Conversation with Matt Tominc – Conscious Investment Management
Funds Management partner Langton Clarke chats with Conscious Investment Management's Chief Investment Officer/Partner Matt Tominc about the challenges for impact investing, strategies for risk management, impact measurement, and attractive opportunities for impact investing.
LC Environmental, social, and governance (ESG), socially responsible investing (SRI), and impact investing are often used interchangeably by both professionals and investors. How do you distinguish impact investing?
MT There are countless definitions of 'impact investing', and the label continues to be applied to many different investment activities. At Conscious Investment Management, we define it as an investment that is made to generate positive and measurable social and environmental outcomes, alongside a market standard financial risk adjusted return. A couple of points here deserve clarification.
Investments are made to generate positive outcomes. We believe impact investment should add positive social and environmental impact to the world. Society and the environment should be a better place as a result of an investment capital flow. The need for this benefit is heightened at a time when COVID-19 has affected the world and society has seen widening inequalities.
Investments should have a market standard financial risk and return. It's critical that impact investors, pursuing their social and environmental goals, don't compromise returns (or accept higher risks than they otherwise would for the same expected returns). As impact investors, if we were to compromise on our risk-adjusted returns, we'd begin to blur the line between our work and philanthropy. There are already fantastic philanthropists and charitable organisations in the world, and we don't exist to substitute funds flowing to them. Conscious Investment Management requires market returns, providing a substitute for investment portfolios, not philanthropic capital.
Much of the confusion with the 'impact investment' term comes from its similarity to other socially-minded investment strategies. We think about impact investing as a sub-set of a broader term—'responsible investing'—which encompasses a range of different approaches to investing. Two popular responsible investing strategies are ESG 'negative' and 'positive' screening.
LC Impact investing faces special challenges due to its unique risk profile. What strategies do you put in place to manage this risk?
MT Impact investments can be made across asset classes, and as a broad comment, the risks reflect those of the specific asset class. For example, an impact investment made in property (let's say social or affordable housing) is exposed to many of the risks typically seen by investors in residential real estate, such as vacancy.
Our model at Conscious Investment Management is to work with partners – we call them our Impact Partners – who have lived or professional experience in their fields and identify and source investments alongside them. For example, we may work with a housing association to identify appropriate properties to acquire for social and affordable housing. In this way, we can mitigate many of the risks of that asset class – such as vacancy – as we have an insight into the ultimate tenant.
LC How do you go about measuring the 'impact' of the investment strategy?
MT Impact measurement is a relatively nascent sector. Measurement practice is evolving—with an alphabet soup of acronyms and approaches being thought up globally by some very smart thinkers. The world hasn't yet progressed to a widely accepted impact investment framework (such as GAAP in the accounting world) for measuring impact, although there are widely used frameworks. We want to leverage the best of current thinking and conform with global best practice, but also ensure we practically complete impact measurement in the right way for our investments.
As the impact investment industry becomes more mainstream, thoughtful and accurate measurement becomes more important than ever. Investors must be clear about their impact investment thesis and define relevant metrics of measurement. They should be transparent and hold themselves to a high level of accountability when measuring their impact, which includes assessment of potential unintended adverse consequences from an investment. They shouldn't, however, let the challenges of impact measurement stall investment and the creation of great social or environmental impact.
To achieve these aims, our impact measurement process has three-steps:
- Quantitative metrics: When we make an investment, we select thoughtful and relevant metrics that we will measure. We cross reference this to global third-party frameworks (we use the GIIN's IRIS+ and Impact Management Project) so our investors can aggregate their impact at a portfolio level, and ensure from the outset the data we need for measurement will be readily available. For example, if we make a solar investment, we might choose to measure megawatt hours of renewable energy generated, or tonnes of atmospheric carbon avoided.
- Independent verification: We obtain independent assurance of our impact metrics, ensuring we have objective and experienced third-party auditors review the quantitative impact metrics we prepare. We want to report our impact to our investors with the same level of independent oversight and confidence as a company reporting audited financial accounts.
- Assessing outcomes: Moving beyond quantitative metrics, we also consider the outcomes of our investment. For example, we might easily measure and verify the number of beds of affordable housing we build, but we must ask ourselves—what is the actual impact of building affordable housing on our society? What could go wrong?
LC The social and affordable housing sector is a growing area for impact investing. What other sectors are emerging as attractive opportunities for impact investing?
MT Real assets are a branch of the 'alternatives' asset class, which include all value-generating physical assets—land, buildings and social infrastructure (hospitals, schools, specialty housing)—that have intrinsic value in and of themselves, without solely relying on a volatile operating business or exit of an investment create returns.
Real assets investments are naturally attractive for impact investors. Real assets are core to communities. Whether it be through the provision of appropriate and affordable housing, generating renewable energy, or delivering critical services through social infrastructure, our society is built on 'bricks and mortar'. On tangible foundations.
Despite the societal and environmental importance of these assets, many are suffering from years of underinvestment. There are many examples, such as the very long wait lists for social or disability housing with many people living in legacy housing stocks, or the fact not everybody has access to cheap and reliable power (let alone renewable energy).
For this reason, we expect many sub-sectors of real assets will continue to present attractive opportunities for impact investment – housing, community infrastructure, medical facilities, solar and other renewables.
LC What are the challenges of impact investment?
MT Impact investments are different from negative and positive screens because they aim to create additional positive social and environmental impacts. This 'additionality' requirement can be a challenge for impact investors, and it requires deep thought and consideration about two key challenges of impact investment:
- What are the full effects of an investment? For example, a renewable project (that has good intentions) can be developed with little regard for the supply chain of its solar panels, which may inadvertently support poor labour practices.
- Would this asset have been financed anyway? If an impact investor expects market rate returns, would other 'non-impact' investors have funded this anyway?
Impact investors exist to respond to these two key challenges:
- Challenge 1 – A distinct focus on assets that have a positive social and/or environmental benefit
Our sole motivation is to invest in assets that have a positive social and/or environmental benefit. We focus on investigating and testing the full and deep social and environmental consequences of each investment. It's a core part of our investment process, and as fiduciaries of impact investor capital, applying this level of consideration is key.
As impact investors, our investment universe is often smaller than other market participants (being limited to only socially and environmentally beneficial assets), so we need to focus on understanding the specifics of each opportunity in our 'hitting zone'. Just like a venture capitalist or property developer in their respective industries, by finding opportunities where others aren't looking, an impact investor can create additional environmentally and socially beneficial assets while earning attractive returns for investors.
- Challenge 2 – Bringing value beyond just capital
Impact investment isn't like philanthropic capital, it needs to work harder to have a positive social and environmental benefit. Investors seeking market rate returns need to engage with how they can bring value beyond just bringing capital. This may be through finding opportunities other investors haven't, doing more work to get comfortable with niche investment sectors, providing longer-term and more stable financing, or a myriad of other ways.
The Conscious Investment Management 'Impact Partner' approach is a unique way we acquire properties, fund assets, or finance social programs which our Impact Partners (the majority are leading charities, but also socially minded enterprises) can operate for the benefit of their mission. In this way, we can make financial investment decisions, with confidence that each house we build, each solar panel we install, will be operated to create the additional positive impact we intended.
The latest edition of Fundamental is available now. Download your copy.
The latest edition of Financial Services Thinking is available now. Click here for all the latest news.
With fund managers asking 'Where to now?', the latest edition of our Toolkit for Fund Managers focuses on what actions you can take to help you reset for the road ahead. Download your copy.