FINVIA
FINVIA
Podcast
8.4.2022
In 1970, Milton Friedman propagated "The responsibility of business is to increase its profits". In a capitalist economic system with a free market economy, the famous economist argued, companies that adopted a "responsible" attitude would be less competitive. Much has changed since then. Making a profit at any price is now out. This is because making a profit is always accompanied by an ecological and social price, which is reflected in a company's cost of capital.
"Companies failing to meet investor expectations on environmental, social and governance factors risk losing access to capital markets", Ernst & Young stated in an institutional investor survey in 2020. For forward-looking companies, it is therefore becoming mandatory to review and align their business models and operating processes with environmental, social and governance aspects. Most companies are now striving to look good from an ESG perspective. ESG stands for "Environmental, Social and Corporate Governance", i.e. the sustainability-related, company-relevant areas of the environment, social affairs and good corporate governance.
It is important to note that the "ESG lens" primarily looks at the risk perspective of sustainability. In most cases, efforts are made to reduce the negative impacts caused by the company (CO2 emissions, resource consumption, waste, emissions) rather than making positive contributions to solving social sustainability challenges.
A good ESG rating does not therefore mean that a company is fundamentally particularly sustainable. On the contrary - an excerpt from "The world may be better off without ESG Investing" in the Stanford Social Innovation Review from 14.07.2021 emphasizes that most ratings have nothing to do with actual corporate responsibility in relation to ESG factors. Rather, as the article specifies, ESG ratings measure the extent to which a company's economic value is at risk due to ESG factors. For example, a company can produce a significant amount of emissions and still receive a good ESG rating if the rating company believes that the environmentally damaging behavior is well managed or does not jeopardize the financial value of the company.
The ESG perspective therefore primarily highlights potential ESG risks or ESG opportunities. However, it does not say anything about the extent to which the company's business model, products and services are sustainable or even make a positive environmental and/or social contribution to the economy or society. The latter is what is meant by the term "impact".
Impact investing marks a new era of investing. Responsible investing has become increasingly relevant in recent years, particularly among the millennial generation (18-35-year-olds) (source: Schroders Global Investor Study, 2016). However, investors who want to achieve a positive social and/or environmental impact with their investments should carefully check whether an investment offer actually has an impact and is not just labeled as such.
It is questionable, for example, how a fund that is liquidly traded on the secondary market can generate impact through an exchange of shares between shareholders. The money invested does not flow to the company, but merely changes hands. Genuine impact investing takes place where an investment is realized with additive capital and a specifically defined transformative goal in ecological and/or social terms. Apart from this, the degree of target achievement and the associated "impact" should be reviewed on an ongoing basis.
Based on this understanding of impact investing, private markets are particularly well suited to responsible investing. What should also please the inclined impact investor is that there is no need to forego a standard market return! In the private equity segment, for example, the IRRs (internal rate of return) actually achieved since inception have amounted to between 16-18% p.a. gross (source: GIIN, Annual Impact Investor Survey, 2020).
More on this in my next blog post, which you can read here.
FINVIA
8.4.2022
Barbara Wokurka
Doing good for the environment and society and earning money from it: sounds tempting. But it's not that simple. Although ESG and impact investing are often mentioned in the same breath, their approaches differ from one another. Where can investors expect a (truly) sustainable investment?
In 1970, Milton Friedman propagated "The responsibility of business is to increase its profits". In a capitalist economic system with a free market economy, the famous economist argued, companies that adopted a "responsible" attitude would be less competitive. Much has changed since then. Making a profit at any price is now out. This is because making a profit is always accompanied by an ecological and social price, which is reflected in a company's cost of capital.
"Companies failing to meet investor expectations on environmental, social and governance factors risk losing access to capital markets", Ernst & Young stated in an institutional investor survey in 2020. For forward-looking companies, it is therefore becoming mandatory to review and align their business models and operating processes with environmental, social and governance aspects. Most companies are now striving to look good from an ESG perspective. ESG stands for "Environmental, Social and Corporate Governance", i.e. the sustainability-related, company-relevant areas of the environment, social affairs and good corporate governance.
It is important to note that the "ESG lens" primarily looks at the risk perspective of sustainability. In most cases, efforts are made to reduce the negative impacts caused by the company (CO2 emissions, resource consumption, waste, emissions) rather than making positive contributions to solving social sustainability challenges.
A good ESG rating does not therefore mean that a company is fundamentally particularly sustainable. On the contrary - an excerpt from "The world may be better off without ESG Investing" in the Stanford Social Innovation Review from 14.07.2021 emphasizes that most ratings have nothing to do with actual corporate responsibility in relation to ESG factors. Rather, as the article specifies, ESG ratings measure the extent to which a company's economic value is at risk due to ESG factors. For example, a company can produce a significant amount of emissions and still receive a good ESG rating if the rating company believes that the environmentally damaging behavior is well managed or does not jeopardize the financial value of the company.
The ESG perspective therefore primarily highlights potential ESG risks or ESG opportunities. However, it does not say anything about the extent to which the company's business model, products and services are sustainable or even make a positive environmental and/or social contribution to the economy or society. The latter is what is meant by the term "impact".
Impact investing marks a new era of investing. Responsible investing has become increasingly relevant in recent years, particularly among the millennial generation (18-35-year-olds) (source: Schroders Global Investor Study, 2016). However, investors who want to achieve a positive social and/or environmental impact with their investments should carefully check whether an investment offer actually has an impact and is not just labeled as such.
It is questionable, for example, how a fund that is liquidly traded on the secondary market can generate impact through an exchange of shares between shareholders. The money invested does not flow to the company, but merely changes hands. Genuine impact investing takes place where an investment is realized with additive capital and a specifically defined transformative goal in ecological and/or social terms. Apart from this, the degree of target achievement and the associated "impact" should be reviewed on an ongoing basis.
Based on this understanding of impact investing, private markets are particularly well suited to responsible investing. What should also please the inclined impact investor is that there is no need to forego a standard market return! In the private equity segment, for example, the IRRs (internal rate of return) actually achieved since inception have amounted to between 16-18% p.a. gross (source: GIIN, Annual Impact Investor Survey, 2020).
More on this in my next blog post, which you can read here.
About the author
Barbara Wokurka
Barbara Wokurka is responsible for impact investing at FINVIA. She can look back on 30 years of professional experience working for financial service providers and in the real economy in the areas of corporate finance and asset management.
She laid the foundations of her career at Deutsche Bank in Frankfurt and London in the Corporate Finance division before joining Porsche AG in 1999 to set up and head up asset management for the Group. In 2007, she moved to Quoniam Asset Management GmbH, where she initially looked after German Tier 1 clients and then took over sales management for the international market as a partner, including the establishment and management of the Quoniam branch in London.
