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Impact investing is defined as the deployment of investment capital seeking to make a positive social and/or environmental difference alongside financial returns.
“All investing has an impact that is largely opaque to the investor, and I think that the work of our field, in part, is to make that impact, positive and negative … transparent to the investor so that the investor can choose.”
— Fran Seegull, Executive Director of the U.S. Impact Investing Alliance
How money is allocated influences which companies are able to grow and what products and services are delivered to people, it is one of the most powerful scarce resources.
Historically, investment decisions were almost exclusively made based on the traditional risk vs return model. Today, ESG ratings have led to asset selection screening based on these factors. Impact investing goes one-step further, specifically directing capital towards companies whose product/service has a positive impact.
Broadly speaking, as much as 1/3 of USA Assets Under Management can be considered as Impact Investments.
A framework for assessing a company beyond its financials
ESG Criteria allow investors and companies to measure the impact they have on people and the planet.
The factors are broken down as so:
E - Environmental - includes a company's use of renewable energy, waste output, and GHG emissions.
S - Social - refers to how a company interacts with society from wages, to gender balance, and human rights.
G - Governance - describe the management and policies a company has in place. Corporate scandals may be a result of poor governance.
What role do the banks and asset owners have to play?
Banking and Asset Management are tools for Sustainability and Development. But the United Nations Conference on Trade and Development 2020 report confirms that there is a $2.5 Trillion Gap to achieve the Sustainable Development Goals. World Investment Report.
More money needs to flow towards sustainability and green projects. Current investment trends and monitoring capacities show we fall short. Green Finance Platform
We can do this by mapping the SDGs to Impact Investing and aligning our goals to our tools. How do we connect the SDGs to ESG?
In our banking world, we need to have structural reforms, integrate ESG risks, and use more sustainable lending. One place that has defined the principles we need is the Global Alliance on Banking Values (GABV).
Another effort to follow is the UN's Principles of Responsible Banking which has had massive adoption with 45% of global assets participating including 275 signatories. You can check if your bank has signed the principles here: UNEFPI Signatories. Check this for resources for implementation.
Think of Asset Managers as chefs because they create portfolios for their clients to balance: Risk, Return, and Impact (Sustainability). The "chef" must cater to the needs of their clients and allign their needs and motives to security possibilities.
Money over everything...?
SRI refers to investment approaches that apply social and environmental criteria when evaluating companies.
How it works:
Investors will create a scoring system based on criteria relating to social impact
Investments are usually made considering the aspects of a company.
Excluded companies are dictated by the goals of the investor, some may want to avoid weapons companies where as others could want to support companies that do not pollute excessively.
$12 trillion market in 2019, or about $1 of every $4 investing in SRI
UN’s Principles for Responsible Investment (PRI) has >3,000 signatories & $90 trillion
Green bond & loan issuance $360 billion globally in 2019
BlackRock predicts ESG funds to rise >$400 billion over the next ten years
Unique tools are being created $25 million water bond for Washington, D.C. in 2016
90% of millennials want to invest retirement savings sustainably ()
75% of savers say they want SRI choices ()
75% of millennials consider company values (, )
Source:
Prepare to learn about the power of the financial industry when sustainable values are applied.
There are so many areas of Sustainable Finance because it touches so many aspects of our society. At oikos International we are developing focus areas with the key points of information you need to build a better financial system. Below are the areas we think form the Principles of Sustainable Finance.
If you'd like to help us explore these areas further, please let us know by emailing Stephen Snider at stephen.snider@oikos-international.org.
Fixed income is a way to change humanity's outcome.
In November 2008, the World Bank became the first institution to issue a green bond.
Green bonds typically have the same structure, credit risk, yield, and rewards as traditional bonds.
Their differentiation comes from “greenness” or being environmentally friendly.
Although that is not particularly well regulated, the investment in itself is structured just like any other fixed-income security.
There are also social, blue bonds, etc.
It is useful to learn more about traditional and sustainable bond factors to better understand how we finance projects using bonds. Source: Schoenmaker and Schramade, 2019.
