‘Impact will gradually replace broad-brush ESG’

Client appetite is growing but questions remain over implementation across asset classes

More funds will shift their focus from ESG to impact investing, according to Michael Loukas, principal and CEO of TrueMark Investments.

“The days of simply gathering AUM based on ESG philosophies seem to be behind us,” he says.

“Without a standardised definition of ESG, only the largest of investors will ever truly create value in the approach. Therefore, it must be about systemic, regulatory and social risk relative to investment performance, or simply about investing with one’s conscience in mind via impact.”

Chicago-based ETF provider TrueMark Investments, which has $195.9m AUM, offers what it deems an impact investment in the form of the RiverNorth Patriot ETF, which invests in mid- to large-cap US companies and donates the advisory profits and fees to the Folds of Honor Foundation.

The impact investing market is certainly growing. Last year the Global Impact Investing Network reported that for the first time, impact assets under management had topped $1trn.

Client appetite

Financial adviser Darren Lloyd Thomas, managing director of Thomas and Thomas, says he has seen a real increase in clients wanting to know more about where they are invested and the positive impacts their portfolios are having on society and the environment.

“We believe this is down to two factors,” explains Thomas. “First, all portfolios have obviously been hit by events over the past 22 months, which has led us to emphasise the importance of ‘making a difference’, even when personal gains are not that great. Second, the behaviour of regimes such as Russia and China have forced the focus, creating a far greater awareness and inquisitiveness within clients’ minds.

This view is shared by Julian Parrott, partner at financial planning firm Ethical Futures. He says that an increased appetite for impact investing is seeing the market grow, pointing towards the fact that in September, a Vontobel study found that nearly three-quarters (71%) of global institutions and professional investors it surveyed were planning to increase their allocations to impact investing solutions over the next three years.

“Client attitudes are moving away from solely concentrating on avoidance strategies to seek a more positive investment and, although exclusion screens remain an important benchmark for many clients, they are now very much becoming a baseline requirement,” he says.

“Our retail clients tend not to use investment sector jargon such as ‘sustainability’ or ‘ESG’, instead leaning towards aspirational terms such as ‘using money positively’ or ‘investing for change’. That shift reflects an increasing awareness of ethical consumerism and a growing consensus around the key threats to our way of life, but also recognition that there are many investment opportunities in this space.

“It is really not that surprising that people are beginning to understand the power of money and want their investments and pensions to be part of the change.”

Push back from asset owners

However, Elise Beaufils, deputy head of sustainability research at Lombard Odier Investment Management (LOIM), doesn’t see impact surpassing ESG any time soon.

“ESG and impact investing represent two very different approaches. In essence, one could see impact investing as a subset of ESG investing and, while all impact funds are likely to be ESG-compliant, not all ESG funds are impact-focused,” she says.

“Therefore, there is no way impact investing can replace ESG. From a fiduciary perspective, it would probably lead to push back from some asset owners because the financial return paradigm would change drastically. And I am not sure how it could be implemented in traditional asset classes.”

LOIM launched its LO Funds – Global Climate Bond fund in March 2017 in partnership with dedicated green and impact bond fund firm Affirmative Investment Management and is in its sixth year of producing impact reports for the fund.

Nevertheless, Loukas remains bullish: “It is hard to predict how the impact investment space will develop over time, but, to the extent that investors and managers alike are willing to prioritise an impact, I am sure it will gradually replace broad-based ESG. Many investors feel good about making a difference, but they also seem to be realising that the more focused or individualised the objective is, the greater chance of truly having an impact.”