Green Economy Journal Issue 63

FINANCE
FINANCE
IMPACT INVESTMENT
providing capital to address the
world’s most pressing challenges
Green Economy Journal speaks to Mike Adsetts, CIO at Momentum
Investments, about impact investment, the strategy that generates
positive, measurable social and environmental impact while also achieving
acceptable financial returns.
How does impact investing work?
A common starting point for implementing impact investing in
practice is the United Nations’ Sustainable Development Goals
(SDGs). The member states of the United Nations adopted the
17 SDGs with 169 targets in 2015 as part of the 2030 Agenda for
Sustainable Development. These goals form part of an extensive
globally coordinated action plan to end poverty and reduce
inequality, while also protecting the planet, tackling climate
change and spurring economic growth. The goals recognise that
social and environmental issues affect everyone and thus apply
to every country, irrespective of their “developed” or “developing”
economic status. Sustainable development embodies the idea of
doing well by doing good.
Impact investing includes profit as one of its main objectives, so
while there is a commitment to social and environmental impact,
investors still earn a market rate of return.
What are the benefits of impact investment?
Impact investments should form part of your investment portfolio
because of the following benefits:
Diversification benefits. The investments are more likely to be
unlisted, private market assets, so they won’t move in tandem with
public market assets. Risk and return drivers are also different to
Mike Adsetts, Chief
Investment Officer,
Momentum Investments.
public market assets. Assets in regulated industries provide stable
cashflows even through times of economic weakness.
Alternate sources of return. There would typically be an illiquidity
premium embedded into these assets, which a holder would be able
to access over the long term. Additional returns to equity holders
through balance sheet refinancing is also a common occurrence
in infrastructure projects.
Inflation hedge. Revenues generated by underlying investments
are adjusted by an inflation factor, which benefits investors. In
addition, concession agreements and other off-take agreements
are long-term, meaning greater cash flow certainty.
Demonstrable positive impact and financial returns. This
investment would provide a physical infrastructure that would be
of economic utility. There would be measurable outputs from each
project in terms of positive societal impact.
Why integrate ESG factors into investing?
We define responsible investing (RI) as an investment process
that includes ESG factors into our process. Issues like increasing
regulation, the growing need for risk mitigation and a heightened
social conscience can be addressed by integrating ESG factors
into our investment process. We acknowledge that we are
in a privileged position to act as fiduciary to our clients and
stakeholders. We consider the ESG risk of our investments to be
relevant to the performance of the overall objective – across all
asset classes, sectors, markets and through time.
This is an approach to investment that explicitly acknowledges
the relevance to the investor of ESG factors and of the long-term
health and stability of the market. It recognises that the generation
of long-term sustainable returns is dependent on stable, wellfunctioning
and well-governed social, environmental and economic
systems. We ensure ESG integration through various governance
structures within our business.
How do ESG factors impact a company’s value?
Each of the factors can affect companies in different ways and can
be integrated into an evaluation approach. For example, carbon
emissions can be measured and potential carbon tax liabilities
factored into a company valuation.
Other factors are nuanced and may require a more judgemental
approach. Governance risks and the red flags around them need
to be considered. The famous example here is Steinhoff and how
the governance failures led to a dramatic destruction of value.
The hardest ones to quantify tend to be social factors and once
again a qualitative impact perspective can be considered.
How should investors approach responsible investing?
Investors can do research on the investment managers to see if
they uphold the principles of RI. At Momentum Investments, we:
Advocate. We participate in market-related industry events and
serve on the responsible investing committee of the industry body
the Association of Savings and Investments South Africa (ASISA).
Report on progress. We show investors that we take our duty to
act in their best interests to heart by publishing our poxy history,
our stewardship report, and our responsible investment and climate
change investment policies, among others.
Seek disclosure. We have a register that shows how we engage
with companies that we invest in to keep them accountable.
Are active owners. We use our influence to help maintain a
well-governed corporate South Africa.
Integrate ESG. We have a responsible investing committee that
serves as an oversight function of responsible investing practices
across the investment team. We follow an integrated ESG approach
across all our asset classes.
Have integrity. We keep to and observe all rules and regulations
which seek to uphold the principles of responsible investment.
Sustainable development embodies
the idea of doing well by doing good.
How do investors assess impact?
By incorporating social and environmental targets into their
investment strategies, investors can align their impact objectives
to the SDGs and track their contribution towards achieving these
goals. Using metrics that reflect their effect on specific SDGs,
investors can address how they are contributing to a sustainable
and equitable future.
What are the key barriers and opportunities in impact investing
in South Africa?
There is a huge need for impact investing with considerations like
levels of liquidity, deal availability and size, and role players involved
needed to be considered. There is still a lot of work that needs to
happen to increase trust levels between the public and private
sectors with Public Private Partnerships (PPPs) still not finding
significant traction. All of this has resulted in relatively limited deals.
When these barriers are overcome, there will be increasing
opportunities in energy, logistics and water infrastructure.
ESG GOVERNANCE AND ORGANISATION
Chief sustainability officers from some of the world’s largest
companies were interviewed for KPMG’s global survey on ESG
governance and organisation, to gain a deeper understanding
of how companies are structuring their set-up and teams for
sustainability and responding to a wave of new regulation and
increased pressure for transparency on ESG. Almost all respondents
reported high ambitions for ESG in their organisations, with half
now viewing sustainability as a strategic issue that is embedded
in core business operations. With ESG covering a wide area of
societal and governance issues, the challenge for many businesses
can be deciding what to prioritise. Decarbonisation and the race
to net zero were the topics most often included in their corporate
ESG strategy, with diversity, equality and inclusion and human
rights in the value chain as the next most-mentioned theme.
Who leads on ESG?
The question now facing many business leaders is who should
make the ultimate decision on ESG as it increasingly becomes
embedded in a company’s fabric. The CEO is responsible for
sustainability in almost half of the organisations surveyed, with a
dedicated chief sustainability officer as the second most popular
option. The remaining respondents revealed a wide variety of
roles taking charge of ESG – from head of supply chain and
manufacturing to the chief risk officer.
Rising regulation
Reporting on ESG has generally been a voluntary exercise. Still,
some jurisdictions are in the process of making it compulsory, most
significantly the EU through its Corporate Sustainability Reporting
Directive (CSRD). Nearly half of the researched organisations plan
to report under CSRD for the 2024 financial year, with nearly a
fifth more planning to do so in 2025.
Nearly three-quarters of organisations in this research have
six or fewer full-time equivalent staff working on non-financial
reporting, and more than half have three or fewer. Just over half
expected to see an increase in this number, with the remainder
anticipating numbers to stay the same.
Just under half of the organisations in this research have ESG
topics in their core corporate key performance indicators (KPIs),
with more than a quarter including them in management-level
performance reviews.
Almost half of the organisations interviewed produce internal
indicators every quarter and several use monthly reporting
for certain measures. Annual is the most common frequency
for external reporting used by more than three-quarters of
organisations, with the remaining respondents doing so quarterly.
ESG KPIs are used in calculating executive pay in most of the
organisations researched, with just over half using these for
short-term and two-fifths for long-term incentives. Just under
half have between 16% and 25% of variable executive pay linked
to ESG indicators.
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