March 30th – 31st in New York, New York, organized by Financial Research Associates
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The Increasing Demand for ESG Scoring and the Benefits of Standardization
As we start off the New Year, TriLinc Global will be discussing notable trends from 2015 that we see as relevant to the development and growth of the impact investing sector in 2016 and beyond. This is the third post in a four-part series.
Coinciding with the rise of entrants in the impact investing space is a similarly mounting demand for increased rigor and standardization around ESG reporting. According to US SIF Foundation’s biennial survey, “Unlocking ESG Integration,” the inclusion of ESG factors into portfolio management grew at a rapid pace between 2012 and 2014, reaching almost $5 trillion in US-domiciled assets. However, a key challenge for asset owners and investment managers has been the lack of an effective, uniform and all-inclusive way to measure ESG factors and impact goals.
Ernst & Young’s 2015 global survey, “Tomorrow’s Investment Rules 2.0,” reported that although 71 percent of institutional investor respondents considered integrated reports – which include both financial and ESG information – essential to making investment decisions, over 25 percent said that nonfinancial information had not affected their investment decisions over the past year. The reason for this was primarily due to the difficulty of verifying and comparing ESG and impact data across firms.
In response, industry players are making strides to develop ESG assessment tools and services, so that investors can use ESG data to more effectively drive investment decisions and portfolio monitoring practices. As of 2014, Bloomberg, one of the largest information gathering and dissemination models in the investment management industry, had gathered and reported ESG data to 17,000 ESG data service subscribers on over 11,000 companies spanning 65 countries. By adding “non-financial” ESG data to its product offering, Bloomberg has been an active change agent in the sector.
Another new player in the field is Morningstar, which is partnering with Sustainalytics to bring ESG scoring into the mainstream by assigning ratings to global mutual and exchange-traded funds (ETFs). Resulting from heightened investor demand for more transparent information about ESG practices, Morningstar will test how companies and investment managers effectively gather, report and incorporate ESG information into the analysis and risk profile of their investments. The new Morningstar ESG ratings will guide institutional firms that create and manage mutual funds and ETFs for the retail market, and will empower “main street” investors to make investment decisions that are both value-based and values-based.
Another industry partnership seeks to offer institutional investors insights into ESG risks, including those not reported through public companies’ mandatory public disclosures. In September 2015, Institutional Shareholder Services (ISS), which provides corporate governance and proxy voting services, began offering its clients ESG screening, analysis and stewardship tools using analytics and metrics provided by RepRisk. This partnership helps ISS clients – asset owners, investment managers, hedge funds, broker-dealers and custodian banks – manage compliance, reputational and investment risks related to their portfolio companies’ ESG activities.
The burgeoning development of analytical frameworks underscores the demand for the integration of ESG variables into investment management practices. However, the industry has not yet established a universally accepted approach to ESG methodology, measurement, benchmarking and reporting, as it has for other investment performance metrics. A growing but still nascent trend, ESG integration will achieve mainstream proportions as sector players assess the various options and coalesce around broadly accepted approaches. Such standardization is crucial to better investment decision-making practices, and will lead to improved risk management and an enhanced understanding of ESG across a portfolio’s performance.
– This post is the third in the four-part series, “Impact Investing: What’s to Come in 2016,” written by Melissa Tickle, TriLinc Global Impact & ESG Analyst.
Retail Investors: Rising Interest and Opportunity in Impact Investing
As we start off the New Year, TriLinc Global will be discussing notable trends from 2015 that we see as relevant to the development and growth of the impact investing sector in 2016 and beyond. This is the second post in a four-part series.
As TriLinc looks toward 2016, it is clear that the evolving regulatory landscape is creating a more enabling environment for a myriad of investors to align their capital with their values in pursuit of economic, environmental and social goals.
This environment has facilitated the expansion of impact products available in the market – from social impact bonds, to mutual funds and exchange-traded funds – and has transcended traditional product offerings to more closely meet investors’ specific ESG and impact interests. Until recently, however, few products were specially tailored to retail investors, compared to institutional and high net worth investors. With the arrival of retail, market-rate impact products in the past few years, retail investors at last are receiving due recognition as essential participants in the impact investment space.
Recent studies validate the retail channel’s importance to the sector. A report by the Global Impact Investing Network (GIIN) dated April 2015, “ImpactBase Snapshot: An Analysis of 300+ Impact Investing Funds,” found that 17 percent of market-rate impact funds targeted retail investors. Given the relative size of the retail investing market – roughly 91 million investors according to BNY Mellon – the retail channel represents a significant market opportunity for the impact investing community.
Financial advisors are in agreement. A recent survey by SRI examining financial professionals’ views on impact investing found that over half of surveyed financial advisors either currently offer, or have offered, SRI and/or ESG investment strategies to their retail clients. Perhaps even more revealing is that 73 percent said impact investing would become a “somewhat bigger” or “much bigger” part of their practice over the next five years.
