CHECKLIST Impact investment Funds

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.