Where do investors ‘really’ want to invest?

People are increasingly becoming conscious of the daily sustainable choices they face, from where they purchase their food, to how they travel. Although their everyday habits might be reflective of their personal beliefs, the question is do their sustainable principles carry over into their investment decisions.

BHP in Australia recently announced plans to demerge its oil and gas subsidiary, despite concerns from some investors that the company will be exposed to higher risk from the lower level of business diversification. However, on the other hand, BHP has also been criticised in respect to its slow pace of advancing towards net zero emissions by 2050. While the decision to demerge has been welcomed by other investors as a step forward, the mixed reception to BHP’s demerger highlights conflicts in the business community around ethical investments, and heightened community concern about corporate social responsibility towards the environment and mitigating climate change.

What is Sustainable Investing? Sustainable investing directs investment capital to companies that seek to combat climate change and environmental destruction, while promoting corporate responsibility.

Global trends

Calls for sustainable investing from individual investors have grown globally. According to the Schroders 2020 global sustainability survey of 23,000 investors across 32 locations, 25% of individual investors “always” ask about the sustainable aspects of investment products when they inquire about investment opportunities with financial advisors, and 40% “sometimes” ask about these aspects[1].

Figure1: Frequency that people ask for information on sustainable investing 

In the Schroders 2019 sustainability survey, responses varied for each generation, in response to the question, “Will you consider sustainability factors as the first or the second priority?”, 27% of Millennials (18-37), 23% of Generation X (38-50), 19% of Baby boomers (51-70) and 14% of older respondents (71+) answered “yes”[2].

Millennials and Generation X were the age groups that agreed the most with exercising social and environmental responsibility with investments. As Millennials and Generation X may be more likely to choose investment products and actively investigate different superannuation funds more than other age groups. Therefore, to attract Millennials and Generation X, investment managers and super funds need to consider increasing their offering in respect to sustainable investment products, and in particular, in impact investments

Figure 2: Ideas about sustainable investments for each generation

Where do Australians want to invest?

Similar to the case with BHP, most Australian companies and institutional investors now face social and environmental obligations demanded not just by the public, but by the government that represents them This has largely been driven by recent devastating weather events in Australia over the last few years from raging floods to devastating fires and biblical droughts across the nation, where at one point, all events taking place simultaneously across different states. The 2020 investment survey “charting consumer expectations and demand for responsible investing in Australia”, conducted by the Responsible Investment Association Australia (RIAA), found that from a group of 1135 respondents randomly selected from the general Australian population older than 18 years of age, 69% want to avoid investing in companies which negatively affect the environment. While 63% will not invest in animal testing-related companies, 61% want to avoid investing in tobacco and alcohol companies[3].

Considering that the majority of Australians wish to avoid investing in companies related to these industries, wholesale institutions, banks, and asset consultants continue to review their investment strategies. The RIAA also noted that 9 out of 10 (89%) Australians feel it’s important that their financial institutions invest responsibly and ethically across the board. Three-quarters of Australians would consider moving their banking and superannuation or other investments to other providers if they found out their current provider was investing in companies that are not aligned with their values. Additionally, 67% of Australians who do not currently invest in ethical companies, funds, or superannuation are likely to do so in the next 5 years with 32% saying they would consider doing so in the next year.

At a glance, there is an increasing impetus demanding sustainable investing on all fronts. With

80% stated that environmental issues are an important factor to consider, and 64% agreed that social problems should be considered when it comes to investing. The top themes are renewable energy (55%), sustainable water management and use (48%), healthcare and medical products (48%), healthy rivers and ocean ecosystems (45%), sustainable land and agriculture management (43%), and education (42%) respectively[4].

Considering that consumers increasingly want to determine their investment products or choose their superannuation funds, institutional investors now should take heed of these consumer preferences when deciding on investment strategies  A caveat to all those managing money on behalf of the ‘conscious generation’, ensure your sustainable products deliver measurable social and environment impact.