This is in large part because retail investors are driving the demand for impact and ESG products across their portfolio allocations. A study conducted by Morgan Stanley showed that 71 percent of individual investors are interested in sustainable investing. According to SRI, 58 percent of advisors claimed the foremost reason they offered impact investing to their clients was in response to demand. Millennials, women, and college-educated investors were among the top three investor profiles requesting impact strategies from their advisors, followed by high net worth individuals, baby boomers and senior investors.
With demand for impact investing in the retail space being driven from the bottom up, the development of tailored impact product offerings for retail investors will continue to be of vital importance. As retail investors continue to increase their knowledge and appetite for impact, and gain access to more market-based investment options, they will exponentially increase the flow of capital dedicated to solving challenges facing our society.
– This post is the second in the four-part series, “Impact Investing: What’s to Come in 2016,” written by Melissa Tickle, TriLinc Global Impact & ESG Analyst.
More Impact Investors Are Going "All In"
If you want to keep up with the latest buzzwords in impact investing, here’s an important one starting to hit its stride: “all in.” It means placing your whole portfolio into assets with a positive social and/or environmental impact. Putting your money–all of it–where your mouth is.
Recently technology executive, entrepreneur and investor Charly Kleissner started a network of super high net worth individuals aiming to do just that, called the 100%IMPACT Network.
For Kleissner and his wife Lisa—she is president of the KL Felicitas Foundation, a 14-year-old family foundation based in San Francisco supporting social entrepreneurs the two formed—it started back around 2004 when they began to get serious about completely aligning all their investments with their values. It was easier said than done. “There weren’t that many products in different asset classes,” says Kleissner. That led to the founding of Toniic, a global group of impact investors aggregating their capital and investing in early stage social enterprises. Then more recently they got the idea to start a network for compatriots who were similarly interested in going all in.
They wouldn’t pool their investments, but they would compare investments, results, and, perhaps most important, impact measurements. Also they would serve as a model for other investors. According to Kleissner, there are now 35 participants with $3 million to $650 million in assets and a total of $3.5 billion in commitments. That includes 25 family offices and about six foundations. Over the next three years, Kleissner says he’s hoping to prove that the bigger the portfolio, the better the return. So a triple digit portfolio could have triple digit profits, and so on. Further, Kleissner says that there are at least 10 million Americans with $1 million or more in investable assets–“if we show over the next couple of years you can build million dollar portfolios that are all in–it could release a movement.”
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Majority of HNWIs Rate Social Impact Investing as ‘Extremely Important’
More than 60% of global high net worth individuals (HNWIs) see driving social impact with their investments as “extremely or very important”, with Asian HNWIs valuing it higher than any other region in the world. According to research by RBC Wealth Management, HNWIs in India put the highest emphasis on social impact in the Asia-Pacific region, with over 90% citing it as a key concern, followed closely by China and Indonesia at 89% and Hong Kong at 82%. RBC said its research also showed that HNWIs want more support from their wealth managers in achieving their social impact goals, suggesting socially responsible investing, impact investing and donations as potential solutions. In addition, wealth management firms that invest time in understanding the importance clients place on driving social impact, and work to identify “appropriate mechanisms” to fulfil these goals, have a better chance at creating “deeper” HNWI relationships over time. Age is also a huge factor in socially responsible investment, with three quarters of HNWIs aged under 40 citing it as an important factor compared with just 45% of those over 60, siting that the most popular way they invest in such global causes is by making investment choices with a “clearly defined objective to create positive social impact.”
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What is Next For Impact Investing?
Impact investing represents a potential additional funding stream for development, but the field is still evolving and those working in it warn investors may be expecting too much, too soon. While the field may be beyond its initial phase, stakeholders focused on building the infrastructure and proving its case agree that there is still much work to be done. Impact investments are made with the intention of generating measurable social and environmental impact, along with a financial return.
It’s clear that the sum invested in this way is growing — a recent study showed that last year about $10.6 billion in impact investments were made and investors intend to commit this year a further $12.7 billion or 19 percent more, with about 70 percent of the total money is invested in emerging markets. Though there is more clarity now about what impact investing is, one of the greatest challenges remains how to define and talk about those investments. And, those definitions would help to tackle what is one of the most often discussed challenges that is impeding growth in impact investing — accurately measuring and tracking outcomes. This article explores both, and what is being done to mitigate them.
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Impact Investing in Asia: Poised to Grow
Impact investments are expected to increase globally this year, with South Asia and Southeast Asia among the top target regions, according to a recent survey by JPMorgan and Global Impact Investing Network (GIIN). This could bode well, in particular, for India’s nascent impact investment sector, which is one of the most active in the region.
