AK: Sarah, for the benefit of readers to whom the Institute is a new development, can you explain the background to its formation and who is involved?
SG: The Impact Investing Institute just turned one year old – it was officially launched in November 2019, which seems like considerably more than only a year ago, given all that has happened since then! It merges two former initiatives: the National Advisory Board on Impact Investment, which was set up last time Great Britain led the G7 (at the time, the G8), and the Taskforce on Implementing a Culture of Social Impact Investing, which was chaired by Dame Elizabeth Corley, at the time CEO of Allianz Global Investors. She and the Chair of the National Advisory Board on impact investment, Sir Harvey McGrath (former Chair of Man Group plc and Prudential plc), decided that the work in which they were engaged would be more effective if the two bodies were merged. The Taskforce had more of a UK focus whilst the National Advisory Board looked at impact investing from both British and international perspectives. They combined operations and successfully obtained funding from two government departments – the Department for Digital, Culture, Media and Sport (DCMS) and DFID (the Department for International Development), which is now part of the Foreign and Commonwealth Office (FCDO). The City of London Corporation is involved too, and we’re also supported by ten financial services firms.
We are an independent, not-for-profit organisation dedicated to increasing the growth and improving the effectiveness of the impact investing marketplace, both nationally and internationally. Since joining, my team and I have been working out where we can add value. There are lots of related initiatives doing important work, but we identified areas of ‘market need’ where we felt we could contribute to solutions and designed our work programme accordingly.
AK: It sounds like it has quite substantial backing, particularly with the involvement of the ten ‘market participants’ from the financial services industry that you mentioned.
SG: We think of ourselves, both internally and externally, as a partnership. Internally, we are a relatively small, paid team of eleven staff members and a couple of secondees, but we work with a much larger group of volunteers who lead most of our workstreams. We call them ‘Lead Experts’ and they sit on our Board. This is one of the powerful features of our model – this voluntary / paid partnership – because we’re working with people on both sides who are so committed to this agenda. They are going out and spreading the word, particularly within their own organisations, but also more broadly across the industry. We also have a large Advisory Council with 25 members; our financial services supporters have representatives who sit on that Advisory Council but it also includes a wide range of institutional investor voices, social sector investors and policymakers, so it’s a very broad church. One of the things that I have found especially interesting and inspiring since joining the discussion formally last year is the range of people to whom this matters, and who are putting so much of their time and commitment into advancing the agenda.
AK: It might be helpful at this point to define ‘impact investing’ for our readers, as this is a topic that is evolving quickly. Your working definition as you are seeking to make this really matter for different groups of stakeholders would be very helpful.
SG: Of course – impact investing is investment that has the intention of delivering a positive and measurable social or environmental benefit, alongside a financial return. We talk a lot about the different components of that definition in order to usefully illustrate how they interact. Some institutional investors have trouble believing that impact investment can deliver a financial return – they believe that you have to sacrifice returns in order to make an ‘impact’ – so part of our work is around managing such concerns. We’re also doing a lot of work around the measurement and accountability side of impact investment, making it more transparent and pushing for standards around reporting. We are looking for ways to accurately measure the combination of impact, on the one hand, and financial returns on the other, to demonstrate clearly how these can co-exist and can in fact be mutually supportive.
AK: As a headhunter, I am interested to know how the transition came about for you personally, from the top tier of financial journalism to social activism within the investment space. How was it that you came to join the Institute as CEO?
SG: I had worked early on in my career in the fund management industry, both in the City and in New York, but I spent the last eighteen years from 2001 to 2019 at the Financial Times. I ran the Companies desk from two weeks before Lehman Brothers’ collapse in 2008 until August 2013 so throughout the duration of the global financial crisis. From 2013 until leaving the FT last March, I was Business Editor. I had a fantastic time at the FT, but latterly I felt that the subject matter of business journalism had become very Brexit-dominated. My brief had originally been to look broadly at themes uniting business across the UK and Europe, but it became increasingly narrowly focused. More importantly, I felt that after nearly twenty years as a journalist, I wanted to ‘do’, rather than ‘write about doing’. I had become increasingly interested in and connected to the world of impact investment; I interviewed Elizabeth Corley when her first report from the Taskforce was published and I’d interviewed her at an FT ‘Investing for Good’ conference as well. I made lots of connections and found my conversations really inspiring, but I wasn’t getting as much content on this topic into the paper as I would have liked. I took voluntary redundancy from the FT in March 2019 with the intention of writing a book and then thinking carefully about my next career move. However, Elizabeth was one of the people who generously gave me their time during the transition period. We got talking about the Institute, and this job then came up, so by July last year I was I was committed to this. It all happened rather quickly!
