The
Impact Transition,
a
short history of impact investment products
As
I am putting together model impact investment portfolios for each of
the United Nations Global Goals, different kinds of (impact)
investment product innovation keep springing to mind. The
developments in the impact investment products offering is one way to
develop basic selection criteria. In many ways they reflect the
evolution of impact investing under it's
previous labels such as: ethical, socially responsible, sustainable,
Eco, Environment, ESG...
My
concept selection list© to
review (new) products is this, is
it?
IMPACT INVESTING STEP
1
Exclusion
or divesting = avoiding negative impact usually referred to as a
few centuries old Christian ethical exclusion, thus in the private
equity sphere going back thousands of years before 0 AD.
Accelerated
by the growing controversies
(e.g. FAGTAF) transparency.
Whether it is exclusion based on principles
or the result of ESG/Controversy
risk aversion, the
results is the same: divestment.
A
recent Morningstar
analyses of investment
streams show acceleration towards higher
sustainability levels (it's globes),
but deeper analyses shows controversies aversion
is the lead motivator.
http://www.morningstar.be/be/news/170164/zoveel-invloed-heeft-duurzaamheid-op-fondsstromen.aspx DUTCH
Controversies
are Governance related issues with strong effect on stock
exchange value posing short term risks. Think scandals, boycott,
lawsuits & fines. (Key questions: are we compliant & how
much, what kind of regulation is coming up and how will it affect
us... do we choose the right path or the wrong way...)
Impact Investing STEP
2
Of
course investors controversy aversion is nothing else than ESG
risk integration. Looking
into: 'is a company lowering negative impact, is decrease
keeping pace with the companies organic growth pattern, is the
company transitioning towards positive impact, is it keeping up with
the impact transition in its markets/sector?
Impact Investing STEP
3
ESG
risk integration research
naturally leads to ratings,
benchmarks & indices
with at the bottom ESG laggards
'worst in class',
& at the top ESG
leaders
i.e.
opportunities, hence the
introduction of ESG leaders
& best in class index
funds or ETP's.
It
can actually be up to a 1000+ companies and 25% of the sustainable
universe according to ESG research experts. With EU regulation on CSR
transparency coming into effect from 2018 onwards, we will see this
universe expand. CSRHub offers Community Employee Environment &
Governance ratings on multiple sources of approximatly 20.000
companies including sector average, controversies & positive
action.
AGENDASETTING
& LOBBY
Hidden
from impact investment product innovation 'dialogue or
engagement' lobbying & shareholder voting have clearly played
a role. They catalysed and accelerated companies transition from
worst in class to either higher ambitions and better Key
Performance Indicators or exclusion i.e. no new investments or
divestment. Read Dutch institutional investors annual sustainability
reports for examples and exclusion lists.
Thematic
& sector focused projects are also part of this universe e.g.
Plastic & Packaging, Tax (transparency &
evasion, the Netherlands is a poor performer), Living Wage
(for multinationals) & contribution to e.g. the Paris Climate
Agreement or Sustainable Development Goals. These
themes & topics are kicked off at conferences with appeals to
politicians, commitment statements, maybe a reputable divestor,
delivery of tool kits, introduction annual questionnaires for ESG
benchmarks or pilot research projects and at shareholders meetings
asking questions or organizing voting viewpoints & support. Which
leads back to STEP 1,2 & 3....
POINTS
of CRITIQUE / FRUSTRATION
-1- My
main critique & frustration is that in spite of big steps in
transparency & benchmarking ethical, sustainable & impact
investment products have never focused on do good impact sectors
such as basic needs & impact tech. They
usually exclude some & increasingly more sectors (do
a check!), but
in general love largecaps
in all sectors
and embrace companies
with clearly net negative impact activities.
If
the objective was proving sustainable investing is
profitable investing, they have
done well. Best-in-class
ESG
companies proved to have done better so that strategy using
operations
before total impact
focus has paid
off. But we missing out on the potential of mid
& small cap basic
needs & impact tech companies. It could have been better due to
flexibility & niche
marketing & cheap
access to capital (cause
for best in class
sustainable corps success,
Eccles et al). Basically
we are looking back at a top down, trickle down strategy
accelerating sustainable
business operations.
Thematic
funds show the same dark side,
the portfolio holdings may have been innovative leaders
in e.g. their green or cleantech fields,
they are often the main suppliers of all kinds of harmful industries
with negative impact.
Thinking
back and seeing the ESG risk controversies trend isn't it time to
exclude negative sectors & companies?
-2-
A second point of critique & frustration is that most impact
investment products focus on doing less harm
by using less resources such as water, non renewable energy emitting
low(er) carbon, waste & reduction recycling etc.
When
focusing on largecaps
obviously this can mean large quantitative less negative impact &
setting an example of cost reduction for a range of companies &
sectors. Still you're Accelerating
doing less harm impact.
-3-
Third point of critique is the preference for planet or
environmental impact, thus
missing out on direct people impact, which could have been avoided
had product innovation focused on basic
needs & impact tech, doing good
etc.
-4-
Last but not least, I've seen many impact investment products being
launched, but not being offered to retail investors
that is available & affordable as
in low costs, no thresholds, listing in safe currencies at accessible
stock exchanges etc. Again a traditional top down, trickle
down strategy testing &
skimming the market.
What
about the early bird gets the worm
&
the second mouse gets the
cheese?
UNDERSTANDING
I
am sure all of these choices by marketeers were the result of
retrospective research & analyses of financial
indicators and that they have
been incremental in growing the ESG investment market and the
acceleration we have been seeing in the last decade.
