The four pillars of impact investing and how they work in the real world
Investors can achieve the greatest positive impact with their capital by focusing on four key themes.
Climate change represents one of the biggest threats to sustainable development. Unchecked, widespread and unprecedented impacts will be felt globally.
Economic losses from natural catastrophes were estimated to be around $275 billion in 2022, according to Swiss Re, with more frequent, harsher local climate events relative to past years. The trend is expected to continue. What’s more, the distribution of the events and the associated losses are disproportionately affecting the poor and most vulnerable.
The impact of natural catastrophes within a country will vary depending on the population’s economic activity. For example, agriculture is severely affected by climate events, and around two thirds of the world’s extreme poor are dependent upon it for their livelihoods. Poorer populations are also often less prepared for climate events, often uninsured and have fewer coping mechanisms.
Around $270 trillion of investment is needed to reach a global target of net zero by 2050, according to Swiss Re. Increasing climate finance is pivotal. It also presents significant business opportunities.
Supporting the transition to net zero must also consider the social implications on vulnerable populations for a fair or just transition.
We believe to be successful in this means focusing on four key themes.
Climate change mitigation
Engaging with climate change mitigation means locating and assessing investment opportunities that help reduce, prevent or capture greenhouse gas emissions. This can be done through investments in sustainable transport, renewable energy, energy efficiency, or natural capital.
By way of example, our team has financed a project to build the largest sustainably powered hydroponic greenhouses in Europe. These state-of-the art buildings cover an area larger than 55 football pitches. The project harnesses waste heat from waste water treatment works to drastically reduce the carbon intensity of the crops inside, by as much as 75%, while boosting productivity by around 50%. Hydroponic farming processes use 10 times less water than field farming, have no need to use pesticides, and nothing is wasted.
The criteria of the project from an investment perspective must of course match the needs of our clients. Many of our clients - a number of which are pensions funds - require long-term, stable revenue streams. They need long-term investments that can match their liabilities, which this and other infrastructure projects can do well.
We’ve also backed a firm rolling out electric vehicle charging infrastructure in India. The Indian automotive industry is the fifth largest in the world and is expected to become the third largest by 2030. Electrification of transport here is a huge piece of the decarbonisation puzzle.
Our financing is enabling an immediate roll-out of 286 charging stations, serving 1,130 e-buses. This is enough to avoid 5,351 tons of carbon per year, which would have been produced by equivalent diesel and petrol internal combustion engines. The company has more than 3,000 charging points across more than 1,500 electric vehicle (EV) charging stations in operation or construction, in 37 Indian cities (as of March 2023). The company commissioned India’s first ever EV charging hub for 50 electric buses in Ahmedabad, Gujarat in 2019 and India’s first solar-powered EV charging station in Patna in 2022.
The circular economy
Investments in the circular economy typically target companies that use systems that seek to eliminate waste and pollution. We’re looking for products and services that can be produced using sustainable processes and with materials that can be kept, reused or recycled.
Our private equity team have made an investment into a leading consumer-to-consumer trading platform which enables asset owners to buy and sell products that they no longer need. This model represents a huge growth opportunity. We expect to see re-commerce or the “second hand economy” grow hugely in importance over coming years.
Every product that’s traded second hand avoids the materials, production cost, energy and consequent carbon emissions generated from producing a new product. Of course the re-commerce model still requires logistics and distribution, with some environmental costs, but these are minimal compared to the production and distribution of brand new products.
In times of recession particularly, we believe there is a significant social benefit by opening up second hand trading as a mainstream model without any stigma attached, enabling a broader cohort of people to benefit from access to goods that might not have been possible previously.
Climate change adaptation
Climate change adaptation for investors means finding ways to improve resilience to climate change for individuals, small- to medium-sized enterprises and communities. Investment might be directed towards companies offering climate insurance solutions or new technologies that improve access to climate insurance or climate risk assessment.
Our team is supporting farmers in emerging markets to capture this risk data – vital to agricultural preparedness – through readily available mobile phones. The system provides essential weather tracking data as well as agri-advice that helps to improve yield. Information on rain patterns can allow farmers, for example, to make better decisions on irrigation and applying pesticides.
The final pillar – social inclusion – refers to investments that contribute to an inclusive and equitable society by improving economic opportunities or access to financial services. This is a crucial element of sustainable development. Investments can range from providing access to sustainable infrastructure and social housing, to solutions thatcan create or maintain jobs.
Experts on our real estate team for example, are finding impactful ways to improve the environmental characteristics of buildings we manage, while fostering greater economic and social vibrancy in the surrounding areas. In a bustling area of south London, our team is at the helm of a pioneering project to deliver several new office buildings, as well as residential buildings, local public recreation & retail spaces. Redevelopment projects – that can target single buildings or entire town centres or neighbourhoods – will also be a crucial focus for net zero ambitions.
Success in investing for sustainability will depend on the strength of the impact and ESG management systems in place. The support for rigorous impact frameworks that align with industry best practices, and are independently verified, is growing.
Using these four key pillars will allow us to guide our clients through their sustainability journey, putting their capital to work for good.