We sat down with Anna Snider, Head of Due Diligence, Chief Investment Office, at Bank of America Global Wealth & Investment Management to understand the reality and potential of “impact” investing.
Tim Nixon, Managing Editor, Thomson Reuters Sustainability: We hear a lot about impact investing these days. How much has “impact investing” realized its potential to achieve a positive impact on the world while at the same time earning market-benchmark matching returns?
Anna: We still have very significant potential for growth. Overall, I’d say we are at the very beginning phases in terms of investors being able to efficiently invest their money in a manner consistent with their values. And that should not be interpreted negatively. It just means that there is a lot of opportunity for public equity, fixed income, private debt and private equity markets of all stripes to mature into an impact model.
Tim: You mentioned “efficiency”. What do you mean by that in the impact investing context?
Anna: In this context, efficiency is about three things: access to standard investment vehicles, size and the maturity of markets, and measurable impact. All three of these areas are in early stages of development, with perhaps the public equity market having the most maturity across the first two.
Tim: Unpack what you mean by “access” as a driver.
Anna: It’s simply the fact that the demand for investing with impact without a performance penalty far outstrips the supply of investment vehicles to which individual investors like pensioners or 401k holders, or asset managers have access. If you asked the average retirement investor on the street whether they would prefer to make a positive impact in the world with their savings while at the same time not incurring any performance penalty, you would find a significant and growing interest which outstrips the supply of vehicles to actually invest in this manner.
Tim: So given access is eventually improved, is the traditional refrain that you must pay a performance penalty for achieving impact no longer true?
Anna: That is correct. In fact, what we see is that investing incorporating impact or ESG criteria increasingly produces no penalty compared to non-ESG alternatives, and indeed also carries benefits in terms of lower volatility and even higher returns compared to peers that are not investing with these issues in mind.
Tim: So what is the challenge with measuring impact?
Anna: The challenge with measurement has been and continues to be one of the keys to accelerating the impact investing paradigm. Many ESG funds use a negative screening methodology to remove or exclude undesirable sectors or assets from the scope of allowable investments (guns, tobacco and fossil fuels are traditional exclusions). However, from an investment standpoint and an impact measurement perspective, strategies that actively integrate ESG factors into the investment decision making or portfolio construction process (either qualitative or quantitative), or in which the asset owner actually engages with the specific invested firm or asset tend to be more compelling ways to achieve positive impact. However, measuring the actual impact for investors using these approaches is complicated at best.
Tim: Isn’t the full engagement model much less efficient from a “cost of doing investing” perspective?
Anna: It can be, and that has been one of the key gating factors for the growth of actual impact investing. But new models are emerging. One of our private equity partners, the Abraaj Group, for example, uses the assumption that full transparency and high performance on material ESG indicators in a business correlates with higher returns, resiliency and long term value potential. Abraaj uses its own on the ground knowledge to select and engage with investments on an ongoing basis.
Tim: But is that model really scalable for the many millions of investors who would like access to this real impact option?
Anna: It may be eventually, as the rewards for shops like Abraaj become more and more apparent. But putting that aside, just having better data and transparency on asset-level performance generally will really help on the measuring-impact problem set. As ESG data models and updating become more and more robust, approaching real-time in some aspects, the costs of measuring and managing actual impact will go down, and the benefits will become increasingly apparent.
Tim: So what is your vision for impact investing given the optimism you express on underlying drivers?
Anna: My vision is to integrate impact and ESG into the way advisers and clients talk about investing so that the current inefficiencies are removed from the discussion. Once access, performance and measuring impact are no longer obstacles, ESG-based investing will accelerate significantly. In the end, “due diligence” on fund selection will seamlessly include an analysis of the investment’s environmental, social and governance based impacts. And with that will come an acceleration in capital moving towards those companies and solutions that will create a positive impact on the world that most investors would like to see for their communities, families and planet.