Zeroing in on the Enhanced Profits From Impact Investing
Investment managers, families, or individuals who wish to see their money return more than a profit, are categorically referred to as impact investors. To validate their investment returns, impact investors need a definitive way to measure corporate impact.
Corporations who wish to lower corporate risk, be resilient in the face of climate and geopolitical changes, and enhance their stock price are thought to be socially aware companies with a tuned-in management or board. To represent this awareness, corporations need a sustainability strategy that is material to the company’s charter.
If we could turn the dials on these two directives to the point that gets both of these end results, we would unquestionably zero in on a course where a positive impact on planetary and social commissions are lined up with investing profits.
Fortunately, these two charges are intertwined. Stockholders who are impact investors want a measurable impact from their investment dollars. This leads corporations to look for ways to integrate sustainability into their corporate strategy. Corporations want to be socially responsible while achieving a profit using a standardized way to report on and demonstrate their efforts. This corporate reporting activity leads to a narrative that attracts more impact investors.
Leading the Way: Corporations
To report their progress, corporations follow frameworks built by non-governmental organizations like the Global Reporting Initiative, the Sustainable Accounting Standards Board, or the Task Force on Climate-related Financial Disclosures (TCFD) to provide insights into their sustainability strategy and resiliency to climate risk. The data from these frameworks filter down to ESG rating schemes created by private organizations and licensed by investors and investment managers to assess stock buy and sell decisions.
The investment managers are assessing both corporate profit potential and risk, the latter the more common application of ESG criteria. (However, this is changing as more data sets become available incorporating not only company reported information but also information farmed and scraped from other sources available on the internet.)
Leading the Way: Investors
Twenty-five years ago, investors were somewhat philanthropic with their portfolios, accepting softer returns in exchange for an investment that reflected their corporate values. Defense, gambling, tobacco, and fossil fuel stock price run-ups passed them by without regret.
Today, investment decisions with ESG data mitigate portfolio risk and enhance returns. The assets moving into impact products are leading corporations to improve their corporate strategies in this regard and they are now measured annually by several global non-governmental organizations.
The Principles for Responsible Investment launched by the United Nations in 2006 and the Forum for Sustainable and Responsible Investment, a member-based organization which organized in 2010, have totaled and reported on sustainable investment assets annually (US SIF provides a U.S. perspective while the PRI and Global Sustainable Investment Alliance provide global summations.) The verdict: assets invested for impact or responsibly are accelerating rapidly.
Adjusting the Dials Synchronously
So how do corporations and impact investors align their courses for more profits and sustainability? The answer has several chapters. Here are a few.
Climate Risk must be viewed from both the CORPORATE and the INVESTOR perspectives. Corporations are becoming acutely aware of the business implications of climate issues. Both natural disasters and resource scarcity are significant, real possible scenarios. (Geopolitical and reputational risk are also significant, with the former in some respects, related to climate.) Corporations are posturing for climate risks through operational strategies and by using frameworks such as TCFD.
Investors wish to evaluate a corporation's positioning in relationship to climate risk and resiliency. So, with access to more information (i.e., data) each year, investment managers have the tools to assess a corporation's vulnerability in the regard.
Recently, another mandate has created a movement. While not a tool nor designed as a reporting framework, the United Nations Sustainable Development Goals (SDGs) are becoming a proxy framework which both investors and corporations can relate to for addressing global risk and all issues in sustainability. Investment managers are using novel strategies to connect investment finance to the United Nations’ SDGs and corporations are responding to this with SDG alignment in their corporate sustainability reports.
The Board, Management and ESG Data, Ratings, and Indexes
ESG may not be an urgent important matter to directors but it is of interest to corporate executives. Good ESG ratings have been connected to lower costs of capital. All three credit ratings agencies have revamped to measure and report on ESG as an integral part of their credit ratings analysis, even going so far as providing their own ESG score.
ESG data has matured, which means that we have more historical data, more consistent data, and more varieties of data, including relational data not reported by the company. With this evolution, analysts, mathematicians, and programmers are finding ways to attribute corporate performance to ESG factors.
Impact or ESG Investing Products
The growth in ESG financial products is impressive—and it is growing. ETFs, Mutual Funds, SMAs, structured products, insurance products, and index benchmarks and leading both corporations and investors to the same course. The addition of an ESG lens to assets continues to grow as reported annually by the PRI, US SIF, and other organizations.
Engagement is preceding shareholder proposals and proxy votes. And divestment is almost the strategy of yesteryear. Proponents say that ownership can lead to working closely with management to improve the company’s sustainability while at the same time making management more aware of the greater global risks to the firm in the future. Companies that are resilient in these areas can offer the opportunity of prospering from their involvement in these evolving business areas. Employee activism is also on the rise-- a form of internal engagement. All of these areas are being discussed by executives and investors.
Impact Investing Perspectives
Regardless of how we define impact investing, from the corporate perspective or from the investor perspective, these views are lining up. Whether we call it ethical investing, socially responsible investing, gender lens, divestment, ESG integration, or impact investing, the outcomes and incentives are becoming aligned.
The 7th Annual CSR Investing Summit , presented by S-Networks Global Indexes, will take place in New York City on July 17th. A full-day forum for engaging with thought leaders and discussing their points of view on how to define, manage, and measure responsible investing, the event includes expert practitioners who are plan sponsors, endowments, consultants, academics, non-governmental organizations, the sell side, and media. For more information, see CSR Investing Summit.
Register for the event here: csrinvestingsummit.eventzilla.net