The big questions around sustainable investment

Resiliency and how to measure impact are two key topics coming out of our Sustainable Investing report.

How do you quantify impact? It’s a huge question and one that runs through our biggest-ever Sustainable Investing report, which you can read HERE. To say the issue – and specifically the impact of global warming – has risen up investors’ agenda in recent years would be something of an understatement.

David Russell, head of responsible investment at USS Investment Management, recalls how 10 years ago the investment arm of the UK’s largest pension funds was one of the few investors raising climate issues with fund managers. Now the climate crisis is one of the hottest topics of conversations for LPs. For managers, that raises questions of resilience. How do you adapt assets to cope with global warming? How do you quantify the risk? And who should pay?

One answer could be resilience funds. French fund manager Meridiam announced in September that it was partnering with the Rockefeller Foundation to launch a fund dedicated to urban resilience infrastructure. The goal, the foundation says, is “to create an industry standard for resilience infrastructure”.

Although others have yet to follow suit, they are considering the issue with respect to their existing portfolios. Benchmarks are emerging and there is a growing realisation that resilience adaptations don’t have to be prohibitively expensive. The UN Global Commission on Adaptation has said such investments have the highest payback ratio.

Importantly, managers and investors can also readily see the return in making sure their assets are resilient. Here’s what Chris Leslie, a senior managing director at Macquarie Infrastructure and Real Assets, told us:

“We recently sold a business that had undergone several resilience upgrades which had improved its sustainability as a business – this proved to be highly valuable to potential buyers during that sales process.”

Impact is also the label given to one of the fastest growing investment movements of recent years. Doubts remain about whether impact investment funds can really live up to their hype, but there’s no question of the growing interest from infrastructure managers wanting to show they are responding to climate change.

As we wrote in our special anniversary Decade issue, a report by the Global Impact Investing Network shows infrastructure to have been one of the biggest beneficiaries of this trend. Among the institutional investors surveyed, the asset class topped the list for growth in allocations – these increased from $336 million in 2014 to $2.3 billion in 2018. The absolute amount of capital going into infrastructure impact strategies remains small but the rise in capital allocated is significant.

The same report found that 29 percent of respondents were planning to increase their allocations to infrastructure impact strategies, with 48 percent looking to do the same in energy impact strategies – some of which could arguably be included in the infrastructure sector.

To delve deeper into what exactly impact investment involves, we spent two days at the GIIN’s 2018 annual forum creating an A-Z of Impact Investing with artist Lee Playle, based on delegates’ suggestions. The fact the letter M was chosen to denote metrics signifies how the notion of quantifying impact is crucial to the success of this burgeoning sector. We suspect that will remain the case for some time to come.

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