Taking an Integrative Approach to Impact Investment

By guest contributor Harald Walkate, Head of Responsible Investment at Aegon Asset Management

Harald Walkate is Head of Responsible Investing at Aegon Asset Management

In the last few years, great progress has been made in the area of impact investment. At first the exclusive domain of foundations, family offices and SRI-driven investors, it is now gaining recognition in mainstream finance as a tool that will help tackle social problems while realizing required investment returns.

This is a welcome but also necessary trend, because for this approach to have the impact (no pun intended) our community desires, much larger dollar amounts will need to be allocated. This will require the unlocking of the vast capital pools held by that mainstream sector — pension funds, insurance companies and sovereign wealth funds around the world. As Antony Bugg-Levine and Jed Emerson write in their book Impact Investing (2011), the key will be “determining where the high-potential capital pools sit, understanding how to motivate their managers to redeploy them, and supporting them do so.”

Exact numbers are hard to come by, but speaking in ballpark terms, today investment has reached the tens of billions. To seriously move the needle, we need to start thinking about how to engage the hundreds of billions, if not trillions, held by those asset owners.

For this, several things still need to happen.

Understanding the mainstream investor

First, the impact community should better understand this “mainstream” financial sector. It should recognize that, however socially-oriented and sustainable these organizations might be, or claim to be, their first priority is matching their investments to the liabilities on their balance sheet.

This is as it should be: whether for-profit or not, this is what they were created to do in order to pay out pensions and insurance claims at some point in the future. This means most mainstream investors take a hard-nosed and no-nonsense approach to asset management, where strict return requirements apply, volatility is thoroughly analyzed, difficult questions will be asked about liquidity, and regulatory requirements need to be scrupulously fulfilled.

Also, for more than a few asset owners, established asset classes such as equity (not even to speak of private equity or venture capital) are totally out of the question. The impact community needs to understand that, while this restriction often poses barriers to certain impact investments, these barriers are there for good reason and will not go away in the short to medium term.

Understanding this will help manage everyone’s expectations of what mainstream finance can do in impact investing. It will also help the impact community to become true “mainstream messengers” and to pitch their investment opportunities more effectively to institutional investors.

Looking for impact opportunities within existing portfolios

Second, asset owners should take an integrative approach to impact investment, looking for impact opportunities within existing portfolios and asset allocation processes, not in addition to them. The recent report Allocating for Impact by the Asset Allocation Working Group of the G8 Social Impact Investment Taskforce is enlightening in this respect. It provides an excellent framework for doing exactly that: “the traditional framework for portfolio construction can be used as the guide rails for making what an investor considers to be a reasonable allocation to impact investments.”

Working for a company that has applied this approach, I can vouch for its effectiveness.

It is worth pointing out that this also means the impact community should not ask asset owners to commit to a certain, separately-labeled, “impact asset allocation”. While such a commitment could have the positive short-term effects of putting the topic on the table, focusing minds with a target, and bringing additional billions into the impact pool, it will not unlock the larger amounts that are required. Separate allocation reinforces the still-common view that sustainable investments are not “real” investments but rather something for the CSR and PR people that should come out of marketing budgets. Finally, there is the risk that these asset owners, feeling they have fulfilled their “sustainability obligation”, will not look for further impact opportunities in their broader portfolios.

Getting the message to into the heart of mainstream institutions

Third, and most importantly, asset owners and asset managers need to get to work with the type of analysis described in Allocating for Impact. This is the hard part.

You’ve heard the expression “good strategy is 2% thinking, 98 % execution.” In this case, the thinking work has been done for us by the Asset Allocation Working Group, but the execution requires individuals within pension funds, insurance companies, asset management firms and sovereign wealth funds to take action.

But how do we reach them with this message? This is no mean task.

For a typical pension fund, insurance company or asset management firm, you need to imagine a very large, often somewhat bureaucratic, organization, with tens or hundreds of exceedingly specialized portfolio managers, analysts, actuaries and risk & compliance managers. They follow highly detailed and thoroughly documented investment mandates and procedures to allocate their capital through analysis and investment decision-making. Making even very minor changes to these complex systems is a significant task.

These people are inundated with information: research generated by internal research desks or external brokers, industry reports, academic papers, actuarial tables, continuously shifting regulatory demands, news nervously flashing across their dual screens. What are the chances they would find the Allocating for Impact report, let alone read it? My estimate is close to zero. The chances that they will take action based on its findings are even more remote.

No, bringing change will require positive and proactive action by the impact investment movement to approach individual CIOs, specialists on the fixed income or research desks, people responsible for asset allocation decisions, or other influential individuals within these organizations. Note here that people without the fancy title, but with an open mind and a creative bent, sometimes wield the most power to make little changes to big systems. They need to be persuaded to start discussions in their organizations about applying the Allocating for Impact analysis across their entire portfolio and to integrate it with their investment processes. Only by doing so will impact investment find its formal place within institutional portfolios.

Who will step up to this challenge?

About the author: Harald Walkate is Head of Responsible Investment at Aegon Asset Management and founder of Insurers’ Investors on Impact Investment (IIII). He has a longstanding interest in sustainability issues and has been specializing in responsible investment and ESG issues since 2009, when he joined AEGON Asset Management (AAM) as Head of the Corporate Office. Harald has worked on a in a variety of initiatives around strategy and governance, including the implementation of a Responsible Investment Framework.  A particular area of interest is engagement and ESG integration for credits. A former corporate attorney, Harald also has significant experience in international business development (M&A, joint ventures, greenfields), in particular in the Central & Eastern European region, and holds a law degree from Leiden University, the Netherlands and an MBA from the University of Chicago Booth School of Business.

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