Paolo Fresia, Investment Director of 100% Sustainability, his family office, oversees a meticulous investment process whereby he selects investments and fund managers with a focus on climate change mitigation, reducing gender inequalities, and sustainable supply chains.
Fresia wants to be a responsible steward of his capital. For him, this means seeking out only those investments - across a wide array of asset classes - that generate positive social and environmental impact.
He firmly believes that combining environmental, social and governance (ESG) criteria with traditional investment metrics leads to superior financial returns. “No one would argue that having more information about risk is negative for a portfolio as it enables you to make better investment decisions. The evidence about that is absolutely clear,” he says.
However, he highlights how too many investors only look at operational ESG metrics, while too few investors consider the impact footprint of companies’ products and services. What matters, he says, is ultimately whether an investment benefits a wide range of stakeholders and contributes to solutions to global social or environmental problems. He thinks tomorrow’s financial outperformers will be those companies where the positive impact they generate is in lockstep with their growth, not at the expense of it. One asset class that is attracting more of his attention recently are social impact bonds, where investors’ returns are explicitly linked to positive social outcomes.
"A significant number of the world's leading impact investing firms are based in the UK. London attracts a diversity of thinking across government, nonprofits and the private sector that is absolutely necessary in impact investment"
A significant number of the world's leading impact investing firms are based in the UK, according to Fresia, with London specifically attracting “a diversity of thinking across government, nonprofits and the private sector that is absolutely necessary in impact investment”.
But he says it can still be challenging and time-consuming to select appropriate fund managers, not least because there is no industry-wide standard for measuring the environmental or social impact of investments. Some fund managers engage in so-called “impact-washing”, he says, whereby they overstate the positive social or environmental impact of their investment strategies in order to attract investor money.
“Each asset manager has their own different way of measuring the impact on anything from start-ups in Africa to a sustainable infrastructure solar generation plant in North America. Sometimes they only cherry pick the positives without doing a full life-cycle analysis and looking at any negative long-term impact,” Fresia explains.
For this reason, Fresia has turned to the IMP+ACT Classification System (ICS), a new digital tool which aims to make the social and environmental impact of funds more transparent and easier to analyse.
“It’s hard for investors to discern what is actually going to make a difference to the world, and what does not,” he says. “That’s where the IMP+ACT alliance IMP+ACT classification system comes very handy. Hopefully such London-based efforts to cut through the noise will be adopted more globally.”
Through an intuitive and educational platform made available for free, the IMP+ACT ICS is facilitating the adoption of the Impact Management Project’s (IMP) classification system. This framework, which is truly emerging as a new industry standard, dissects investor and enterprise impact into well-defined categories, without using jargon, thereby enabling greater comparability of impact across the investable landscape.
Investors will be able to short-list funds according to the investment category they wish to invest into, whereas fund managers will be able to self-report their impact achievements and have it translated into the IMP’s classification system. The new tool was developed in consultation with over 150 organisations including investors, fund managers, nongovernmental organisations and academics.
Fresia has started using the ICS to help him move more of his portfolio from investments that simply avoid harm to those that contribute to solutions, and to deepen his investor impact by providing more undersupplied and flexible capital, as well as selecting fund managers who can demonstrate proactive engagement with their investees.
While previously he was rating fund managers himself according to the IMP framework, using the ICS Fresia says he is able to better question the investment methodology of fund managers and encourage them to use the tool's framework “to make them think more holistically and in-depth about the social and environmental impact of their investments.”
“Investors are moving away from viewing sustainable investing as simply a ‘trend’, to being the smart way to invest for the long term."
Over time, Fresia believes more fund managers from around the world will classify themselves on the ICS tool. For fund managers, the appeal is being able to market their services and their particular impact strategies to a targeted, and growing, global audience.
“Investors are moving away from viewing sustainable investing as simply a ‘trend’, to being the smart way to invest for the long term. The COVID-19 crisis has highlighted this need more clearly, with investor demand for ESG and impact funds rising rapidly. What will make a big difference to the speed of this deployment is the availability of both robust data platforms and firms to implement investment decisions based on such ESG/impact data. In the UK such infrastructure is definitely there.”