AK: It sounds like a fascinating place to be and at precisely the right time. Has the pandemic provided greater impetus around the importance of investing to support social causes? Has it removed procrastination from the conversation?
SG: I feel very strongly that this is the future of investment; at some point in the future, all businesses will have to account for their negative and positive impacts and investors will reward them for the positive and punish them for the negative. This is the way that we are moving, not just in terms of our response to the climate emergency but the social challenges and vulnerabilities that have been highlighted by the pandemic. It is absolutely clear that if people don’t have access to decent healthcare and housing, educational resources, and adequate infrastructure, they will be terribly vulnerable to the consequences of a crisis like the one we are currently living through, and that is not acceptable. There is no hiding from this anymore. Additionally, in terms of the environment, you simply cannot extricate the social considerations from the required move to a net-zero carbon economy. Impact investment is one of the tools that we need to bring to bear both privately and in policymaking to mobilise private sector capital to address social and environmental challenges.
AK: Is there an equivalent to the Impact investing Institute that you work with in the United States? And how is the topic represented elsewhere internationally?
SG: The National Advisory Board on Impact Investing that I mentioned earlier was part of a global group of initiatives in different countries that remains active and is called the Global Steering Group for Impact Investment. That now has over 30 national members from advisory boards around the world. The Impact Alliance in the USA is extremely active. Each country follows a slightly different model and may undertake slightly different activities, but the Global Steering Group provides an incredibly powerful means of communicating with each other. Particularly at the beginning of the pandemic, it provided an intangible but important sense of mutual support, motivation and continued coordination. In some of the less wealthy parts of the world, impact investing bodies are quite small – often only one or two people – and very short of resources. We are incredibly lucky in the UK in that I am able to run an organisation with significant resources behind it. This is not the situation in many countries, although what we try to do through the Global Steering Group is to share experiences and learn from each other, because the lessons we can take from other parts of the world can be substantial. We have a knowledge exchange programme with national advisory boards in sub-Saharan Africa, for example, and it is an effective way of sharing information and being more effective as a group. Lots of the issues relating to impact investment are pertinent around the world; consequently we believe very strongly that there should be global convergence of impact measurement and reporting standards, in order to effectively monitor and motivate the parties involved.
AK: Individual countries clearly need to be pushing in the same direction on issues to make a difference, including the key developed market economies of today and the fast-growing will-be dominant players of the future. Is it more difficult or perhaps easier to get this onto the radar in fast-developing countries where the investment sector is less mature, such as China and India?
SG: India has an incredibly vibrant National Advisory Board on Impact Investment already, as it happens! There are incredibly exciting developments underway worldwide, particularly in Asia-Pacific, Latin America, and Africa. It would be reductive to assume the UK is leading the field; for example, Indonesia recently issued a ‘green sovereign bond’, and we haven’t yet issued these. The global investment community engages with this agenda in various different ways but broadly speaking, there is a clear perception across the industry that to ignore environmental, social and governance factors in investing nowadays is not sensible. For example, there is a very clear and established relationship between not sticking to environmental good practice and punishment by the market – that is, by customers and by investors. Therefore, looking at ESG nowadays is a way of managing risk; you need to meet these criteria, or you will suffer for it commercially. Further along from that mode of thinking, though, you move along what we call the ‘spectrum of capital’ from ESG integration towards delivering a positive impact. In this way, we see integration of ESG factors as a basis upon which to build in order to ultimately deliver an impact. This is a fast-moving space so different investors, organisations, asset managers, asset owners and countries are at different stages of the conversation. Some are extremely advanced: a Dutch pension company, PGGM, has matched its whole portfolio against the UN’s Sustainable Development Goals. They have been extraordinarily pioneering in both how they engage with and think about impact investing and also how they’ve integrated it into investment and asset allocation processes. One of the things we are working towards is to have the ‘best practices’ that such pioneers are establishing refined, considered and implemented as standard by other organisations around the world.
AK: We’ve touched on some of these already but in more detail, what are the key initiatives on which you are currently spending your time?
SG: We have multiple projects and workstreams underway. We work to a theory of change where we are attempting to deliver understanding of impact investing, competence in impact investing, use of relevant data to drive the market, high-quality standards in reporting and measurement, and an enabling policy and regulatory environment. Our activities aligned to those outcomes divide into i) engaging and educating, ii) providing tools and information, and iii) advocating.
On the engaging and educating front, we have developed a learning framework which is now live on our website. This is to enable financial advisers and other financial services professionals to gain a greater understanding of the topic and have more complex discussions with clients on the topic of impact investing. There are regulatory pressures catalysing this movement, but a lot of clients are also proactively asking questions, so advisors and asset managers need to have the tools to be able to keep clients informed. We are currently working with a number of relevant trade associations to adapt that learning framework for their specific needs, which we hope will prove valuable to their members.
