The impact fund market is coming of age and why ‘impact washing’ is over-hyped
The ClearlySo Impact Funds team share their insights into the impact fund market, reflecting on nuances around the shift towards sustainable, ESG and impact investing.
2019 has been a game changer from the impact fund market, with high-profile acquisitions of impact fund managers, a huge increase of investment and activity from institutional investors, and growing demand for ESG, sustainable, and impact investment strategies across all asset classes.
This year, barely a day has gone by without reading an article about how impact investing is “going mainstream”. Whether a global asset manager announces that it is launching a new impact fund having recently discovered that they ‘have actually been an impact investor for years’; an insurance group who has set up an accelerator programme for impactful technology companies; the acquisition of an impact fund manager by a behemoth asset management firm; or a hedge fund manager who has seen the light and is going to set up an foundation to address climate change. In this fast-growing space, the step-change we have seen in 2019 for the universal embrace of impact investing as the financial market’s new purpose has been remarkable.
Institutional investors whom until a year or so ago were labelling impact investing as a passing fad, an interesting twist to CSR, or something to do in the years before you retire, are now flinging capital, staff, and marketing budgets into new strategies and rebrands. Whilst it may be easy to be cynical of these recent convert’s motivations, the amount of new capital being allocated into impact / sustainable / ethical / ESG strategies, whatever label you give, is clear to see.
As pioneers in the impact investing space for almost 12 years, ClearlySo has seen the market grow from a handful of entrepreneurs, angel investors, miles of column inches and a tonne of goodwill, to a half a trillion-dollar sector spanning all asset classes, investor groups, and geographies.
Most noticeably has been the number and calibre of impact fund managers bringing ‘Impact products’ to market. According to GIIN, 120 impact fund managers raised capital in 2018, with 146 fund managers expecting to raise capital by the close of 2019.
With over $500bn impact AUM, there is little wonder that mainstream asset management firms are starting to not only take notice, but to take actions into their own hands.
As a specialist advisor and placement agent to Impact Fund Managers across Europe we have seen this growth first-hand from a wide range of sources. In 2019 alone, we reviewed over 100 funds and products with impact investment strategies. These have predominantly been of three types:
- Emerging impact fund managers with thematic / sector focused investment strategies typically with track-records or backgrounds from mainstream asset managers;
- Corporates, endowments, charities and financial institutions looking at impact investing as not just a way to gain access to new business models and technologies, but to best position themselves strategically in a fast-changing environment;
- Mainstream asset management companies which feel under pressure from their competitors, existing LPs, staff, society, or capital flights from their traditional products to either establish an impact fund, acquire an existing impact fund manager, or even try to incorporate impact into all of their existing investment activities.
Whilst track record remains an issue for most impact fund managers – most of which have launched within the last five years – some established asset managers are entering the space, bringing with them historic fund management credentials and performance.
Asset managers looking to enter impact investing have typically taken four routes: (i) unearth their own impact credentials through previous activities or a pivot in strategy and go to market with a new impact product; (ii) acquire one of the emerging impact fund managers to gain credentials, experienced staff, existing portfolios and assets; (iii) partner with or purchasing impact measurement tools which can be applied across existing and future portfolios, aiming to make incremental improvements across the board; or (iv) hire a new team of impact investment experts, train up existing staff, and see what happens.
For those looking to launch their own products, we regularly hear the phrase ‘on reflection, we have actually been impact investors for the last 20 years, how can we re-shape our track record to highlight company X or strategy Y’; or we often receive ‘impact fund’ investment presentations with a solitary slide highlighting relevant technicoloured UN SDG logos, with one line, stating that the firm will only invest in companies in alignment with the UN SDGs.
We normally advise these asset managers not to launch an ‘impact’ fund unless it is actually going to be impactful, and to focus less on the label or branding, but more about what they plan to achieve from the underlying investments when adopting a positive impact perspective. Nevertheless, launching an impact product is often the most direct way for fund managers to show their investors, stakeholders, and competitors that they are both active and innovating in the space.
For the most part institutions are taking the ‘impact’ part of impact investing seriously, as they realise ‘impact in name only’ products do not sit well with the majority of investors, for whom impact measurement and reporting is an important and fundamental requirement questioned at very early due diligence of a fund’s strategy.
