Impact investors champion “Trojan Horse” investment products as market leaders focus on scaling “from billions to trillions”

trojan horse

Investment products such as social bonds and green energy stocks can act as a “Trojan Horse” to convince the finance industry about the benefits of using capital to make a positive impact, said experts at an impact investing event in September.

Socially and environmentally conscious investing has gained momentum as the coronavirus pandemic accelerated interest in the idea that companies, asset managers, and asset owners have responsibilities to broader society as well as to their stakeholders. 

The impact investing market is estimated to be worth USD715 billion, according to the Global Impact Investing Network’s annual survey in 2020.

Speaking at The Global Steering Group for Impact Investment's (GSG) Global Impact Summit 2020, officials from global institutions including Bank of America, Amundi, and Pendal Australia explored the path to taking impact investing “from the billions to the trillions”.

Richard Brandweiner, CEO at Pendal Australia, an investment manager with over USD100 billion in funds under management, said that traditional managers are starting to realise that the “tools they grew up with are not sufficient to maximise outcomes for stakeholders”.

Another attendee, Laurence Laplane, head of Impact Investing at Amundi, compared sustainability risk to a “mispriced option”, meaning that sustainable investors can pay little, but outperform the market in the long-term.

Brandweiner went further, and said that the explosion in green bonds has acted “like a Trojan Horse” for impact investing. Managers of all types took note when green bonds burst into mainstream financial markets, because of their competitive risk and return profile. 

For traditional managers, they were being offered “just another AAA rated bond”, but even better as these bonds traded on tighter spreads and with higher demand. Later, the managers would learn of the positive impacts that these bonds had made in the post-issuance report. 

“I’ve seen people spend their entire career solely focusing on that year’s returns, and then suddenly they see that there’s a bigger thing going on,” said Brandweiner. “This is creating a Trojan Horse. It’s very easy to convince someone that, for example, electric vehicles and solar power is going to be a big investment theme over the next few years, but over time, that actually changes the way they see what they can do with capital.”

According to Brandweiner, the next step is harnessing the power of pension funds and sovereign wealth funds in order to scale up the impact investing market.

Jackie VanderBrug, head of Sustainable and Impact Investment Strategy, Bank of America, adds that there are also “Trojan Horses” on the equity side. “The pandemic, the racial reckoning, and ongoing climate reality have resulted in a shift where all that alternative energy play has become mainstream, and now the social side has come on very quickly.”

One of the summit’s keynote speakers was former UK Prime Minister David Cameron, who praised the use of socials bonds to link up governments with private initiatives. 

The issuance of social bonds has surged as governments deal with the fall-out from the coronavirus pandemic. Ratings agency Moody’s says a record USD33 billion in social bonds were sold to fund managers in the second quarter of 2020, which is almost double last year’s total issuance of USD17 billion.

Cameron’s government oversaw the launch of one of the UK’s first social bonds in 2010, which supported a project to reduce re-offending by inmates at Peterborough Prison, “one of the most intractable problems”.

“The deeper the problem, the greater the return if you get it right,” said Cameron, but the former politician warned that there is also a danger in proselytising about impact without ways to measure it.

The Chair of GSG, Sir Ronald Cohen, was also the founding Chairman of Big Society Capital, a social investment institution established by Cameron’s government, which invests to achieve social and financial returns. 

In his welcome address to the summit, Sir Ronald Cohen said that a “tipping point” had been reached, with impact investment globally predicted to reach USD1 trillion this year. “Victory is now in sight. All that remains for us to do is to define the ways in which we can secure it.”