Finance Meets Charity at Impact

    Stockholm (NordSIP) – Here in Stockholm, but also in the rest of Europe, sustainability is definitely a hot topic right now. But for those who are new to the concept, it is not always easy to grasp the breadth and depth of the subject. Who does what? What do investors say they do and what should they be doing instead? At NordSIP, it is our mission to guide investors in this labyrinth and to help the industry grow through improved information flow. Here comes a short guide; an attempt at painting a clearer picture of the space.

    To help set the background we have created a couple of charts.

    Our first picture shows the traditional asset management spectrum, in the context of sustainability. People stand at both end of the spectrum: on one side, the pensioners, the savers or the insurance beneficiaries and on the other, the consumer, or just our children, the inhabitants of the planet of tomorrow who will grow up in the world we leave to them, at the risk of sounding a little corny. In the middle, we find the aggregators of their funds on the left, the “asset owners”, sovereign wealth funds, pension funds, or insurance companies. Then we step into the world of asset managers, who provide products to these aggregators, including long-only funds, hedge funds, private equity or private debt and venture capital funds, and a plethora or more exotic product managers. On the right are the companies the assets are invested in. These are the entities who operate in the world and will influence the consumer, the society or the environment. The most concerned with sustainable investing are the people: those at either end of the spectrum, as well as those working within the different organisations. A special focus is cast upon the up-and-coming millenial generation, which have started to matters for asset managers, as they are now allocating their pensions. These same millenials are often pushed by their ambitions to be entrepreneurial and work with something meaningful to them. They come up with the projects and founding the companies that are at the other end of the spectrum.

    In parallel to the asset management spectrum, lies charity. By definition, the purpose of charity is not to make any profit, and therefore does not qualify as a financial investment. However, charity lies along-side the investment spectrum because it serves some of the same purpose for individuals on both ends of the spectrum: someone who cares about a cause may choose to allocate some resources to people who have the opportunity to advance that cause.

    Now if we zoom into this spectrum, regardless of what actors we are talking about, sustainable investing can take different shapes. This is what we show in our second picture.

    On this second chart, on the vertical axes, we represented the degree of sustainability. At the top lie the charity-led organisations. We would like to argue that not all charitable activities are actually sustainable. Many projects have shown that throwing money at a problem year after year will not solve it. There are therefore several degrees of sustainability in charity as well, which is why the arrow points downwards at the top of our chart, to show that the optimal level of sustainability may not be at the highest level of charity.

    At the bottom of the chart, are the actors who are increasingly considered the light-weight in sustainability, those who stop at mere exclusions. Looking at the spectrum from that end, a positive improvement for some funds consists in adding layers of sophistication in their screening processes, and weighing positions according to the degree of sustainability of the investment targets. This method is often used when considering the carbon footprint of companies for example, and thus contributing to different methods of “de-carbonising” portfolios. Further up the spectrum, come the so called best-in-class investments. These funds actively select the investments that have the best ESG profiles, instead of under-weighting or excluding the worst ones.

    Another positive improvement which can be implemented separately or in concert with improved screening touches upon governance: proxy-voting is usually considered as a positive hygienic step. Even if it often consists in aligning votes with guidelines from service providers, the use of votes to influence companies and their policies is an important mechanism to change poor practices in all dimensions of ESG. Some funds or asset owners, such as Folksam for example, go one step further in the governance dimension, by arranging meetings with companies, following up on a regular basis about their concerns, and proposing resolutions at AGMs.

    Impact investing is where the traditional sustainable investing practices cited above meet charity. Impact investors are not charities. They exist on the basis of providing a financial profit to the investor. At the same time, they are the most engaged in the projects or companies they invest in. Social impact bonds are a good example of such investment opportunities. Even if the investors of these bonds are often still charitable foundations, the concept is commercial: the investor makes a profit if social improvement targets are met. They often create a win-win situation, as they introduce a financial incentive to produce non-financial improvements. Other types of concepts such as micro-finance have proved successful then and again. There is also more than one type of way of introducing impact into a portfolio, and many investment vehicles that can contribute to that endeavor.

    An important consideration when looking at this spectrum is the time-horizon of the investment. The longer the term, the better for sustainable investments: it would be hard for a day trader to impact companies through proxy voting, let alone engagement with the company. Also, the necessity for liquidity in an investment makes it difficult to reach projects where results can only be shown over time. Luckily, those actors who stand on the left of our first picture, the pension funds and other asset owners, often have a long-term investment horizon, as pointed out by Sony Kapoor in his critique of the Norwegian sovereign wealth fund.

    While progress in the investment community is undeniable, we find that one of the main challenges the sustainable investment space faces today is how to move upwards in the sustainability dimension. All three groups of actors described above have to be nudged upwards. At NordSIP, we are striving to promote ideas that will contribute to this move, and look forward to reporting on the progress as it unfolds.


    Picture (c) Lightspring – Shutterstock

    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.

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