Impact investing must step out of shadow of ESG for buy-in from institutional investors, say managers

ESG Regulations

There are significant barriers for the impact investing world to overcome if the strategy is to gain substantial investment from institutional players, according to a new whitepaper from CAMRADATA on impact investing. 

Between 2016 and 2018, the volume of assets invested responsibly grew by almost USD8 trillion. Impact investing was one of the fastest growing categories, up almost 80 per cent, but CAMRADATA notes that this only amounts to less than USD200 million in monetary terms. 

Other forms of responsible investing, such as ESG Integration and Screening are worth USD17.4 trillion and USD19.8 trillion in assets under management, respectively.

“Impact investing firmly stands on the shoulders of ESG. Impact is the next step. Impact investing is being part of the solution for example defined by the Sustainable Development Goals. If you want it in black and white: ESG is more about doing no harm while Impact is focused on doing good,” says Marjoleine van der Peet, portfolio manager of Kempen’s Global Impact Pool, at CAMRADATA’s roundtable.

Europe’s largest pension funds are struggling to engage seriously with impact investing because there are not many impact funds large enough to absorb commitments of GBP50 million or more. On the other hand, smaller investors also have difficulties investing in impact funds, as they are mostly available on private markets, which often require a high minimum investment and a higher level of due diligence, creating a barrier to entry.

Kempen’s Global Impact Pool offers a diversified basket of impact funds within a pooled format so that investors can combine due diligence efforts. Van der Peet says that Kempen had not, to date, found enough funds that made the institutional quality hurdle or the strict impact test, to populate an entire fund.

The roundtable identified another problem for institutional players as being the lack of impact-oriented fixed income products that meet the needs of the DB pension plans that are seeking them.

Anna Rudgard, a fixed income researcher at professional services firm Aon, mentions the US strategies that are billed as core credit that claim Impact status because they predominantly buy municipal bonds. She says that a municipal bond fund may not be the best way to achieve progress globally on a wide range of impact goals. 

Green bonds are a concern for many managers. As Nick Samuels, head of manager research at investment consultant Redington, notes, “there is greenwash in parts of this market”. 

Despite these issues, pension funds are increasingly motivated to invest for impact. The whitepaper notes the example of the London Borough of Islington pension fund, which has committed to lowering carbon exposure in its equity portfolio by 75 per cent within three years. It switched passive equities into two Low Carbon indices, and invested in two infrastructure mandates with ESG and low carbon criteria, and is now looking into impact investing in social and affordable housing.

Pensions, investment and insurance consultancy LCP has also recently completed an impact private equity search on behalf of the GBP500 million pension fund of a charity.