Impact investing is the next big thing in ESG investing, according to asset manager Lombard Odier.
Bertrand Gacon, head of impact office at Lombard Odier, said investors should look at the ESG impact of their investments, as well as companies’ ESG ratings, which are based on past performance. “High scores in an ESG analysis do not necessarily imply high beneficial outcomes for the environment and society. Tesla, for example, which is revolutionising both the automotive and the battery industries with its electric vehicle innovations, has a relatively poor ESG score in most models simply because it is an immature, fast-growing company that has yet to formalise its governance, code of ethics, certification standards, and other processes. By contrast, a company like Total scores well in ESG models, despite the fact that its core product is a leading contributor to greenhouse gas emissions.”
Gacon added that most impact investing is based on relatively small companies which produce easily measurable positive outcome, such as a chain of gyms in a deprived neighbourhood. But this does not translate into mainstream investing. He added: “The solution, of course, is to integrate some of the key performance indicators that impact investors use – the carbon intensity, water intensity and social returns of products and services, for example – into mainstream ESG analysis. We believe it helps if investors try to keep track of the direction of movement on ESG factors within a company, too. It’s positive if a company signs the Carbon Disclosure Project (CDP), for sure; but it should get a better score once it starts to change its fleet of salespeople’s cars to hybrid models, and the best score when it can demonstrate a tangible reduction in greenhouse gas emissions as a result.”
He concluded that as ESG becomes mainstream, investors will increasingly see the impact of their portfolios as a critical factor in assessing their ESG performance.