Impact Investing - Part 1
The idea of sustainability is very easy to embrace for everyone. After all, our very purpose is foremost to stay alive within a world that will continue to provide for us. As such, it was only a matter of time before the financial services industry found a way to bring this concept to the investment world. Impact investing and ESG certifications are increasingly used as investment themes or as ways to structure portfolios - particularly for family offices and pension funds who typically have a focus on multiple generations and the long term.
So how does one invest with impact? That depends on how one defines sustainability. Some people view alternative energy companies as having a positive impact on the environment. Others view education, healthcare or technology companies as drivers of future sustainability. Then you also have some that invest in any company as long as they have ethical policies of governance in place. It most certainly is a big universe.
And therein lies the problem with impact investing: it can mean a lot of different things to many people. We recently met one (successful) impact investing manager and we asked them how they defined their universe. After going through their fairly broad definitions, in their attempt to satisfy a lot of the different definitions on the subject matter, it became quite clear that in the end there was little differentiation to the broad market indices (such as the MSCI World). And again, although this manager offered an interesting way of skewing the portfolio to a certain theme, there was no guarantee that this would have any impact (sorry for the pun) on our investments. The fees however (at nearly triple the price of a market index), would most certainly have an effect on our wallet - even more so when compounded over time.
Given that Impact investing is so opaque and ultimately very personal, then maybe we also have to define our investment universe more specifically. Which also probably means that we won’t be able to just buy such a tailored index or fund to match our theme. We may have to consider investing directly into private companies to get our exposure, but that makes things infinitely more complicated and expensive. It may be that impact investing is very much like charity work and, to really make a difference, one has to get involved and not just throw money at the problem. It could also be very simple and we could all start using less plastic, recycle more and forego using our car for short trips. Changing our behaviour would most certainly have a greater impact than buying some random index with an even more random definition.