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Impact investing: a promising opportunity for the future
A few days after Impact Day 2023, organised by the France Digitale association on 23 November, we spoke to Florence Kiss, Impact Specialist at Lombard Odier, about the challenges of impact investing. We asked her to explain the concept of impact investing, its link with financial performance, emerging trends and Lombard Odier’s convictions in this area.
What does impact investing mean?
First off, I want to stress that it is about investing, not philanthropy. It’s important to be clear about the distinction between these two concepts because sometimes we find some confusion among investors. Specifically, impact investing aims to generate a financial return while also producing positive, measurable effects on the environment and/or society. This means supporting companies that contribute positively to society or the environment (e.g. via certified green bonds, social impact bonds or private assets).
If we use as a basis the definition of the Global Impact Investing Network (GIIN), which is the standard point of reference in this field, impact investing rests on three fundamental elements:
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Intentionality refers to the investor’s intention to help produce a positive social or environmental impact.
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Additionality defines the investor’s positive contribution enabling the company or project being financed to achieve or increase the net positive impact.
- Measurability denotes the ability to measure the impact transparently against precise objectives.
This third concept of measurability, which ties in with transparency, is very important and enables greenwashing claims to be easily debunked.
Finally, I would like to highlight that the impact can be either environmental (e.g. linked to the environmental transition) or social (e.g. linked to social housing or education for a target population).
Is impact investing compatible with financial performance?
I get asked this question a lot. Yes, it is possible to have your cake and eat it! For the bulk of our investments, we seek returns that are in line with traditional markets. When we invest in certified bonds1, for example, we expect yields that are at least equivalent to those on traditional bonds. The environmental or social impact comes on top of the financial performance, not instead of it. The same goes for investments in private assets.
How does that translate into impact investing at Lombard Odier?
In our CLIC® investment mandate, we have a dedicated impact allocation, which aims to directly finance transition-related projects in listed or private markets, while achieving financial performance that matches traditional venture capital.
For clients that request them, we also offer “impact first” products, like we did with the Humanitarian Impact Bond2 a few years ago. The aim of that project was to finance three state-of-the-art physical rehabilitation centres in Mali, Nigeria and the Democratic Republic of the Congo. In these cases, the client is willing to risk their capital or make their coupon secondary to the impact objectives. However, that is not what we do in most cases.
What makes your job different from that of a traditional financial analyst?
On the financial side, the analysis is the same. The difference comes at the investment selection stage. There is additional work involved in verifying the intentionality, additionality and measurability to achieve the expected outcomes.
At Lombard Odier, we are fortunate enough to be able to rely on holistiQ Investment Partners, our sustainable investment platform launched this year in conjunction with Systemiq. Systemiq has developed an analytical framework that enables an issuer’s sustainability status to be quickly established, which is a good starting point for talking about impact. This framework draws on the EU taxonomy, which itself contains the notion of double impact: financial and environmental.
What is the hardest thing to demonstrate about the impact that an investment makes?
Generally speaking, the hardest thing to demonstrate is additionality, and it also reduces the investment universe. If you buy green bonds3 on the secondary market, for example, some projects have already been financed at that point, using the funds invested when the bond was issued, which means that you lose additionality and impact. We also take the view that it is hard to have an impact when you buy shares in a listed company, because even if that company is in transition, you can’t channel the funds towards its green activities only. We can make an impact through shareholder activism and by exercising our voting rights, but that is hard to measure. That sends you in the direction of private markets, where liquidity conditions are quite different.
As an investor, what do you demand and what do you look for when carrying out your due diligence?
Let’s take the example of green bonds3 from an issuer wishing to finance green projects. We start by using our internal methodology to analyse whether the company truly has a transition strategy in place (or whether it is being opportunistic). If the company has issued green bonds before, we check that it has published proper allocation and impact reports for its previous issues. We then study the categories of projects announced for this issue, the process for selecting these projects and the associated impact measures that have been announced. Finally, we check whether the financed projects are consistent with the strategy.
The due diligence involved in impact investing is meticulous and demanding. Speaking personally, I have a few trick questions up my sleeve that quickly allow me to decide whether we can proceed or not.
Are clients increasingly asking for impact investments?
As a bit of context, impact investing has been around for a long time in private markets, for instance in the form of microfinance, but it remains fairly niche. The first change came when green bonds began to be issued in 2008, taking impact investments into listed markets. Covid has led to a notable surge in demand for impact investments, but it remains a relatively new area and still only accounts for a small slice of the finance pie.
Read also : The rapid rise of nature-based investments
Despite everything, we see a clear positive trend, particularly among younger generations or entrepreneurs, who demand to know what their money is being used for. We are nevertheless still in our infancy because the transition is only just getting started. By its very nature, finance takes a very short-term view, whereas the problems we are talking about here are long-term ones. We often find ourselves calling for investor patience when it comes to impact.
Is the current rise in interest rates affecting impact investing?
Yes, it is opening up more opportunities to talk about impact. To date, we have mainly talked about it via microfinance or private markets (where the impact offering is also growing). Rising interest rates make bond investments more attractive from a return perspective. We are therefore receiving increasing demand, which we can satisfy using certified bonds.
1 Certified bonds: a certified bond is a financial instrument issued by an entity – generally a company or a governmental organisation – that meets specific criteria linked to social or environmental objectives. These criteria are defined by a label or certification provider that verifies the issuer's commitment to sustainability. Sustainable bonds seek to raise funds for projects that make a positive impact.
2 Humanitarian impact bonds or social impact bonds: these innovative financial instruments generally entail collaboration between private investors and government agencies. They are issued to fund specific social or environmental programmes. They differ from traditional debt instruments in that they are illiquid and do not provide a guaranteed yield.
3 Green bonds: a green bond is issued by an entity (a company, government or organisation) to raise funds specifically allocated to projects or activities that deliver environmental benefits. These may include initiatives relating to renewable energy, energy efficiency, water conservation or efforts to mitigate climate change. Green bonds give investors a way to contribute financially to projects which respect the environment.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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