Alex Hoctor-Duncan, Global Head of Aberdeen Standard Investments, discusses the evolving and timely topic of impact investing.
The environmental, social and governance (ESG) issues facing the world today are no doubt on the rise. This goes hand-in-hand with the rising popularity of impact investing. According to the latest annual survey from the Global Impact Investing Network (GIIN), the market was worth US $715 billion at the end of 2019. Not long ago, we could have called it a fledgling discipline, or a niche area that was attractive to only a select few investors.
The current landscape
Today, impact investing has moved firmly into the mainstream. Its rise in popularity is not that surprising as ESG issues across the globe increase in both number and severity. Among them are the global pandemic, the effects of climate change, rising inequalities and increasingly populist politics.
More and more investors want to address these issues as they become increasingly sophisticated in understanding them. And, importantly, they want to do so while earning a positive return. Impact investors want to invest today to change tomorrow, but they also understand that respecting people and our planet is a legitimate and valuable business strategy.
Many see the United Nations’ Sustainable Development Goals (UN SDGs) as the most useful guide available for determining impact investment policy. The UN set the 17 SDGs nearly five years ago, with the aim of guiding global policy and funding over 15 years. Ban Ki-moon, who was UN Secretary-General at the time, called them “our shared vision of humanity and a social contract between the world’s leaders and the people”.
The industry meeting demand?
To meet the growing demand of the environmental and socially-conscious investor needs of today, the industry has reacted with a plethora of products. For example, there are approaches that aim to address a single SDG, while others try to meet more than one. Some also have a completely different agenda, while still sitting underneath the impact-investing umbrella.
However, the abundance of options adds a layer of complexity as investors seek to understand how best to measure the performance of their investment decisions. Although the market has grown considerably in recent years, the track records of many of the products available are relatively short, and thus performance records can be a useful indication in measuring financial metrics.
But a burning question of impact investing is how we measure against the non-financial targets? The tangible evidence that suggests our investment decisions are making a difference to the world. There are currently no standardised measures by which to gauge how or if a particular investment product is meeting its goals. This is a developing area that generates much debate. What we do know, is that a clearly defined impact objective, investment framework and analysis process, as well as clear measurement targets are essential in making an impact investing strategy successful.
From a global equity impact investing perspective, an active engagement approach is crucial. To manage a meaningful impact investment strategy, asset managers need to engage actively and regularly with companies. By doing so, they can learn more about each company’s sustainability strategy and impact. They can also appraise its management, encourage best practice on ESG issues and exchange views. It is this level of insight and understanding that can make all the difference when it comes to assessing non-financial impact.
Once the impacts have been measured, there still begs the question of how to convey the information to investors in a useful and meaningful way. Reporting across the industry is not yet standardised, but nevertheless, it is extremely important that investors see a regular, detailed and transparent account of the impact of their investment. This approach helps to build context and unravels the impact investing story for the investor as they address some of the most pressing issues affecting the environment and society today.