The Market is Adapting

In response to public demand, the proportion of sustainable investment in the financial market has been growing. In Australia, responsible investments in assets under management (AUM) have been increasing from AUD 980 billion in 2018 to AUD 1,281 billion in 2020. In terms of proportion of market AUM, 31% was in responsible investments in 2019, jumping to 40% in 2020[5].

Figure 3: Responsible Investment AUM compared to the remainder of the market in Australia 2018–2020 ($ billions) 

Companies are also facing up to the challenge and increasingly focusing. According to KPMG, about 98% of ASX100 companies now provide sustainability reports to the public. Globally, 100 companies with the greatest revenue across 52 countries (N100), and the largest 250 companies internationally (G250), have emphasised sustainable reporting[6]. These growing trajectories of sustainable investment reporting can be considered a reflection of high demand from investors, and some financial markets adapting to its needs.

Figure 4: Growth in global sustainability reporting rates since 1993: N100 and G250

Are Institutional investors adapting fast enough and what should we do? 

Financial markets are changing as a growing majority of investors now seek sustainability in their investments, and the market has been adapting to fulfill some of the needs of clients, yet are the investment options keeping up with the actual demand for them?

With 77% of people would not willing to invest against their personal beliefs, the investment industry could be doing more to satisfy investor appetite for sustainable investments by also having financial advisors pro-actively providing their clients with sustainable investment options and information as 45% of people say they only receive information on sustainable investing if they prompt their financial advisor[7].

Figure 5. “The investment industry could be doing more to satisfy investors’ appetite for sustainable investments. 

Money is fluid and humans move in herds, there is more action being taken from Gen X’s to Millennials to the recently entering Gen Z’s they have made their investment intensions clear and are demanding   that their investments are driven by intentionality towards sustainable and ethical investing practices that also have the ability to provide a good financial return. These cohorts are willing to shift their investments towards sustainable impact investing and 67% are most likely to do so in the next 5 years (RIAA)[8].

Investing in positive impact could in fact lift Australian savings rates with 53% saying that they would be motivated to invest and save more money if they knew their savings or investment made a positive difference in the world[9].

To finish, a quote from Adam Smith should be headed, as after all he did not only write Wealth of Nations for which he best known for, he also wrote a classic, ‘The Theory of Moral Sentiment’

“A nation is not made wealthy by the childish accumulation of shiny metals, but is enriched by the economic prosperity of its people”

Adam Smith

Wholesale institutional investors, banks, and asset consultants or all financial services must look to actively incorporate the impact investing needs of clients and not merely at ESG or SRI level which are risk mitigation tools or outdated aspects of positive impact measurements tools respectively. To better serve current and future generational client’s, superannuation’s and banks must seek to communicate the impact (positive/negative) to their consumers and disclose and be transparent in how the companies that are invested in aligning to their personal beliefs and the needs of the wider social and environmental demand of the country and the world. As in the end, “IMPACT” is never a local issue, it is a global one.

References:

[1] Schroders, Sustainability survey, 2020, https://www.schroders.com/en/insights/global-investor-study/2020-findings/sustainability/

[2] Schroders, Sustainability survey, 2019, https://www.schroders.com/en/au/advisers/insights/global-investor-study/2019-findings/sustainability/

[3] Responsible Investment Association Australia, Charting consumer expectations and demand for responsible investing in Australia, 2020, https://responsibleinvestment.org/wp-content/uploads/2020/03/From-Values-to-Riches-2020-full-report.pdf

[4] Responsible Investment Association Australia, Charting consumer expectations and demand for responsible investing in Australia, 2020, https://responsibleinvestment.org/wp-content/uploads/2020/03/From-Values-to-Riches-2020-full-report.pdf

[5] Responsible Investment Benchmark Report Australia, Responsible Investment Association Australia, 2021,

https://responsibleinvestment.org/resources/benchmark-report/

[6] KPMG, Survey of Sustainability Reporting, 2020, https://home.kpmg/xx/en/home/insights/2020/11/the-time-has-come-survey-of-sustainability-reporting.html

[7] BlackRock, Global Sustainable Investing Survey, 2020,

https://www.blackrock.com/corporate/about-us/blackrock-sustainability-survey

[1] Schroders, Sustainability survey, 2020, https://www.schroders.com/en/insights/global-investor-study/2020-findings/sustainability/

