29 Jul 2012

SRI or Impact Investing : it’s time to leave concepts behind and implement !



“Is there evidence that Impact Investing actually makes an impact” ? It was a question recently raised in a discussion.
It must be clarified what Impact Investing is. When browsing throughout blogs and forums on the web about this topic, you may be astonished with the great deal of definitions and interpretation there are.

A SRI retrospective

For many decades, SRI (Socially Responsible Investment) has been the expression used to qualify investment processes including social and environmental criteria (also called extra-financial). It must be admitted that this concept has not really be up to the expectations of the promoters of a sustainable finance. The abbreviation SRI is sometimes turned into Sustainable and Responsible Investment, as “social” sounds too ambiguous depending on the country and cultural environment you are from.
SRI has always suffered from a lack of strict definition and consequently no norms in term of qualification criteria to comply with have been established. As a result, no respectful label has emerged to certify this asset class and any fund can declare being SRI upon its own rules and selection process.
In 2003, the image of the SRI had been already severely hit by a survey from the respected Natural Capital Institute (a pioneer think-tank on the topic of sustainability). The report found that the screening methodologies allowed practically any blue chips (i.e. the major companies listed on the stock-exchanges) to be selected by most SRI mutual funds : “over 90 % of Fortune 500 companies are included in SRI portfolios” (see page 18 of the report). The conclusion is simple : either sustainability is a false problem (so we lose time debating over it ! … or nobody want to tackle it, so hard the problem is. I sincerely think the second assumption is the right one. 10 years later, the findings of this survey are still on the top of the SRI agenda (see page 16). Not surprisingly, their recommendations (see page 27) are still acute :

1. change screening criteria
2. improve and change fund language description
3. moderate investor expectations
4. become transparent and specific with respect to how companies are chosen
5. maintain constant online disclosure of portfolios with full commentary on why a company have been selected or deleted

Why SRI has failed ?

At the end of the day, the SRI has failed in its mission to promote the concept of investing with a positive impact on the society. I wonder whether the “best-in-class” approach may have not been the fatal trigger putting SRI in a situation of confusion ? Does the fact of being considered as the best social / environmental company in my industry sector or the less harmful one (what “best-in-class” means) prove that I am a socially responsible business actor ?
For instance, is the premium carmaker BMW, top-ranked listed company among European SRI stocks really a socially responsible actor, while they invest massively in the SUV market segment … even if they have significantly reduced the carbon emission of their vehicules and increased the rate of recyclable parts in every units built ? How do they address the most pressing and urgent challenge of the automotive sector : satisfy a growing (and legitimate) demand in the emerging countries to increase their capacity in mobility when it is commonly agreed that the planet could not survive the same ratio of car/inhabitant as it is in the OECD zone. In this respect, is the very cheap Nano car from Tata (with a sell-price of 2.900 USD) a viable solution to improve individual mobility for everybody ? There is one evidence today : the automotive industry is very far away from being sustainable and few efforts are made to develop alternative vehicules.
As a conclusion, the concept of SRI is clashing those of sustainability because it has failed to address the fundamental questions of the continuity for the human life. The same controversial debate could happen about the pharmaceutical sector where many blue chips are selected within SRI portfolios although some invest more massively in segments like comfort medicine where profits are quick and high than in drugs to fight against some diseases still affecting the most vulnerable populations.

The exception of microfinance

The only part of the sustainable finance industry that has succeeded is microfinance, just because every investor has perceived the concrete link between a microcredit and its impact on the daily grind of the beneficiaries. But microfinance can also be very unsustainable when it is diverted towards consumption loans as it has been used to happening with some rogue microfinance institutions. The purpose of microfinance is to support income generating activities with people who are not credit-worthy regarding the commercial banking standards. Acquiring consumption goods is not the immediate objective of microfinance … just the happy end resulting from increased revenues in the household.
Even if microfinance has proven to be a success throughout the world, its potential of development is intrinsically limited by the size of the credits that can be granted. With the failure of the concept of SRI, nothing else has emerged to be a solution for financing SMEs engaged in a true process of CSR (Corporate Social Responsibility).

Impact Investing

To fill this gap, a new concept has raised in 2007 with Impact Investing. The term of “impact” is probably to put in relation with big concerns that have been widely exposed, debated – over the last 10 years around – and more recently picked up by the political community : climate change. Even if some prominent researchers argue that the global warming might be a pure natural phenomenon on the Earth … for the first time in the human history, everyone has getting aware that human activities might alter our conditions of living. The significant rise in the price of energy – correlated with limited reserves of fossil resources – is putting pressure on our consumption behavior and consequently it will/should lead to new business models to set up in a near future.
Whereas SRI appears to ease the social and environmental damage without changing the current business practices, Impact Investing – as it is defined in a recent study from the IESE (Business School University of Navarra, Spain) – argues that there is no trade-off between financial gain and social impact … but a positive correlation between both. According to its authors “the origin of an investment decision should be the judgement of a business model that happens to include a given social impact”. Their approach of sustainability is somehow unusual, as it slashes the global hypocrisy overwhelming most debates about responsible finance : “Unless this positive correlation is evident, any investment with a social goal is simply philanthropy”, they write. We can welcome their courageous opinion !
To wrap up, the authors qualify the concept of Impact Investing with 4 key-characteristics :
– Profit as an objective
– Intentional, pre-determined social impact
– Positive correlation between the intended social impact and the financial return of the investment
– Measurable social impact

I would dare to say that if their presentation of this concept is very clear, impact investing is itself absolutely not a revolution ! It is just the only way to act and preserve the planet. There isn’t any other sustainable way. The common sense has always stated that any harm to the environment put the human life in danger, as well as the personal development of the human being is a must to build a peaceful world (which requires first access to education for everybody and to the basic entitlements that get the development of ones capabities possible).
In this context “impact investing”, to my sense, is a very misleading terminology : everything you do in life has an impact, be it positive or negative. Whether you invest in clean tech. or in pornography, your investment will have got an impact. The first one is nice, the second one is sad …
I distrust by default conceptual terms that are too vague. It seems to me that we are inventing new words as if we would like to work around the reality. Generating a positive impact should be an intrinsic side-effect in every investment process. If not, we should tag the latter as a scam with respect to the humanity. There is no other alternative. We must call a spade a spade. That’s all …

3 Responses to SRI or Impact Investing : it’s time to leave concepts behind and implement !
  1. Your post was very informative thank you for that

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    • Thanks for your contact. Please go to “Contact us” (see menu on Home Page). I visited your website. Interesting !

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