Ocorian AMEA Non-Executive Director, Raju Jaddoo, explores how impact and 'Environmental-Social-Governance' investing is governing sustainability-led investments in the developing world, becoming inescapable realities for companies and funds wishing to attract investors.
Impact and ESG (Environmental – Social – Governance) investing are reshaping adviser and investor relations. They are fast becoming the business model of the future, with investors exercising a greater degree of diligence on how their investments are bringing wider benefits.
Impact investing: Aims to generate specific social or environmental effects alongside financial gain.
ESG investing: Using non-financial Environmental, Social and Governance factors to evaluate companies and countries on how far advanced they are with sustainability.
In particular, ESG is a significant growth area within the funds industry, and with increasing emphasis being placed on these indicators by investors and regulators, one that is not going to reverse.
A duty of care
When the United Nations Environment Programme commissioned Freshfields in 2005 to interpret the law with respect to investors and ESG issues, the report concluded that not only was it permissible for investment companies to integrate ESG issues into investment analysis; but it was arguably part of their fiduciary role to do so.
In 2014, the Law Commission in England & Wales confirmed that there was no bar on pension trustees and others from taking account of ESG factors when making investment decisions. It has therefore become abundantly clear that failing to consider all long-term investment value drivers, including ESG issues, is a failure of fiduciary duty.
Impact does not impair profit – it actually drives it
Since the UN PRI (Principles for Responsible Investing) were established in 2006, investment institutions from over 50 countries, holding in excess of USD 90 trillion of assets, have signed the pledge to factor social and environmental welfare into investment decisions.
As one of the advisers of a leading European pension fund recently put it: "we have zero tolerance for fund managers who are in denial of the importance of ESG factors." Furthermore, there is a growing demand on institutional investors, especially in North Western Europe, to demonstrate proof of the impact of their ESG investments.
Prominent business leaders understand that impact investing does not impair profit – it actually drives it. They have realised that social and environmental consciousness is quickly becoming an inescapable reality for businesses and that to remain competitive, they must evolve.
More than 450 investors allocated USD 1.3 trillion to impact investments worldwide in 2016, raising demand for impact investing products and services. Family offices and 'living donor' foundations have been leading the charge. For example, the Ford Foundation has allocated USD 1 billion from its endowment to impact investment; the largest commitment of its kind by a private foundation.
Large investor groups are responding to a similar shift in values among their clients and savers. This has been led by asset management firms and banks, which collectively manage USD 85 trillion of individual and smaller institutions assets. Pension funds, the second largest group of investors in the world (USD 41 trillion), are now also moving in the direction of impact investing under the pressure of pension savers.
Reconciling sustainability with the financial goals of the investor
The change in investor attitude is steering capital to a new cadre of specialist impact investment firms. From now on, the new paradigm is the triple helix of risk-return-impact. To do this does not require reducing profits in favour of impact, they can both be maximised at normal levels of risk.
Differing from ESG Investing, which focuses on reducing company and investors risks and/or assessing a company's non-financial performance, impact investing focusses on business models and the products and services these companies produce. This goes beyond ESG-related compliance and investing.
The United Nations Conference on Trade and Development (UNCTAD) identified that achieving the Sustainability Development Goals (SDGs) will take between USD5–USD7 trillion, with an investment gap of about USD2.5 trillion in developing countries. The role of the private sector is critical in attaining these goals. It can bring agility in delivery and new approaches to financing. Ultimately, impact investments can reconcile societal development objectives with that of investors' intention to include both financial return and social impact.
In a recent letter to its shareholders, the Chairman of a leading global alternative asset management firm stressed that their proactive ESG efforts seek to not only ensure that their investments align with the Firm's mission and values, but they also view ESG as a potential value driver for their portfolio companies. He added: "in effect we believe that we can both protect and enhance the value of our investments through an ongoing program of risk management and pursue impactful opportunities that meet the needs and demands of society ".
In the African region, making ESG mandatory could be a game changer for the SDGs according to the head of faculty from the Graduate School of Business in Cape Town (GSB). The proposal by the authorities in South Africa to make it compulsory for pension funds to report on how they implement ESG provisions in their approach would really set the pace for others to follow.
According to the latest African investing for impact barometer published by the Bertha Centre for Social Innovation and Entrepreneurship at the GSB, around USD 428 billion of investment assets had been allocated by July 2017 in Eastern, Western and Southern Africa, in line with strategies seeking to generate impact together with return. And this is only half of the region's total assets under management.
Funding the future
Impact investing through ESG is fast becoming a reality, especially in the developing world. It is a must for reconciling social and environmental objectives with financial return, as much as for attracting investor funds looking for sustainability.
Originally published 12 March 2019
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