Fund Solutions

Asset Owners Prioritising ESG Impact Over Risk

New reports suggest growing appetite for impact investing options, but challenges remain on metrics. 

Asset owners globally are increasingly focused on measuring the real-world impact of their sustainable investment strategies, according to a series of reports, rather than just avoiding ESG risks.

More than half (59%) of US institutional investors implement sustainable investment strategies, according to a recent report by research consultancy firm Cerulli. Around two-thirds (66%) of asset owners have hired or plan to hire an asset manager to oversee their impact investing strategy, the report added. In comparison, just 20% said they have hired or plan to hire an asset manager to oversee an ESG screening strategy.

This marks a shift in thinking by asset owners, as they both look to mitigate the ESG-related risks their investments may be exposed to, such as climate change, and measure the impact they are having on wider society and the environment.

The double materiality lens being incorporated into mandatory sustainability reporting frameworks in Europe and the UK support a more impact-led approach by requiring corporates and financial institutions to disclose both the ESG-related risks and the impacts their investments have.

Last year, the fifth edition of the Global Sustainable Investment Alliance’s (GSIA) biennial review highlighted that US$35.3 trillion of assets were being managed using one or more of seven core sustainable investment strategies in 2020, including ESG integration and negative screening. Impact investing strategies accounted for US$35.2 billion, the report noted, compared to US$24.8 billion in 2016.

Asset managers are also responding to this growing trend, Cerulli said. In particular, asset managers are developing funds responding to the health, social and economic impacts of Covid-19, covering healthcare (50%), housing (41%) and community economic development (38%).

Measuring their impact

Despite the increasing adoption of impact investment strategies, both asset owners and managers are struggling to procure impact data on the real-world outcomes associated with their investments, according to a Global Impact Investing Network (GIIN) report.

Over three-quarters of asset owners (78%) said that collecting impact data from external asset managers was one of the biggest challenges they faced.

Two asset managers admitted they do not have impact measurement expertise, GIIN added, instead relying on others in the industry, such as research houses, academics and non-governmental organisations to guide their impact measurement and reporting progress. This can be costly, several asset managers said, “and it is not always evident that asset owners are willing, or able, to pay additional fees and cover those costs”.

In August 2021, an International Finance Corporation report warned that just a quarter of impact investments had a clear impact management strategy in place.

As a result, there is demand for impact measurement tools and methodologies.

The World Wide Fund for Nature (WWF) noted that impact tools and methodologies are still in the early stages of development, even though investors are already working to compare their portfolios impacts to benchmarks and other portfolios.

One initiative aiming to help improve interoperability between existing standards to better consolidate both companies’ and investors’ understanding of best practice in impact management is the Impact Management Platform, which was launched in November 2021.

It will link to existing resources that support organisations and investors looking to implement impact management actions, such as sustainability-related disclosures and business strategies.

ESG investing with impact

According to a new report by US investment bank Jefferies, the accepted definitions of impact investing and ESG investing have recently become blurred to form a hybrid approach, which it refers to as ESG Investing with Impact.

“Traditional impact investing is defined as committing capital towards explicitly addressing social or environmental problems, [but] ESG investing with impact is an emanating trend, which in our view can be described as a desire for capital allocators to both deliver sustained alpha on a risk adjusted basis, whilst also targeting positive real economy impacts,” Jefferies said.

Exploring the themes outlined by the United Nations Sustainability Development Goals is a useful starting point for investors switching to an ESG investing with impact approach, Jefferies said. The bank identified five key steps to achieve “the zeitgeist of impact measurement”, specifically, identifying specific areas for impact, determining a solution provider, establishing a delivering mechanism, defining an appropriate return characteristic, and evaluating over long-term time horizons.

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