6 Theses on Inclusive Impact Investing & Outlook 2019
-1- VALUATION OF CORE ACTIVITIES IMPACT will surpass the present prevalence of (ESG, CSR) operations valuation. Growing Exclusion & Transparency movements steer ambitions from 'avoiding harm', to 'doing less harm' i.e. lowering negative impact, avoiding 'little positive impact' and searching for 'more positive impact' i.e.'doing good'. E.g. in Basic Needs & Impact Tech, the UN GlobalGoals contributions and 'scaling impact' through disruptive social innovation.
The work of the Sustainability Accounting Standards Board (SASB), CSR scientists, Financial, Big Data & AI analysts and popular & political demand for decent & common sense finance will accelerate 'real world valuation'.
More in Exclusion & Transparency theses.
In 1995 the Dutch government created fiscal stimuli for Green Funds, by impact investment connoisseurs acclaimed as a wonderful investment vehicle & fiscal incentive for large & small investors. Dutch super sustainable ASN bank launched it's (numerous) prizewinning public equity Water & Environmental (impact) fund (538 Mi Euro AuM) in 2001. The Dutch Water Authorities Bank NWB bank has launched Water Bonds since 2014. (So) Dutch institutional impact investors decided in 2017 to focus on 'Water Projects' (infrastructure & environmental) as 'the Lowlands' (literally below sea level) have an unique experience in both 'keeping it dry' & exporting this unique know-how & expertise with rising sea levels, dealing with extreme weather events & complex water management.
Proof of intent came with the Dutch enthusiasm for the European Investment Bank EIB 1st 'Sustainability Awareness Bond' for water infrastructure projects in Europe and beyond. Note that the rapid growth of GreenBond market reaching 162Bi US$ emissions) was kicked of by the EIBs launch of the 1st Climate Awareness Bond in 2007.
-a- I predict BLUE is the new GREEN and rapid development of Blue Bond emissions by public & private issuers. The ClimateBondInitiative already has Water Investment standards https://www.climatebonds.net/standard/water,
so a BlueBond Initiative is not required. Expertise sharing, co-operation (#SDG17) & co-investing always is.
-b- I predict a Dutch, but preferably EU, Blue Funds scheme/facility which can learn from the Dutch experience with its Green Funds scheme (e.g. fiscally motivated investors would invest on the 31st of December & divest Jan 1st. Brrr.
Green Funds usually 'close' for investments by October 1st. Political Restructuring: downgrading & repairs of the fiscal facilities have caused dwindling AuM in Green Funds.
-3- TRICKLE DOWN EFFECT & MISSING MIDDLE need CATALYSTS
As the division of impact investing in exclusive & inclusive continues, politicians and the financial sector have to accelerate trickle down processes, catalysts & standardised impact investment products.
At present (Ultra) High Net Worth Individuals & Institutional Investors are served with tailor made often private equity impact investment products or in public equity with ESG & SASB (materiality of sustainability for profit) based investment products.
There is a missing middle...
Small private investors invest through online crowdfunding for impact platforms either directly for deep impact and employment through SME finance or mostly price competitive (finance first) objectives public equity index funds with impact promises or listed actively managed thematic impact funds.
-4- IMPACT ETP'S PRICE > QUALITY COMPETITION
Inclusive Impact investing Index funds lack quality competition & focus on price competition (Finance First).
Impact Investment Fund Checklist
· Inclusive & Competitive: is it accessible & affordable for retail investors?
· Broad or Basic: does it focus on basic needs & sectors
& the importance of impact dedicated accelerators?
· Paper or Practice: based on vision & strategy paragraphs or clear action plans & programs?
· Progress or Promise: based on Key Performance Indicators relevant to the core business or impact washing?
· (R)Evolutionary or Inert: increasing impact ambition or a copy cat ?
(e-Book p. 82 upgrade +2)
· People or Planet: most ESG/Impact funds focus more on Planet: 'doing less harm' than People 'doing good'.
· Impact or Finance First focus, is it an Impact dedicated Issuer (expert) ?
-5- EXCLUSION
5.1: Exclusion grows: new & more issues (problem) & topics (ethical opinion & stand)
5.2: Divestment movements are growing
5.3: Exclusion 2.0 Scaling to (sub)sectors
5.4: Exclusion 3.0 Done talking
5.1: New issues & topics ie promoted from the public lobby agenda to Shareholders Meetings agendas keep appearing.
E.g. Political affiliation & views of companies on … (Firearms / POTUS Pulling out of Paris), (sex)slavery & trafficking, data security & privacy etc.
Media attention, social media exposure & grassroot movements, data transparency & scientific research & journalistic investigation fuel attention for (new) issues & topics.
