Pasi Vanttinen, Managing partner, Vana Capital & Ventures
Sustainable, Responsible and Impact investing markets have been founded based on the concerns over resources and capital allocated to sustainable economic, environmental and social/societal development. Capital, investments and resources are allocated to provide solutions to problems and take advantage of the opportunities in climate change, in different environmental and social challenges around the globe.
SRI Investing Markets Overview
We know that SRI Investing markets have all grown tremendously by the assets under management over the past years and decade. We know that most of these investments have provided similar or better returns than the traditional approach and markets. We expect the growth to continue in terms of the assets under management with continued good returns and new products for investors in the area.
Sustainable Investing market segment have been estimated to be around 22.9 trillion USD by Global Sustainable Investment Alliance (GSIA) organization based on their members Assets Under Management in 2016. Responsible Investing market subsegment size estimate by GSIA is around 248 billion USD in total Assets Under Management based on their members figures in 2016. Then the Impact investing market subsegment size estimate by Global Impact Investors Network (GIIN) is around 114 B USD based on their members Assets Under Management globally in 2016.
Sustainable Investing Market
Sustainable investing is an approach that considers environmental, social and governance (ESG) factors in portfolio selection and management. It covers all investment classes from equity to fixed income and thematic alternative investments. It aims for good above market rate returns. There are also focus in making positive impact in sustainable economic, environmental and social development. It is called the “Triple-Bottom-Line” approach to investing, in which economic, environmental and social returns or impacts are all important. UN “Principles of Responsible Investing” (PRI) and “Environment-Society-Governance” (ESG) standards are used in its investing evaluation, in decisions, in follow-ups and in measurements. Sustainable investing market has grown fast and offered good returns in the past 10 years.
Responsible Investing Market
Responsible investing is an approach that considers social and environmental problems as important targets to invest in and offer resources to solve them to make more sustainable world in the future. It covers also all investment classes. It aims for good above market rate returns and positive impact in sustainability. There is also so called “Triple-Bottom-Line” investing approach. UN PRI, ESG, customized social and environmental metrics are used in its investing evaluation, in decisions, in follow-ups and in impact measurement. Responsible investing market has grown and offered good returns too for years.
Impact Investing Market
Impact investing is an investment approach, which aims to solve different social or environmental problems as part of the broader sustainable and responsible investing markets universe. It is also rapidly growing investment practice, which uses its capital and resources to drive critical social and environmental change around the world. There is also community investing side, in which they help the underserved individuals or communities by financing business or projects that have a clear social or environmental purpose.
Impact investing covers all investment classes from equity to fixed income and thematic alternative investments. Investments have different return targets and expectations from good above market rate returns to only capital preservation target, but they have all targets to get measurable positive “impact returns” in sustainability. Variable financial returns expectations are linked to targeted and expected “impact returns” to sustainability, which explains the wide spectrum of acceptable financial returns. It has the “Double-Bottom-Line” approach to investing with aiming positive measurable social or environmental returns and economic/financial returns. Impact measurement is very important in impact investing.
Impact Investing Measurement and Metrics
Impact measurement is the key fundamental difference, which separates it from the other sustainability and responsibility investing. There are different standard and proprietary metrics, which are used in impact measurement. Standard impact metrics includes IRIS, GSIR, GIIRS, SROI and SPI4 (microfinance), which are used and IRIS being the most typical metric. There are numerous proprietary metrics, which are built and modified from existing standards or built from using UN Sustainable Development Goals (SDGs) as base for the metrics and measurement. There is no single agreed standard metric for positive “impact returns” measurement.
Impact Investing Returns
Impact investing market have many subsegments in its investing focus from impact venture capital and thematic investments to community, social venture capital and philanthropic venture capital. Each focus has its own aims in terms of investment returns and in impact returns. Investment returns go from good returns to below market rate returns or even to just preserving the capital.
Impact investing market has grown, evolved and developed tremendously over the past years and decade. It is expected to grow, to evolve and to develop even further in the future. There are exciting times ahead.
The Concluding Remarks
We know that there are different definitions and interpretations about sustainable, responsible and impact investing. The key is to remember that they are all concerned about providing solutions to problems and creating positive value-added or impact in sustainable economic, environmental and social development.
There are different aims for the investment and impact returns in each of these market segment.
Please find some market actors and organisations “standard” definition for sustainable, responsible and impact (SRI) investing:
The GSIA definitions of Sustainable and Responsible Investments are:
- Negative/exclusionary screening: exclude from investments funds, companies or projects with bad or negative practices based on specific Environmental, Social and/or Governance (ESG) criteria;
- Positive/best-in-class screening: investment in sectors, companies or projects selected for positive ESG performance relative to industry peers;
- Norms-based screening: screening of investments against minimum standards of business practice based on international norms and good governance practices;
- ESG integration: the systematic and explicit inclusion by investment managers of environmental, social and governance factors into financial analysis;
- Sustainability themed investing: investment in themes or assets specifically related to sustainability (for example clean energy, green technology or sustainable agriculture);
- Impact/community investing: targeted investments, typically made in private markets, aimed at solving social or environmental problems, and including community investing, where capital is specifically directed to traditionally underserved individuals or communities, financing that is provided to businesses with a clear social or environmental purpose;
- Corporate engagement and shareholder action: the use of shareholder power to influence corporate behavior, including through direct corporate engagement (i.e. communicating with senior management and/or boards of companies), filing or co-filing shareholder proposals, and proxy voting that is guided by comprehensive ESG guidelines.
The GIIN definition of Impact Investing is:
- General Investment Focus: investments made into companies, organizations and/or funds with the intention to generate social or environmental impact alongside a financial return, and investments used to drive critical social and/or environmental change, community investing to help underserved individuals or communities, financing for businesses or projects that have a clear social or environmental purpose to better all;
- Social Theme Target/critical social need: investing in critical social or community problem themes (for example access to finance, employment generation, food. & agriculture, health, education, income / livelihoods, entrepreneurship) and needing to be changed for better;
- Environmental Theme Target/critical environmental need: investing in critical environmental problem theme (for example renewable energy, energy efficiency, clean technology, climate change, clean water, sanitation, waste management) and needing to be established or improved to be make it better;
- Impact Measurement: social or environmental improvement targets and measurement metrics are key for impact investing, standardized and customized or proprietary metrics for measuring progress against impact objectives, standard metrics include IRIS/GIIRS/SROI/SPI4 (microfinance), customized or proprietary metrics can be built from standard models or from Paris Summit/COP21 for climate change and UN Sustainable Development Goals (SDGs) for sustainability;
- Investment Returns: scale and scope are wide from good returns to market rate returns and below market rate returns or even to just the capital preservation within all positive measurable impact in sustainability;
Sustainable, responsible and impact (SRI) investing have changed and continues to change the investing and financial markets. SRI investments and investors have offered different solutions to many social and environmental problems. SRI investing has offered good returns and made positive impact in sustainability for the past decade or even decades. We are expecting in more exciting times for it all in the future.