Investing for Sustainability Impact (IFSI) refers to an investing strategy where an investor emphasizes positive behavior changes among companies, corporations, or policy makers with the goal of benefiting broader social or environmental aims. This could include influencing these entities to reduce or eliminate behavior that results in negative sustainability outcomes or to increase positive outcomes.
- Investing for Sustainability Impact (IFSI) refers to an investing strategy where an investor actively pursues positive sustainability goals through attempts to intentionally influence companies and policy makers.
- Instrumental IFSI is a strategy where setting and achieving a sustainability impact goal supports the achievement of the investor’s financial return goals.
- Ultimate-ends IFSI is a strategy where the sustainability impact goal is the end result and can be pursued in parallel to the financial return goal.
Understanding Investing for Sustainability Impact
Institutional investment management is concerned with the overarching goal of its investors, such as pension funds and insurance firms, which is maximizing their financial return while minimizing the risk involved in achieving it.
However, it has become increasingly apparent that this goal must co-exist with the broader goal of sustaining, and perhaps improving, the quality of the social and natural ecosystems that are essential to achieving it. The issue is that these ecosystems, which are necessary for the continuing welfare of humanity, are deemed to be under threat, in large part from the economic activity that is the basis for some of the investments.
In short, IFSI captures any approach whereby investors leverage their influence to provide solutions to sustaining these ecosystems even if they aren’t legally bound to do so.
Sustainability Impact Goals
A sustainability impact goal is what may result from any investor attempts to intentionally influence (directly or indirectly) companies and policy makers to pursue positive sustainability outcomes.
An investor who is concerned about the environment funding an automobile company that manufactures electric vehicles is an example of directly influencing a sustainability outcome. An example of indirect influence might entail engaging with analysts to study investor demand with regard to sustainability preferences.
What Is A Legal Framework for Impact?
A Legal Framework for Impact is the name given to a joint project by the Generation Foundation, the United Nations (UN)-supported Principles for Responsible Investment (PRI), and the U.N. Environment Programme Finance Initiative (UNEP FI). The law firm Freshfields Bruckhaus Deringer was commissioned to conduct a legal analysis, examining the question to what extent legal frameworks permit or require investors to take sustainability impacts into account.
UNEP FI works with more than 400 members—banks, insurers, and investors—and more than 100 supporting institutions to help create a financial sector that serves people and the planet while delivering positive impacts.
These entities are “using the report as the catalyst for a three-year work programme designed to reshape legal and regulatory systems so they are equipped to meet the most important sustainability challenges.”
What Does the Law Say?
The report studied the laws of 11 global investment hubs (Australia, Brazil, Canada, China, the European Union [EU], France, Japan, the Netherlands, South Africa, the United Kingdom, and the United States). It concluded that where a sustainability impact goal may be relevant for achieving the financial objective—where sustainability factors pose a material risk or opportunity, for example—investors would likely be required by law to consider the relevant sustainability impact and act accordingly.
Where they are not required to do so by the law, investors could pursue sustainability impact goals in their own right, in parallel to financial return goals. However, these cases are more limited and subject to the investor’s specific circumstances.
Types of IFSI: Instrumental vs. Ultimate Ends
IFSI will ultimately hinge on the investor’s mandate—which, in the field of investing, is maximizing shareholder value. With this in mind, the report identified two types of IFSI: instrumental and ultimate ends.
The focus here is in safeguarding or augmenting the investor’s portfolio. Sustainability impact goals are targeted to support the social and natural ecosystems that contribute to achieving the investor’s financial goals.
The focus here is on the sustainability impact goal itself and the associated outcome. It can be pursued alongside the financial return goal but is not dependent on it.
No U.S. laws or regulations require corporate institutional investment managers to pursue ultimate-ends IFSI. But there are cases where it may be possible as long as it does achieve positive financial returns permissible.
Benefits of IFSI
One of several potential benefits of IFSI can be summed up by the concept that by helping others, you help yourself. Investors who adopt these strategies can drive real-world outcomes that can then influence the global community to make the necessary changes that would increase the probability that the social and natural ecosystems are functioning properly. In short, the future is more livable and more promising for all.
In doing so, the drivers (institutional investors) would be investing in the future, which would increase the likelihood of their portfolios experiencing sustained positive financial returns.
Measuring Sustainability Impact
Measuring sustainability impact is largely dependent on the data reported by the business itself. Organizations like the Global Impact Investing Network (GIIN) and the Impact Management Project (IMP) have tried to come up with a way to standardize the reporting of data so that there is a baseline for comparison. Still, the process of measurement is largely subjective.
The authors of A Legal Framework for Impact suggest that “merely reshaping a portfolio so that it is less exposed to financial risks posed by sustainability factors” would not be classified as IFSI, as it does not “involve setting and seeking to achieve specific sustainability impact goals.” This may, however, be used as a part of an IFSI strategy.
Rather, “a deliberate and well-signaled move by large numbers of investors” toward achieving a sustainability impact goal could be classified as an IFSI strategy, and the results could be measured over time.
To see the sustainability details on the stock exchange level, you can check out the Stock Exchange Database, maintained by the Sustainable Stock Exchanges Initiative.
Why should investors invest in sustainability?
Investors should invest in sustainability to protect the social and natural ecosystems that are essential, not only to ensure that the future is more livable and more promising for all but also to increase the likelihood of their portfolios experiencing sustained positive financial returns.