5.2: Divestment movements get bigger & more effective. Eg Fossil Fuel & Coal are excluded from new ETP's like Vanguards 'exclusionary-screened' ESG index ETPs excluding Fossil Fuel & Nuclear Energy next to conventional & controversial weapons, AGTAF* & UN Global Compact (principes) violaters. *Alcohol, Gambling, Tobacco, Adult Entertainment, (civilian) Firearms). Tobacco special in #EuroSIF2018.
Australian ethical investment advisor Balance Impact has a searchable database & publishes a (new) impact ETF guide. https://balanceimpact.com.au/
5.3: New (sub)Sectors are excluded on 'High Risk' and 'Little Social Benefit' eg by Colombia Threadneedle from it's Social Bond Fund. Little contribution to the Sustainable Development Goals (Eccles & Consolandi) potentially inspires exclusion.
5.4: Decades of shareholder engagement, dialogue & voting are transforming to done talking & divesting. E.g. in 2018 Dutch insurance company & asset manager Aegon (825 BioEuro AuM) announced divestment from palm oil and pension fund ABP (419 BioE AuM) divested 4Billlion Euro from tobacco & nuclear weapons.
-6- TRANSPARENCY creates confusion & often also conflicting data not net impact clarification.
True but also amazingly simple clarity..
Transparency has many effects.
DUNNING KRUGER EFFECT : The more you know the less confident you are likely to be.... But wise people are full of doubt. Its is better to move even fail forward than stagnate or suffer from analysis paralysis & the bystander effect. Be the change you want to see in the world.
Failing = learning. Fail to act = fail to Learn.
6.1: Transparency gives simple net impact insight: MSCI's sustainable impact exposure % (SIE%) – MSCI ESG/SRI screening (fail) % (of ETF's op etf.com, etfdb.com & iShares, not for all investment products).
Impact scores of ETPs: To find highest sustainable impact scores on etfdb.com choose ESG investing in the top menu. > choose E, S or G (Environmentally Responsible, Socially or responsible Governance) > a list with ETFs met disclosed theme data appears. Click [ESG?] in the menu > carbon intensity & sustainable impact exposure % scores of ETP's appear from top to bottom, high to low. (Don't click sustainable impact → whole universe appears. SIE% can be combined with SRI screening % (fail) on etf.com under Sustainability data. All data is delivered by MSCI.
High(est) E & S exposure in ETFs scores combined with E & S themes:
Go to etfdb.com top menu offers ESG investing > 41 themes half Social ¼ Environment ¼ Governance. For ETP with highest Sustainable Impact exposure % go to ESG investing > choose any ES(G) theme > an ETP list appears with e.g. revenue exposure but for water stress even High Risk Business Segment (%), High Risk Geography (%) Moderate (%) High (%) Exposure Low (%).
Revenue Exposure to Social, Environmental Impact (%) is undisclosed, transparent for members (free month trial)
Clarification of MSCI SIE%: https://www.etf.com/sections/blog/evaluating-sustainability-etfs-msci?nopaging=1
6.2: Transparency gives insights in the importance of sustainable investing for profitability of sectors & companies
Bob best-in-class Eccles developed metrics & rating with the Sustainable Accounting Standards Board (SASB) & rated 11 sectors & 55 sub-sectors.
Eccles nickname comes from his work on The Impact of Corporate Sustainability on Organizational Processes (2012) with Ioannou & Serafeim. https://www.hbs.edu/faculty/Publication%20Files/SSRN-id1964011_6791edac-7daa-4603-a220-4a0c6c7a3f7a.pdf
6.3: Transparency gives insight in ESG performance & the effect of ESG sentiment (perception): Prof George Serafeim published a paper based in financial & Big Data & AI analysis showing ESG sentiment is factor influencing fund valuation. 'In the presence of negative sentiment a firm’s good sustainability performance is largely discounted'.
Prof. George Serafeim, Harvard Business School Accounting & Management Unit Working Paper No. 19-044. October 12, 2018). Public Sentiment and the Price of Corporate Sustainability https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3265502
6.4: Transparency shows effects & trends of ESG fund rating on capital flows. The introduction of Morningstar sustainability ratings (globes) in 2016 resulted in capital flows from low(er) rated funds to high(er) rated funds within in 2 years.
MSCI has a color based funds rating system, but has not yet communicated capital flow (effects or trends)
6.5: Impact Revenue Transparency In 2016. Russell launched Green Revenue indices for FTSE and MSCI a revenue index based on the UN Sustainable Development Goals. These indices give insights in core activities and increased impact activities.
Note that ESG & Sustainability ratings are not perfect,
can and will improve … through transparency, comparison & discussion.
ESG ratings by different raters differ and combined with improved ESG data systems, materiality & SDG weighing, Big Data and Artifical intelligence analysis will improve insights.
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