Real-World Impact

The following excerpt is from a wider series of academic perspectives by Natixis Investment Managers. These debates, with some of today’s leading thinkers, enable us to find more nuanced opinions on sustainable investing and explore a better way forward in ESG.

What are the key things to highlight for investors that want to invest with impact?

Florian Heeb: We say that impact is the change in the real world that is caused by your activities. You always need to think about what would have happened without your investment. It sounds trivial, but it connects to something we call «additionality» – you need to cause impact rather than own it.

You don't have an impact by being exposed to impactful companies, rather you have to change companies themselves to become more impactful. To clarify that, we make a distinction between investor impact and company impact. Company impact is what a company causes in the world. We often talk about Tesla and how many tons of CO2 emissions it saves by replacing petrol cars with electric cars.

Investor impact is the effect you have as an investor on what a company does. Can you reduce negative impacts or make a company with positive impact grow faster? We see a lot of emphasis on company impact currently, but there’s a lot more work to do on how investors influence companies.

Do you think investors see the difference between company impact and investor impact?

Julian Kölbel: Most don't. There's this strong focus to invest in companies that are sustainable, but with different motivations at play. One is the impact motivation – the desire to change the world.

The other one, which is also very powerful, is the idea of alignment with the portfolio – to own a portfolio where you can identify with the firm's projects, assets and so forth. There’s also the financial motivation. Everybody knows renewable energy will continue to grow in the future. And if you improve your risk processes by integrating ESG aspects, it will also yield better financial performance potentially.

These mixed motivations are a problem because they are not always consistent with each other. So I think it helps to be clear about them and explicitly state what a product intends to deliver.

Why invest in companies that require concessionary finance to scale positive impact – and how does this differ from ‘blended finance’?

JK: Concessionary investments are one important way to support the growth of enterprises that do something sustainable or have a positive effect on the world. This is potentially a business that operates in a developing country but that doesn't yield a globally competitive rate of return for the risk they're exposed to.

Often these enterprises have growth problems, so concessionary lending or equity financing helps them expand their positive impact. The additionality is relatively clear because there's not a whole line of other investors who want to do the same investment, precisely because they are a bit sub-optimal in terms of performance. And we see blended finance as an instrument to increase the efficiency and the amount of funding that does this sort of thing.

So, for development banks, for instance, that’s their mandate – to grow entire industries, in a sustainable way, in countries where they think there will be employment gains, and to go in there with large tickets to get this going. It seems like there's lots of potential for combining these different sources of funding.

FH: We think the strongest sustainability impact you can have is exactly in the spaces where investments are not yet market rate. So, risks are a bit higher and returns are not what you would expect.

That's basically what blended finance does – it pursues a mission to expand positive company impact, but it also changes the financial conditions to the point where commercial investors can say, yes, now it's something I can work with that more or less meets my risk-to-return expectations.

• For more information

Florian Heeb, academic associate and Ph.D. researcher at University of Zurich's Center for Sustainable Finance and Private Wealth (CSP).

Julian Kölbel, environmental scientist, economist and postdoctoral researcher serving as Head of Research at the Center for Sustainable Finance and Private Wealth at the University of Zurich.

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