The majority of investors (74 percent) are now incorporating sustainable or impact investing measures at a high level, according to a survey by Cambridge Associates of 144 of its clients.
Cambridge Associates defines sustainable and impact investing (or “SII”) as including a spectrum of sustainable investing activity, such as negative screening, ESG integration, DE&I integration, impact investing and others.
Most investors have integrated SII, which “would mean that this is something that an investor put in their investment policy statement”, says Cambridge Associates’ managing director and partner Annachiara Marcandalli. Those investors engaging with SII are either applying broadly across their portfolios or carving out an allocation.
Climate has emerged as the dominant theme in impact and sustainable investment. Year-on-year data from Cambridge Associates’ surveys shows that resource efficiency and climate change, in which just 38 percent of respondents invested in 2018, is now the most prevalent sector, with 77 percent active in the space in 2022.
“Climate change is the defining investment theme of the next 20 years,” says Marcandalli. “If we need to do what we all agreed that we were going to do by signing the Paris accord, we need to change pretty much everything, in a very radical way. I’ve never seen an estimate that puts the investment needed at less than 3 percent of world GDP.”
Second on the list is social and environmental equity, which includes racial/and or gender equity as well as the social implications of climate change and the energy transition.
Reasons not to invest
A noticeable minority (35 percent) of LPs are yet to enter the SII space.
The impact on financial performance is the most common reason for a reluctance to engage, alongside a preference for philanthropic activities. Clearly there is still an association between impact investing and concessionary financial returns.
Marcandalli warns investors of the dangers of this way of thinking. “We’re capturing all our respondents’ views, and there are some who say, ‘I don’t think this will be relevant for the financial performance of my assets’. But we think, when non-financial factors impact the competitive positioning of a company, they can make a significant difference”.
Shifting focus from the LP community to the GP universe, the number of general partners that have launched funds with a specific environmental or social objective (such as those that would qualify as Article 9 under the EU’s Sustainable Finance Disclosure Regulation), is still small. This is according to a survey by fund investor Adams Street Partners of 157 of its general partner relationships.
There continues to be notable variation between how managers in different parts of the world approach ESG and impact investing.
Research from Adams Street found that almost 62 percent of its top-scoring managers (measured using its own ESG assessment methods) are based in Europe, while just 18 percent operate from North America. By contrast, North American managers make up the majority of its lowest scorers, compared to just 18 percent coming from Europe.
Yohan Hill, director of ESG and responsible investing at Adam Street Partners, confirms that “it’s reflective of where the market is. ESG demand in Europe is ahead of the rest of the world, both due to regulation and investor pressure. On the flip side, it’s great that managers from all the different regions have managed to be represented in the leaders.”