Having an impact
This drive to actively shape the future of a company or an industry is something that defines the new generation of investors, but it is also something that more experienced investors are increasingly seeking.
The importance of having a positive impact on the environment and society through investments is growing globally. Incorporating environmental, social, and governance (ESG) factors into the portfolio construction process and ensuring that underlying investments fulfil a certain set of predefined criteria are two ways of expressing one’s values. To achieve this, portfolio managers most commonly use exclusion lists or focus solely on industries that have a positive impact on the environment and society.
What is ESG?
ESG stands for Environmental, Social, and Governance. It is within these factors that many investments can be evaluated for their responsible, sustainable, and impactful qualities.
- Environmental: How does a company affect the world physically – does it appropriately manage its waste, its effect on biodiversity, and its greenhouse gas emissions, among other things?
- Social: How does a company handle the social side of its operations – for example, does it consider its effect on communities throughout its entire supply chain, and put in place policies to ensure a just workplace for employees?
- Governance: How does a company deal with ownership and oversight – is it committed to fair, transparent corporate ownership and governance structures?
What is impact investing?
Falling under the umbrella of responsible wealth management, impact investing aims to generate a positive social or environmental impact while aligned with an investor’s personal goals and values. Some impact investments strive to achieve financial returns that match traditional investments while others are concessionary by design – however, all aim to generate intentional and measurable positive change. ESG frameworks can be used to measure an investment’s strength in these areas.
Investments in public market equities can only have a limited impact, as investors are not always able to influence the company’s strategy or because the capital raised is not necessarily linked to better ESG practices. Public market investors are also unable to sustainably reshape a company’s value chain.
With private equity, on the other hand, investors can provide capital to companies or projects that are closely aligned with their desire to have a positive impact on the environment and society and can thus directly influence a company’s day-to-day operations by making them more sustainable. Thus, private equity is the predestined asset class for investors seeking to have an impact.
Generally, private market investors can follow two approaches to ensure that their capital makes a genuine impact: first, by providing funding to early-stage technology companies in sectors that need innovation to tackle the most pressing environmental and social issues, such as climate, finance, and agricultural technologies. These companies can disrupt old industries and provide innovative products and services that support more sustainable growth.
Secondly, they can ensure through active engagement that their investments in later-stage companies will lead to an improvement in the environmental and social practices of the daily business of these companies.
Why is impact investing relevant?
In a world changed by the Covid-19 pandemic and a society now focused on protecting natural resources, impact investing is one of the fastest-growing investment approaches. It offers opportunities that are not only socially and environmentally beneficial but also financially rewarding.
Impact investing is a core part of many investors’ strategies – not least that of Monique Baer. Monique is a fourth-generation member of the Baer family, though she does not have any formal ties to the company.
Impact investing is something that is close to her heart, as she explains: “Many people have the intention to get involved, they want to create more impact with their wealth, but they don’t know how to go about it, they are seeking help and guidance to take their first steps.
“Just investing can be a difficult process, but impact investing – in order to do it properly – requires an even greater understanding. Whether you have large or small sums to invest shouldn’t matter, as it all has an impact, but there must be good guidance available for all levels of financial ability.”
How can you begin investing with impact?
As our Head of Sustainability Yvonne Suter explained in an episode of our , it’s important for investors to first identify what really matters to them in terms of general responsible wealth management – and consequently, impact investing. The second step is to figure out what role they wish to play in making these goals a reality.
“There’s a whole range of investment solutions available these days. You can start with considering ESG factors in your investment decision, then you can go a step further and you can invest in so called ESG leaders. So these are the companies which perform better in terms of ESG factors compared to their peers in the same industry.”
But impact investing goes beyond negative or positive ESG screening; it takes a much more active and intentional approach: "For those investors who want to generate, let’s say, a positive and also a measurable impact, we talk about impact investing. This is one of the fastest growing investment approaches.”
Yvonne adds: “All this terminology, these different investment strategies, can be a rather complex landscape. So, what might help in this situation is that you try to get access to some sort of leadership, meaning insights into global challenges and how to possibly resolve them.
“Another thing is that you may get transparency on a portfolio level that lets you see to which extent your investments are in line with your personal values and ambitions. And finally, it’s also about sharing experiences with like-minded investors.”