An increased bias emerges from the statistics on responsible investment, placing the spotlight on so-called impact investment. Not surprising. But what exactly are we talking about?
Responsible investment is deployed in seven main strategies or approaches. The best known and most widely used is the integration of environmental, social and governance (ESG) factors. A variation comes from ESG thematic investing, which will adopt a more targeted selection of companies. More traditional avenues follow, sometimes using negative filtering (by exclusion of companies), sometimes positive filtering (by inclusion) or based on standards (by exclusion). Finally, a more direct intervention will take the paths of commitment (or shareholder activism) and impact investment, or intention.
In the 2023 summary report from the Responsible Investment Association, it appears that the proportion of Canadian assets under professional management managed under responsible investment criteria increased from 47% to 49% between 2021 and 2022. We also measure a notable increase in the proportion of respondents who rank the search for a social or environmental impact among their three main motivations, going from 20% in 2022 to 31% in 2023. Surprising? Not really. Because the survey also indicates that the three main obstacles to the growth of responsible investment still remain, in order, greenwashing, the absence of standardized disclosure frameworks or standards and the lack of reliable data. In short, these investors want to measure themselves — or rely on managers who do so — whether their commitment really produces the desired impact.
But, as we can guess, we are talking about a small market. Worldwide. There are currently around $1.2 trillion in assets under management in the broad impact area (up from $715 billion in 2020), even more if you take a broader view, writes ESG strategy leader Cara Williams global consulting firm Mercer. It is still a specialized or niche market, difficult to access for small investors. In fact, this family includes a handful of mutual investment funds or funds traded on the stock exchange which are deployed here and there in the offerings of certain financial institutions, to which we must however add the Fonds de solidarité FTQ and Fondaction.
But having said that, and overall, about 34% of the money channeled through impact investing goes to private equity (in the form of private placements) and about 39% to infrastructure, “so that Most of the money in these areas is in private or less liquid markets. The challenge is to make it accessible to the general public,” adds M.me Williams.
The specialist explains that impact investing differs from ESG by being particularly focused on measured results. “Even though the term ESG is increasingly adopted across all investment sectors, in some cases the nuances of sustainable investing have been lost amid buzzwords, unclear outcomes and, in some cases , exercises [d’écoblanchiment]. In impact investing, you invest with specific intention, in areas where you want to have a particular impact. » A return is expected, to which is added a “social return” coming from an additional intention or objective. In short, a return which is not constrained to maximizing the return on investment.
The specialist firm Addenda Capital has already associated the theme with “an investment approach aimed at intentionally generating both a financial return and positive social and/or environmental impacts, and whose effects are actively and adequately measured”. We therefore go further than investments integrating ESG (environmental, social and governance) criteria with, the big difference, the intention to obtain or create financial and social value, and to measure their social impacts.
Not philanthropy
And we’re not talking about philanthropy. Impact investors will seek competitive returns. The Investopedia site notes that private investments, for example, can easily generate returns that outperform the S&P 500 index by 15%. Another study, by the University of California, calculated that a median impact fund had an internal rate of return just one percentage point lower than a median no-impact fund. In its 2023 report bringing together more than 300 impact investors with assets under management of US$371 billion, the Global Impact Investing Network indicates that most of them say they are achieving results that are superior or in line with their expectations both in terms of financial performance (79% of respondents) than that of the desired impact (88%). Just 16% reported underperformance against their financial target, and 3% against the impact measure.