Adrian de Groot Ruiz, economist and CEO of Impact Institute, sat down with Jayda Etienne, Assistant Editor of Preqin First Close, to discuss how investors find alpha in sustainability.
Impact investing is often met with skepticism. Some asset managers and stakeholders are doubtful about the reality of achieving financial goals while also ensuring positive non-financial results. Can they really have their cake and eat it too? Despite these big questions, impact investing is gaining momentum. The Global Impact Investment Network estimates that the global market’s worth over $1tn. Jayda Etienne, Assistant Editor of Preqin First Close sat down with Adrian de Groot Ruiz, economist and CEO of Impact Institute, to discuss how investors find alpha in sustainability.
In our experience, most businesses want to have a positive impact but don’t know where to start. We provide investors and other leading organizations, such as Ahold, ABN AMRO, DBS, Itau Bank, Schiphol, UBS, and the Walton Family Foundation, with the tools to do so. This involves a holistic assessment of portfolio companies, identifying risks and uncovering opportunities through an impact lens. As well as helping clients with their data needs, whether these are to satisfy shareholders and investors, or meet specific regulatory criteria.
The starting point is to get insight into your portfolio to see where material risks and opportunities arise. Data is crucial to get these insights. For example, do you have carbon emission figures? In which potentially high-risk sectors or regions do you have exposure? Gathering such information allows you to narrow down the set of impacts relevant to your business and provides a solid focus. Good software and data solutions are crucial to realize this. The next step is working out how these impacts fit into your investment strategy to help you generate alpha.
Credible data is absolutely critical at the investment due diligence stage to effectively screen companies and potential investees. It’s also vital at the regulatory compliance stage to ensure you meet all requirements. Many LPs go into panic mode when it comes to compiling data required for new regulations, but that’s where we can step in with robust, granular, and auditable data. Good data will only become more important as ESG regulation evolves to target both listed and unlisted companies.
Managing impact risks at the company level, such as increasing carbon taxes or legal exposure to human rights violations, often involves considering these factors: location, product, supply chain, and outputs, such as carbon emissions. If, say, you were looking to invest in a company that makes electric batteries, that product is used for renewable energy storage which has a positive impact. However, battery manufacture requires scarce raw materials, and so sourcing and transporting those has negative impacts. So, it’s about weighing up the risks to calculate whether an investment makes good financial sense whilst also having a positive impact.
Suppose you’re measuring water usage or the positive health impacts garnered from pharmaceutical investments. Our unique approach is that we can also monetize impact, making it easy to compare very different impacts, and create data that is suited for decision making. This means converting those indicators into a single monetary unit, which gives you in dollars the net-positive and -negative impact of any investment.
Our Global Impact Database houses data on environmental, social, and economic impacts for thousands of companies, 140 countries, and 65 sectors around the globe. It’s a good starting point for financial institutions trying to understand and manage the societal impact of their portfolios, because they can quickly identify and compare the risks and opportunities of an investment without having to do full impact assessment.
Yes, absolutely. Lots of new and bigger impact funds are being set-up. There’s also been greater uptake across the different asset classes. Whereas five years ago it was mainly VC funds in the impact investing space, we’re now seeing more private equity and real estate managers anticipating the potential. For example, incorporating sustainability measures into building construction and building refurbishments is a new and exciting approach to impact investing. We’ve also seen quite a few GPs raise first-time impact and ESG funds to stand out and appeal to investors. As ESG investing grows in popularity among LPs, impact funds can help GPs attract capital and remain competitive.
Before Preqin was established, there was very little financial data on the alternatives industry, despite a growing need. It’s a similar story with impact data, and so we saw an opportunity in this partnership to bridge that data gap. We believe start-ups, mid-caps, and SMEs present the greatest potential for positive impact in society, yet they’re underserved and overlooked by most data bodies.
I expect impact investing to become very popular. Right now, there are two distinct impact markets. There’s deep green, where firms build their core financial strategy around impact investments. This is quite a niche market but growing fast. The other is the incorporation of impact data into mainstream investors’ decision-making processes. This is where our partnership with Preqin will be most beneficial because those mainstream investors are Preqin’s client base. For us, the next few years will be focused on educating and making impact data accessible to LPs and GPs that haven’t spent the last decade immersed in the world of carbon credits and human rights risks.
Jayda Etienne is Assistant Editor of Preqin First Close, the essential newsletter for the global alternatives market. It’s quick, easy, and free to subscribe here.
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The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin and Impact Institute accept no liability for any decisions taken in relation to the above.