Sustainable Investing: Measuring Impact | In Practise

Sustainable Investing: Measuring Impact

Former Director, Impact Investing at UBS

Why is this interview interesting?

  • How regulation is driving increased investor interest in ESG
  • Asset management frameworks for ESG investing
  • Typical measurement frameworks for social impact investing
  • Challenges in measuring impact and potential solutions to drive accountability

Executive Bio

Tenke Zoltani

Former Director, Impact Investing at UBS

Tenke was the Director, Impact Investing at UBS where she built the impact investing advisory offering for UHNW clients. Prior, she was an Investment Manager at Islan Asset Management in Switzerland and has worked in the emissions markets in London and Geneva analysing private market opportunities in emerging markets. She specialises in environmental finance, and advises international corporations, private foundations, financial institutions, and HNW individuals on direct investments. Notably, she also worked alongside Lord Nicholas Stern, author of the seminal Stern Review, in climate research and publications. She is a Committee Member in Geneva for 100 Women in Finance, a member of Sustainable Finance Geneva, a former GES Fellow, and sits on two impact investing fund boards. Read more

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Interview Transcript

To begin, could you lay out how you’ve seen the behavior of wealthy individuals, or high net worth individuals and institutions change, over the last decade, towards ESG?

I think it’s easier to answer on the institutional side, because it’s been very pronounced. I work largely with European institutions, so not very much exposure in the US. I work a little bit with Asia, as well. What I would say is, speaking from the European perspective, institutions and institutional investors, in particular, are having a greater focus on ESG. I think it’s driven by two components. On the financial institution side or the asset management industry, they feel that regulation is coming, especially in London, that is going to mandate that they consider environmental, social and governance factors, especially material ones, in how they conduct business and how they report, especially. This is so their shareholders and their investors are aware of potential risks, more than potential upsides.

I think potential regulation, on the one hand, is changing behavior. At the same time, I think the other factor is that there is just an awareness of environmental issues. I think, certainly, we can say climate change, but also everything from water scarcity and food security and energy efficiency. All these factors are being considered now, in how businesses are run and how investments are made.

On the social side and the governance side, as well, we have the same issue. Socially, how employees are treated, how customers and clients are handled, how business contracts are written, how well people are compensated and, of course, looking at gender issues. All of these things are more and more in the mainstream and this is changing weekly. You never used to have headlines about these issues and now, it really is every day. On the governance side, we’ve had quite a few fantastic blow ups and very obvious key man risks and, certainly, PR issues. I’m thinking of Elon Musk, in particular. If you look at how Tesla is rated, I know it’s a public company, but there’s huge governance issues there. I think an awareness of these issues, a fear of regulation and then, at the same time, I would say there is a little bit of pressure now, from either shareholders or stakeholders, to consider these, in how businesses are operating. These are coming together and changing institutional behavior.

On the private side, I think it’s less pronounced. In my experience, working with private investors, there has always been a focus on impact, inherently, with some of these people. They have been mission driven by certain passions. Whether it’s finding interesting technologies, whether or not they are good for environment, they still want to innovate. Looking at new building materials that can be applied to low-income communities. I think there have always been things that people are passionate about, and it’s manifesting itself in impact and now it’s got an impact investing name, so people can combine their passions and how they are spending their money. I think it’s less pronounced, but now we have a way of categorizing these types of investors and how this money is being put to work. I think it’s more prominent, just because we are hearing more about it, but I don’t really feel that of the older generation, that here are more impact investors. I do feel that is the case in the younger generation, but I think it’s more of an institutional shift.

Relating to the point you made on institutional investors thinking that regulation is coming, you mentioned Elon Musk there. He’s a character himself and there’s governance issues there. But we’ve seen WeWork or even Zuckerberg, and the questions over his control. Just in terms of the regulations, do you think the asset managers believe that there’s going to be some kind of compulsory reporting required? How do you think it’s going to work, when you have Musk, Zuckerberg, Adam Neumann, that have such great control, in some of these corporations?

On the asset management side, first, certainly the clients I work with in London, the asset managers, part of their motivation working with me, it’s very transparent, is that they think that regulation is coming, so they want to get ahead of the curve. It’s also informed, because they are often raising money for new strategies, new funds and they’ve realized that they can’t raise money from the development finance institutions of the world, or some of the banks, or certainly the pension funds, unless they have a very clear system for how they are measuring, or at least reporting, ESG. I think it’s moved very quickly. One client said, actually, “I’m having trouble raising money from the European Investment Bank. They have very strict criteria on having environmental and social management systems. We don’t have one; we don’t have an ESG policy. What do we do? How do we start?".

They are middle tier asset managers, so they don’t have hundreds of billions, but they do have the low, 5 to ten billion under management and under advisement. This trend is going to carry and is going to move very, very quickly. Whereas, on the governance side, with people like Musk and Zuckerberg, yes, I think it’s a very dense issue. You have the very nature of how the share classes are put together, particularly, what strings are attached to governance, when IPOs take place. I think this is going to change. It’s a bit delicate, dense, with venture capital and private equity firms, right now, especially in the US, that have tons and tons of cash and are willing to pay exorbitant amounts of money for accessing these companies. But this is certainly not going to continue forever. I think we need to strike a better balance.