Traditional Bond Factors
Sustainable Bond Factors
There are many valuation methods useful in analyzing and financing sustainability. Below are just a few of the methods possible and some useful research papers to help you learn more.
There are many frameworks created to assist companies and major stakeholders in the financial industry to form their sustainability goals and implement the necessary changes to achieve them.
We have identified 4 key frameworks which are having a big positive impact:
The 17 SDGs are at the heart of the 2030 Agenda for Sustainable Development which was adopted by United Nations' members in 2015.
The Doughnut is the creation of economist and Oxford professor Kate Raworth.
The social foundation is the minimum social standards we want for humanity, based on the UN SDGs.
The ecological ceiling highlights the nine planetary boundaries set out by John Rockström and his colleagues. Beyond which lie catastrophic environmental changes.
Between these two limits, is 'the safe and just space for humanity' to operate in sustainably.
Created by the PRI, these six principles intend to guide investors on how to act in order to create a more sustainable global financial system for the future.
The PRI has almost 4000 signatories now made up of institutional investors.
Reporting and accounting standards are crucial to the business world, allowing companies to understand themselves better and facilitating transparency between firms, shareholders and investors.
The SASB has developed standards specific to 77 industries, identifying the ESG issues most relevant to financial performance.
Homes, offices and industrial buildings are in need of a revamp
Did you know that nearly 50% of the world's greenhouse gases come from the built world?
27% from building operations and 20% from building materials and construction, both of these areas need to have an operational overhaul.
Green buildings are those that are environmentally responsible and resource-efficient, through the full lifecycle - from design, to construction, to operation and finally with demolition.
PropTech companies, those that are using technology to the real estate industry, are finding many creative solutions to this problem.
The notion of considering sustainability in the financial world did not always exist...
1700s - John Wesley's novel idea
The founder of the Methodist movement, is credited with the first conscious investment practice. Urging followers to refrain from making investments in 'sin stocks' such as weapons and tobacco.
1971 - Pax World Fund launched
To avoid supporting companies contributing to the Vietnam War, the first sustainable mutual fund is launched.
1988 - Institutions Created
After NASA's James Hansen told a congressional hearing that there was a 'real warming trend', climate change attracted global attention. The Intergovernmental Panel on Climate Change (IPCC) and the United Nations Environment Programme (UNEP) are established.
1997 - Agreements in Japan
The Kyoto Protocol, an international treaty committing to reduce greenhouse gas emissions, is signed by 192 states.
2006 - Principles in Place
The United Nations' Principles for Responsible Investment (PRI) is launched to encourage further development of sustainable investing.
2007 - Impact Investing
The term 'impact investing' is coined by the Rockefeller Foundation. Putting a name to investments that intend to generate both a financial return and social impact.
2009 - A Network is Born
The Global Impact Investing Network (GIIN) is created to promote investing with the aim of creating a social benefit.
2015 - Frameworks in France
At COP 21 the Paris Agreement is signed by 196 parties agreeing to meet certain future climate goals.
2020 - The Largest Asset Manager Acts
Larry Fink, founder and CEO of BlackRock, wrote in his annual letter that companies generating more than 25% of revenues from coal production will be removed from their active portfolios.
2021 - Study Shows Sustainable Finance is Significant
The Global Sustainable Investment Alliance (GSIA), found that 35.9% of total assets under management were sustainable as of 2020.
2022 and beyond - You Can Make an Impact
The industry is still growing and getting more attention everyday. Could you be a key part of this exciting future?
Risk experts have to consider climate risk also
The purpose of the insurance sector is to understand, manage and carry risk on behalf of people, companies and governments. With the increasing focus on ESG issues, the industry has to adapt.
Leading this is the United Nations Environment Programme Finance Initiative, which has identified four principles to integrate ESG into insurance:
Auxiliary topics that are worth checking out!
How can we deal with the future uncertainty?
Risk is a measurement of uncertainty, and so it is a crucial factor when considering the unknown future before us. Through analysing the probability of an event occurring, and the resultant financial impact, we can analyse risk and put measures in place to minimise loss.
