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Impact investing and socially responsible investment: complementary approaches
Ethical investment, sustainable investment, socially responsible investment and impact investing: this multitude of terms denotes different approaches to a powerful transformation of finance in an effort to shape a more sustainable economy. We will concentrate on the concepts of impact investing and socially responsible investment (SRI), which are both approaches that we use at Lombard Odier.
The common denominator in these two approaches is their underlying principle: they aim to use capital as a means of fostering economic and social progress, and to combine financial return with social impact.
Socially responsible investment follows the rule “Do not harm” and aims to direct investments towards traditional companies with the best practices from the environmental, social and governance points of view. These are known as ESG practices. SRI evaluates the way in which companies carry out their activities more or less regardless of what their business aims are. It prioritises “how” over “what”. The goal is to exclude commercial businesses with bad practices relative to their activity sector. Responsibility is the most important factor. SRI focuses on the shares and bonds of listed companies, valued according to ESG rating criteria. Given the kind of companies selected, their size, liquidity and diversification opportunities, it is possible to integrate an SRI approach at a large scale.
The common denominator in these two approaches is their underlying principle: they aim to use capital as a means of fostering economic and social progress, and to combine financial return with social impact.
By contrast, impact investing has a “Do good” philosophy and aims to resolve a specific social or environmental problem. This may involve financial inclusion, access to drinking water or electricity, the development of ethical, sustainable agriculture or green tech. Under this approach, the company's objective is crucial: “what” takes precedence over “how”. The company's intention, its corporate goal, and the short- and long-term consequences of its products and services are the keys to appraising it. Investment often focuses on local small and medium-sized companies in order to allow them to develop identified projects. The aim of impact investing funds is to create a major impact, in general by investing via debt or private capital.
Impact investing and socially responsible investing complement each other by providing investment opportunities in different sizes of companies with different approaches and different asset classes.
It is SRI that has evolved the most in recent years, ever since the signing of the Paris Agreement. The amounts managed under this approach are increasing greatly, already accounting for around a quarter of managed assets worldwide, and responsibility is starting to be an ineluctable investment criterion. Recently, the European Commission published a project aiming to draft European regulations that would give this approach the impetus, framework and standards that it had previously been missing. The strength of SRI lies in its benefits of scale. The impact made by investment is marginal, but is multiplied by the amounts involved.
Impact investing allows investors to select precise projects that meet the most urgent sustainable development needs. Under this approach, the impact of investment is tangible and palpable. It is an innovative sector, a work in progress.
Impact investing allows investors to select precise projects that meet the most urgent sustainable development needs. Under this approach, the impact of investment is tangible and palpable. It is an innovative sector, a work in progress. By its very nature, it is not so easy to access, as investors are more reassured by the better liquidity offered by the large volumes and longstanding track records of SRI. Nonetheless, impact investing makes it possible to allocate capital to companies that transform their business models in the interests of the sustainable development goals of the international community, that save the current economic system from its own excesses by including social and environmental externalities in their valuation and that genuinely rethink today's world. The challenges facing this sector are still numerous, but the potential in terms of impact is huge, and investors' appetite is increasingly evident.
That is why we created the Lombard Odier Gateway – Development Finance Fund: a fund of funds that facilitates access to impact strategies and allows investors to use their capital to meet the vital needs of underprivileged communities. Among other things, our approach helps to boost financial activity in developing countries, which tends to be almost completely ignored by socially responsible investment. Our approach has a very significant impact, because it invests in poor, vulnerable populations who are often excluded from the traditional financial system.
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