Stockholm (NordSIP) – Managers with the right set of skills have long been providing private equity opportunities that offer measurable environmental, social and governance (ESG) impacts alongside financial returns. Doing the same with private debt is still rather less widespread. On Tuesday 26 April, NordSIP tuned into a seminar organised by the Cardano Group, entitled “Creating Real World Impact in Emerging Countries.” The discussion focused on real world case studies, wherein private debt investment helped contribute to job creation, improved water security, lower greenhouse gas emissions, or better gender equality.
Stefan Lundbergh, Director of Cardano Insights says debt should not be overlooked as an effective vehicle for impact investment. The high degree of influence of private lenders over the design of a new business venture affords them the ability to impose sustainability criteria as part of the deal during the negotiation phase. Lundbergh also points to the greater additionality that is achievable in emerging markets, for example where renewable energy replaces wood or coal fires. He also believes the perceived riskiness and volatility of emerging markets does not reflect the reality of private debt investing with the right deal-sourcing and portfolio management partners.
Local knowledge is key
The conversation turns to the practicalities of accessing the asset class in the right way. Sinisa Vukic, lead portfolio manager for the ACTIAM/Cardano financial inclusion strategy explains: “Providing private loans is always challenging because sourcing usually takes 6 to 9 months. It makes sense to separate the fund management and deal sourcing. It helps a lot because you can focus on the part you do best, selecting the deals that fit into your portfolio from a risk, return and impact perspective. We have deal-sourcing agents around the globe with feet on the ground and a good understanding of local market dynamics.” This separation also helps ensure a dispassionate, pragmatic assessment of the opportunities that are put forward.
No trade-off between impact and return
Vukic explains how the financial inclusion strategy seeks to maintain a healthy risk/return profile alongside the non-financial ESG outcomes, so that it does not risk jeopardising the fiduciary duty of Cardano’s institutional clients. With respect to risk, Vukic reiterates the need for co-operation with local agents that understand the regulatory environment and are more likely to be able to detect potentially serious governance failings on the part of borrowers in their local market. Interestingly, Vukic believes the default risk of the impact strategy is significantly lower than mainstream private debt strategies. This may result from lending the smaller businesses that are less dependent on the state of the larger economy, and a more granular understanding of the characteristics and aims of their business model.
In Vukic’s experience, there is no trade-off between and impact and financial performance. On the contrary, the presence in a business of measurable positive ESG-related outcomes is a reliable indicator of future success across the board. One of the main challenges with financial inclusion-focused impact investing is aggregating numerous smaller deals to be able to offer sufficient scale for institutional clients.
These types of investment strategy come to life with real-world examples of impact. Vukic explains how they achieve measurable carbon reductions by investing in more fuel-efficient stoves, which replace open fires. It is more complex when investing in the local food chain, where a deep understanding of the culture and agricultural practices is essential to select the right investments and measure the additionality. The strategy also targets job creation and aims to lock that element into the loan agreement.
An asset owner’s perspective
For Catelijne Reissenweber, Head of Fund Management at Dutch life and pensions insurer Athora, sustainable impact was a logical next step beyond ESG-based exclusion and engagement. Athora was also able to justify adding the impact strategy to its portfolio thanks to favourable financial metrics that helped the business case. “Another very important reason is that it speaks to people. We communicate with our clients, and even those with limited investment knowledge seem to know what microfinance is about. It seems to appeal to people and can act as a catalyst for them to start looking at their overall pension situation with renewed interest.” For Reissenweber, being a long-term investor is also an opportunity to tackle sustainability challenges that cannot be met by more trading-orientated entities. Coupled with the potential liquidity premium, it is possible to generate a win/win situation from this type of impact private debt strategy, with healthy uncorrelated financial returns accompanied by measurable positive sustainability outcomes.
