Impact management is about both opportunities and risk
Claudia Coppenolle, Co-Founder & CEO of the IMP+ACT Alliance offers FaithInvest members an exclusive insight into how the IMP+ACT Classification System can help asset owners in their impact journey.
FaithInvest: Why should faith-based asset owners be looking at impact?
Claudia Coppenolle: If we want to build a sustainable future, we need capital to be re-allocated in a way that puts society and the environment first and centre. Faith-based asset owners need to be part of this transition.
Recent macro-economic events have highlighted the need for a more sustainable future. The allocation of capital plays a crucial role here, and in the investment community people have finally realised that social and environmental performance has substantial implications for investor returns.
Take climate change, for example. The environmental costs of climate change are likely to increase – for example, if and when governments impose carbon taxes on companies that don’t meet certain emission benchmarks. This means it is vital for asset owners to begin to understand social and environmental impacts so that they can identify the related risks and opportunities in their portfolios.
"The journey towards impact investing really is a journey, so it is about understanding where you and where you want to get to" – Claudia Coppenolle
FaithInvest: How should an asset owner wanting to take the first steps towards looking at impact begin?
The journey towards impact investing really is a journey, so it is about understanding where you and where you want to get to. A first step should be setting clearly defined impact goals. This is not simple, and asset owners often overlook this when first looking into their portfolio’s ESG credentials. Impact goals will allow asset owners to define and communicate how they will be expecting asset managers to measure, manage and report on the impacts of their assets.
Asset owners can also play a key role when it comes to creating the demand for better data and transparency in the impact field. They can do this simply by demanding more information from their managers.
FaithInvest: Your website talks a lot about the IMP+ACT Classification System. Can you describe this for our network?
We believe that better access and public disclosure is a key step to create crucial market infrastructure in this field, and the IMP+ACT Classification System (ICS) is a free reporting and screening tool for investment practitioners to disclose how they manage impacts and align with the SDGs.
Since its launch in June 2020, the ICS has been adopted by over 100 asset managers who have "classified" their impacts according to both their alignment with the SDGs and the foundational framework of the IMP’s Impact Classes (see Background to Impact Classes at the end of this article). Funds self-report impact information to the ICS in form of “Classification Statements”. These are available in a Public Directory. Asset owners and allocators can use this directory to sort and screen for impact-aligned products.
FaithInvest: The IMP’s Impact Classes sound very useful too. Can you tell me more about them?
The goal of impact classes, similar as with asset classes, is to be able to group and label investments with similar impact characteristics. An ABC categorisation (see box: Background to Impact Classes, right) allows segmentation of investments by commonly perceived attributions on how they advance sustainable development and the SDGs.
Impact classes are already applied by a large group of investment practitioners such as Nuveen, M&G, Bank of America and Schroders and have been integrated into impact ratings and standards – for example, the SDG Impact Standards.
Classification is not about creating impact-only portfolios, but instead enabling investors to understand where they can and should be doing more to advance sustainable development, even if as a first step that means mitigating negative outcomes and dis-investing from assets that do cause harm.
(For more on impact classes, see the end of the article.)
FaithInvest: Looking more broadly now, what are the benefits of looking at impact?
What many investors underestimate is that impact management is not only a form of risk management but is equally about opportunities. Impact ventures often offer services and products to emerging or undeserved markets where there is huge demand and enormous growth potential. Actively including such assets in a portfolio can not only meet the growing demand for sustainable solutions, but equally be immensely profitable.
This can be underpinned with data. Over the last few years we have seen increasing evidence that companies that perform well on material environmental, social and governance factors not only create market-rate returns, but even outperform peers. This has become more apparent in recent market conditions. For example, in Q1 2020 during the first wave of the pandemic, research published (by Blackrock) indicated better risk-adjusted performance across sustainable products globally with 94% of a representative selection of sustainable indices outperforming their parent benchmarks.
FaithInvest: And, on the other side of the equation, what are the challenges in looking at Impact?
While the sustainable, and specifically impact investing, industry has significantly matured over the past few years, it is still considered to be in its infancy. That means certain growing pains and challenges still need to be overcome.
More common standards, practices and frameworks now provide better data and clarity on the performance of impact investments, but there is still confusion caused by a lack of standardisation, universal guidance and regulation on how to measure, manage and report the social environmental impacts of investments cohesively. This makes comparability of investments increasingly difficult for investors looking to manage the impact of their multi-asset, multi manager portfolios and has shown the need for a ‘common approach’ and foundational framework that could round existing efforts into the same logic, without adding to the reporting burden.
FaithInvest: Lastly, I think our network subscribers would like to know your views on the big themes that will shape the Impact conversation in 2021.
I think from a thematic point of view, the climate transition and net zero ambitions of companies and investors will dominate this year’s discussion, especially with COP26 coming up later this year.
The second big theme will be around further regulation and standardisation for the space. The EU taxonomy will be the first major regulation the field has seen in a while, so I think a lot of organisations are currently looking at how to integrate some of these new disclosure requirements.
There is also a lot of standardisation work going on that aims to set clearer expectations for investors wanting to align with the UN SDGs or start assessing impacts more holistically. One example is the newly released SDG Impact Standards, which will help organisations and investors to define clearer pathways for setting up their practices and translating an intent to align with the SDGs into action.
A longer term but encouraging project is the collaboration between CDP, the Climate Disclosure Standards Board (CDSB), the Global Reporting Initiative (GRI), the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB), who shared their vision for a comprehensive corporate reporting system in a joint statement of intent in September 2020.
Background to Impact Classes As a pillar of best practice, Impact Classes, established by the Impact Management Project in collaboration with a network of practitioners, look at five dimensions of impact - what, who, how much, contribution, and risk. Data collected for each of these dimensions underpins an “ABC” categorisation system, which segments the contribution of an investment towards a specific impact goal or a high-level impact strategy.
A = Avoiding harm in order to mitigate negative social or environmental outcomes
B = Benefiting stakeholders in order to favour more socially and environmentally sustainable outcomes
C = Contributing to solutions that address identified social and environmental challenges and serve otherwise underserved stakeholders
The ABC framework is not intended to replace existing frameworks or rating techniques, but to round existing approaches in the same logic. As such they align well with existing ways to describe the strategies of investors to manage ESG credentials, often described as “negatively screened” (A type), “ESG integration” (B type), “thematic” or “impact” investments (C type).
More information: www.impactalliance.co.uk