There are three main categories of risks related to sustainability:
Physical Risk
Encapsulates risks related to the physical impact of climate change
Examples include extreme heat events, which studies have attributed to human action causing warming of the climate in many studies
Transition Risk
Includes risks related to the transition to a low-carbon economy
A big aspect of this is stranded assets, which are assets that have suffered from unanticipated write-downs or devaluations due to climate factors
For example, nearly 60% of oil and fossil methane gas and 90% of all coal reserves would have to remain unused to keep temperature increase at 1.5°C - the target level set in the 2015 Paris Agreement.
Litigation Risk
The chance of legal action being taken in response to company's behaviours relating to climate change
Since 2017, the total number of climate litigation cases nearly doubled to 1550
Quick activity: Can you think of which industries could be most susceptible to each of these risks?
Public companies, meaning they are listed on the stock exchange, have a market value which is known as market capitalisation.
Share price is impacted by supply and demand, and sustainability factors are increasingly influencing demand of stocks.
Tesla is a great case study for this, it took them 17 years to turn their first annual profit in 2020. Yet it became the most valuable automative company in the world in July of that year, before the news of its annual profit was announced. Investors became confident in the future of cars being electric, and hence demand for a piece of the company skyrocketed.
The most common intrinsic valuation method is the discounted cash flow (DCF) approach.
Analysts are now aware that many factors relating to sustainability will impact the future cash flows of companies. For example, necessary investments to make processes less polluting or potential regulations that could force a firm to change some of its products/services.
Quick Activity: Think of a company you like, or one you don't, how do you think sustainability factors might affect their future cash flows?
Conducting business in an ethical way
Corporate Social Responsibility (CSR) is a management concept whereby companies are socially accountable to themselves and their stakeholders. Through integrating social and environmental concerns into their operations and stakeholder interactions firms a company can achieve balance socially, environmentally, and economically.
There is an accounting framework that considers these three key factors which is called 'the triple bottom line'. The three areas are often referred to as The Three P's; People, Profit and Planet.
TOMS shoes - Founded upon the social mission that for every pair of shoes sold, one pair would be given to a child in need of shoes.
Starbucks - In its hiring procedures Starbucks strives for equality and diversity, hiring veterans and refugees, and maintaining 100% pay equity across men and women and people of all races for performing similar work.
Salesforce - Champions a 1-1-1 philanthropic model, this means giving 1% of product, 1% of equity, and 1% of employee time to communities and the non-profit sector. Interlinking success of the company with positive impact.
Quick activity: Think of a job that you have done, what is a way that CSR practices could be applied to the work or company?
Human rights considerations for those most impacted by climate change
Climate Justice is liked to human rights and international development, as it acknowledges there is a disparity between those having the largest causal influence on climate change and those feeling the largest burden from its impacts.
As the more developed nations have achieved their wealth in-part due to climate damaging practices, such as burning fossil fuels, many argue it would be 'just' for them to redistribute their wealth more equitably to those dealing with the consequences.
People in low- and lower-middle-income countries are ~5x more likely than people in high-income countries to be displaced by extreme weather disasters. ()
Just 122 corporations account for 80% of all carbon dioxide emissions. ()
From 1990 to 2015, the richest 10% of the world's population were responsible for 52% of cumulative carbon emissions. ()
World leaders are continuously struggling to find a 'just' solution to the climate problem, what do YOU think would be a fair agreement between developed and developing nations?
The change starts with you!
Many people like to save some of their income for the future, and investing is one possible approach.
If you decide to do this, how can you be sure that your money isn't supporting companies that don't align with your values? Check out the resources below to find out!
Some great organisations to help you with your decision making are below:
Find out what your bank is doing with your money and find a bank that invests aligned with your values. They only review U.S banks and credit unions currently. They pull together information from publicly reported data, financial institution websites, and surveys. You can check if your institution is certified as sustainable, if they invest in low-income communities, if they do small business lending, if it is women or minority-owned, and much more.
The following resources about fossil fuel divestment were prepared by our partner @SriEvent. Check out @SriEvent website for more resources, news, #LiveTweeting, and more.
