Johanna Raynal is director of ESG and impact at Swedfund, a Swedish development finance institution, and was a speaker at the Impact Investor Forum May. New Private Markets caught up with her for a briefing on the organisation’s investment approach and the future of impact.
How does impact fit with your portfolio?
We are a development finance institution and have a specific mandate from the Swedish government to fight poverty by sustainable investments in developing countries. This is the core; the starting point for everything that we do, so we have been impact investing for 40 years.
How do you invest?
We do both direct equity investments and commit capital through fund managers with local presence and sector expertise. We also issue private sector loans.
What do you look for in an external fund manager?
Irrespective of the instrument – whether it is a fund investment or a loan – we use similar sustainability criteria, which includes both impact and ESG assessment requirements. In addition to that we have the financial requirements.
The fund manager needs to have its own sustainability policy or investment code. They need to have an individual at the firm with an ESG mandate and for ESG to be implemented in their investment process: thorough due diligence, monitoring, action plans… basically you could say that we require our fund managers to have similar ESG criteria as we do for our direct investments.
We also look at ILO conventions and human rights, as well as anti-corruption, because we work in areas where corruption is a high risk in the contextual environment. We require our managers to have an anti-corruption management system and risk identification in their processes.
Those might be classed as the ESG-related criteria. In addition to that we have three themes that you could describe as core impact areas.
One is gender equality. We require our fund managers to do gender risk due diligence, and we assess whether the manager’s investments qualify for the 2x challenge.
Climate is the second area. We see how the managers have embedded climate risks into their investment process, but also if they have the capacity to conduct climate impact analysis of their portfolio: quantifying CO2 emissions.
The third area is digitalisation.
Depending on the maturity of the manager we will consider helping them develop their own impact management framework, including a theory of change, a clear impact narrative and ways to measure impact.
How do you measure your portfolio’s impact performance?
Our portfolio impact and ESG data goes through a full audit, to the same level as our financial data.
We collect data for our three pillars: impact on society, sustainability and financial viability. For gender equality that means quantifying female representation among management, boards and among employees, as well as assessing how the products the companies produce help women. We calculate climate data on CO2 emissions for all portfolio companies. We collect job data, so we understand how many direct jobs the portfolio provides. And we collect data on tax payments.
Those are the most important KPIs on the impact side. On the ESG side, we track how many of our portfolio companies have a social and environmental management system in place; how many companies act according to the ILO conventions; and how many companies have an anti-corruption management system in place.
We gather these data from all portfolio companies, and include them on an aggregated basis in our annual integrated report.
Are you seeing anything new and exciting in the impact space at the moment?
There is a lot of interest in impact investing at the moment. This is driven by many different things, not least in Europe by the Sustainable Finance Action Plan and the related EU Taxonomy. EU rules are not only driving the ESG part, but also driving interest in impact.
On the other hand, more players emerging in the field means more different measurement frameworks popping up. I really, truly, hope we will see harmonisation. I think [the Global Impact Investing Network] is doing good work on this front, and EU standards on non-financial reporting are also helping. I hope all these elements contribute to harmonisation.
In the context of the ongoing covid-19 pandemic, it is increasingly important to support and invest small and medium-sized enterprises to build back better. We work together with our European colleagues in the DFI community in order to be able to do more.