Stockholm (NordSIP) – Beyond the human devastation that COVID19 wrecked across the planet throughout 2020, the pandemic spent the first half of the year undermining the stability of financial markets. Much has been made about the ability of sustainable investments to better withstand this shock, vis-à-vis its conventional counterparts.
According to Sarah Norris, one of the portfolio managers in charge of Aberdeen Standard Investments’ global equity impact strategy, sustainable investments did indeed outperform their counterparts during the crisis. The portfolio manager argues that success comes down to intense engagement.
Performance during COVID19
“The global pandemic has reinforced the perception that environmental and social risks have tremendous economic consequences,” Norris says. “Health crisis and extreme weather events and other social and environmental crisis draw attention to the significant need for solutions; not just because it’s ‘the right thing to do’, but because there are economic ramifications from ignoring these risks.”
And that creates opportunities for companies who are developing products and services in response to some of these risks and trying to provide solutions to these issues. I think the pandemic, extreme weather events, and the increasing prevalence and relevance of environmental and social issues reinforce the message that impact investing delivers a double bottom line of financial return and impact outcomes.
To Norris, the infrastructure commitments made by public authorities are also supportive of sustainable investors, according to Norris. “Purely from an economic standpoint, demand is likely to have a ‘green’ tint, and so companies whose products and services meet climate ambitions or social commitments have a better opportunity to capture that demand.”
Engaging with Disclosures
According to the portfolio manager, active corporate dialogue be an important component for impact investments. “Constant and active dialogue with companies is essential to our approach to impact investing. The definition of impact investing is intentional investment to deliver financial returns alongside measurable positive social and/or environmental impact. So we must be able to measure and evidence the impact companies that we are invested in have.”
“A key challenge to impact investing across asset classes is the availability and homogeneity of data. There’s no standardisation for impact reporting which means there are no screens or providers that collect and present data for you. We rely on company annual reports and conversations with management teams to collect data that we then report in our annual impact report.”
While some impact managers estimate impact using academic journals or peer comparisons, Norris takes a more focused approach. “We believe that our impact as investors is to work with companies on disclosure. We don’t want to see more disclosure, but better disclosure. This allows us to hold the companies to account and track progress on their impact goals.”
Investing in Education
Norris was keen to discuss two examples of companies held by ASI’s global equity impact strategy that have achieved their social and climate impact goals.
“Chegg offers solutions that tackle the costs associated with attending university in the USA as well as the quality of education”, she explains. “It started as a textbook-rental service, combating prohibitive cost of textbooks faced by student in the USA ($100-$150/book). More recently, the company as invested in online educational services that address the resource gap by supplementing in-class teaching with services such as study aids, step-by-step solutions to question banks, online tutors, and other online educational offerings. These services seek to ‘improve the overall return on educational investment’.”
According to Norris, Chegg has not raised prices in over 5 years and acknowledged that many of the users were from state universities, where class sizes tend to be larger and resource for individual teaching is more limited. “Ultimately, we would expect Chegg to publish how its services deliver improved educational outcomes, and the geographic split of student users, as well as a breakdown of the types of universities,” Norris argued.
Another success case, ASA International (ASAI) is one of the world’s largest international microfinance institutions. It provides small, socially responsible loans to mainly female low-income entrepreneurs, in Asia and Africa. “According to the UNDP, if women farmers had the same access to productive resources as men, they could increase the yields on their farms by 20-30%, which could raise total agricultural output in developing countries by 2.5- 4% per annum, and reduce the number of hungry people in the world by 12- 17%. Achieving gender equality in educational attainment and labour force participation by 2030 could raise global GDP by 3.6%,” Norris says.
“According to the World Bank, approximately 1.7 billion adults across the world do not have access to financial services within the traditional financial system,” Norris explains. “Operating across Asia and Africa, ASAI uses this data to target its services in those countries with the lowest penetration of financial inclusion and currently has over 2.1 million customers.”
“ASAI begins by sourcing references from family and community members to offer an initial loan based on the customer’s ability to repay. In parallel, it works with women to provide financial literacy training and ensure that loans can be repaid. Loan sizes are gradually increased to clients who successfully repay their initial loans, up to $250,” Norris adds.
“Throughout the process, ASAI engages with its clients’ communities, using weekly collection visits to assess business development and coordinate larger meetings where customers can exchange knowledge, ask questions, and develop their businesses,” she adds. According to Norris, affordable benchmarked interest rates and engagement with its debtors have resulted in customer retention and relatively low default rates for ASAI.
Image courtesy of Aberdeen Standard Investments