The focus on sustainability and the integration of environmental, social and governance (ESG) factors into investment processes is an increasingly important priority for investors globally. The most assertive form of this approach is ‘impact investing', whereby capital is allocated not just to avoid doing harm but to bring about positive changes.
NN Investment Partners (NN IP), in association with consultancy Kirstein A/S, conducted a survey among Nordic institutional investors, who are often recognised for their advanced approaches towards responsible investing, to know to what extent are institutional investors adopting this approach? And how do they prefer to implement it?
43% currently invest in such strategies, while another 22% plan to do so in the near future. Less than one fifth (19%) say they have no plans to invest in impact strategies while 16% are undecided.
‘Impact' is commonly measured with reference to the United Nations' 17 Sustainable Development Goals (SDGs), which are incorporated into its 2030 Agenda for Sustainable Development.
NN IP's investors are increasingly contemplating a shift from ESG-integrated investment solutions to an impact-based approach. These types of strategies are considered to invest for the greater good while helping to reduce longer term portfolio risk. They also offer access to sustainable growth companies (both listed and private) offering a more viable return stream. Although some investors think an ESG approach may cost them returns, 75% of those with established allocations to impact strategies believe that net returns will differ very little from traditional strategies. Still, on average, investors allocate only close to 5% of their total portfolio to impact strategies.
Edith Siermann, head of Fixed Income and Responsible Investing, NN Investment Partners said: "Our research shows that the appeal of impact investing is not limited to creating a better world. Improved risk and return and sustainable growth are also important, which explains why many investors have indicated to us that they want a broad range of impact products to choose from."
"We already see that the transparency of our approach to impact investing helps asset owners justify larger alloca-tions to impact in their core portfolio holdings. Applying stringent selection criteria and fundamentally analysing investment candidates are essential to ensuring that our investments deliver true impact and financial returns."
NN IP's research showed that investing to support the environment is top of the agenda for investors, with 97% describing it as being ‘very important', versus 81% and 73% who cite governance and social factors respectively. In terms of specific SDGs, Climate Action (Goal 13) proves to be the single most important SDG for all investors by some margin, followed by Goal 7, Affordable and Clean Energy and Goal 6, Clean Water and Sanitation - all of the top three focus on climate-related solutions.
In terms of listed equities, Nordic investors prefer global impact strategies that target multiple SDGs, ranking them an average 3.6 on a scale of one to five. Strategies focused on single themes such as water, healthcare, or energy efficiency rank lower at 2.67 and focused strategies that target a single SDG, such as low carbon funds, rank 2.56. The reasoning for this is often a preference for making a broad impact and difficulties in scaling up narrowly focused strategies. Nordic investors see green bonds as the epitome of fixed income impact investing, ranking them 3.69, followed by corporate bonds (3.34) and thematic funds (2.77).
Many investors perceive private assets to be the very nature of ‘impact', especially infrastructure, which is closely linked to a number of SDGs, while private equity managers are in a unique position to influence businesses to drive positive change. Ranked preferences for private market impact among Nordic investors, on a scale of one to five, included: private equity (3.78); private debt (3.58); infrastructure (3.25) and thematic funds (2.72).
Siermann continued: "Nordic institutions, especially those in Sweden, are leaders in the field of ESG integration, but investors across Europe and globally display a clear desire to improve. Impact investing is seen as an investment approach with a wide range of untapped opportunities to create sustainable, long-term investments."
"There are hurdles to be overcome, including the limited size of the investable universe, fee models that are out of synch with the going rate for impact strategies and the complexity of allocating to SDGs. But whereas the last decade has been about exclusion, the next 10 years will be about how to measure and increase impact. This is one of the pillars of our responsible investing approach because the better you can measure an impact, the better you can make one."