What is the state of impact investing? The panel of experts from large institutional investors to small foundations at the 2013 Green Living Business Forum share their thoughts on the growth potential, risks and opportunities, and the valuation of social and environmental factors. Six common threads emerged from the discussion chaired by CBC host Evan Solomon.
Impact investing is small but rapidly growing. Currently it accounts for $50 billion globally, according to Bart Houlahan, Co-Founder of B Lab, a non-profit that helps entrepreneurs solve social and environmental problems. While this is a very small part of the capital markets, it is the most rapidly growing segment.
Investors assume impact investing means giving up profits. According to Jane Ambachtsheer, Partner & Global Head of Responsible Investment at Mercer, some investors and investment managers think impact investing means giving up profits and from a fiduciary point of view they are not allowed to do that. Data actually shows the opposite to be true. If you invested in the Global 500 companies in 2005 you would have a total return of approximately 40% by 2011. That’s not bad. But if you put your money in companies in either the Carbon Disclosure Leadership Index (CDLI) or the Carbon Performance Leadership Index (CPLI), your return would have been approximately 80%. Over this six year period, companies that devoted resources to managing their carbon delivered double the return to their investors than companies that did not. Doing good equals doing well. See more details in my article CDP Canada 2011: Key Highlights.
“Impact investing can provide good return on investment,” according to Julia Langer, Chief Executive Officer of Toronto Atmospheric Fund, a fund who has invested more than $50 million in local climate solutions and has helped Toronto save more than $55 million on its energy bills. “It’s not just about feeling good. But you need to know how to value it.” For more on how environmental, social and corporate governance (ESG) factors are valued by the financial industry, read my article Investment Bank, VC, Credit Rating Agency Talk Sustainability.
Investors don’t know how to value climate change risks in their portfolio. They either don’t realize or don’t know how to deal with the climate change related risks in their investment. If you hold stocks in BP or Shell, how much climate change related risks are there in those investments? Analysts at HSBC found those investments could face a loss in market value of up to 60% should the international community stick to agreed emissions reduction targets. The analysts found a massive over valuation of oil, coal, and gas reserves held by fossil fuel companies. This carbon bubble could lead to another financial crisis, according to Lord Nicholas Stern, a professor at the London School of Economics. His warning is supported by Citibank, Standard and Poor’s and the International Energy Agency. There is also arguably a water bubble in the market, says Ambachtsheer. Investors have exposure to these underlying bubbles but few know how to value them, or even know they exist. These resources need to be priced appropriately and knowledgeably.