are interrelated, it is important to address each, and to endeavour to reach each target to try to ensure that no one is left behind.
The UN estimates that annual investments of USD 5–7 billion per sector are needed in order to achieve the MDGs worldwide. However, in developing countries alone, there is still a shortfall of some USD 2.5 billion in investments per year. This gap can only be closed if private capital is brought in. Just 2.7% of the world’s assets under management to date would be enough to significantly alleviate poverty and inequality.
According to the 2019 Global Family Office report by UBS and Campden Research more than a quarter of family foundations are already committed to impact investing in one form or another. Family offices have been focusing their efforts on climate change along with health and clean water. Families and their family offices are key investors because they have the funds and, above all, the flexibility to make innovative investment decisions.
Jennifer Wu, “L’impact des critères ESG sur les portefeuilles “, allnews, October 30, 2019
Diane Bérard, “Investissement: l’analyse ESG est-elle dépassée?”, Les Affaires, July 31, 2019
Peter A. Fanconi, “Un monde meilleur grâce à l’impact investing“, AGEFI, May 27, 2019
Beth Pinsker, “Family Offices Lead the Way on Impact Investing”, Reuter.com, February 10, 2020