*Expanding our thinking*
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IMPACT INVESTING
EMERGING ESG ISSUES
Impact investing goes beyond traditional responsible and sustainable investing by targeting positive real-world environmental or social outcomes in addition to financial returns. At Redington, we’re increasingly exploring impact options for our clients because we fundamentally believe that, when executed effectively, these strategies have the potential to produce meaningful results that can deliver both financial and sustainability objectives.
The past few years have seen a proliferation of impact funds in the industry, and almost 40% of the surveyed asset managers report managing at least one impact fund.
These funds account for just under 2% of total firm asset under management (AUM) (£638.8bn impact vs. £37.7tn firm AUM). This relatively low AUM figure is to be expected, given many of these are first-time impact funds with smaller initial fundraises. However, we predict this figure to increase as managers begin to see the growing market and client demand for impact solutions (particularly with regards to net zero).
Do you manage any impact funds?
Turning our attention to strategy, only 11 strategies (out of 232) describe themselves as impact funds, accounting for less than 1% of total strategy AUM*. Despite there being a greater number of illiquid impact strategies than there are public equity impact funds, from an AUM perspective, public and private market impact capital are on par with one another (accounting for c.£9bn each). Public market funds have enjoyed larger fundraises, and it seems institutional investors still favour liquid strategies.
*Please note, whilst we didn't receive any responses regarding impact from fixed income managers this year, we expect this asset class to play a greater role in this space moving forwards.
Impact funds by asset class (count)
We have a higher conviction in the potential for private market investments to generate real-world impact as the asset managers tend to have a greater influence over investee companies owing to their larger investment stakes and the potential for closer relationships with management teams/borrowers.
We also believe that additionality is more naturally akin to private markets and more challenging to prove in public markets.
But impact isn’t impossible in public markets. Especially when investing in small to mid-cap and/or emerging market companies where there’s a clear need for real-world change (such as on climate) but a lack of alternative funding sources. Under these circumstances, public market investing can often be the most impactful route.
Impact funds by asset class and regional focus
We often hear that the lack of a track record for impact funds is a deterrent for investors. And, of the surveyed asset managers, illiquid strategies have longer relevant track records than listed equity funds. However, when researching the impact universe, rather than automatically screening out first-time impact funds, we undertake additional due diligence to get comfortable before underwriting them. Just because a strategy is new, small and/or hasn’t been done before, doesn’t mean it isn’t a good idea worthy of capital allocation.
The majority of impact strategies currently target environmental themes, such as climate change, the energy transition and biodiversity. As asset managers explore the impact opportunity set, we expect to see greater diversification across themes and more socially-focused areas.
Impact investing track record
What impact themes does this strategy focus on?
The most common framework for assessing impact is alignment to the UN Sustainable Development Goals (SDGs), with 10 out of the 11 surveyed impact asset managers evaluating performance against select SDGs. Although we have some concerns around the validity of alignment to the SDGs (which were developed for countries rather than companies/investors), we understand the attraction of a single, widely adopted framework. Other frameworks like IRIS+, the Impact Management Project and Operating Principles for Impact Investment have lower adoption rates (with two of the surveyed asset managers utilising them).
Looking now at reporting, it’s encouraging to see that 100% of the surveyed impact asset managers report on impact, and 64% undertake independent verification of their reports. Reporting on outcomes is particularly important for impact funds as this is how we can hold them accountable for aligning with their impact objectives.
While the number of first-time funds, limited AUM and lack of track records highlight that impact investing is still in its early stages, it’s encouraging to see more managers seeking ways to generate positive outcomes for the environment and society as well as returns for investors. This is an incredibly exciting space, and we’re eager to watch it develop and grow.
As asset managers explore the impact opportunity set, we expect to see greater diversification across themes and more socially-focused areas.
Impact reporting and verification
More than 70% of the surveyed asset managers have begun to focus on new ESG issues over the past year. Looking at an asset class level, a greater proportion of equity and fixed income strategies have seen new themes emerge compared to the other asset classes we surveyed. New themes are slower to emerge in illiquid credit and liquid alternative strategies – climate remains a top priority given the work needed in this area.
Whether as a result of firm-level commitments, client demand and/or financial materiality, it’s evident that asset managers are exploring a wide range of issues – from sustainable food systems to human capital management. Particularly prominent areas include biodiversity and human rights.
Are there any new emerging ESG issues that this strategy has begun to focus on over the last year?
What emerging themes are managers contemplating?
More than 70% of the surveyed asset managers have begun to focus on new ESG issues over the past year.
Looking again at integration, asset managers predominantly consider biodiversity in their engagements with relevant parties (83%), portfolio management (64%) and due diligence of investments or counterparties (63%).
However, despite progress in biodiversity integration, reporting is still minimal – even across asset managers who claim to consider biodiversity and other nature-related criteria in their investment decisions. Only 16% of respondents currently report biodiversity KPIs, with a further 8% developing reporting capabilities. We acknowledge that clearer guidance and methodologies are needed for these figures to increase meaningfully and will continue to watch this space closely.
How do you consider biodiversity and nature-related criteria in the investment process?
Do you report on biodiversity KPIs for this strategy?
Compared to biodiversity, human rights as a theme is more established across asset managers. Notably, 84% of the surveyed asset managers have a modern slavery statement/firm commitment to human rights, and around 70% of strategies consider human rights in their investment processes.
Looking at where human rights is integrated within the investment process, we see very similar methods to those discussed in the biodiversity section (i.e., engagement, due diligence and portfolio management). One area of differentiation between these two themes is that managers have a larger focus on screening investments based on human rights (70%). In contrast, only 54% of managers claim to consider biodiversity in the screening process.
Firm: Do you have a nature-related statement or consider impacts on biodiversity as a firm?
Strategy: Do you consider biodiversity and other nature-related criteria when making investment decisions?
Since the formal launch of the Taskforce for Nature-related Financial Disclosures (TNFD) in June 2021, financial institutions have increasingly focused on biodiversity and ecosystem services over the past year. Just over half of respondents either have or are developing a firmwide nature-related statement, indicating a commitment to considering their firm’s impact on biodiversity.
This trend continues at the strategy level with over half of asset managers considering biodiversity in their investment decisions and a further 9% looking to integrate biodiversity into their investment processes in the near future.
Firm: Do you have a modern slavery statement or consider impacts on human rights?
Strategy: Do you consider human rights criteria when making investment decisions?
Unfortunately, despite what we view to be positive human rights integration for the majority of respondents, few asset managers are reporting on human rights at the strategy level. In fact, fewer managers report on human rights (7%) than biodiversity (16%). This seems largely due to challenges regarding the quantification of human rights and poor supply chain transparency.
The surveyed asset managers cite the inconsistency/lack of frameworks, data collection challenges, regional differences and tenuous links to financial materiality as key challenges to incorporating further themes into investment processes. Whilst we fully appreciate the difficulties associated with exploring new ideas and themes, we’re encouraged by the sincerity of research asset managers are undertaking to comprehend the implications of different ESG-related topics.
We believe these challenges provide the investment industry with plenty of opportunities for future progress.
How do you consider human rights criteria in the investment process?
Do you report on human rights KPIs for this strategy?
