Whether motivated by internal conviction or external pressure, the investing community is exhibiting growing interest in sustainable investing. This area of investment has developed several different branches, including screening approaches aimed at selecting only investments that come out well under environmental, social and corporate governance criteria. However, what specifically interests many asset managers is impact investment that proactively backs projects with the dual objectives of achieving a social purpose and producing an acceptable investment return.
But, so far, there has been much talk and not too much action, as is revealed by the statistics. The recent Global Sustainable Investment Review points to just $170bn in impact investment projects and themed investments, a drop in the ocean relative to the total global assets in fund management’s hands of many tens of trillions of dollars.
To be fair, it’s early days, given that the idea of impact investing has not been around for very long. There are specific problems as well that are currently deterring a sizeable commitment by investors.
The definition of what exactly impact investment is deters quite a few. This may not be resolvable to any accurate degree, as there will always be grey areas. Even organisations at the forefront of the game are not attempting to impose a single definition. It is more than possible that what goes as ‘impact investment’ may not really be so in some cases. Conversely, there could be very many investments around the world that qualify for inclusion, but go unsung and unrecognised. The best that can be aimed for, perhaps, is establishing guidelines, but in the end every investor or investing institution will have to follow their own conscience and stick to criteria which they are happy with.
In addition to identifying guidelines and codes, criteria for screening and measuring the impact are work in progress. Fund managers will justifiably hold back until these are in place, as they need to be accountable to their underlying clients. Availability of suitable investments that fulfil the criteria, however they are chosen, seems to be yet another barrier. In the Americas, for instance, this seems to be much less of a problem than in Europe.
The question of investment performance is also relevant. It is all well and good wanting to engage in social projects, but investment returns are a core objective of institutions trusted with other people’s money. In the case of mutual funds and defined-contribution pension plans, for instance, there is a fiduciary duty to optimise returns to the end-clients, who can individually decide whether or not to back social projects. But these clients would have cause to be aggrieved should their fund manager hare off in the direction of social activities reducing their returns in the process. The rich, of course, are free to do as they wish and, laudably, the next generation of the wealthy is very supportive of the social investing idea.
Social investment bonds are therefore destined never to hit the big time, given the huge sacrifice of risk-adjusted returns implicit in their structure. Green bonds, on the other hand, are exactly what the doctor ordered in this context, as they involve no sacrifice of market returns, at least in theory.
There is a long way to go before the investing community and its underlying savers will be confident enough to back impact investment in all its different guises to any substantial degree. Given the pressing nature of global problems, perhaps there is a strong case for governments to provide a fillip through measures such as tax relief and other incentives to savers. This might be a cheap way of achieving vital planet-wide objectives.
This article is taken from the Investment Management Review, our in-depth review of Investment news and analysis, soon to be available to all members of the Institute.