Impact investments risk solving one problem while creating another

The entire lifecycle of an impact investment is coming under increased scrutiny, according to panelists speaking at PEI’s Infrastructure Investor New York Forum on Tuesday.

From supply chains to end-of-life disposal, investors committed to impact funds investing in infrastructure expect asset managers to take a holistic view of how their capital benefits the world, the panelists explained, speaking about the downside risks of the global energy transition.

“Looking deeper into supply chains is something that public-sector companies have been dealing with for years, and it’s something that we are increasingly getting the question from investors about when we’re doing a solar investment,” Andrew Harris, principal at North Sky Capital, said during the panel. “Where are those panels coming from?”

North Sky Capital is a US-based asset manager making investments focused on having an environmental and social impact.

Harris cited research suggesting the vast majority of solar panels are manufactured in a Chinese city noted for previous incidents of human rights abuses. He added: “For impact investors looking up the supply chain, you’re solving one problem on the environmental side with climate change, and you’re creating another problem on the social side.”

Last week, during a panel at PEI’s Responsible Investment Forum: Europe, Douglas Bryden, a partner at law firm Travers Smith, noted that he has been seeing an increase in the references in private fund side letters to the “soft law” around human rights, such as the ILO or OECD labour guidelines.

Jim Hughes, managing partner at EnCap Investments, said that public policy can help investors “define the risk”. He referenced European regulators coming up with a solution to solar panels being thrown in landfills as one example for how governments can help direct the private sector to workable solutions. In that case, recycling programmes were instituted that actually helped investors enhance the value of solar investments they thought had reached the end of their lifecycle.

“It doesn’t take a lot of incentive to generate a solution,” Hughes said.

However, for wind turbines, he added, it may be a little more difficult, which explains the inaction investors have seen from the public sector on that front.

“Candidly, there’s not a lot of valuable material in a wind turbine blade. And we haven’t seen solutions that are tremendously economic yet,” Hughes said. “So, the challenge there is some reluctance on the policy front because there’s potentially a financial penalty associated with requiring that.”