How do you make money while making an impact?
Greener and more socially conscious firms need cash – and lots of it. That need could open up a world of opportunity for investors, writes Environment Editor Paul Melia
BUYING a gas-guzzling sports car might be disastrous for the planet, but what if instead you chose an electric model?
And what if you were so impressed with its performance, you invested in the company which produced it, because you could see the climate benefits of moving away from fossil fuels and to clean energy?
Climate change is just one of many pressing issues which the UN wants addressed by 2030 under the Sustainable Development Goals (SDGs), but eradicating hunger, improving access to clean energy and protecting the planet will take more than good intentions.
Cash, and lots of it, will be required. For investors with a conscience, impact investing could provide a good return on their capital while 'doing some good'.
A term coined around a decade ago, impact investing involves channelling capital into listed companies which deliver healthy financial returns, but also have a long-term vision to solve global social and environmental problems.
Examples of firms in this space include Danish energy company Vestas, which aims to bring renewable energy on a par with conventional, but polluting sources, such as oil and gas.
Others include Belgian firm Umicore, a materials technology company which derives much of its revenues from clean technology, including battery recycling.
Irish firm Glanbia is also cited for its commitment to sustainable food production.
"We're looking to discover those companies that are able to deliver a positive effect on any of the sustainable goals through their products and services," investment director in Aberdeen Standard Investments' (ASI) impact investing team, Ross McSkimming, says.
"You will get pure players like Vestas who want to do the right thing. We want to avoid those companies where it's an inconsequential part of their business. They could be making charitable donations, but they don't have that clear strategy."
Investment is scaling up, in part driven by those seeking above-market returns, but pressure is also mounting on firms to invest in ways compatible with their corporate social responsibility agenda.
The Global Impact Investing Network's 2017 Annual Impact Investor Survey says some $114bn is currently under management. Research from JP Morgan suggests that will grow to $1 trillion by 2020.
But ASI, formed through the merger of Standard Life and Aberdeen Asset Management and which has €681bn in funds under management, says assessing impact is difficult. Is investing in renewables in India, or taking a stake in eco-friendly real estate, really demonstrating impact? How do you assess performance?
ASI uses the UN's 17 SDGs as a metric to identify companies and help measure their impact.
Adopted in 2015, the SDGs range from eradicating poverty to providing clean water and sanitation, developing sustainable cities and taking climate action. Due for delivery by 2030, targets are in place for each goal.
ASI says as an asset manager, it cannot give its client's money away, so the starting point is a belief that it can deliver above market returns. While quantifying financial returns is straightforward, measuring impact is more problematic.
"There isn't any standardisation," McSkimming says. "Some (companies) do it well, some don't.
"Increasingly we're seeing companies link their annual report back to the SDGs, but you need deep analysis to see if they're having an impact.
"I think as an industry we have to agree common standards. It will come in time but we are quite far away at the moment.
WThe next stage of development is to link that data to the KPIs the UN put in place. Through an annual report, we will be able to say you made a financial return, and the social and environment impact."
Stephen Nolan, chief executive of Sustainable Nation, a not-for-profit established by the Government to promote Ireland as a hub for sustainable business, says there is opportunity for Ireland in this space.
Raising awareness of impact investing as an opportunity for Irish-located firms to develop specialist new products, and work to domicile new funds in Ireland, will form part of its 2018 sustainable Finance action plan.
"The quantum of capital required to meet Paris (climate agreement), SDG and EU targets is in the trillions. The public sector can only fund 10pc to 15pc of that," he says.
"It's a source of sustainable finance which is becoming mainstream. You have entrepreneurs, NGOs and the financial markets looking at solutions. It's a big growth sector and we're seeing it more and more in Ireland."
But not all investment decisions are clear cut. ASI cite Glanbia, a global nutrition group, as a company which fits the profile for impact investment. It produces, among other products, infant formula for export abroad.
Given that Ireland has major challenges around agricultural emissions, and that there are question marks around shipping infant formula across the planet, is there not a clash?
"It's a live debate," investment director Global Equities with ASI Dominic Byrne says. "Before we invested with them, we engaged on how their products are produced, and how they're handling their emissions.
"We're looking for opportunities (and) infant nutrition is not an issue. These (SDGs) are issues the world needs to solve."