By Kirsten Temple, Head of ESG and SRI, JANA
Over the past 10 years, the investment community has increasingly broadened its focus beyond financial statements to also consider environmental, social and governance (ESG) factors when analysing companies and making investment decisions. Led by the UN-sponsored Principles of Responsible Investment, the charge to consider ESG has largely been driven by the acknowledgement that these factors can influence investment outcomes. High profile examples such as the 2010 BP Deepwater Horizon oil spill and the 2015 Volkswagen emission scandal have highlighted the importance of considering ESG when making investment decisions, with both companies facing significant share price falls and longer-term challenges to their financial sustainability. BP has estimated that the total cost of the oil spill was US$62.6 billion, while Volkswagen has suffered direct costs from the recall of vehicles and fines, along with substantial brand damage that could impact the company’s profitability for years to come.1
While for many the primary motivation for considering ESG factors is to improve investment returns, encouraging better management of ESG risks can both improve the sustainability of profits for companies and improve outcomes for the communities in which they operate. For example, good management of environmental risks reduces the risk of financial penalty for the company and benefits those that may otherwise be affected by environmental damage.
Some investors are now seeking to take a further step, from ESG to ‘impact’. Impact investing refers to investments that both seek to generate a financial return for the investor and deliver environmental and/or social outcomes. While small relative to the overall market, ‘impact’ investment has grown markedly, with the quantum of assets captured by the Global Impact Investing Network (GIIN) Annual Survey reaching US$77 billion in 2016.2
Impact investing has historically been associated with philanthropy, with many foundations and other philanthropic investors willing to accept below market rates of return in order to achieve their social and/or environmental goals. However, there are also a large number of ‘impact’ investors seeking a ‘win-win’ outcome, targeting competitive investment returns alongside ‘impact’ goals. The most recent GIIN annual survey found that nearly 60% of respondents target ‘market rate’ investment returns from their ‘impact’ portfolio.2 This component of the ‘impact’ market has grown over time, and we believe will continue to grow both in overall size and as a proportion of the ‘impact’ investor community in coming years.
The funds management industry is increasingly responding to this demand, with many traditional asset managers entering the ‘impact’ space with new products that target competitive investment returns alongside ‘impact’ goals. While many ‘impact’ investment strategies today come in the form of private equity, private debt and other unlisted structures, investment managers are turning their mind to how the concept of ‘impact’ investing can be applied to listed equities strategies. These strategies are still in their infancy, but in time will make ‘impact’ investing accessible for a broader range of investors.
1. ‘4Q and full year 2016 results presentation’, BP, 7 February 2017.
2. ‘Annual Impact Investor Survey’, Global Impact Investing Network, 2016.
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