Another entry point is through acquisition or investment in emerging impact fund managers. This has been driven by the reality that large institutional investment managers typically do not have the right expertise in their own teams. This has been illustrated by a number of high-profiled acquisitions over the last few years:
- In July 2019, Schroders ($444bn AUM) acquired an emerging impact fund manager Blue Orchard ($3.5bn AUM) an expert in microfinance and climate smart growth investing in emerging markets
- In June 2019, Australian pension fund Christian Super acquired a significant minority stake in ResponsAbility Investments, a $3bn AUM Swiss-based impact asset manager specialising in inclusive finance, renewable energy, and sustainable agriculture in emerging markets
- In October 2017, Natixis / Mirova acquired Althelia in order to allocate over €1bn to environment and climate related investments over the next five years
- In July 2015, Goldman Sachs Asset Management acquired Imprint Capital, an ESG / impact investing boutique, in order to help scale impact investing and bring it into the mainstream
Last month, Zamo Capital recently announced the first GP-stake investment fund backed by Big Society Capital, a UK wholesale impact investor. They plan to invest capital into a number of emerging UK impact GPs to help them effectively raise capital from LP investors, warehouse deals, and provide strategic direction for future investment strategies and fundraises.
Alternatively, many institutions have invested in ESG / impact measurement specialists or are investing in proprietary measurement and reporting frameworks.
- DWS and Allianz have both invested in digital ESG-scoring provider and fund manager Arabesque’s S-Ray product
- Pimco has invested in Comet, a tool to measure the progress of issuers against specific impact objectives, as well as an internal scoring system to measure carbon intensity metrics
- In September, MSCI acquired Carbon Delta, a specialist in climate risk assessment and reporting for the institutional market, providing global investors with solutions to help them better understand the impact of climate change on their portfolios
- MAN Group launched their proprietary ESG analytics tool in July this year, to monitor non-financial risks and analyses, environmental and social factors across single issuers, portfolios and indices
Finally, many institutional investors are building their own in-house teams or training existing staff to stay ahead of the curve in the transition towards sustainable and responsible investment practices:
- Standard Life Aberdeen now have a 20 strong ESG investment team, many of which have been recruited in the last 12 months
- Blackrock’s sustainable investment team now consists of 22 investment professionals globally, more than doubling in the last 24 months
- BNP Paribas, an early market mover in the microfinance space, have recently doubled their sustainability team to 25
- Many of these hires have historically been analysts and researchers, but increasingly there has been a shift to focus on money managers who can run new impact fund strategies and portfolios
This shift towards impact investing isn’t just in private markets and alternatives, where the majority of impact investing has occurred to date. Assets allocated to public equity and debt strategies with ESG and impact screens have also significantly increased. Assets in sustainable ESG mutual funds have almost doubled since 2012 to $1.8tn, and during the same period the number of new ESG funds launched has risen by 80% to 3,955 (Morningstar).
This adoption of ESG / sustainable / impact investment strategies has to some extent been driven by downward pressure on fees caused by significant reallocation to passive products and by push back from investors on the traditional 2 and 20 models of the past. These trends have made impact investment (specialist, very much actively managed products with larger costs to cover) a way for asset managers to reposition their active management strategies to one of the only strategies that can still justify high fees for such an innovative approach.
This entry of established financial institutions into the impact investment space has led some impact investing purists to accuse these new entrants of green-washing or impact-washing. This is a genuine concern and something that we see on a regular basis, but from our perspective one which has been overplayed.
In some cases there are merits to concerns around impact-washing, but by casting these shadows of doubt for institutional investors coming to impact for the first time, we run the risk of discrediting the sector as a whole and therefore discourage asset owners from shifting from the status quo. We are missing the bigger picture. For the most part, we shouldn’t be concerned whether this has been driven by demographic shifts, public awareness, wanting to make their children proud, a chance to charge higher fees, or simply not wanting to get left behind by competitors. Creating systemic change in the financial system and wielding its immense influence to solve global problems was never going to happen overnight.
Impact investing becoming mainstream within the entire financial system will take decades not years, but the needle is moving in this direction. Having toiled in the impact investing space for over a decade, we are well-placed to observe this shift in momentum and to put this surge in activity into perspective. From our vantage point it is clear to see that we may have been early, but we were not wrong. Impact investing is here to stay, and impact is becoming a third dimension (in addition to return and risk).