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Definitional concerns surrounding ESG have waned in the past few years. They are now mostly about measurement and standards. But what about impact investing? It looks like the new battle ground.
Driven largely by the growing power of climate action forces, rising during the pandemic to a tidal wave of consumer, political and investor might, greenwashing is no longer the problem it was.
Widespread awareness around the world, even at the small investor level, including regulatory awareness, has shone sufficient light on the subject that professional fund managers are becoming less and less likely to gild the lily with their portfolios’ ESG credentials. ESG is now integrated at asset owner level and, increasingly, at outsourced manager level.
Impact investing, in a sense the pointy end of the ESG spectrum, has until recently tended to have one major satisfactory but crude distinction with traditional investing which at least narrowed the breadth of the possible problem. Impact investors were confined to private markets, or so it was assumed. That distinction is increasingly being challenged.
At one of the webinar sessions held in conjunction with last week’s PRI Digital Conference (October 18-21), T. Rowe Price, a global manager with long-held ESG principles and processes, addressed the issue head on.
Hari Balkrishna
Hari Balkrishna, the manager’s portfolio manager for the ‘global impact equity strategy’, asked the question of himself whether impact had a place in the public markets space or whether all the action was in the private space. He made three salient points:
The opportunity set of existing companies – T. Rowe Price tracks about 15,000 globally for which it has ESG data – was recognising the “need to be relevant, to be on the right side of change” occurring around the world. “They are therefore evolving to think more squarely about impact,” Balkrishna said.
There is a lot of innovation coming out of private markets, for instance to help in the transition to a low-carbon environment. And a lot of those innovations are coming to the public markets inhabited by managers like T. Rowe Price through IPOs, acquisitions and alliances.
Big global listed equities managers can actually make the biggest impact, through voting, shareholder activism and engagement with investee companies. “I would argue that we have more impact because a lot of the time we are dealing with the largest companies in the world,” he said.
Maria Elene Drew, T. Rowe Price’s head of research, responsible investing, asked: “Why would you want to limit the impact to private markets? Having a suite of funds focused on public markets can help change.”
As ESG investors grapple with more operational issues, such as problems with the lack of uniformity of data supply and standards for its applications, impact investors have already addressed these. They have developed various classifications and definitional standards and their own guiding body, the GIIN (Global Impact Investing Network).
But the definition of impact investing, unfortunately, is not a simple one sentence, or even a one-paragraph descriptor. It is embedded in a set of nine principles, developed by practitioners in the US and Europe as ‘The Operating Principles for Impact Management‘
Those principles can be distilled into a timeline of four stages: strategic intent; origination and structuring; portfolio management; and impact at exit. Intentionality and measurement – of the impact on society as well as the investment portfolio – are crucial elements of an impact investment.
There is also an impact verification service, BlueMark, which this year launched ‘The Benchmark for Impact Investing Practice’ for both investor and manager use.
The hard-core and established impact investors who are behind the trend to institutionalise impact investing on behalf of asset owners have come around, perhaps reluctantly, to agreeing that genuine impact investing can be made through public markets, as long as the principles are adhered to.
Tideline, a US-based impact consultant co-founded by former Australian investment journalist Ben Thornley, published a guide in August, ‘Truth in Impact’, which was endorsed by GIIN and others in a webinar that month. See our coverage here.
Greg has worked in financial services-related media for more than 30 years. He has launched dozens of financial titles, including Super Review, Top1000Funds.com and Investor Strategy News, of which he is the former editor.
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