Unlike more traditional ESG approaches, sustainable investing does not just rely on shareholder influence to do good while producing competitive returns. It also achieves positive outcomes via investment selection, portfolio management, and where needed, contractual arrangements.
With impact investing, meanwhile, doing good becomes the goal in itself and there is a clear link between invested money and measurable outcomes. As with sustainable investing, this relationship is positive, but here it is more fluid. Impact investing targets market returns. So-called impact-first investing requires a trade-off.
We believe sustainable and impact investing produces better results versus mainstream ESG approaches. Specifically, there is a bigger positive impact, results are predefined, transparent and quantifiable, risk adjusted returns are improved, as is diversification.
Our favoured approach is to create a platform to mobilise public and private capital. This could include a range of funds that focus on solving different global issues, each with its own risk, return and correlation profile.
Strategies include a so-called double bottom line – doing good and making money. For example, this could be achieved by investing in projects that increase food production or generate renewable energy cashflows. Private equity and private debt strategies seem to work the best. These can be in-house funds, often run by asset management firms, or public-private partnership vehicles that buy in the management expertise they need.
The matching up of private and public money can be vital to creating investments that have the proper returns and risk mitigation in addition to the measurable impacts. Investors approve because the presence of a large named organisation can legitimise an investment. Government or quasi-public institutions like these structures because their money has been leveraged into worthwhile projects.
Finding the right investors and partners while structuring a solution is hard. But the real valued added a manager brings is to make a suitable return at the same time as meeting a client’s desire to do good. For example, what is the best way to make money from toxin management? Is investing in fuel cells or hydro storage more profitable?
Therefore sustainable portfolio management teams need to be large and experienced enough to have a deep understanding of a wide range of disparate sectors and industries, both in the private and public domains. Contacts are also crucial as politicians and bureaucrats often have a disproportionately big influence on outcomes.
The most common way for investors to gain exposure to sustainability and impact strategies is via private funds. These can be equity or debt-based, and come in multiple forms and with different risk levels. The majority of impact funds are private equity funds, but the largest funds with the most liquidity are private debt funds.
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