The potential for institutional asset owners, ie. super funds, to drive a step-change in adoption of impact investing has long been discussed, but so far no consistent approach has been adopted. This month, the Global Impact Investor Network (GIIN) has published an issues brief that goes to the source, surveying its global member base of major asset owners about their progress on impact investing, and the challenges they’re facing.
The brief focuses on a few key priorities required to establish a strong foundation, it looks at the approaches asset owners are taking to setting priorities and selecting impact targets. And out of a global selection of 24 asset owners, 4 were Australian, they are: Australian Ethical, Aware Super, Christian Super, and NSW Treasury Corporation.
To be clear, the sample shows that most institutional asset owners aren’t setting impact targets, but in the interest of changing that, it’s highlighting the challenges they’re facing, and potential paths forward.
GIIN recognises that the current status-quo for these investors is an efficient portfolio that does no harm, but the ambition is for these powerful investors, with large pools of funds at their disposal, to add ‘impact’ to their risk/return calculus. To influence real world outcomes through their investments, and to offer another layer of positive returns to the lives of their beneficiaries.
“Not only are asset owners recognising and building renewed pledges for inclusive stakeholder engagement; they have also moved from ‘aspiration’ to ‘action and allocation’ and are now developing their thinking on impact strategies, impact target setting and better understanding the differences between ‘outputs’ vs ‘outcomes’ metrics.” Says Zarmeen Pavri, GIIN’s Senior Advisor and liaison representative for Australia and NZ.
Identifying Impact Priorities
The report first acknowledges that most of the asset owners surveyed did consider some level of social and environmental factors in their investment process; most often described as an integrating ESG factors. However, progress to go further, to assess impacts across their entire portfolio, was far less common.
The first step then, for most of these investors, is to identify priorities. The most common environmental impact that was being assessed was the impact of climate change, the financial risks were well understood. But a much smaller cohort reported that they were targeting social issues. For those that were, it was diversity and access to basic services that were the priorities.
Factors driving these priorities included internal capacity, which highlighted the need to have sufficient expertise in the organisation in order to make meaningful and professional progress on the issue. And, of course, the issue needs to have a viable financial outcome, it needs to be investable. This has helped to push environmental issues to the top of the list, given the quantifiable metrics, and investible technologies.
These are large organisations, with a dizzying array of stakeholders, regulatory burdens, and a bureaucracy not accustomed to change. And while societal expectations are cited as driving priorities, “not a single institutional asset owner indicated that severity of social or environmental need was the primary reason for pursuing impact.” The report explains.
How to set targets
Across the spectrum, there appears to be two key approaches to setting targets.
The first is a top-down approach that looks at the portfolio, or asset class, as a whole. This occurs most often when setting climate-change targets, the nature of measuring and managing a very quantifiable output like ghg emissions lends itself to these clear and comparable targets.
Aware Super was cited as an example, for its targets which aims to: Reduce carbon emissions by at least 30% in the equity portfolio, as well as advocating for an economy-wide 45% reduction in emissions by 2030, across their portfolio.
But of course, investors are all at different stages of their impact journeys. The report explains that, “less than half of respondents included in the sample reported setting quantitative impact targets at either the portfolio or asset class level.”
The second approach is bottom-up, this involves a more organic process of assessing historical performance data, and setting targets at a more targeted, investee level. By taking this approach, the investors are able to develop a specific set of expertise about a particular issue, and they allow these themes to be defined by the companies in which they invest.
The report explained that this ‘measurement and management approach’ is a useful step for informing quantifiable targets, and identifying areas for focus, rather than focusing on arbitrary impact goals.
“This report shows signs of a more disciplined practice of impact investing that is being adopted by institutional investors, but also, there are early signals of intention to have an unwavering commitment to impact transparency, integrity and taking steps to pursue and build impact measurement authentically.” Zarmeen says.