Impact investing: mission possible ?

At the recent launch of the Luxembourg Valuation Professionals Association (LVPA) last week, I spoke in a panel discussion about the 'Challenges and trends in valuations today’ and shared that a redirection of capital to the most pressing concerns we are facing is needed and that's a massive wake up call for all of us.?Everyone should be concerned, and we should move beyond fulfilling only regulatory requirements and focus on saving lives. Everyone at every level has a part to play.?

How we invest and what we invest in is changing.

Intensified by the climate crisis, pandemic, growing inequality and start-up overvaluations, what we know is that the way we’ve been doing things might not be fit for the purpose anymore.?Our new trajectory should be orientated towards a world in which our mission is focused on impact and effortlessly woven into how we do business.?

But here’s another curve ball: What if investors are influenced by our cognitive biases when it comes to sustainable investing? The answer just might come courtesy of a start-up called Neuroprofiler,?using behavioural finance to help investors find that positioning sweetspot with their clients. This is a major step forward.?

"This impact revolution is going to be as widespread and as deep as the tech revolution which has preceded it."? – Sir Ronald Cohen

Mission and purpose

Impact cannot exist without meaning and a highly mission-driven, purpose-filled agenda.??

An example of this comes from when I sat down with Olivier Mathiot from 2050 in a previous Finscale episode. I thought about a quote on their website which I feel perfectly describes where we are and the importance of what needs to change in the investment world: "If we want to actually change the world, the first step is to change the way it is financed."

Olivier joined forces with Marie Ekeland to launch this evergreen fund to realign the interests of investors, entrepreneurs, their teams, and subscribers.?The result is truly a reimagined investment thesis, the vehicle, the distribution, and carried mechanisms, and ultimately, the flexibility and liquidity being left in the hands of investors.

When delving more into how the power of tech can truly amplify mission-driven impact and purpose,?Greenomy is doing just that. Last year, on Finscale, Alexander Stevens, CEO and co-founder, shared with me how he and his newly formed team have developed a platform to enable lenders, corporates and investors to equip themselves to meet the requirements set by European Green Deal within the framework of the Green Taxonomy, CSRD and SFDR.? Their pilot projects include ABN Amro, HSBC and a strategic partnership with Deloitte.?

The new world unfolding

While making healthy returns is not off the table and the two can definitely co-exist, we are seeing growing numbers of traditional investors redirecting their efforts into this market and looking for opportunities to create impact and change in our world. Private Equity investments with healthy financial returns and measurable impact are only a few clicks away. Global Impact Investing Network (GIIN) highlights a promising split: "fund managers represent the majority of impact investors (63%) and manage 63% of total impact investing assets."

Impact investing might still seem to be in its infancy, but it packs an almighty punch and is gaining momentum. It not only allows investors to zero in on making a real difference in a sustainable for-profit way but also enables these efforts to be localised, amplified and to create real-world change.?

A recent report by the GIIN puts the size of the impact-investment market at USD 1.164 trillion, exceeding the USD 1 trillion mark originally estimated.

The need to redirect capital is growing

There’s an intentionality that impact investing brings to the table – a greater good, creating additional impact for those in whom they invest, social and environmental returns, localised efforts, and investment capital directed strategically without being driven solely by financial returns.?

The 2030 Sustainable Development Goals (SDGs) still have a USD 2.5 trillion annual financing gap. More needs to be done, and this is where impact investing can deliver the most change.

The drive to achieve "net-zero" carbon emissions is shining a spotlight on impact bond portfolios made up primarily of green, social and sustainability bonds, which gives investors the ability to tap into this fixed-income instrument and zero in on propelling projects with a focus on environmental or social benefits.?

There’s no doubt that the Covid-19 pandemic has also had a profound effect on capital markets.? The world changed as we saw free falls across sectors, a change in what the future might look like for investors, and of course, an unprecedented impact on society.?

In the UK, the Impact Investing Institute was launched in 2019 by bringing together the following initiatives:? The Government’s Taskforce for Growing a Culture of Social Impact Investing and the UK National Advisory Board on Impact Investing. In the next few years, they aim to "have delivered a credible shift in capital markets to make them fairer, more effective and working better for people and the planet, with an intention to drive over GBP 500 billion of UK managed capital into investment under impact principles."?

These Social Impact Bonds (SIBS) are giving rise to a powerful effort to bring about societal change, allowing funds to be directed to specific sectors and locations.

Undoubtedly, the drive towards achieving attractive total returns and positive impact will drive the growth of emerging-market impact bonds in the coming years. The problems we are facing in the world are becoming harder to ignore, and the need to help support initiatives and key issues will become a major market focus. Coupled with a huge drive around economic inequality and the climate crisis, investors have a massive role to play.?

The gift and curse of ESG?

For impact investing to grow, investors will need to feel confident, and with the current scrutiny ESG is facing, this could be a major stumbling block.?ESG and impact investing are two different disciplines with different actors and frameworks.?

Last month, Bloomberg rang the alarm when it reported the drop in new ESG fund numbers.

The reason? Greenwashing.

Citing an analysis by PwC, they showed that of "8,017 so-called Article 8 funds - an EU designation that requires a product to "promote" sustainability - only 989 were new at the end of the second quarter. The rest were reclassifications of existing funds. A similar analysis of 1,061 Article 9 funds - whereby a product needs to have sustainability as its "objective" - showed that only 286 were new."

The controversy surrounding greenwashing saw the Financial Conduct Authority (FCA) in the UK release a statement last month setting out "new measures including investment product sustainability labels and restrictions on how terms like ‘ESG’, ‘green’ or ‘sustainable’ can be used."

Sacha Sadan, the FCA’s Director of Environment Social and Governance, said, "Greenwashing misleads consumers and erodes trust in all ESG products. Consumers must be confident when products claim to be sustainable that they actually are. Our proposed rules will help consumers and firms build trust in this sector."

Impact investing is by its nature measurable, and these crackdowns show that ESG seems to be going down the same road, which will be a good thing. Maybe it’s time the two join forces.?

What does the future hold?

We might move fast or slow. We might have more questions than answers right now. Maybe this is a good thing. We need to dismantle old ways of doing things so we can open a new way of doing business that works for all.??

What we do know is that momentum is growing from the GIIN stats, government support, frameworks, corporate interest and the multitude of start-ups taking up this fight.????

"It's more than a trend; it's a change in our economic system." – Sir Ronald Cohen, chair of the BNP Paribas NGO Global Steering Group for Impact Investing (GSG) partnership

Stay up to date on the rapid pace of change with tips, inspiring stories and strategies from the most inspiring people in the finance sector.?

• Sign up to my English newsletter
• Subscribe to my English podcast Apple podcast / Spotify