Auditing the impact practice of ‘sustainable’ investments

More than a quarter of the assets run by US fund managers are deemed to be ‘sustainable’ by the Global Sustainable Investment Alliance (GSIA). There were $30.7trn of sustainable assets in the world in 2018, an increase of 34% from 2016, and a 2018 study by Schroders revealed that two thirds of people around the world had increased their sustainable investments over the past five years.

Given the tidal shift in opinion on climate change, in particular in the past twelve months alone, we suspect that the level of sustainable investments is even greater today. TCI, an activist fund with $28bn under management, recently called upon asset owners to fire asset managers that do not provide emissions transparency in their investment portfolios. With the number of impact investments growing, who is keeping an eye on the credentials and the true impact of these ‘sustainable’ funds?

Defining sustainable

You could play bingo with the variety of terms used to label sustainable funds—ESG, Ethical, Sustainable, Responsible, Green, Impact, SRI to name but a few. What does ‘sustainable’ really mean? It can often take a forensic investigation to find out how each fund manager is defining their own investment criteria (what stocks are included or excluded from their funds). Helpfully, the Investment Association has just launched industry-wide definitions of these terms, to help create a more common language for advisers, fund managers and consumers.

Transparency on ‘impact funds’

Common definitions are clearly required, but an even more important initiative was launched earlier this year by the International Finance Corporation (IFC). Operating Principles for Impact Management, led by the IFC, are not just another set of principles to sign up to, but are a tipping point towards greater transparency on impact for investment funds. The ninth of their principles requires signatories to:

publicly disclose alignment with the principles and provide regular independent verification of the alignment

There are now 77 signatories to these principles, ranging from specific impact investors like Leapfrog to mainstream institutions such as UBS, Zurich and BNP Paribas. This is a significant development for the industry and should be welcomed by those of us who are worried about the potential backlash of companies claiming to be sustainable but not delivering what it says on the tin. This principle, rallies against a lack of integrity in the industry and helps to reduce the risk of ‘impact funds’ being mis-sold.

What’s more, increasing your transparency rather than ‘green washing’ will signal to the market place that you are credible market leader in impact investing. Another benefit includes, the opportunity to learn and develop as you asses your own impact.

Auditing impact practice

NPC has almost 20 years of experience thinking about impact, what it constitutes and how it can be measured. We have been applying this expertise to impact investments for a number of years, for example in developing our Impact Risk Classification framework for assessing the impact practice of multi-asset portfolios.

Our track record, independence, charitable status and commitment to impact puts us in a perfect position to audit the impact of signatories of the IFC principles, to assess alignment with the principles, to help funds with their disclosure requirement and to drive the industry towards improved impact practice.

Do get in touch with Plum Lomax, NPC’s Principal: Impact Investing, to discuss our impact audit services on plum.lomax@thinknpc.org