Impact investing is on the rise. In early June, Swiss Sustainable Finance’s annual report confirmed that impact investing’s share of the Swiss market is increasing. “Of all the approaches to sustainable investment, the impact investing category is showing the fastest growth rate (70%),” according to the report.
In Europe, impact funds now feature in various top 10s in terms of inflows. Although they still only rank 10th, their rise seems inexorable. But how does an investor manage impact, particularly in emerging-market countries where it would seem to be even more useful than in developed countries?
We spoke to Simon Pickard, Chair of the Impact Investment Committee at Union Bancaire Privée (UBP) and Mathieu Nègre, Portfolio Manager, Positive Impact Emerging Equity at UBP.
What does impact mean at UBP, and what are the principles on which your approach is based?
We currently manage three impact funds with around CHF 700 million of assets under management: two focusing on developed markets and one on emerging markets. We are also working on a new biodiversity fund. Our approach consists mainly of selecting listed companies that, as well as performing well financially, generate a positive, measurable impact in social and environmental terms. We look for companies whose business models are aligned with the UN’s Sustainable Development Goals (SDGs) across six themes: three environmental and three social. Those companies include ones capable of developing solutions to support energy transition and ones that can bring financial services to people who currently cannot access them. A key point is that ESG applies to all companies, whereas impact concerns only a very specific subset of them.
In what way is UBP’s approach distinctive?
We have proprietary processes and tools.
We have our own scoring system called IMAP, standing for Intentionality, Materiality, Additionality and Potential, which are the four key criteria on which we judge the “impact intensity” of companies in our portfolios.
This allows us to create an impact profile for each company we look at. For example, it helps us find companies that have been problematic historically but whose intentions point in the right direction, and those that have high rankings but whose trajectory is not as positive as it might appear at first glance. Since engagement is a central part of our approach, we have also developed a tool called the Impact Engagement Framework (IEF). This involves a process that can be applied systematically to several regions and sectors: we ask 12 fundamental questions, ensuring that nothing is overlooked when engaging with companies. It’s not just a case of choosing the “right company”; what’s important for us is the role that the asset manager plays once the company is in the portfolio, and the influence that the asset manager has in ensuring that the company hits its targets. You need a system in which asset managers are required to justify their investment decisions on an ongoing basis.
To what extent do you use external expertise?
Our Impact Advisory Board features a number of external experts who specialise in sustainability matters. They include Jake Reynolds, who leads the Cambridge Institute for Sustainability Leadership at the University of Cambridge; Kanini Mutooni, who has spent a long time working for Toniic, the global action community for impact investing; Tony Juniper, Chair of Natural England, a UK public-sector organisation tasked with protecting England’s natural environment; and Bastien Sachet, who works for the EarthWorm Foundation, a Swiss NGO that works with major food producers to improve their supply chains. The Board meets every six months to analyse investment cases and to guard against greenwashing.
How do you measure results?
We calculate a range of SDG-related performance indicators for each investee company. We then collate the results, after weighting them according to the percentage of the investment portfolio that each company represents. To give you an example, we measure the impact of an educational organisation by the number of pupils or students it teaches and by the percentage of students coming from deprived families or those lacking educational qualifications. We may also look at the employment rate among school-leavers, wage levels, the wage premium relative to the market or subjects studied as part of a university degree. It’s worth noting that figures come from the companies themselves, and this example is not without controversy. In Asia, there are a lot of “cram schools”, which are not very beneficial. We prefer companies that fund additional university places. All these indicators, which obviously vary widely between companies, are published in our annual report.
You mentioned an impact fund focusing on emerging markets, which is quite a rarity.
This is a project that is very close to our hearts. When you think about impact, you think about deprived communities, developing regions. But it’s not as simple as that. Ordinarily, if you mention investing in listed emerging-market stocks, it’s Chinese tech companies or state-owned oil producers that come to mind. But obviously, these are not at all the companies we are looking at. Impact investing in emerging markets means targeting companies that need investment from the financial community in order to move forward. And there are lots of them, from Northern Asia (China and South Korea) to South America, India and Africa. They are working hard to make progress in renewable energies, water treatment, waste management, the treatment of local medical conditions and financial solutions such as microfinance for people who really need them. The difficulty is that these companies do not yet understand the ground rules that allow them to present themselves as companies that have a positive impact on their environment. There is a knowledge deficit among both investors and company management teams. So at UBP, we’re on a real voyage of discovery, finding little-known companies whose average market capitalisation is much smaller than that of index constituents, which means that they are not covered by analysts.