In an interview with Samuel Bevan, an investment manager at Aberdeen Standard Investments and supporter of NESsT, we gained insight into the public market’s shift toward impact investing in Europe and the challenges that investors and businesses must overcome in the transition.
The Growth of Impact Investing in Numbers
Catalyzed by the changing consumer mentality and new government regulations, global sustainable investments are expected to reach $150 trillion over the next decade. In Europe, Bloomberg’s analysis shows that funds devoted to environmental, social and governance (ESG) factors amounted to $132 billion in 2019 alone, and assets managed by funds that incorporate ESG criteria increased to $668 billion — a 56% increase in one year.
The drastic increase in ESG investments is echoed in the growth of the impact investing market, which targets investments that generate positive, measurable social, and environmental impact alongside a financial return. According to Global Impact Investing Network (GIIN)’s analysis, the size of the global impact investing market reached $502 billion by 2019.
Let's look at some key factors that are driving European fund managers and financial institutions to activate their impact investing vehicles.
1. Changing regulations.
In recent years, European policy makers have been channeling their efforts to establish a sustainable funding market for social entrepreneurship. In the Action Plan on Financing for Sustainable Growth, published in 2018, the European Commission highlights objectives to redirect capital flows toward sustainable investments, manage financial risks that arise from climate change and social issues, and promote transparency and long-term sustainability in financial activity. In early 2020, the European Commission adopted the Taxonomy Regulation to provide a precise framing around climate change, which helps investors with this specific sustainability goal to measure impact and find funding opportunities.
New regulations also subject financial market participants and products, including pension funds and alternative investment funds, to additional sustainability-related disclosure obligations that prevent “greenwashing.” As a result of these “do no harm” regulations, investors have to measure and disclose any negative impact their investments have on the environment and on society, “this is a huge change for the industry that wasn’t possible 5 years ago,” comments Sam.
2. Strong performance against market volatility.
In our current period of high market volatility, ESG funds have sustained their performance in comparison to funds in other industries.
A study by Morningstar shows that 24 of 26 ESG-tilted index funds outperformed their closest conventional counterparts. Jon Hale, author of the analysis, notes that ESG funds performed “consistently better than average”, which is a great sign that ESG investing “is not just some kind of bull market phenomenon, and it's more and more of an all-weather type of approach.” Bloomberg’s recent analysis corroborates this finding, and further illuminates that the average ESG fund declined less than the S&P 500 even in face of overall high market volatility. COVID-19 did not dissuade ESG demand, and investors continue to be interested in and swayed by ESG information.
““Originally, when we marketed ESG funds, we thought that the returns may be lower than a regular portfolio because you don’t have as big of a universe; however, we have seen that market volatility does not affect the ESG portfolio as much. Consequently, when clients look at risk and return, an ESG portfolio with lower volatility becomes the more favorable option.””
3. Organized action.
The European Commission created several financing instruments for social enterprises, including the Programme for Employment and Social Innovation (EASI) that de-risks financial institutions that fund social enterprises and encourages the formation of innovative vehicles. Another example is the Expert Group on Social Economy and Social Enterprises (GECES), which brings together representatives of private and public sector networks to communicate with national governments on social economy policies.
The Social Impact Accelerator (SIA), launched by the European Investment Bank and EIF, is the first pan-European public-private partnership “addressing the growing need for availability of equity finance to support social enterprises.”
Organized action is also growing around pension funds that ban fossil fuels and coal. Funds with ESG considerations have a proven track record of lowering investment risks. Surveys of ESG portfolio managers reveal that avoiding exposure to industries that are heavily reliant on oil and gas have insulated them from recent market volatilities that are associated with the collapse in the price of oil.
4. Rising consumer awareness.
Millennials and Generation Z investors are demanding more transparency. Motivated by a collective sense of social responsibility, more investors want to invest in line with their values and see that their investments are not solely generating profit.
Despite the unprecedented growth in ESG and impact investing, impact investors and entrepreneurs still face many challenges ahead.
The demands of private consumers are not well channeled to private banks. Private consumers need to have more agency to reach sustainable funds, “an improved platform needs to exist for retail money to find its way to sustainable investing,” adds Sam.
For portfolio managers who want to pivot their portfolio toward ESG and impact investing, the hardest part is “getting the first client off the ground and obtaining a track record,” says Sam. The first clients are important for an investment manager to reach the critical mass that is required to sustain their fund, and mixed metrics make it difficult for new actors to dedicate resources.
A lack of comparable impact data across products and funds may deter investors who have strict reporting requirements.
Sam shares that he sees “a lot of new blood and innovation happening.” This year, more funds are linked to the UN’s Sustainable Development Goals, which indicates that there is client demand for sustainable funds. People are motivated to make change and push for these products, and “investors change the way that businesses interact and behave,” he adds.
About Sam Bevan:
Sam is an Emerging Markets Debt Investment Manager at Aberdeen Standard Investments specializing in corporate credit. He is a proactive innovator who champions ESG analysis and led its integration into the investment process, resulting in successful pitches for high-profile responsible investing mandates. He also designed an impact fund that aligns to the UN SDGs, a market-first in its field.
Sam is a volunteer at NESsT. Currently, he is designing a mezzanine debt/equity fund with NESsT CEO and is providing financial modeling advice to social start-ups.
Sources:
https://www.iisd.org/system/files/publications/sustainable-investing.pdf?utm_source=www.google.com%2F
https://www.bloomberg.com/news/articles/2020-01-30/european-esg-funds-pulled-in-record-132-billion-in-2019
https://thegiin.org/research/publication/impinv-market-size
https://ec.europa.eu/info/publications/sustainable-finance-renewed-strategy_en
https://ec.europa.eu/knowledge4policy/publication/sustainable-finance-teg-final-report-eu-taxonomy_en
https://medium.com/disruptive-design/what-is-greenwashing-how-to-spot-it-and-stop-it-c44f3d130d5
https://www.morningstar.com/articles/976361/sustainable-funds-weather-the-first-quarter-better-than-conventional-funds
https://www.bloomberg.com/news/articles/2020-03-13/older-esg-funds-outperform-their-newer-rivals-in-market-tumult?sref=wINQCNXe
https://www.morningstar.com/articles/998953/can-interest-in-esg-investing-hold-up-during-a-pandemic
https://ssir.org/articles/entry/how_to_mainstream_impact_investing_in_europe#:~:text=The%20European%20Sustainable%20Investment%20Forum,billion%20(%24122%20billion)%20in
https://cornerstonecapinc.com/esg-fund-performance-in-volatile-markets/
http://www.eif.europa.eu/what_we_do/equity/sia/index.htm