Cara Williams, global ESG strategy leader, Mercer
Impact investing differs from ESG by being particularly focused on measured outcomes. It can be adopted by a much broader audience if we can unlock the opportunity for smaller investors.
‘Investing in Earth’ is the goal of Earth Day 2023, but investing with intent – and with ESG outcomes in mind – has been on investors’ minds for several years already. The challenge for everyone in the market is how we can find ways to connect this investment ambition with effective opportunities to do actually do so.
ESG has become one of the investment industry’s most significant trends in recent years, as investors, governments and the public alike have recognized the potential for investment value when incorporating non-financial performance measures around environmental, social and governance challenges.
But while ESG as a term is seeing broader uptake by all parts of the investments space, in some instances, the nuances of sustainable investing have been lost amid buzzwords, unclear outcomes and in some cases, box-ticking exercises. For asset owners with wide-ranging responsibilities for their members, it is critical to remain focused on financial returns, as well as measurable outcomes around carbon, social responsibility or other non-financial focuses.
ESG is not the same as impact
At Mercer, we oversee more than $16trn in assets under management and we have assessed asset managers on their ESG factor integration for around 20 years. Incorporating ESG factors is a question of investment acumen and how well you integrate all the information available to you when you make decisions as a portfolio manager, which is quite different from trying to ‘do good with your money.’
It is particularly about asking if the thing you are investing in is doing well enough to produce the sustainable revenue necessary to thrive in the future. That means treating people well, treating communities well, treating the environment well, responding effectively to current and future regulations that could hurt or potentially benefit that organization or market. These are typical indicators of course, of most well-run businesses.
We actually consider impact investing to be quite different. In impact investing you are investing with specific intent, within areas where you want to make a specific impact.
The challenge here is that the potential choices on where to focus are so wide that investors or asset managers need a very clear aspiration of what they want to impact, and can build their portfolio around that – for instance clean water. Where? In developing markets. Specifically? In the global south. Greater granularity allows more precise measurement of outcomes.
We find that only the most sophisticated asset owners can currently go to the ground and see if their investments will have the impact they are hoping for. Smaller investors don’t have the breadth of expertise or resources to have a well-diversified impact portfolio that still delivers returns. But what if they could?
An opportunity for smaller and larger investors
There is about $1.2 trillion in assets under management in the broad impact space right now (according to the Global Impact Investing Network or GIIN) – more if you took a wider view. Pitchbook data suggests that about 34% of that is in Private Equity and around 39% is in Infrastructure, so you are seeing most of the money in these areas in private markets or less liquid markets. The challenge is making it accessible for the broader public.
Frankly, a major constraint around investing with intent is accessibility. Private equity offers access to the exciting unlisted emerging companies that are dedicated to tackling some of the biggest social and environmental issues today, while infrastructure investing is helping entire countries move towards a more sustainable future.
We know that more retail investors, particularly younger ones, want their investments to have a positive impact. But for the average investor, private markets are inaccessible because of their illiquidity, longer lock-up periods, and higher fees.
Private markets may open as new fund structures emerge, and understanding of the asset class deepens. New technologies, such as tokenization, which has helped contribute to the growing range of digital assets, may help democratize what has been a restricted asset class for the mass market. Perhaps, as we all consider how we can deliver results for ourselves, our clients and the planet, having an impact on accessibility might be the next area to make meaningful change.
Mercer was proud to be part of the panel Investing with Intent at Stockholm Climate Week 2023.
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42 w
this is a major step
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Informative post and really puts things in perspective
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Interesting, as a "normal" person how would you distinguish the difference between ESG investing and investing with intent? :)
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43 w
This is an important stride
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A very important step
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Thank you, Cara Williams, for elevating the importance of impact investing. It seems that #ESG is becoming more bogged down with politicization in the USA...