With people like Musk, I think the data from Refinitiv, if you look on one of the Reuters terminals or one of the ESG reports for Tesla, you find that they don’t even have very basic CSR policies in place, they don’t have good stewardship policies. I think the governance, at the board level, is also missing. They have a clear wage gap, I believe, on the gender side; I would need to double check that. There are very clear issues that have come out there, that need to be addressed.

To that point, when you have someone who has such control over the board, over the company, over the shareholders, ownership of the company, is it necessary to make these reporting metrics compulsory, similar to the Financial Accounting Board? We’ve seen SASB, for example, in their metrics, they had a framework, but it’s not compulsory. You don’t have to report on these things. Do you think it’s moving towards compulsory reporting on such metrics?

Some of it, yes. Honestly, I think the wisdom of the crowd or the investor sentiment is just going to force these disclosures. I’m very much a free-market person and I don’t want to impose more regulatory burdens on these companies. But I think a greater level of transparency, particularly on the social issues, should be part and parcel. I think any kind of negative impacts definitely need to be exposed. Just looking at their peer groups, the companies, especially in the automotive industry, I think if you have peers that are reporting then you are also going to report, otherwise, it’s going to impact your share price and, if not, I think investors will really struggle under their due diligence, so the issues are going to come out anyway.

You mentioned that you’re working with asset managers, to design an ESG framework, to raise capital from European banks or with development finance houses. What exactly are these asset owners, pension funds, development finance companies looking for?

I think they’re looking for risk, any red flags. Certainly, to avoid any PR disasters. If you are a KfW from Germany, if you’re the European Investment Bank, if you’re OPIC, these are really sovereign entities, to the extent that they are built on taxpayer money, for the respective countries and they’re responsible for their citizens. They need to make sure that they are not putting their citizen’s money to work in unsavory ways or that they are not going to expose themselves to any nasty PR issues, whether it comes to toxic spills or negative effect on the climate or just treating people badly in the countries of operation.

From one perspective, I think it is just a responsibility and why they are asking these questions. What I really believe, and when I work with my clients, this is one of the first conversations I have, is that I’m doing this, not for the PR benefits or not because it’s the flavor of the month, but I really believe that you can generate some positive performance, and certainly outperformance, by considering these factors. I think you can generate some alpha from either very, very strong environmental, social and governance behavior or, certainly, creating impact. The reason for that, just very fundamentally, is if you are working better in the communities where you operate and with the people and the stakeholders, throughout your value chain, then it’s much more likely that you’re also going to have better financial performance and it should resonate throughout the whole investment cycle.

What type of frameworks do you work with, with asset managers, to develop?

That’s a bit challenging. I think it’s almost always proprietary, but I believe it’s more and more linked to SDGs. Everybody has seen the sustainable development goals, in one context or another. They’ve probably already put them on their website, without knowing why. It’s usually easy to say, let’s take this generally agreed upon 17 goals; let’s dig into the indicators, because I think, there’s 260 indicators. We can see which ones are closest aligned to your business and then use that as your KPIs, or maybe we select three or four that we can measure and report events. At the top level, I think it’s quite practical and it will resonate with investors, as well.

Digging deeper, I like to use IRIS. I think recreating metrics is not particularly helpful, because it just contributes to an even more fragmented reporting, across the world. I, personally, like IRIS. Beyond that, I am familiar with the IMP framework, as well, but I believe, at the same time, that it is confusing for a lot of people. It’s really deep impact and it’s not necessarily appropriate for those that are just beginning their journey of impact measurement and also, for the asset managers, I think it’s a bit overwhelming. If you come with the IMP framework and methodology to a meeting with a CFO, he’s going to look at you like you’re crazy and I don’t think it’s going to resonate. I like to keep it simple, but make sure that there are verifiable and measurable indicators associated, that are appropriate to the strategy.

What do you think is the biggest challenge for asset managers, in taking up one of these frameworks, for impact?

It’s just being consistent. It’s really not rocket science; it’s not difficult. But the portfolio managers are already really busy and there’s a lot of risks to consider. Everyone has a job and a half and it just adds another layer of work and it’s a new skill set, as well. I understand that it’s an exercise that the whole company might not even believe in, at the outset. I think, as long as there is some consistency built in, in working with the asset manager, for example, to say, listen, this is why we’re doing this; we’re trying to keep it simple; we’re trying to keep it light touch for now. But you do need to check in with your investees or your customers, on a regular basis, when you’re doing your other diligence or reporting or monitoring. It’s quite easy just to add a set of questions for them to report back to you. Then it’s just starting with a simple Excel; I don’t think they need to invest tons of money in having their own software or their own impact reporting database. We can start in Excel and then just track it, regularly, across the strategies, across the portfolios.

So they just need to be clear on where each of those portfolio companies stand, with regards to ESG factors, to begin with?

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Sustainable Investing: Measuring Impact

December 2, 2019

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