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Applying ESG criteria and the United Nations (UN) ‘Social Development Goals’ (SDGs) is already an inherent part of how institutional asset allocators invest. Taking the next step to reaching the SDGs, whilst delivering outperformance for investors, will involve better support for small scale, early stage ESG projects that avoids the false marketing risks that arise.

The conclusions of our recently released, 5th annual Environmental, Social & Governance Investing report has indicated the argument for including ESG investments in a portfolio, is less held up by rationale and proof but by the justification of added value to a portfolio.

Large scale ESG investments, such as infrastructure projects and carbon minimisation technology, have developed financial return track records that are long and sustainable enough for pension plans, insurers, foundations and asset managers to include in their portfolios. However, these examples, as with many other investments they make, would be rated as positive contributors to the UN’s SDG goals, particularly SDG 8 which focuses on promoting economic positivity and full employment.

Going forwards to progress the implementation of the SDG goals, more needs to be done to address the problem of ‘scale’.

With all investments, investors have to consider practical trade-offs from an investment. Impact investors recognise that addressing the world’s major social and environmental problems could generate significant business opportunities. They intentionally aim to improve the lives of people around the world, while seeking an attractive financial return.

Small scale projects though often come in to small a size as to make them worthwhile to apply institutional level of due diligence checks too. Reportedly, some smaller project owners have also been guilty of applying the ‘ESG’ compliant label to investment opportunities to make them more attractive, despite there being serious flaws in the business model that underpins them and makes the trade-off between positive and negative impacts less attractive to asset owners. The role of third-party asset managers can obviously play a significant role, taking on the responsibility of identifying and wedding out of such risks, but even for them some projects are just too small to be explored. Organisations, such as the UNs Principles for Responsible Investment (PRI) committee, could set up pooling vehicles which small scale project owners can apply to be a part of and thus, receive investment when offered as part of a larger investment opportunity to ‘sticky’, long term investors.

Such pooling vehicles can also address the challenge of ‘measurement’. Return horizons are almost always longer for small scale projects – it’s impossible to change the world in six months – and return volatility for individual stocks can be well above average, given small scale projects often uneven growth paths and reliance on disruptive technologies. This typically shouldn’t be a problem for pension plans, life insurers and other traditionally long-term investors, but many still look at the short-term risks as an overly significant factor to their investment decision making.

To achieve such pooling vehicles, at an intermediary level where default risks and a level playing field is established, there needs to be greater collaboration among academia, Non-Government Organisations (NGOs), authorities and private sector to both provide input to the investment decision making but also offer better reporting on the social impacts that result from such initiatives.

In summary, as reporting and collaboration between different party stakeholders becomes more established, the financial impacts and the value of businesses positive social impact will become clearer to most investors. In doing so, a vital next step will be taken towards fulfilment of the SDGS combined with offering institutional investors attractive returns in this prolonged low yield environment.


By Noel Hillmann, Managing Director, Clear Path Analysis

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