Mainstreaming Impact Investing

Jessica Ground, Global Head of Stewardship, Schroders, will hold the workshop ‘Mainstreaming Impact Investing – A role for listed securities?’ on the Congress on Impact Investing on 24 January 2017.

In 2014 Jessica became Global Head of Stewardship, overseeing the integration of Environmental, Social and Governance factors into investment processes across geographies and asset classes. She also has responsibility for Corporate Governance and Stewardship policy and implementation globally. Jessica joined Schroders in 1997 on the Gradate Programme and initially worked as a research analyst on a pan-European and Global basis. She became a fund manager in 2006 on the Prime UK Equity team with responsibility for £9bn of institutional and retail money. She has a BA in History from the University of Bristol and is an Associate of the CFA Society of the UK. She sits on the IA’s Corporate Governance and Engagement Committee and on the Steering group for the BankingFutures project.

Based on your experiences, what has to be taken into consideration in an impact investing deal?

The term of “impacting investing” is relatively new and is used to describe a range of investment styles, asset classes, sectors and geographies. As such, the market has not yet been accurately quantified.

Much of the excitement generated in this space has been around social enterprises and not for profit companies with a measurable social impact. From talking to a number of players operating in this space we have identified a number of considerations that point to a gap between hype and execution.

Sourcing deals can be difficult and take time and many in the industry say finding appropriate projects is far more difficult than finding committed money. This is not made any easier by the fact that these projects are inherently pretty small and hard to scale. In part, this seems to reflect the fact that many projects are in relatively niche areas – public agencies are more likely to establish their own efforts in more mainstream area. Finally the quantification and tracking of the impact, while laudable places a significant cost and reporting burden on relatively small organisations with modest capital budgets over which to spread costs.

What is the potential and where are the hurdles regarding the future development of impact investing?

While we believe that impact investment will continue to grow, and create some exciting opportunities, it is only ever likely to make up a small proportion of portfolios. This leaves investors who want to have an impact with their entire investment portfolio, with a challenge. As the role of public markets has grown, giving investors direct influence and exposure to large companies, it is natural that social and environmental considerations have become more important to investors. Global Stock Markets account for approximately a quarter of financial assets. Adding the value of corporate debt brings the total value of securities issued by private companies to around one-third of that total, roughly similar to the annual output of the world economy.

Listed companies have a huge role to play in creating a more sustainable world, in how they treat their employees, their customers, and consume natural capital. We have a long track record at Schroder of engaging with the companies that we invest in on Environmental, Social and Governance issues, seeking to improve their performance in these areas. In 2015 we conducted almost 500 of these across 33 geographies.

In our experience companies rarely operate in a black and while manner, we want to encourage them towards improvement and transparency. Evidence shows that this can provide performance benefits too. A recent study by MSCI (Can ESG add alpha? An analysis of ESG Tilt and Momentum Strategies – Zoltan Nagy, Altaf Kassam, Linda-Eling Lee (June 2015)) showed that strategies that looked to invest in those companies who are improving their ESG scores had an added value of 2.2% p.a. respectively, an even larger degree of outperformance than just having a tilt towards those companies with already existing strong score.

What are the concepts of impact investing at Schroders?

At Schroders we have been working on client solutions through active fund management, combined with a focused engagement programme leading to a quantification of outcomes and impacts for our clients. While one size of solution can never fit all needs, we have the tool kit to develop solutions that help measure and track the performances of individual products or for individual investors, reflecting their focus or priorities.

An example of our ability would be a mandate that was concerned with tracking change and delivering outcomes. The beneficiaries are looking to measure “more than financial returns.” They have set a number of targets around diversity, business ethics, supply chain, and climate change that are demanding. They expect that portfolio will achieve substantial improvement through a focused engagement programme over time. Once again we have built a unique system that track progress and reports regularly on these targets using public auditable data.

We also believe that successful engagement will lead to improved investment returns. A recent study investigating this approach demonstrated that engagement resulted in +2.3% return on average after the year of engagement. And when those engagements led to successful outcomes, the returns +7.1% on average in the year after the initial engagement (Active Ownership – Elroy Dimson, Ouzhan Karaka b, Xi Li (August 2015)).

We have been developing these solutions over the past three years. As we learn and improve our methodology we expand these types of approaches and expect them to become more mainstream. We expect this type of active engaged investment to deliver positive impact in both in terms of performance and outcomes, across a substantial part of investors’ portfolios, and have a wider impact on the world as well.