It has been estimated that US$1.6 billion of capital has been invested in more than 220 impact enterprises across India, with more than half of the investments in microfinance. In addition, impact equity investments in India are estimated to grow 30% this year. Along with microfinance, enterprises in agriculture, health services, clean energy, and education are attracting investments. Narayan Ramachandran, CFA, Unitus Capital’s co-chairman, has said, “the biggest challenge is the market/business plan challenge, which is, if you invest in something, can it grow big enough and profitable enough for you to have a range of exit options?” He noted that while there have been successful exits recently in financial services enterprises, there isn’t a long list of companies in India “that have been sold in subsequent rounds to different and new kinds of investors.”
Operating impact businesses in areas such as agriculture, health services, and other sectors “have really only been invested in over the last five to six years.” The support of impact investing around the world needs to come to small businesses in such a manner that they are helped, facilitated, and nurtured to grow into bigger mainstream businesses rather than a large impact business, which mainstream investors are not interested in.
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Measuring the "Impact" in Impact Investing
Without solid metrics to quantifiably measure results in social and environmental terms, the whole “impact” part of “impact investing” would be worthless. The Aspen Network of Development Entrepreneurs (ANDE) is working to build an understanding around impact measurement, and they have collaborated with their members, TriLinc included, to write a report on the “State of Measurement: Practice in the SGB Sector,” which was released this past month.
ANDE is a global network of organizations that propel entrepreneurship in emerging markets with a mission to understand the impact of supporting small and growing businesses (SGBs). As a rule of thumb, they aim to create a measurement system to figure out how well companies are doing, and help them to improve.
Recently, ANDE conducted a survey and follow-up phone interviews with 34 of its members. TriLinc’s Marni Hodder and Kathryn Haugen contributed to the survey and participated in a follow-up phone interview. TriLinc helped ANDE gain an understanding of the struggles and triumphs it has endured thus far with impact measurement. Further, Joan Trant and Ms. Haugen joined the network on a Metrics group working call to help make changes and improve upon the rough draft of report.
As depicted in the report, ANDE found that most impact investors in this market are operating using three key “lenses:” collecting metrics related to both the scale and depth of impact, tracking economic development indicators such as job creation, and collecting specialized sector metrics to benchmark their portfolios. Then, a majority of firms and funds report these results to their current funders, and often use the results in their discussions with prospective investors.
However, 40% of ANDE’s survey respondents indicated that they believe the largest challenge they face is the lack of stability and resources for their investees concerning their impact measurement. Additionally, social metrics need to “balance and align” with financial performance indicators. This would place greater emphasis on transparency and attribution, as well as help to develop more efficient and effective ways of data collection and management.
All in all, there has been tremendous advancements in measurements in the past five years. ANDE has been encouraged by the organizations they surveyed, who have all either implemented some measurement strategy or are in the process of doing so, lending to their early efforts centered around the need for such “accountability” (Metrics 1.0) and “standardization” (Metrics 2.0), and are now moving on to “value creation” (Metrics 3.0). Together, they have proved it is possible to collaboratively create reasonable, sustainable metrics that funds and investors across the globe can utilize.
What’s Holding Back Impact Investing?
With the unveiling of a new report at the White House last Wednesday, the investors who have pioneered the impact investing movement are now urging the U.S. government to create policies that will turbocharge its growth. Seasoned impact investors say there is much more potential to direct private capital towards addressing the world’s pressing social and environmental challenges than what is done today–especially if a number of policies can be tweaked.
Their report details more than two dozen government actions that could both remove existing barriers to impact investing, increase the effectiveness of the government’s own programs, and proactively provide new incentives to encourage growth. “If you were to imagine a crew team on a river, it’s like we don’t have all of the oars in water, because private enterprise has, for the most part, sat on the sidelines,” says Jean Case, CEO of The Case Foundation and an advisory board member. There exists a fear that social and environmental goals of good organizations will be diluted as financial interests blend with what is traditionally charitable work. But advocates say there are safeguards and transparency will help in many situations, and the potential to do good far outweighs the downsides.
In the end, what is needed are more standardized ways for people to access social impact investing opportunities.
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Why Impact Investing is an Emerging Paradigm Shift in Philanthropy
Impact investing is a frequently featured topic of conversation at forums or conferences on philanthropy today. Its popularity is linked to the potential for impact investing to cause a paradigm shift in the way philanthropy is approached—targeting investment capital as a complementary resource for achieving the social and environmental changes typically pursued by philanthropic organizations. The central theme underpinning the potential of impact investing is the creation of economic value and social value being, not necessarily, mutually exclusive.
Market-based approaches to critical social and environmental challenges do exist or can be developed, and those interventions can attract private sector capital. This provides a significantly larger, complementary source of capital alongside of philanthropic budgets and increasingly limited public sector resources. All in all, financeable interventions can satisfy a range of objectives—from mitigating climate change to creating jobs in agricultural communities to providing health care for underserved people—attracting a broad population of investors interested in creating change.
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