Unburnable Carbon: Are the World’s Financial Markets Carrying a Carbon Bubble? -The original report released in 2011 by Carbon Tracker that codified the concepts of "stranded assets" and "carbon bubble" from which the fossil fuel divestment movement and campaign started
Global Warming’s Terrifying New Math - This article by Bill McKibben published on Rollingstone.com in 2012 triggered the fossil fuel divestment movement and campaign first in US college campuses and then across the world
Laudato si' encyclical letter (in particular: par.26, par.165) - Pope Francis' so-called "green" encyclical that stressed the urgent need to progressively phase out fossil fuels and inspired the Catholic world to act on climate through divestment
Fossil Fuel Divestment Act - The law that in 2016 made Ireland the first country in the world to divest from fossil fuels
LD99 - An Act To Require the State To Divest Itself of Assets Invested in the Fossil Fuel Industry - The law that in 2021 made the Main State the first in the US to divest from fossil fuels
Harvard Will Move to Divest its Endowment from Fossil Fuels - The moment Harvard University, the richest on earth, in 2021 committed to divest from fossil fuels in practice after a decade of resistance to one of the longest, strongest and most iconic divestment campaigns in the world, carried out by its students
Invest-Divest 2021 report - A decade of progress towards a just climate future (released October 26, 2021)
Divestment Database - The database of fossil fuel divestment commitments made by institutions worldwide
350.org - This US-based non-profit, climate activist organization was co-founded by Bill McKibben and represents the heart of the fossil fuel divestment movement and campaign ("350" stands for 350 parts per million, which is the concentration of carbon dioxide in the atmosphere considered safe by scientists)
Laudato si' Movement - Formerly the Global Catholic Climate Movement. They have a great section on Divestment. This is a coalition of Catholic institutions and organizations from across the world committed to acting on climate, being inspired by Pope Francis' encyclical Laudato si', which is linked above
DivestInvest - A global network of organizations committed to divest from fossil fuels and (re)invest in climate solutions in order to tackle the climate crisis
The Fossil fuel Non-proliferation Treaty - A global initiative launched in 2020 to phase out fossil fuels and support a just transition through an internationally binding treaty modeled on the historical Treaty on the Non-Proliferation of Nuclear Weapons
The 'polluter pays' principle
There is a general consensus that carbon pricing is a key strategy that will help lead us to a fully decarbonised economy.
It works by putting a price on carbon emissions, companies have a large financial incentive to reduce their emissions.
The two most common carbon pricing policies are:
Emission Trading System (ETS) - Companies have emissions units which are tradable, if a company emits less than their units, they can sell the remaining and benefit financially.
Carbon Tax - Directly sets a price on carbon by setting a specific tax rate on greenhouse gas emissions.
In terms of Sustainable Finance, this refers to how shareholders are using their collective power to force companies to make organizational and operational changes through the use of engagement, shareholder resolutions, public advocacy, and more.
Some organizations working in this space are below. These groups are helping the average shareholder take collective action to change the way public companies are behaving.
Can technology save us?
Technology is unlikely to be the silver bullet that many people hope it will be, however innovation will be a key contributing factor to achieving necessary climate goals. A McKinsey report found that 40% of required emissions abatement could come from technologies that are still being developed, so watch this space!
ClimateTech is a sub-sector of technology companies which are focusing on developing and/or utilising technologies to combat climate change. Companies in this space are attracting significant investments from venture capitalists (VCs) who are early-stage investors, giving capital to risky start-ups in return for equity in the company, in the hope that it will grow.
Some of the most successful and impactful ClimateTech companies include:
Nature's Fynd - Using their fermentation technology they turn fungi into dairy and meat food substitutes, using a fraction of the water, land and energy resources of animal protein sources.
Prometheus Fuels - Has developed a tools to filter atmospheric CO2 and turn it into a viable net-zero fuel that can compete with fossil fuels.
Volocopter - An electric powered air vehicle designed to operate as an air taxi, reducing cars on the road.
Crunchbase is a great resource for finding exciting start-ups, check it out and see if you can find a ClimateTech firm that you think will see financial and environmental success!
