Impact community must heal ‘self-inflicted wounds’, but ESG backlash presents an opportunity

There is still confusion around key terms in sustainable investing, but the backlash against incorporating ESG considerations into investment decisions presents an opportunity for the industry to get its house in order.

Andrew Siwo, director of the sustainable investments and climate solutions (SICS) allocation at New York State Common Retirement Fund, argued that the investment community needed to do a better job of setting “bright lines” around key terms such as ESG and impact, as inconsistency and confusion persist. He was participating in a state of the market panel at the Impact Investor Summit: North America on Tuesday.

Siwo is among New Private Markets’ list of eight people who will shape sustainability in private markets this year, in part due to the SICS allocation’s ability to write large cheque sizes for impact. Last year, NYSCRF made a $750 million commitment to Brookfield’s energy transition fund – the largest external investment to an impact fund on record. The investment was made out of NYSCRF’s real assets bucket. Other impact investments include $150 million to the Apollo Impact Mission Fund in December 2021 and $300 million to KKR’s Global Impact Fund in 2018.

To illustrate the continued ambiguity, Siwo described a recent pitch he had received from a GP, during which he said that the strategy looked like impact investing, to which the GP responded that it was not an impact fund. When Siwo asked, “what if I had capital for an impact fund, what are you now?”, the manager swiftly changed its response.

“What if that manager were simply able to say, hey, let me tell you what we’re doing. We are trying to address these intractable problems and we are targeting returns appropriate with this asset class and these are the problems we’re trying to solve,” Siwo said. “This definition [of impact] has been around for 15 years and yet people are raising capital and clueless, and that becomes problematic and perhaps creates some self-inflicted wounds across this lingua franca and I think we just have to do a better job of those bright lines.”

Fellow panellist Andrew Lee, global head of sustainable and impact investing at UBS Global Wealth Management, was of a similar view. He noted that, as the sector has grown, “a lot of nuance has been lost” with regard to the role sustainability considerations play in investment strategies, and whether they are purely relevant to financial performance or part of a deliberate intention to create positive impact.

Lee suggested that the pushback against ESG that has taken place in the US is an opportunity to address these issues “head on”. He said: “Underneath all of the politicisation is actually a desire for the clients to understand more, whether it’s simply sustainability transparency on the underlying investments, whether it’s thinking about sustainability or impact in the context of value creation, or whether it’s actually sustainability or impact as an objective that you’re delivering and measuring and reporting on to your client set.

“So maybe out of the backlash that we’re seeing, the politicised environment, we’re actually seeing a shift towards understanding and thinking about what impact means to that particular investor”, he added.