Impact investment is growing rapidly. Why? What are the developments? And how does this business model contribute to the transition to a sustainable and inclusive society? In 6 articles, we highlight the developments, opportunities and risks of Purpose & Impact investment. This is the fifth article. As the ambition to move from compliance-driven CSR to true social impact continues to grow, the help of impact finance is needed. It enables the transition from ESG to Impact. But it is a complex puzzle to solve….
By Martin de Jong and Anne Rademaker. This article was previously published at: Portal Sustainable Finance.
Imagine you are responsible for CSR within an organization. And your main goal is to improve that organization’s CSR performance. You strive to become a purpose-driven organization with social impact. But turning your organization into an impactful company requires transformation. That can be quite a complex puzzle because there are numerous reasons why the status quo seems sufficient. One way to solve that puzzle is to enlist the help of impact investors.
Transition driven by impact investors
Changing an organization to a truly sustainable and impactful business requires a good strategy and sufficient time for implementation and execution. Since most organizations have financial obligations, there is not the luxury of pausing, rebuilding and restarting the organization. It is a complex puzzle. Take Unilever, for example: when they launched their “sustainable living plan,” the support of some major shareholders was essential. Unilever is still implementing their master plan that began in 2010, while remaining operational and delivering results. It all started with a vision, purpose and a strategy.
But an impact investor is more than a bag of money that gives time to change. Impact investors have a broader understanding and knowledge that can help companies. They bring specific market knowledge but also knowledge about different markets and companies, which helps the board gather insights and solve the transformation puzzle. However, it requires an active engagement with these types of investors: instead of just selling the value of your company, you are also asking for added value, and that is a vulnerable position to take. It is time for a new way of thinking, as a company attracts investors who mirror your own behavior.
Compliance-driven approach
The transformation to a truly sustainable and impactful business requires the right and patient investors. However, many business leaders feel that investors are only there to maximize financial returns. Generally, hedge fund activists are focused on creating as much financial value as possible in as short a time as possible. There are countless examples of this, and this does not help a company’s long-term impact. Therefore, a company should seek investors who are there for the long term and support the value creation of that company, to not only have the resources, but more importantly: the time to transform.
Another piece of the puzzle for a company starts with building an Environmental, Social and Governance (ESG) track record. If a company scores high enough in key ESG ratings year after year, it helps attract impact investors. This is also one of the main reasons why companies participate in the CDP and the DJSI. It is estimated that currently more than $30 trillion of publicly traded stocks and funds are based on ESG performance. That approaches half of all publicly traded stocks and funds worldwide.
It may feel like a compliance-driven approach, but for now it is the most important puzzle to solve. ESG gives impact investors guidance, in addition to credit ratings. The governance part of ESG will drive a mature risk and compliance process within the organization, another part of the transformation puzzle. Depending on the industry, the following steps can be taken. Remember that investors are risk calculators. This means that if your company can be the first in the industry to receive a high ESG rating, your company is likely to become the most preferred investment.
The Global Network of Impact Investors offers some great insights to help solve the puzzle. One very relevant insight is shown in the infographic below, linking your problem to issues relevant to impact investors.
