Thursday 12/09/2019

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Impact investing or ESG investments: which one will win over investors?

Responsible Investment Strategist

While the wording of the question seems to place these two approaches in opposition, in reality this is not the case. They complement each other, making them mutually beneficial and ultimately essential to each other. A summary by Ophélie Mortier, Responsible Investment Strategist, following her participation in the Luxembourg Sustainability Forum in June.

 

The strengths and weaknesses of both types of investment are widely known:

  • Impact investing, unlike private investments, has a clear impact mission: its intention is visible, measurable and verifiable. There remains the challenge of its limited accessibility to investors and therefore its potential size and the extent of its impact.
  • Sustainable and responsible investments focus on ESG aspects from a process and product perspective, including the company’s social license to operate and the impact of its products on ESG themes. While the industry still faces the challenge of clarifying its intentionality and particularly its metrics, the impact is real and its magnitude and scope are increasing.


Mutual enrichment

  • In financial terms, sustainable and responsible investments give impact investing the depth it currently lacks and provide an essential lever for the volume of the financing required.
  • In terms of impact, impact investing has pushed the limits of sustainable and responsible investment by forcing it not only to reject the least exemplary/virtuous market players but to demonstrate how they make a positive contribution to society as a whole.

Looking at the long road travelled by our sustainable expertise to date, this double lesson can be seen throughout the last seventeen years.
The first strategies we launched at Degroof Petercam reflected pure best-in-class approaches that left little room for transition, effort or commitment. Today it is no longer enough not to invest in the less virtuous companies in a sector. It requires commitment, impact and action. Without falling into the trap of excessive reporting, transparency requires relevant and reliable indicators and information. Going beyond the absolute carbon footprint figure, it is essential that we understand what contributes to the carbon footprint and how that will evolve in the future.

More requirements and more analysis

It also results in a more critical attitude towards information received. The impact request leads to questions about the company’s primary purpose, its contribution to a more sustainable world and its evolution over time. Sustainable themes are increasingly reflected in portfolios, constituting the major differentiation with ESG integration funds, which generally integrate the risk related to ESG issues but do not take systematic account (concept of intentionality!) of the response to sustainability issues. This requires an increasingly pointed and focused analysis of the real issues in the sector or sub-sector. Here too there is an “impact” for asset managers and other financial players: we have to engage with ESG rating agencies to ensure that both sides understand the real issues and the scores or ratings that reflect this aspect of combined risk and opportunity, instead of the company’s level of reporting.


“To invest, not to invest, or to disinvest.
A decision with a major impact!”


What about the sustainability of countries?

For sustainable investment to extend the impact to the entire economy and meet the financing needs related to sustainability issues, it must use all possible levers, including sovereign bonds. While the assessment of country sustainability seems to be a very complex exercise where commitment can be particularly limited, sovereign bonds remain the largest class of public investment assets and are therefore a major financing tool. True, not everyone has the capacity to engage with a country. However, deciding whether or not to invest in a country’s debt has an impact by definition. We must bear in mind: an investment decision entails making a choice: to invest, not to invest, or to disinvest. This makes it an impact decision!

Whatever the limits, complementarity and differences between the two are, the essential thing is to aim for a common objective of sustainability in the primary sense of the term: meeting the needs of current generations without compromising the needs of future generations. It also implies a constant questioning of approaches and convictions in order to evolve with the times.

Faced with major paradigm shifts at all levels - democracy, consumption, environment, technologies, etc. - two options are open to us:

  • Reject change and fight for the status quo that some defend as more social and more humane, or
  • Accept change and disruption and remain open to and critical of solutions that are part of this transition in a framework of good practices and exchanges on sustainable alternatives in each part of a company’s operations.
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