On the advocacy front, we have worked with the Green Finance Institute and the LSE’s Grantham Research Institute on developing a proposal for a ‘Green+ Gilt’, which is a UK sovereign bond combining environmental projects with social renewal. As I was saying earlier, we believe strongly that you cannot consider addressing the climate emergency without considering the social consequences of addressing it. The Green+ Gilt is a way of doing both. It has been encouraging how much engagement and endorsement we have had on this, both from the investment community and from government. We have a letter of support with over 30 signatories – investors, asset owners, and influential voices like the Confederation of British Industry and TheCityUK.
When it comes to providing tools and information, we have tried to address market needs. One of the big hurdles that many pension trustees face is that they believe impact investment is incompatible with their fiduciary duty, partly because of the misconception that impact investment requires you to sacrifice financial returns, but also because fiduciary duty has been rather narrowly interpreted as requiring an exclusive focus on that financial return. We believe not only that fiduciary duty is compatible with impact investment, but also that you are in fact neglecting your duties if you are not engaging with the concepts underpinning impact investment. One of the other partnerships we have is a pro bono legal panel of ten firms and with them, we’ve developed a legal paper on the compatibility of impact investment with fiduciary duty. We have also developed a set of Four Good Governance Principles for Pensions which we are discussing with stakeholders; they are to inform discussions at trustee level and amongst the advisory community. You may be able to tell that we have a big focus on pensions, as one of our objectives is to mobilise large pools of capital, but these good governance principles will be applicable in many different contexts.
AK: I understand that a global set of reporting standards is also something that you are working on at this stage, akin to International Financial Reporting Standards (IFRS) in the accounting world.
SG: As I said earlier, I think that we will move to a point where all externalities are priced properly. If you make a pair of jeans but destroy the environment or pay unfairly low wages, the market will increasingly reward your good behaviour and punish your bad behaviour. Regulation is moving in this direction anyway, but as mentioned, I think we are moving to an increasingly transparent world where impacts, both positive and negative, will be considered by investors alongside financial returns as a matter of course. One of the necessary steps to get there is for there to be clear, transparent and comparable standards for businesses, for investors and for individuals, and we therefore support global convergence on these matters. There are exciting developments already underway; a statement of intent has been issued by the relevant global standard setters and a consultation paper has recently been issued by the IFRS Foundation regarding a Sustainability Standards Board. As I say, things are moving fast here, both because of the pressing need for transparency and accountability, but also critically because we need to make life easier for businesses, investors and individuals in this regard. We do not want to add more burdensome regulation to an already strained system; moreover, we think that convergence of impact investing standards will actually help businesses and investors by simplifying the process. An example is a major British FTSE 100 company that is determined to be a good corporate citizen; they have integrated ESG and impact factors into their different business models and reporting mechanisms but at one stage they were reporting against 250 different ESG-related metrics! There needs to be a far simpler and more transparent system for everybody.
AK: In terms of education, is the Institute doing anything at the school- or university-level to get these matters into the academic environment?
SG: I personally feel that more needs to be done at school-level around financial literacy generally and I suspect impact investing will increasingly be a part of that. However, our comparative advantage as an Institute lies in the strong and deep network we have within the institutional and social investment communities, particularly in the City of London. We don’t have expertise in education so it’s not something in which we are currently engaged. That said, it’s early days for the Institute and there is definitely scope, if not a necessity, to bring this topic into schools in future. Another point around financial education, beyond school and university, is that it is incredibly important that people across society feel more empowered in regard to their money and that they appreciate the impact that their money can potentially have. We’re working closely with ‘Make My Money Matter’, an initiative spearheaded by Richard Curtis, the screenwriter, aimed at making individuals feel that their own money, in the form of their pensions and investments, has the power to deliver positive change.
AK: What is the Institute’s governance structure and to whom are you accountable?
SG: I personally answer to our Board and we also have a diverse range of funding supporters to keep updated. As I mentioned earlier, we have a theory of change which defines our activity, and we have put KPIs in place informed by this theory, against which we report on an ongoing basis. One of the things that has become clear to me though, since taking on the leadership of the Institute is that ‘it takes a village’, which is to say that this is very clearly a collaborative effort across multiple bodies. A lot of people are pushing in the same direction to deliver change and that is one of the reasons why we have a very collaborative model. As mentioned, we work internally as a partnership, but we also have external partnerships with the Green Finance Institute, the Global Steering Group, the Impact Management Project, Pensions for Purpose and so on. We work readily with other organisations to deliver the change that is necessary.
AK: Effective collaboration with these partners is sure to be key to the Institute’s success as you collectively tackle these challenges. It is an immensely exciting time for ESG and impact investing specifically and we are grateful to you, Sarah, for providing our readers with this update.