[2] Schroders, Sustainability survey, 2019, https://www.schroders.com/en/au/advisers/insights/global-investor-study/2019-findings/sustainability/

[3] Responsible Investment Association Australia, Charting consumer expectations and demand for responsible investing in Australia, 2020, https://responsibleinvestment.org/wp-content/uploads/2020/03/From-Values-to-Riches-2020-full-report.pdf

[4] Responsible Investment Association Australia, “Charting consumer expectations and demand for responsible investing in Australia”, 2020, https://responsibleinvestment.org/wp-content/uploads/2020/03/From-Values-to-Riches-2020-full-report.pdf

[5] Responsible Investment Benchmark Report Australia, Responsible Investment Association Australia, 2021, https://responsibleinvestment.org/resources/benchmark-report/

[6] KPMG, Survey of Sustainability Reporting, 2020, https://home.kpmg/xx/en/home/insights/2020/11/the-time-has-come-survey-of-sustainability-reporting.html

[7] Schroders, Sustainability survey, 2020, https://www.schroders.com/en/insights/global-investor-study/2020-findings/sustainability/

[8] https://responsibleinvestment.org/wp-content/uploads/2020/03/From-Values-to-Riches-2020-full-report.pdf

[9] Same as above[/vc_column_text][/vc_column][/vc_row]

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Don’t be fooled:

There is a difference between Impact Investing and ESG

The Definitions and Differences

Many people and companies believe that if one is to be conscious of the environmental and social implications of their investments or screen out any negative effects and put in place some level of basic governance to their capital investments that they are Impact Investors. This customary view does not level up to what “Impact Investing” really is.

The GIIN (Global impact Investing Network) defines impact investing as “investments with the intention to generate positive, measurable social and environmental impacts alongside a financial return”[1]. The key factor in this definition is the INTENTION of the Investor or Enterprise that wishes to part with their capital, as they intend to advance a positive ethical outcome alongside a favourable financial return.

In the case of ESG, Investopedia defines this area as an “environmental, social and governance practice of an investment, that may have material impact on the performance of that venture”[2]. Although this shows a social and environmental conscience, the main objective of ESG valuation pertains to the investment’s financial performance. Therefore, this adherence to ESG is mostly a risk mitigating factor for practical purposes beyond an ethical concern, since many organisations wish to follow ESG criteria for brand promotion, to avoid negative PR and/or to signal their companies that they could be at risk similar to the VW emission scandal or the 2010 BP oil spill debacle that plummeted the company’s stock prices and resulted in billion-dollar payouts and negative public relations[3]. In short ESG is driven by a commercial opportunity over an intentional positive outcome to society and the environment.

Another factor to note is that ‘Socially Responsible Investing’ (SRI), which is similar to ESG, yet goes one step further by actively eliminating or selecting investments that follow certain ethical guidelines. For example, SRI’s will seek to avoid investing in companies that deal with alcohol, tobacco, firearms production, human rights and labour violations and environmental damages etc[4]. SRI still values profit but it seeks to balance its yield against its core principles, i.e., to generate return without violating one’s social conscience[5].

Why Impact Investing?

Impact investing allows an investor, whether it be a Fund Manager, an Individual Investor, a Pension Fund, Religious Institution, an Insurance Company, a DFI or Bank to provide capital to address the world’s most pressing challenges in the world. Whether it be equality, sustainable agriculture, renewable energy, conservation, micro finance, climate impacts and/or accessibility to basic services such as housing, healthcare, education and food for all people.

Impact investing is not a welfare scheme or charity. Many impact enterprises and investors seek to intentionally invest in projects or research that will provide a future positive social and environmental impact (more so under 1 or more of the 17 stated UNSDG’s)[6], they also expect to generate a financial return on capital at market value, with a few exceptions at concessionary return in the short term.

We as individuals and team members in organisations each have the ability to positively change the trajectory our forefathers deteriorated over decades of industrialisation and over consumption. The opportunity to be a part of the future solution, one that is no longer decades away, but a present circumstance and action that falls upon our shoulders to push forward so our children and the future generations can enjoy the pleasures of natural beauty, humanity and kindness to all things around us that we were lucky to experience and have a glimpse of when we were young.

