Impact investing roundtable discussion

How would you describe impact investing?

William Nicoll: An investment where you have a measurable, positive environmental or social impact, and where you are able to monitor and maintain that investment throughout the life of it. Amandeep Shihn: Intentionally creating a measurable societal and/or environmental impact over the long term alongside a financial return. Adam Matthews: A model that serves the general need of society, as well as generating returns. ESG is clearly important, a key stepping stone. We should be encouraging companies that have demonstrated clear evidence of their overall contribution. Nicoll: What has changed is there is more specialist knowledge in the sector that allows you to make a proper, considered view of what is impact and what isn’t impact investing. Shihn: There’s not one technical definition which everyone uses or agrees with. That makes discussions more interesting, more fluid and more dynamic. For clients it’s how you integrate that within your framework as an investor and an owner. So there’s no one-size-fits-all. There are a number of dynamics which feature in an asset owner’s discussions and views, but everyone should have a belief which they put into writing and then into practice and then hold themselves to account by that. We’re having more and more discussions with clients in this regard. Nicoll: If we are funding a solar park, on the surface that looks like an environmentally good thing, but we need to have more detail, more understanding of what the governance of that particular project is. You need to look at all the possibilities for controversy that are there in an ownership structure.How are these being used or positioned in portfolios? Matthews: We recognise that the church, as an investor, is in a different space to others. For us there is a clear link between our ethical policies and our values. Climate change is one example where we are proactively looking for opportunities. These opportunities include infrastructure, renewable energy and green investments. The Church Commissioners, for example, are the largest holder of forestry, and that makes a very significant return. Much more emphasis has been placed on it as a result of having a policy on climate change that really sought to focus us much more in looking for those opportunities. It’s done within the expectation that it’s also got to make the return we seek as well. Having clarity on the values of the organisation and allowing that to drive and to find those opportunities is quite important.You don’t see that being a problem with fiduciary responsibilities? Matthews: Our Ethical Investment Advisory Group is staffed with experts on ethics, theology and investment theory. They produce independent advice that then goes to our trustees, who balance that against their fiduciary responsibilities. It enables us to very clearly look at these opportunities in line with the returns that we need to make to be able to fund the cathedrals, the pensions and the activities of the church. Shihn: There is often a perception, it may be a misperception, among asset owners that doing something ethical or doing something ESG-related or sustainability-related might have a negative impact on your financial returns. Infrastructure, renewable energy are all examples of investments which have impacts and can have strong returns in their own rights. When making decisions and taking actions concerning sustainability, asset owners need to ensure that these are consistent with their mission and beliefs. Actions also need to take into consideration the materiality of any changes made to their investment portfolios and end objectives, while also fulfilling their fiduciary duty. Matthews: Is it easy to find information about the underlying assets so that you are comfortable with the price? Shihn: Data quality and availability is improving. But there is still a long way to go. Schemes like Global Impact Investing Network’s (GIIN) IRIS Metrics, have key performance indicators (KPIs) for different asset classes and different asset types that look at the financial and non-financial aspects of an investment. These are meant to be measurable KPIs that you can look at and try to measure portfolios against. Matthews: Bespoke analysis can play a key role. In relation to climate change, we’ve initiated a major initiative with the London School of Economics. It allows us to plot where individual companies sit in the transition to a low carbon economy against the 2° target and against the current regulations in each of those sectors. We’re doing this with a group of other high-profile asset owners, and will be offering it to the whole market to use and adapt as they see fit. The tool will identify the leaders and potential future investment opportunities. There remains a knowledge gap regarding what a company’s future projected environmental performance looks like. We will be pushing to fill that gap by asking companies for further disclosure. Nicoll: Do you find there are lots of impact-type investments out there that are easily accessible? Because of all those difficulties. Shihn: From our client base, the rate of take up or understanding of the investments based in impact is markedly different from a global perspective. We have some very large asset owners, say, in Australia or Canada, which are very much at the forefront of this. They say: “Well, we definitely want to have an impact from our investing so we will go out and look for particular investments. Maybe do our own on-the-ground research and partner up with asset managers and companies.” Whereas some other asset owners are not all as fully up to speed on the topic, or maybe don’t have the governance and so are trying to explore what they could do within their constraints. We’re also in an environment where pension schemes, in general, have been de-risking. So their proportion of returnseeking assets has been coming down. Because of that where is the marginal effort in their limited time and trustee meetings? Is it spent on matching assets which are the bulk of the portfolio? Or do they look at the smaller equity part of the portfolio? Looking at our delegated client business, roughly speaking the equity exposure is fairly small, maybe in the region of around 10%. So in terms of time spent and where they’ve put their mental capacity to work, it’s maybe not as high a priority. The discussions with clients looking to explore sustainability for the first time is more in the public equity space. Nicoll: If you want to put direct money to work, then [primary] debt is one of the obvious ways to do it. That also should link with the de-risking agenda. You can lend to solar companies or building student accommodation or funding hospitals or social housing. The problem that we’ve seen in the debt market, certainly in terms of impact assets, is that a lot of the assets tend to be very small. So we look to use primary debt, where we try to get sufficient returns to satisfy fiduciary duties, and also know that the information on possible impact should be very good. Shihn: For a number of years now, we have been doing a lot in terms of debt, real estate and infrastructure investing which may also have a social impact. This is something which has continued to grow in recent years and continues to do so. Matthews: What more could the government do to encourage pension funds in this space? Shihn: The Department for Work and Pensions changed the wording of their legislation earlier this year. It got rid of E, S and G, which is great, because it goes beyond that. But financial and non-financial are also perhaps not great definitions. Non-financial can very easily turn financial. Nicoll: The consistent refrain from asset managers to government is consistency and clarity on regulatory regimes. Many of these assets are going to be inside some sort of regulatory regime, whether it’s in the UK or elsewhere. Shihn: If you look at something like solar energy where it’s still a very heavily subsidised market, and now that it’s becoming cost effective, cost competitive, those subsidies seem to be reducing and that in itself changes the investment and the risk profile for investment. So regulatory regimes are going to have a massive impact in certain parts of the market. Matthews: The signals from government on renewables in the UK are very mixed. In areas such as renewables key measures and initiatives are being changed very rapidly and one begins to ask the question, “What’s the overall policy direction of the government?” And just being able to signal to asset owners that, “These are priorities. There’s going to be a long-term commitment here that we can then seriously look at it in that context.”Obviously, we’re looking over a much longer horizon, we need to get as much security as we can.