Maya Sibul: How does impact investing differ from ESG investing, and what are some common misconceptions that you wish you could debunk?
Alex Wise: A common misconception that I wish I could debunk is that impact and ESG are the same thing. That’s just not the case. ESG is a risk management tool that people use to look at the risks in their portfolios. This is where ESG adds value because it should mean that funds and investors are selecting more conscious companies – companies that take health and safety seriously, companies that have good governance and diversified representation within boards and committees when it comes to gender, racial background, and class.
Impact is about looking at the intentionality of an investment strategy and asking if it is being set up for environmental or societal goal that we’re all looking to achieve. Within impact investment, we’re able to map these to the UN Sustainable Development Goals. These are the world’s biggest problems and a true impact fund is setting out from day one to make a contribution to solving them.
Maya: ESG committees can often be seen as an optics move, which is common throughout the industry. To what extent do you think that greenwashing stems from data management issues – or is there another underlying factor?
Alex: There are several things that anybody can do to “tick the box”. This comes from what investors and regulators are asking. If your limited partner’s ESG diligence questionnaire is five questions long and it says something such as “Are you a signatory to the Principles for Responsible Investment (PRI)?”, “Do you have an ESG policy?” then that's all you're going to do. From the data perspective, it's worth drawing a strong distinction between private and public markets. Because in public markets, there's a lot of data compared to private markets. The quality of the data and the integrity of that data is something open to wide debate – for example, why is one company rated as 75 [on a scale of how ESG compliant they are] with one provider and 50 for another?
It's an ongoing discussion in public markets about the integrity of ESG rankings and ratings, but in private markets, where we operate, you're able to drill down quickly and for managers that say that they consider impact as part of their strategy, you could have a good idea from your first screening whether they are impact-washing or greenwashing.
"The phrase that always puts me on high alert is when the CEO says 'ESG is at the heart of everything we do' – that always tends to be a red flag."
Whilst lots of managers in private markets will hold their hands up and say, “we're not sustainability-themed funds, we do things that are unsustainable”, there are still greenwashers. The phrase that always puts me on high alert is when the CEO says “ESG is at the heart of everything we do” – that always tends to be a red flag. You have to be careful in your diligence about the managers, their processes, and how deeply they are integrating ESG within their investment process. There are also funds who say they are “impact” when they aren’t.
In one sense it is much easier for true impact funds, as they can be assessed according to tested methods and many also verify their impact using quality providers such as Bluemark. Where I’ve seen plenty of greenwashing is within the listed equity space. For example where you have “Global Manager impacts equities fund” that used to be called “ESG equities” or whatever and it keeps changing its name depending on what circumstances it needs to fit – that’s a big clue greenwashing is going on.
It’s not only at the manager level; we have also just seen a major global brand pension fund provider in Australia sued for greenwashing by the regulator.
Maya: Let’s discuss ‘megatrends’ and thematic investments – what exactly are they and how do you identify them?
Alex: We see the world is going through a range of very complicated transitions; climate change and the energy transition are probably the most widely discussed, but there are other transitions that are happening in society.
When you start to look into megatrends, some such as food tech create synthetic proteins to create more sustainable food, so sustainable urban agriculture is resonating well. There's a lot of exciting stuff going on in education, particularly. In the US there is an interesting discussion about a potential move away from college degrees as they have become so cost prohibitive and a create life-long debt burdens for borrowers. Additionally employers prefer up to date training rather than out of date university courses.
There are complex transitions and we want to find the experts that have invested in these markets and have demonstrated a track record within a particular area.
Maya: The area is growing – do you expect further legislation, disclosures, and reporting procedures to be introduced over the coming few years?
"There is an overarching trend in favour of better regulation and enforcement of misleading disclosures with regard to sustainability and more stringent anti-greenwashing regulations."
Alex: ESG, impact, and sustainability regulations are moving very quickly, and there is still a lot that has to be done. The EU taxonomy was a great start and it's going to continue to evolve. Definitions of greenwashing also need to be locked down.
There's also legislation that will come out of the US, even with the ESG culture wars that are happening there at the moment. Globally, there is an overarching trend from the majority of stakeholders in favour of better regulation and enforcement of what regulators see as misleading disclosures with regard to sustainability and more stringent anti-greenwashing regulations.
As increased transparency takes hold and we see more complex analysis, impact investors will be able to apply more sophisticated benchmarking within the requisite universe or peer groups. There will be benefits from the investors to this increased transparency that regulators are pressing for.
Maya: Do you see the polarisation and politicisation of ESG in the US as something that will blow over – or do you think it will have a long-lasting effect on uptake?
"We believe sustainable investment portfolios that manage ESG risk are going to perform better over the longer term; to exclude them from pensions is a huge disservice."
Alex: We believe sustainable investment portfolios that manage ESG risk are going to perform better over the longer term and to exclude them from pensions is a huge disservice to those plan members that are trying to provision for their retirement. Some of their retirements are going to be 10, 20, 30 years off, and the politicisation of the subject flies in the face of prudent investment management. Whenever politicians use pension funds as a political football, it's the plan holders that end up losing out.
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