MAINSTREAM ASSET MANAGERS TARGET IMPACT
Could the Schroders-BlueOrchard deal pave the way for further M&A in the impact investment space?
The FT thinks so. Reporting on consolidation in the financial industry, journalist Jennifer Thompson writes that “flaunting environmental, social and governance credentials is old hat. Showing that your portfolio actually changes the world for the better—and not just excludes the so-called sin stocks—is swiftly becoming the next big growth area for asset management.” Mainstream asset managers are after a slice of the market for many reasons, chief among them client demand (i.e. from a whopping 84% of millenials) and differentiation.
But what is a would-be responsible asset manager to do? Building a team—particularly given the notorious dearth of talent—and an investment track record takes time. Doing a deal, as Schroders demonstrated this summer, speeds things up. Expect more M&A between incumbents and boutique impact investors, concludes the FT; or in the words of DWM partner Edward Marshall: “Impact investing has arrived. These recent acquisitions and the continuing entry of major players makes clear that investors and managers alike understand the value and appeal of impact investing, and that it will be a growing part of the financial industry for years to come.” (It’s even creeping into the CLO market.)
As the meaning of impact investing changes, so too does its scope. Once associated with philanthropy, it’s now simply investing with the understanding that every company has real-world impacts. As per the comments in the FT article: “the asset management industry’s dominant meme of standard finance theory is slowly absorbing the notion that risk is wider than previously realised and elements of the SDGs are no longer irrelevant.” And so ESG metrics are harder to ignore (though perhaps some more than others).
INTRODUCING GREENWISHING: A TOXIC COMBINATION OF HYPE AND HOPE
This week, IPE drew attention to a recent paper titled ‘Greenwishing: The wishful thinking undermining sustainable finance'. In his essay, author Duncan Austin argues the sustainable finance movement has reached a major crossroads. On the one hand, the sector is thriving; on the other, global environmental metrics continue to deteriorate, with global CO2 emissions 55% higher than in 1997 (and accelerating) and ecosystem health declining at unprecedented rates.
So what’s the reason for the divergence? Austin pins it to greenwishing, "the earnest hope that voluntary sustainability efforts are closer to achieving the necessary change than they really are.” More widespread and fuelled by good intentions, greenwishing poses an even greater threat to the industry (and planet) than its cynical cousin, greenwashing.
The problem is, ESG is still essentially peripheral. Shareholder value maximisation continues to take priority, with “little regard for the full cost of corporate externalities.” Unless the sustainable finance industry acknowledges its own limitations, it could divert energy from the only form of change—systemic policy change—capable of addressing our environmental challenges fast enough. In essence, the industry needs to rally around a collaborative initiative.
It’s a point made again this week—and again in IPE—in a different context. UK pensions minister Guy Opperman has recently made clear that he sees UK pension schemes as having a role to play in reining in climate change, which ramps up the pressure on pension trustees to weigh ESG and climate risks more explicitly. But, as IPE concludes, climate change and other macroeconomic, systemic risks “cannot be sufficiently hedged through portfolio construction and asset allocation alone.” Once again, moving the dial on climate change will depend on “collaborative industry initiatives”—or nothing will change at all.
IN OTHER INDUSTRY NEWS
UBS has raised US$225m for KKR's Global Impact Fund, “one of the largest investments to date” in the private-equity vehicle that launched last year. The capital is part of the bank’s commitment to allocate US$5bn over five years to impact investments related to the UN SDGs.