@Mercer_Investments
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Mercer Investments
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Silva Hanell, Wealth Leader & Partner at Mercer Sweden ESG and impact seek distinct outcomes, but their strategies can go hand-in–hand for investors wanting returns and societal benefits. Environmental, Social and Governance considerations – ESG – have become core tenets of the financial industry over the past ten years. As these non-financial performance factors have become more commonplace in investment decisions, there has been a growing desire from investors to actually make a difference with their money. Last year, The Economist released a scathing analysis of ESG frameworks and their outcomes, concluding that a misalignment between the asset management industry’s raison d'etre – to generate returns for its investors – and the profitability of ESG had, thus far, proven too big a bridge to cross. You can’t improve what you can’t measure It’s become clear over time that while a focus on ESG factors such as climate or diversity is a significant step in the right direction, it is not able nor necessarily even intended to guarantee both healthier societies and a more stable or equitable planet, at least not on its own. Instead, some investors have turned their attention toward impact investing, where progress may feel more tangible progress can be made. Impact, particularly in private markets, offers investors the opportunity to be a more active investor than is typical and input into companies with targeted societally beneficial outputs. From this perspective, impact investing gives investors a seat at the table, access to specific challenges that are smaller and more solvable, and the chance to change companies from within in order to make those desired solutions happen. How impact begins where ESG stops Impact allows us to build on those foundations of ESG and have a more direct influence on chosen matters. It allows investors to guide companies through partnership rather than legislation and directives alone. Furthermore, impact investing exists to create greater alignment between companies and ESG issues, which in turn can help alleviate some of the in-built contradictions of outright returns versus societal considerations. Making impact accessible But from an investor’s perspective, how to integrate ESG and impact considerations into their strategy can be complex. Impact investments have an accessibility issue, particularly for non-professional investors – Gen Zs, for example, appear keen to align their assets with their ethics – with fewer vehicles available within the marketplace. These investments often tend to be relatively illiquid, which compounds the issue further. ESG is now more commonly integrated into funds whereas many impact-related funds are neither integrated into investment decisions nor are they commonly investable, or at least are not yet. Furthermore, impact investing requires, at least at some level, interaction with firms from sectors such as energy and technology. Impact investing provides investors a greater opportunity to help shift legacy practices in these areas, particularly in energy, toward a more sustainable, climate-positive arena. Mercer was proud to be part of the panel Investing with Intent at Stockholm Climate Week 2023.
Mercer Investments
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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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this is a major step
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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...
Mercer Investments
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How you invest matters. Social and environmental issues are deeply connected with economic and financial outcomes, which means investors have a unique power to create change. When executed well, impact investing can not only deliver the financial benefits you were expecting, but also create the change you are looking for. On Earth Day, Mercer joined Stockholm Climate Week for the session Investing with Intent: the Case for Impact. Mercer was represented by Cara Williams, Global Head of ESG and Sustainability, Silva Hanell, Wealth Leader for Investment Solutions in Sweden, and Max Messervy, Head of Sustainable Investment, Americas. Also joining the session was Dr. Christin ter Braak-Forstinger, Co-founder & CEO of Chi Impact Capital, and Pia Irell, Impact Partner of Trill Impact. Every dollar you invest could actively deliver a certain kind of good Many investors already focus on environmental, social, and governance factors to better understand the potential investment risks and identify opportunities. But if you want to go beyond understanding ESG impacts, positive and negative, and invest with intent, you need impact investing. Impact investing proactively helps dynamic businesses deliver a specific social and environmental benefit, alongside financial outcomes. Or, as Cara Williams put it, “impact investing begins where ESG stops.” Impact investors connect the pursuit of risk-adjusted returns with the delivery of positive real-world outcomes, often related to the United Nations Sustainable Development Goals (SDGs). Each SDG provides a range of impact investment targets. For example, climate action is a key target that motivates allocations to renewable energy or green buildings. However, investing with intent and knowing where to start your impact investment journey can also be challenging. “The biggest challenge in the impact space is the fact that the choices out there are so wide that where you [determine to] actually focus has proven to be quite challenging for asset owners. To ensure that asset owners achieve their intended impact, we recommend that they first define what they want their impact to look like. Once this impact is defined, the question arises of how asset owners look to continue developing their portfolio while aligning with their impact objectives,” said Cara Williams, Global Head of ESG and Sustainability at Mercer. “For example, if you choose to invest in clean water, are you going for it globally? Even in developed markets, such as the United States, we have challenges providing clean water. Or are you going to choose specific markets like in the global south where you feel like that’s a bigger issue?” Impact investors come in all shapes and sizes, ranging from institutional investors and fund managers to development finance institutions, foundations, pension funds, and individual investors. Additionally, when it comes to their approaches to impact investing, their strategies can be just as varied – whether it's chasing market rate returns or investing in long-term capital. Regardless of differing investor profiles and approaches, collectively, impact investing can concentrate efforts towards many specific outcomes into broader, unified goals – using the individual outcomes to drive collected outcomes no investor could achieve alone. “Investing with intent is very important,” said Silva Hanell. “It starts with including climate in strategic decisions and explaining to the trustees and the people the importance of having an intent. It’s not only about managing an equity risk or credit risk, but also a climate risk. “We need to stabilize global temperatures on Earth. We are in emergency mode. Everyone needs to invest with intent. Impact investing should be our normal, everyday way of thinking.” Impact investing: Investing in a sustainable and inclusive future Climate change is both a pressing issue and an opportunity for the investment community. Institutional investors, such as pension funds, financial institutions, insurers, wealth managers, endowments and foundations, hold trillions of dollars in assets in their portfolios that can be applied towards investment into climate initiatives. By managing these portfolios to avoid climate transition risks, asset owners can reap various benefits, including market, technological, and reputational advantages. When applying impact investing to address global challenges like climate change, it can expedite the just transition and unlock economic opportunities in a decarbonized economy. However, it is critical that impact investments toward climate solutions also take a holistic approach to ensure that communities reliant on carbon-heavy industries are given the support they need to transition to a decarbonized economy. As Max Messervy, Mercer’s Head of Sustainable Investment, Americas explained, “It becomes a question of how to help all these different communities, and it's not just those who are directly employed but also thinking about their families. How can they have access to a secure pension if they have to change jobs or retire early? “I believe that the private sector has a role to play in facilitating that retraining for workers who’d like to be retrained into different economic sectors and facilitating finding roles for them as well. There could be intentional hiring by, for example, new renewable energy companies or offshore wind developers.” To learn more about Mercer’s work with impact investing, click here. https://youtu.be/CpRtb1Lz3oU?t=21397 Rewatch Stockholm Climate Week anytime on We Don’t Have Time Play.
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Very insightful on the impact of investing, a good reminder of the power of money
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True climate leadership in investing
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Great to see the issue of climate justice being raised as critical in this context.
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Great article,
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Great article! I'd be interested in learning more about how Gen Zs influence the impact investing landscape.
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interesting