The
question from the impact investors perspective
is whether a more impact
oriented approach or at least balancing impact & return would
have delivered worse, equal or better results....
Eg Skagen found that since the financial crisis ESG
improvers (ESG Momentum)
showed better results for investors than ESG leaders (+ more impact)
Why
keep looking in the rear view mirror
when moving forward in a rapidly
changing landscape.......
I
think the problem is, as it is with everything, you really have to
know a lot about the market, do a 360 umfeld
analyses, take a long term perspective (megatrends)
weigh
in
utopian & dystopian scenario's,
define & collect all relevant
data etc.
to ask the right
question
and research critical causes, consequences and possible scenarios.
Then
please
take
one
logical & rational step further for
impacts sake.
THE
CHANGING
ROLE OF CHARITIES
Coming
from a charity fundraiser background as an early impact investing
investigator I'd find charities developing partnerships with
financials
& investors to
jointly invest.
Usually thematic
innovative private equity
funds to accelerate both
capital flow
e.g micro finance or
green tech
innovation.
Exclusive by nature.
In
the Netherlands only two of these funds, both micro finance, are now
offered as low threshold retail impact investments: one by
listing in NYSE A'dam
and the other by online
sign up
with
pre-authorized
debit (PAD) or pre-authorized payment (PAP).
(Listing in The Netherlands is
inclusive
since anyone can trade on the stock market in the Netherlands at very
low costs with price breaker brokers.)
I have
seen US retail investment funds based on CSR
focusing on
charitable donations or activities.
(But) The Heron Foundation (270MiO AuM &
100% impact) analyses of
it's portfolio showed
that that was actually a counter
indicator of the total impact of companies.
An Accessible &
Affordable robo advisor
investment product in this category discontinued & the team
'relaunched'
thematic portfolio's in 5
do good impact themes
people OR planet. The robo
platform behind the fund
offers dozens of thematic portfolio's -positive & net negative
impact!- and as-you-wish
portfolio's from 10US$ (US only).
More
recently I have seen a sustainable investment product donating
part of its fees to a charity liquidated after 5 years & I have
seen ETPs launched with the support both by expert input &
investment capital of charities. In the Netherlands to have both
their assets managed according to a tailor made mandate: the Think
Sustainable World ETF combining broad exclusion themes with high ESG
performance and to catalyse capital towards their mission....
In the
US ImpactShares kickstarted by the Rockefeller Foundation launched
ETP's with the NAACP (minority entrepreneurs) YWCA (Gender Equality)
and upcoming with the UN Capital Development Fund for the 47 Least
Developed Countries.
ENVIRONMENTAL
FUNDS
I've
seen index funds first based on benchmarks (reduction)
ambitions, transparency, progress and increased
ambition eg Low carbon offering an attractive evolution
working towards decoupling: companies growth from
growing resource consumption & emissions / resource &
emission efficiency and/or higher quality standards, developing
neutral or positive alternatives. Carbon tracking, footstep and
benchmarks are technically & probably financially supported by
environmental NGOs'& philanthropic organizations / individuals.
SOCIAL
FUNDS
I've
seen an index fund based on Childrens Impact but all paper policies in
sectors & companies without child labour issues and probably some
charitable & educational work & clearly. Not focused on
children products & services (even detrimental to their future).
But I have also seen investment products around SDG5 Gender
Equality move from minimal ESG data such as the number &
percentage of women at executive level & the board towards multi
level criteria. Think policies for retention, remuneration
(the gender pay gap), respect (for work/life
balance) & realism in
the satisfaction i.e. the litmus test: actually delivering on
promises on workplace adaptation, childcare facilities & positive
best practice.
Maybe
the worlds most successful gender equality index Equileap
launched in 2017 is developed by gender experts and based on
19 criteria*. It is now
the index basis for around
700 Million US$ in investment products.
So progress, but I still think inclusive impact investment
products could improve lots too. My
concept check list to review (new) impact investment funds is:
·
Broad or Basic: does it
focus on basic needs & sectors & the importance of impact
dedicated accelerators?
·
Inclusive
&
Competitive: is
it accessible & affordable for retail investors, are the costs &
USPs competitive compared
to (existing) offers. Or is a launcher just trying to keep up with
the competition assuming that 'it's' existing clients will prefer a
home made (probably white label product) and that they might attract
new customers with 'new' products?
·
Paper or Practice: based on vision strategy paragraphs or
clear action plans & programs?
·
Progress or Promise: based on Key Performance Indicators
relevant to the core business or impact washing?
·
Evolving or Inert: higher ambition or a
copy cat ? with few impact perks, broader exclusion or thematic
focus
·
Impact
dedicated Issuer ?
*
Equileaps 19 Global Gender Equality criteria Gender
balance in leadership and the workforce › Non-executive board ›
Executives › Senior management › Workforce › Promotion and
career development opportunities • Equal compensation & work
life balance › Fair remuneration › Equal pay › Parental leave ›
Flexible work Options • Policies promoting gender equality ›
Training and career development › Recruitment strategy › Freedom
from violence, abuse, and sexual harassment › Safety at work ›
Human rights › Social supply chain › Supplier diversity ›
Employee protection • Commitment, transparency, and accountability
› Commitment to Women’s Empowerment › Gender Audit
About
the author: I
am a doctorandus (MA) in Political
History:
strategies & trends in development cooperation (RUUtrecht 1983 &
RUGroningen 1985-1988), Master
of Arts,
(Erasmus) Institute
of Social Studies
(The Hague) in Politics
of Alternative Development Strategies (1989-1990).
This Thoughtpiece©
does not contain investment advice.
