Sustainable or ‘impact’ investments aimed at environmental, social and governance (ESG) targets have never been more popular.
Data from the Global Sustainable Investment Alliance gathered in 2019 shows that the amounts invested in sustainable finance have more than doubled in past seven years, to over US$30tn (with the vast majority of investors coming from Europe and the US).
Popular wisdom holds that this trend is being driven by socially conscious millennials seeking more than just fiscal returns with their investments and pension pots.
And while that is undoubtedly true, there are several other factors which have arisen, since 2015 in particular, that have only added to the desire of investors to look, in detail, at what their investments are funding.
After all, 2015 was the year that the United Nations General Assembly set out its 17 Sustainable Development Goals (SDGs).
The SDGs have since been universally adopted as aspirational standards not only by governments (for which they were designed) but also by the impact investment community.
That, combined with the ever worsening and visible effects of climate change, has further added to the desire for investments to have a positive ‘impact’ as well as a monetary return.
Impact investing is here to stay and the past perception that, in order to have a positive social or environmental outcome, an investor must sacrifice financial performance has also been challenged by the current pandemic.
Recent well-publicised reports, stated that many funds with an explicit ESG or sustainability focus have been able to produce better results than their sector average and benchmarks in both the UK All Companies and Global sector.
That produced great headlines but dig a little deeper and some have argued that this can be largely attributed to a single factor – an extremely low exposure to energy companies and a commodities sector that has suffered so much in the first half of 2020.
As with so many financial instruments, it is important to understand what is happening behind the headline or label.
Indeed, the fact that the sector has been expanding so rapidly has raised concerns from seasoned players that new entrants seeking to pile into the sector are engaging in “impact-washing”.
This derivative of the more established term “green-washing” describes the PR ‘spin’ which seeks to persuade a naive investor that a particular investment is in fact delivering some ‘good’ alongside its financial returns, when, upon closer inspection, that is not the case, at least in any meaningful sense.
This has become more of a danger as investments have moved away from the traditional world of private equity investing in developing countries and into mainstream financial markets.
Consider, for instance, the following pension funds labels and what is actually included among their top 10 holdings.