Asset managers offering impact investing products require external audits to ensure they are not impact-washing, an ESG Clarity and Square Mile event has heard.
Speaking at the Responsible Pathways webinar on Tuesday, Schroders investment director, impact strategies, Jack Wasserman, and Ingrid Kukuljan (pictured), head of impact investing at Federated Hermes, shared their thoughts on the challenges and opportunities within impact investing.
Kukuljan highlighted asset managers’ struggle to provide clear measures and evidence amid claims of impact-washing as there are not enough off-the-shelf solutions for measuring impact.
“We couldn’t find any. And the reason for this being… impact investors will look for granular data – you know, really going deep into detail and we couldn’t find anything that satisfied this.
“The second problem is looking at the net-benefit analysis – you’re looking at the inputs and the outputs of a company. It’s not only important how many emissions a company’s helping to avoid. It’s actually important to work out how many emissions that company’s also generating,” she commented.
Kukuljan said for these reasons her team produced its own database with over 20 KPIs, which now has two years of data. She added that the corporates held within Federated Hermes portfolios have also stated the challenges they have reporting, but have been keen to understand from the asset manager how to do it better.
Creating their own method of measuring impact works well for the team, according to Kukuljan: “With the impact database, we have accountability and traceability for our investments. We can explain every number behind the decision to invest in a company. But more importantly, it gives our clients the opportunity to actually report on how their capital has helped achievement of individual United Nations Sustainable Development Goals.”
Schroders’ Wasserman also explained how his own team has addressed this: “Independent and external verification of impact management processes is something which we think is critical to avoiding greenwashing. It is getting someone outside of your own firm to come in and actually look under the bonnet with a full audit of impact processes.
“We’ve had external independent verifiers come into our business and have a look at our processes and then independently report back to us where these align with best standards in delivering consistent impact,” said Wasserman.
He described it as having been a useful exercise to confirm good procedures are in place and for learning to improve outcomes.
The results are something he said Schroders is happy to share with investors.
FCA asking tough questions
Laurence Taylor, portfolio specialist at T. Rowe Price Global Impact Equity Fund, said he was very encouraged by how well the UK regulator Financial Conduct Authority (FCA) is addressing transparency in this area of investing.
“We’ve taken our strategy launch through Australia, the US, EU and the UK. The FCA is unequivocally got the best, toughest standards that I’ve seen anywhere in the world. And that’s really encouraging.
“It links back to [avoiding impact washing] because the level of data, the forensic nature of the questions… ‘show us your key performance indicators, show us your analysis, show us your thesis describe in the prospectus how you’re going to measure real-world impact.’
“I haven’t seen that type of detail asked for in a client prospectus in my entire career and that’s all very intentional by the FCA around putting standards around products,” said Taylor.