Investors are increasingly emphasizing the need for measurable outcomes from their investments. However, this task is far from straightforward, as there are still varying responses to essential questions concerning impact Investing.
Steering an ESG portfolio solely through exclusion criteria is a thing of the past. Selecting a portfolio solely based on a best-in-class ranking is also increasingly being critically examined among asset managers. Instead, the idea of an impact-oriented approach is gaining more and more support. Impact investing has become a topic that everyone is talking about.
Unlike altruistic donations, impact investing is associated with a return objective. And unlike socially responsible investing, the reduction of pollutants and social disruptions is actively pursued in impact investing, explicitly defined, and verified through measurable metrics. In this respect, there is a common understanding: the impact must be positive, measurable, and intentional for an investment to be classified as impact investing. So far, so simple.
The effectiveness of engagement and stewardship – meaning active shareholder involvement to encourage companies towards more sustainable business models – is also a topic of controversial discussion. It is questioned not only in private equity financing but also in liquid public capital markets.
Smaller asset managers are also convinced that engagement works. Coline Pavot, Head of Responsible Investments at French asset manager LFDE, observes:"Engaging in long-term dialogue with the company can create impact." Arnaud Gougler, Head of ESG and Strategic Projects at the Swiss startup Finreon, further reports that his firm successfully exerts pressure on management by taking short positions in companies with high pollutant emissions.
Lastly, there's a fundamental issue that impact investors face: data availability. Without the necessary data, measuring impact – and thus the essence of impact-driven investments – is basically compromised. Corporate reports remain the primary source of data. Institutional investors are turning to artificial intelligence, hoping that AI will significantly simplify the extraction of useful non-financial information from texts in the future.
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