ESG Club


THREE QUESTIONS ON IMPACT INVESTING


Bérénice Lasfargues and Sophie Mechin, BNP Paribas Asset Management


Are impact investors sacrificing returns? While numerous investors pursue respon- sible and sustainable goals through their allocations, many also find the financial attractiveness of impact investing relative to other investment strategies ‘at least somewhat important’, seeking risk-adjust- ed, market-rate returns for their assets. This shows the notion of an inherent trade-off between impact and financial performance is not valid.


Impact investing offers a range of invest- ment strategies, with different types of financial and impact risk-return profiles from which investors can choose, depending on their objectives.


What are core characteristics of impact investing? Adding an impact objective to the invest- ment process affects what you invest in and how you invest. It influences the nature of the investment process and requires resources and skills that are different from traditional investing.


There are three core characteristics that set impact investing apart from other investment strategies: 1. Intentionality – Capital should be invested with the explicit intention of solving an issue of sustainable develop- ment. It should contribute to a positive social and/or environmental impact which is aligned with the UN Sustainable Development Goals


(SDGs), or widely accepted sustainability goals. other


2. Additionality – The investment actively adds to the impact, for example, through engagement, by providing technical assis- tance or helping to scale the impact by attracting other pools of capital. An impact investor should be able to dem- onstrate that as a result of the integration of impact considerations in the invest- ment selection process (through the use of impact metrics, for instance), the investment universe of the portfolio dif- fers materially from a standard universe. 3. Measurement – The investor should set measurable, realistic, evidence-based goals for what the investments should achieve over a defined time horizon before making the investment. The goals are used to manage and meas- ure impact performance throughout the investment process and are the basis for transparent, public and regular reporting.¹ Regarding embedding impact in invest- ment processes, standards are emerging. One such standard is the Impact Princi- ples, to which BNP Paribas Asset Man- agement is a founding signatory. We are developing an internal framework for impact investing based on the Impact Principles and the three core characteris- tics of impact investing outlined above.


What is behind the rise of impact investing? More and more sustainability-linked risks can have a negative impact on countries or industries. These include extreme weather, environmental damage linked to human activities, infectious diseases and biodiversity loss. Fortunately, these risks are increasingly being recognised by governments, the private sector, civil society, academia, etc.


PI Partnership – BNP Paribas Asset Management


That recognition includes the awareness of the need for system-level responses involving multiple stakeholders and sectors. Solutions are estimated to cost $5trn to $7trn (£4.3trn-£6trn) annually². It is clear that the public sector does not have the means to address these challenges. Inves- tors have a role to play.


In parallel, since these sustainability chal- lenges are transforming economic sec- tors, investors must take them into account from a risk perspective, not only in their scenarios and outlooks, but also in their assessments of the invest- ment strategies, assets and issuers they invest in. Apart from an awareness of the need for active asset selection, investors are also increasingly taking on the role of engaged stewards. Addressing the sustainability challenges presents business opportunities. It is esti- mated that investment in the SDGs could unlock opportunities worth about $12trn (£10.3trn) and create 380 million jobs a year by 2030³. There are economically viable and attractive ways to address these challenges. That also attracts investors. Finally, on the demand side, there is grow- ing appetite for responsible investment products, and, more importantly, for products with a positive impact, from the general public. This is a sign of changing consumer behaviour, which is promoted by governments. All of this is driving the rise of impact investing.


1) IMPACT INVESTING – A DEMANDING DEFINITION FOR LISTED AND NON-LISTED PRODUCTS (frenchsif.org) 2) Business and the SDGs | United Nations Development Programme (undp.org) 3) Release: Sustainable Business Can Unlock at Least US$12 Trillion in New Market Value, and Repair Economic System


For professional investors. BNP PARIBAS ASSET MANAGEMENT UK Limited, “the investment company”, is authorised and regulated by the Financial Conduct Authority. Registered in England No: 02474627, registered office: 5 Aldermanbury Square, London, England, EC2V 7BP, United Kingdom. www.bnpparibas-am.co.uk This article is issued by the investment company. Investors considering subscribing for the financial instruments should read the most recent prospectus or Key Investor Information Document (KIID) available on the website. Opinions included in this article constitute the judgement of the investment company at the time specified and may be subject to change without notice. This article does not constitute or form part of an offer or invitation to subscribe for, underwrite or purchase an interest in any strategy. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial investment. Past performance is not a guide to future performance.


36 | portfolio institutional | October 2022 | Issue 117


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