Additionality, regulation and a lack of investable sustainable fund products were all talking points at M&G’s half-day impact event in London last week. A few takeaways from the afternoon:
Additionality in debt dominates discussions
The topic of additionality in impact investing, meaning whether the impactful outcome would have occurred without a given investor’s involvement, was a key talking point for panellists and attendees alike.
Much of the discussion centred on how the concept can be applied to lending. Private credit is a relatively passive form of investment compared to private equity investment, so how credible is it as a vessel for impact investing? There are some arguments that can be made, with M&G spokespeople focusing on the catalytic nature that a lender can play in certain situations: specifically where without the involvement of one impact-minded lender, the loan would not happen.
“The role of private credit is to sort of scale up some of those great ideas that our equity colleagues here have hopefully seeded, and I think we’re able to do that in a really specific way,” Aditi Rao, part of the portfolio management team of M&G’s private credit impact fund, said. “We’ve all mentioned additionality, but I think we can finance a very specific project, or building a specific factory, and I think that’s very focused in a way that investing in a public equity business never would be”.
The topic prompted a lot of questions at the event – mostly probing whether a lender can really bring additionality to the party and whether additionality is always part of the investment process. “Do you have cases where you’ve decided not to invest in something because it ticks all the other boxes, but additionality isn’t strong enough?” asked one roundtable participant.
“Additionality for us is a fundamental part of the process,” was the response at the time.
In a subsequent email to New Private Markets, M&G added: “In our assessments, we ask how the world would be different if a particular company did not exist or if it were not adequately funded. We might also ask if the type and terms of our investment capital are additional to what the company could raise without us. For example, in many cases potentially high impact companies might not be able to access long term or flexible capital from other sources. In other cases it is clear that a company or sector will be funded with or without our participation, due to government incentives for example.”
Mixed views on the importance of regulation
Inconsistent regulation was cited as a blocker in some areas of sustainable investing.
“This fragmented policy landscape really is a challenge for companies,” said PRI environment head Rebecca Chapman, speaking in the context of plastics and the circular economy. “Some countries are implementing bans; others are levying taxes… this fragmentation really heaps complexity and expense onto companies and ultimately consumers.”
On the other hand, attendees were urged not to get too hung up on regulatory complexities by one panellist. Though it is important for policy to ensure that investments are having real impact, it is “also important for everyone to be able to get on with something”, said Ian Temperton, chief investment officer of plastic recycling company Plastic Energy, one of M&G Catalyst’s portfolio companies.
M&G Catalyst is the firm’s private markets impact strategy: it invests “in innovative, privately owned global businesses working to create a more sustainable world”, said the firm. It has previously committed to Northern Gritstone, a venture capital firm committed to tackling England’s regional wealth and employment inequalities, as well as a vehicle to finance IP-backed businesses.
“It’s okay to nurture nascent industries with some imperfections in what you put together, so that they can get on with some stuff,” Temperton added. “You have to be careful of subsidy arbitrages, whose business models solely rely on some rule that isn’t designed to last… but also I’d discourage everybody thinking too hard.”
Insufficient impact opportunities for LPs
There is lack of good investment opportunities for allocators looking to build a multi-asset impact portfolio, according to Kalinka Dyankova, fund analyst at Kleinwort Hambros: “Today there are not many ideas,” she said.
Kleinwort Hambros is a private bank owned by Société Générale. It seeks to help “clients to build sustainable legacies”, according to its website. The firm has its own criteria for assessing the sustainability and impact credentials of its managers, said Dyankova. At present, only 18 of the 180 funds with which it works meet its definition of impact.
“In order to build a sustainable multi-asset portfolio, we would have to push a lot of ETFs, a lot of products just for the sake of it,” she added.
What’s ‘sustainable’ is constantly changing
Another potential worry for investors is assets considered sustainable in the present may not be in the future.
“We’ve gone from a world of black and white to sort of shades of grey,” said Rao, in reference to the developing understanding of sustainability and impact.
Impact director Rana Modarres pointed to biofuel as an example of a product that may not be as sustainable as once thought: “the perspective we’ve landed on now is that it doesn’t make sense to cut down trees and make pellets and ship them across the ocean and use them for heat.”
“What we’ve come to realise is that the waste input that is being incinerated is not truly always non-recyclable… That is not to say waste energy is uninvestable; I think we’ve just had to set some real parameters around which it is investable for us,” added Rao.
It is not clear whether M&G currently has bio energy companies in its portfolio. John William Olsen, head of sustain and impact equities, listed biofuels as one of the areas that “will require accelerated investment and innovation” to facilitate the global energy transition to Net Zero earlier this year.