mallowstreet Insights: Is impact investing the ‘ugly duckling’ of ESG? 

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As I combed through the 101 articles that I read in preparation for one of our many upcoming surveys, I found a study by Aon I had bookmarked with a note: “A significant increase in impact investing.” Returning to it, I was disappointed to see that the multi-trillion figure quoted by Aon actually refers to responsible investing instead. 
 
I wanted to find out how far off the figure was, so I went to the Global Impact Investing Network (GIIN). It estimates the global impact investing industry only at about $500bn in 2019. Just 2% of investors participating in GIIN’s impact investing surveys are pension funds. 
 
Is impact investing the ‘ugly duckling’ of ESG for UK pension funds? What should impact asset managers know before they target this institutional market? mallowstreet Insights will look to answer these questions with an upcoming survey, but as usual, we take stock of recent developments first. 
 

Impact investing is perceived to clash with fiduciary duties 

 
The mallowstreet ESG Report shows that four in five pension schemes think ESG impact should be a legal duty, with a majority of them viewing it as a fiduciary duty. The mallowstreet Trustee Report further shows that while a majority of trustees think of ESG as just a consideration, a fair number see it as investing for positive impact. 
 
Yet, according to the ESG report, there is limited interest in impact funds, green bonds, thematic funds and even passive or smart beta ESG products. In fact, some pension schemes believe impact investing to be at odds with their fiduciary duties, no matter the number of studies showing that members want their pensions invested in a way than benefits society and the environment. 
 
 
 
Norges Bank Investment Management (NBIM)’s recent statements speak to this perceived conflict between fiduciary duty and investing for impact. A signatory to the UN Principles of Responsible Investing (PRI), the firm has concerns about UN PRI’s focus on “real world impact” and “outcome-based reporting” against the UN Sustainable Development Goals (SDGs), stating that these requirements could be interpreted as an expectation that financial investors should have dual or multiple objectives. 
 

Pension schemes may confuse impact investing with the impact of their investments 

 
According to the Investment Association (IA)’s Responsible Investing Framework, impact investments are “investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return.” They can include bonds, stocks or private investments but need a commitment to measure and report on positive impact against a framework like the UN SDGs or similar. 
 
But any investment has an impact, positive or negative. Take Impact-Cubed's new tool for assessing portfolio impact - it measures the impact of any portfolio by referring to the new EU taxonomy, which was developed to designate which economic activities are consistent with the EU’s commitment to reach net-zero carbon emissions by 2050. 
 
The IA is also planning to set up a working group on sustainability reporting, which should demonstrate to investors the “adverse impacts” stemming from investment decisions and advice. 
 

Data can help investors measure the impact of their portfolio 

 
The mallowstreet ESG Report shows that data is key to measuring impact and understanding it, but what cannot be measured cannot be reported or understood. Only about a third of pension schemes measure investment impact, while two-thirds report difficulties in assessing it. 
 
A number of initiatives are under way to make impact measurement easier. Refinitiv have launched a data standardisation effort to identify and consolidate the data required to finance the UN SDGs, which have become the new benchmark for those investing for positive impact. 
 
But looking beyond impact investing, MSCI have developed a value-at-risk (VaR) measure for climate risk, which is arguably the first ever “forward looking and return-based valuation assessment to measure the potential impact of climate change on company valuations”. VaR measures typically show the value that an investment stands to lose in a certain scenario. 
 
However, the 2° Investing Initiative is calling on financial institutions to collect evidence on impact as they develop measures for it. In particular, the initiative warns against “setting targets labelled as science-based” without confirming actual “GHG emission reductions in the real world”. 
 
Is measuring impact only for impact investors? 
 
Is impact investing the most unloved ESG asset class, and why? 
 
I welcome your comments within our online community or on albena.georgieva@mallowstreet.com