Impact investments spark ever more interest among selectors and investors, the topic was discussed in the latest issue of InvestmentEurope featuring among others Jean-Guillaume Peladan (pictured), head of Environmental Investments and Research at Sycomore AM.
According to him, impact investing remains a vague notion. Speaking to InvestmentEurope, he says that historically impact investing has been related to the universe of social economy but that it has become a larger issue and it is now appearing as the new frontier of ESG investments.
“Impact investing raises the following questions: What impact? Of which nature? On which perimeter? Of which intensity? Positive or negative? For example, an insulation manufacturer can have local positive social impacts, very negative local environmental effects on some criteria but positive global environmental impacts on climate,” he pinpoints.
Says Peladan, “nobody has the monopoly of impact.”
“We share this idea with the Prophil consultancy firm, which focuses on mission-led companies and recently published an international study showing how companies can serve common good. Impact investing knows no borders, it transcends fund structures as well as the type of stocks (listed or non-listed) and financing (shares or bonds). At Sycomore AM, impact investing is clearly key topic and interest is raising among our customers,” he argues.
Also for Peladan, there are no geographical constraints in impact investing. Social and environmental issues can be seen across the world, he says.
“Most players involved in the ecology and energy transition are established in Europe and in Asia, in particular Japan, for deep historical reasons. First infrastructures were built in Europe and Asia as both were facing a number of issues such as the scarcity of energy source or the high cost of natural resources, whereas in the United States, the use of cheap energy sources – coal, oil and gas – has expanded when the country developed itself. It explains how deep is the American addiction to fossil fuels.”
NEC, Sycomore AM’s tool to measure impact
The measure of the impact made by one fund’s investments remains the hardest part of the impact investing’s portfolio management job since a common benchmark has yet to be found.
Peladan dismisses the idea that the calculation of the carbon footprint, used by a number of asset managers and owners, could be an efficient indicator to measure impact made while investing.
Sycomore AM’s environmental investment and research head recalls that measuring carbon footprint consists of dividing the number of tons of CO2 equivalent emitted by a company on a partial perimeter by its market capitalisation.
“As a consequence the carbon footprint of the company is daily fluctuating with the stock price… That is what we call the street light syndrome. Someone who has lost his keys at night will search under the candelabra because it is the only enlightened place,” Peladan says.
Hence instead of using carbon footprint as an impact investment indicator, Sycomore AM has been developing a methodology since two years around the creation of a net environmental contribution (NEC). Peladan terms it “a physical and tangible benchmark.”
“The approach compares the impact of the investment to the functionality the company aims to serve. We work with 20 different referential grids (construction, food, beverage, clothes, transport, energy, mining, metals, waste management, water management…). For instance, we are assessing the impact of the transport of a passenger through two sub-indicators: the quality of air with the level of airborne particles and NOx (50%) and the carbon emissions (50%) per passenger and per km,” Peladan details.
The NEC has been implemented into the Sycomore Eco Solutions fund, the French boutique brands as an impact investing strategy.
“The core of the Sycomore Eco Solutions fund dwells in doing stock-picking within a universe of stocks determined by two indicators: the net environmental contribution (NEC) on a scale of -100% to +100% and that our ESG rating. Only stocks that carry a net environmental contribution (NEC) of over +10% and scored more than 2.5/5 in our ESG screening are eligible in the fund.
“We have calculated the NEC for 300 stocks and we are extending it to 1,000 companies. To achieve this, Sycomore AM has partnered with BNP Securities Services to speed up the deployment of the methodology to the entire fund range of the firm and few indices,” the firm’s head of Environmental Investments and Research.
Peladan adds that the fund holds stocks of a very diversified range of businesses including Dutch organic and natural food company Wessanen, British waste management firm Biffa to insulation specialist Kingspan and Austrian fibre producer Lenzing.
“In less than two years, around 25% of the companies we hold either have had capital increase, have been targeted for M&A operations or have been part of a M&A process. Not only renewable energies were concerned but all the range of businesses close to the environmental and ecological transition: it shows how dynamic it is! It means that the consolidation momentum and the need of financing for these businesses are speeding up,” Peladan concludes.