July 30, 2019 / In-depth

What does Schroders’ acquisition tell us about the Impact market?

By Joe McGrath

Swiss fund firm BlueOrchard focuses on inclusive and climate-smart growth in emerging and frontier markets

What does Schroders’ acquisition tell us about the Impact market?

If fund managers needed a sign they should consider impact investing as a viable strategy – rather than just the latest fad – they may have just been handed it.

In a significant move, Schroders, one of the UK’s largest managers, has acquired a majority stake in BlueOrchard Finance – recognised as a pioneer in microfinance and impact investing.

Indeed, if a big player like Schroders is getting in on the sustainability market, then others should take note of the potential growth opportunities in this arena.

Schroders is clearly set on expanding its sustainability capability as it sees clients increasingly pursue investments that have a beneficial impact on society and the environment, as well as generating positive financial returns.

Switzerland-based BlueOrchard focuses on inclusive and climate-smart growth in emerging and frontier markets, offering investors impact investment solutions across asset classes including credit, private equity and sustainable infrastructure.

Operating internationally, it has invested more than $6bn in over 475 institutions across 80 countries, and has $3.5billion of assets under management.

Peter Harrison, group chief executive of Schroders, said the firm had a strong belief in the value investment can create in society, particularly within emerging and frontier markets and shares BlueOrchard’s values.

“They [BlueOrchard] are a blueprint for the future of our industry and through our combined contributions, we can purposefully affect positive change,” Harrison said.

Peter Fanconi, chairman of BlueOrchard, believes the partnership with Schroders will further enable the achievement of the United Nation’s Sustainable Development Goals and increase its positive impact on the planet.

The trend towards well-known asset managers expanding into impact investment has certainly been gathering pace over the last few months.

One of Europe’s leading companies Carmignac last month [June 24] ramped up its dedication to ESG investing by appointing a new sustainability manager, Justin Kew.

ESG is integrated into more than 90 per cent of Carmignac’s assets, including 3 SRI-labelled funds, and with the appointment of Kew it aims to advance its ESG process and design investment solutions, including impact investment.

The trend has become so great, a new UK organisation – dedicated solely to helping investors invest their cash to benefit communities and society – was launched last month [June 4].

The Impact Investing Institute is being jointly led by City of London veteran Liz Corley, the former chief executive officer of Allianz Global Investors, and hedge fund millionaire Sir Harvey McGrath, chairman of Big Society Capital.

The Institute has already attracted considerable support from businesses and government, with support coming from private firms and foundations, together with the Department for Digital, Culture, Media and Sport, the Department for International Development and the City of London Corporation.

Commenting on the launch, Corley, a long-time champion of investments with a wider social impact, said the Impact investing market was growing rapidly in the UK and around the world.

“Investing for positive impact goes beyond avoiding harm and mitigating risks and is at the centre of a wider movement towards more responsible investing,” said Ms Corley.

“The Institute will play a significant role in ensuring the UK continues to stay at the forefront of innovation in Impact Investing, enabling UK savers to invest in line with their values and have increased ownership over the social outcomes that their money generates.”

Troy Mortimer, head of sustainability and responsible investment at KPMG UK, said the shift in investor sentiment had been huge, even in the past year.

“In our 2019 survey of Asset Management CEOs across 11 of the world’s largest economies, two in three see their growth tied to the shift towards a low-carbon economy and ESG investing,” said Mortimer.

Climate emergency, single use plastics, inequality, political instability are all massive problems and investors are increasingly aware they can do something about them, said Mortimer.

“ESG has certainly come of age, it has moved out of the shadows onto centre stage,” he added. “That’s because it’s not just investors driving the change, its regulators and policy makers too.”

With investors increasingly wanting their capital to be used for good, pure ESG impact investment players, such as Impax Asset Management, are seeing significant growth in their assets and revenue.

With approximately £14.5bn in both listed and real asset strategies, Impax, which invests in companies providing solutions to resource scarcity and environmental pollution, has seen its revenues double from £32.7m in 2017 to £65.7m in 2018.

Sarita Gosrani, head of ESG research, XPS Investment said while impact investment was not yet mainstream, the theme was increasing in prominence with fund managers launching products that aim to generate financial returns alongside achieving positive outcomes for problems as identified by the UN Sustainable Development Goals, for example.

“Impact investing is different from ESG integration in that it looks at the output of companies and whether the revenue streams come from helping to solve the challenges the world is currently facing,” said Ms Gosrani.

Impax insists its investee companies must be ‘pure plays’, generating at least 50 per cent of their revenues from sales of environmental products or services in the energy efficiency, renewable energy, water, waste or sustainable food markets.

In its last Impact Report, published earlier this month [July 15], Impax revealed the positive environmental impacts of its investments in 2018.

It measured several factors, including the volume of carbon emissions avoided, water treated, saved or provided, and waste recovered or treated for each $10m of investment in Impax’s three main listed equity strategies, and its renewable energy private equity strategy.

But for the moment, Impax is one of the few that undertakes such rigorous analysis.

Ms Gosrani at XPS said fund managers were innovating, but there remained hurdles for them and investors.

“One of the challenges around this type of investing comes from a lack of consistency in the measurement of impact across managers and even the inability to measure tangible impact in some cases,” she said.

“A more scalable area of development is sustainable investing which is principally around taking a longer-term horizon and recognising the value to an investor of changing practices now for the better, and which should also drive strong investment performance.”

Mortimer at KPMG UK said while the EU had just published new guidelines for issuers on climate related market disclosures and more ESG disclosure standards for asset managers and their funds, much more needed to be done and “it has got to be done properly”.

“We need industry standards, we need better data, we need better ways of measuring risk and assessing impact,” he concluded.