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    On a Fasttrack to Meaningful Impact

    by Julia Axelsson, CAIA

    Given the increasing shortfall in investment capital needed to finance the UN Sustainable Development Goals, it has become obvious that the involvement of the private sector will be crucial going forward. To address this imperative, earlier this year, Allianz Global Investors (AllianzGI) announced the creation of a dedicated Private Markets Impact unit within its sustainable investment platform. 

    Entrusted with leading this effort is Matt Christensen, the firm’s Global Head of Sustainable and Impact Investing. Sustainability veteran Christensen sounds genuinely excited about the opportunities that this new setup presents. Purposeful investments in private markets are certainly the right fit for this long-time proponent of impact additionality. At AllianzGI, he is determined to move beyond merely reducing ‘footprints’ – namely reducing the negative impacts of a company’s own operations on the environment and society, be it a company’s carbon or water footprint – and towards leaving an actual positive ‘handprint’. 

    The Human Factor

    According to his job description, Christensen is responsible for “accelerating the growth of impact investing” as part of AllianzGI’s growing private markets platform.” ’Accelerating’ is the perfect term to describe what I’m aiming at here,” he comments. “And the best way to do it is by finding the right people. For me, it always comes back to people,” he says emphatically. 

    Hiring has therefore been high up on Christensen’s agenda since day one. Yet, given the current demand for sustainability experts, attracting talent can be challenging. “Yes, it is a rather competitive marketplace,” he admits. “But we have a lot going for us. Above all, we have the strong support of senior management, a clear vision for what we want to achieve and a differentiating offering. These three tailwinds enable us to attract talent.”

    Senior and experienced professionals seem indeed to be gathering quickly in AllianzGI’s newly created dedicated Private Markets Impact unit. The team of twelve combines existing equity and debt investing expertise, headed by lead Portfolio Managers Martin Ewald (Blended Private Equity vehicles) and Nadia Nikolova (Development Finance & Private Debt), with a brand-new Impact Measurement and Management unit under the leadership of Diane Mak. Christensen reveals that he is looking to add more resources that should help strengthen the unit’s developed markets private equity and private debt capabilities and expand the firm’s offering. 

    Blended Finance to the Rescue

    Blended finance is an area where AllianzGI’s teams already have a reputation for being frontrunners. Earlier this year, at the G7 summit in Elmau, world leaders endorsed the innovative blended finance strategy initiated jointly by AllianzGI and the European Investment Bank (EIB). The Emerging Market Climate Action Fund (EMCAF), officially launched during COP26 in November 2021, aims to finance climate mitigation and adaptation as well as environmental projects in Africa, Asia, Latin America, and the Middle East. The strategy is an excellent example of a concrete innovative, and market-led approach to mobilising private investments for climate-relevant infrastructure and enhancing multilateral finance and collaboration. 

    Grand pledges and high-profile endorsements aside, EMCAF is already making a real impact where it is needed the most, according to Christensen. To illustrate this, he uses one of the investments already made, the ARCH Cold Chain Solutions East Africa Fund. It is easy to grasp why it makes sense in the heat of Ethiopia, Kenya, Rwanda, Tanzania, and Uganda to channel money into greenfield assets in temperature-controlled supply chains such as storage and distribution of food and vaccines. 

    Matt Christensen, Global Head of Sustainable and Impact Investing
    Allianz Global Investors

    “We are really excited to be a part of this project which creates a positive impact on so many levels,” says Christensen. “Temperature-controlled storage and distribution reduce post-harvest food loss. It contributes to emission reductions, as food waste eventually results in methane emissions. There is a clear social aspect to the project, too. Refrigerating improves food security and alleviates health problems,” he explains.

    Blended finance solutions seem a particularly good fit for this type of investment. “Ideally, the project would be successful, and the investors will get a healthy return,” says Christensen. “If the business falters, however, this way of financing provides some protection that can ease investors’ concerns and encourage investment in such areas. Successful blended finance projects feature the right combination of debt, equity and grant financing, the right seniority of investors in terms of absorbing losses and earning returns, and appropriate risk-mitigation measures.”

    What is an Acceptable Rate of Return?

    While on the complex and somewhat controversial topic of impact investments’ returns, Christensen feels compelled to elaborate. “I don’t believe that impact investors need to trade financial returns for impact,” he asserts. 

    “They should, however, ask themselves what constitutes an acceptable rate of return for them. I think of market-rate returns as a bandwidth, stretching between maximum impact and maximum financial return. You could aim for maximising one of these or try to find an acceptable point between the two extremes,” he explains. “What is fascinating is that aiming for more impact often ends up supporting financial returns, too.”

    According to Christensen, the old risk-reward equation doesn’t fully capture the complexity of investing. “There is a missing link between the two,” he says. “Unless we incorporate impact into the equation, we cannot account for the increasingly important non-financial risks and non-financial returns.”

    Managing What You Can Measure

    These non-financial risks and returns are, however, notoriously challenging to quantify. Even if an investment’s impact appears tangible, it is far from a trivial exercise to measure its complex environmental and social outcomes and the interplay between them. “You need to go about it in a systematic and structured manner,” says Christensen. 

    “At AllianzGI, we adhere to some simple principles that help us delineate the task at hand,” he explains. “To start with, we are careful when screening and selecting investment opportunities. Assuming an impact enterprise view, we attempt to establish the impact proposition of the business we are investing in from the very beginning. Once the targeted impact outcomes are identified, we assess the materiality of the potential outcomes, the degree of additionality and the likelihood of impact delivery. This helps determine what impact results we measure and should aim to achieve.” 

    According to Christensen, working in private markets comes with its own set of distinct features. On the one hand, there is the possibility of direct investor contribution. “In private markets, we can add value by working within the company and helping management to drive the impact agenda,” he says. 

    On the other hand, the lack of data, reporting standards and common indicators makes it even more challenging to measure the impact of these investments. “KPIs abound in public markets, and there are plenty of frameworks and evolving standards,” comments Christensen. “Private markets, however, are still lagging.” Hence the need for developing a proprietary impact framework that leverages on market best practices where available to support the firm’s rigorous measurement and management of impact over the lifecycle of the investment and ensure that impact is being delivered. 

    “The future growth trajectory of impact investing depends on asset managers demonstrating how the impact can be measured and reported,” concludes Christensen.

     

    Image courtesy of Nicgorski

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