Comparison of ESG versus Impact Investing in a typical investment process

Gaining greater clarity in the difference of Impact Investing over ESG can be determined by the actions taken at each stage of a typical investment process. The 4 key stages are: Originate, Deployment of capital, Managing the investment project and Exit[7].

Measuring Impact

In the past many of the concerns in ‘Impact Investing’ has been due to the lack of standardised measurements. Yet with improved and more robust screening tools being developed over the past couple of years such as IRIS+ (under GIIN), IFC’s Environment and Performance Standards, Operating Principles for Impact Management (with good guidance on responsible exits), UN Principles of Responsible Investments (PRI), Sustainable Accounting Standard Board, Alinus SPI4 etc. greater ability and capacity is being presented frequently to assist in validating the returns and positive impact that these investments are bringing not only to the investor but to the overall community and planet.

Although many questions may exist in these screening processes and they may vary according to the asset class or industry the measurement pertains too, one of the key questions asked by many is how an enterprise/investor can monetise impact?

Y Analytics provides a simplified measure to assess impact and help organisations define impact by incorporating 4 metrics[8].

Although no unified best practice has emerged for impact investing as yet, the pace at which impact investing is gaining traction gives hope that more refined, streamlined methodologies will emerge in the near future. Until that time, multiple frameworks are used in combination (on average a combination of three tools, frameworks, standards and rating systems[9]), along with some customised elements to fit an investor’s strategy[10].

To understand these frameworks and their roles in impact management, Franklin Templeton and Tideline classified the frameworks into five broad categories.

Ultimately each investor must decide on a combination and level of customisation required for proper impact management system. As this is an emerging area, a dynamic process is required to continuously improve and capture all impact variables.

That is why here at #WoNA, we make it our mission to assist each investor find the right IMPACT Fund Manager that sets a combination of realistic, evidence-based targets for what our investments can achieve, that value the importance of monitoring and evaluating actual achievements using appropriate data to ascertain whether the investment made provides material positive changes to society and the environment and avoids harm along the way.

Therefor in summary, despite the commonalities in ESG and Impact Investing and the fact that many advisors lump these two areas together into an umbrella term such as ‘sustainable investments’, there are 3 important distinctions that can help investors ensure their investment are impact investments. They are,

1. Select assets with the INTENT of impact,
2. Contribution to the impact of the INVESTEE FIRM,
3. OBJECTIVE MEASUREMENT of the impact investment.

[1] GIIN – What you need to know about Impact Investing – (https://thegiin.org/impact-investing/need-to-know/) accessed on 9^th April 2021

[2] Investopedia – ESG, SRI and Impact Investing: What’s the Difference – (https://www.investopedia.com/financial-advisor/esg-sri-impact-investing-explaining-difference-clients/) accessed 7^th April 2021

[3] Investopedia – ESG Criteria – (https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp) accessed 11^th April 2021

[4] [Same as ref. 2 above]

[5] SRI – (https://www.investopedia.com/financial-advisor/esg-sri-impact-investing-explaining-difference-clients/) accessed on 7^th April 2021

[6] UN Sustainable Development Goals – (https://sdgs.un.org/goals) accessed 12^th April 2021

[7] IFC – The difference between ESG and Impact Investing and why it matters (https://ifc-org.medium.com/the-difference-between-esg-and-impact-investing-and-why-it-matters-8bf459b3ccb6)

[8] Evidence based Impact, Y analytics (https://yanalytics.org/research-insights/evidence-based-impact ) assessed 15th April 2021

[9] GIIN: The state of impact Measurement and Management Practice, December 2017 – accessed 15^th April 2021

[10] Franklin Templeton: Five Building Blocks for Impact Management – (https://www.ftinstitutionalemea.com/content-common/topic-paper/en_GB/five-building-blocks-for-impact-management-tideline-0319.pdf) assessed 12^th April 2021

Image Credits: Markus Spiske from Pexel

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