Podcast:The future of impact investing

 

 

 

 

 

The Responsible Investing Podcast Ep.20: The future of impact investing– with Sarah Norris

 

In our latest podcast, we take a deep dive into the fascinating world of impact investing with ASI’s Sarah Norris.

 

 

Transcript

 

Amanda Young: Hello, I’m Amanda Young, you are listening to the Aberdeen Standard Investments Responsible Investing podcast, discussing all things relating to responsible investment issues.

Now today I am delighted to have as my guest, Sarah Norris. Sarah is the perfect guest to have on our podcast today because we want to continue our conversation on impact investing. Now in a previous podcast, I chatted to another Sarah – Sarah Gordon, who leads the Impact Investing Institute to talk about the impact investing movement in the UK today. I’m keen to explore a fund managers perspective of how impact investing actually works in practice. But before we start a little bit about our guest today, as a fund manager, Sarah is well versed in understanding ethical, environmental and social issues when it comes to managing portfolios. She is the co-portfolio manager of the Global Equity Impact Strategy and has also spent many years running the Aberdeen Standard Investments European Ethical fund.

She attended the University of Virginia where she studied English and Comparative Politics and Sarah then went on to the University of St. Andrews here in Scotland, to study International Relations with a focus on conflict resolution.

Now, Sarah has a very interesting background, which provides some context into why she has a passion for both investment and impact because her studies led her to work with an NGO around the Southern Sudanese independent referendum, and she continues to work with an education charity Focus, initially out of Moli Andro, South Sudan, but more recently, in a refugee camp in Juba.

Sarah’s passion for social justice has led her to raise money for this charity to set up a library in their camp and we’re really delighted to say that the books finally arrived last year.

Interesting fact about Sarah is that she ran seven marathons over seven days through the Amazon rainforest. This is not only an amazing achievement, but one that took place in an amazing location. Wow, Sarah, what an introduction and I’m absolutely delighted to have you on our podcast today, a warm welcome.

Sarah Norris: Thanks very much, Amanda, I’m equally delighted to be here today and to chat with you about something that’s really a mutual passion, I think

Amanda: Absolutely..

Sarah Norris: So, I’m really looking forward to our discussion today.

Amanda: Now, as I said, in my introduction, I’m keen to focus today on impact investing, we often hear about impact investing or investing with impact. But I still think that there may be a bit of confusion as to what impact investing actually is. So maybe to start with, perhaps you can give us your view on what impact investing is, and how it differs from other types of sustainable investment.

Sarah: Definitely, because every investment has an impact, whether it’s positive or negative. And I think that’s the important thing to keep in the back of your mind. And when we’re talking about impact investing, we’re really talking about the kind of original Rockefeller Foundation definition, which is ‘intentional investment to deliver measurable social or environmental outcomes alongside financial return’.

So, when we’re talking about impact investing at Aberdeen (Standard Investments), we’re looking for companies who are intentionally developing products or services that are quantifiably, measurably, demonstrably, changing the world in some way and trying to really tackle one of the world’s most pressing global issues. And this is distinct from other types of investment, because it’s not about excluding certain types of businesses, it’s not solely focused on how our company is run and working to engage on improving labour policies or environmental policies, or even looking at alignment, material alignment to a Sustainable Development Goal. It goes one step further and focuses on intentionality, what is the company’s intent? And how is it really being a mission for that business? And can we measure how that intent is coming through in products and services and how they’re addressing a global issue.

Amanda: Now, that’s great, because we’re going to go on to talk about how that works in practice. But before we do that, we’ve heard a little bit about your background work in Sudan, and it’d be a great opportunity to explore this. This is a far cry from the financial services industry. So maybe we could hear a little bit about how you made that change from your work in Sudan to now managing impact investing portfolios.

Sarah: Definitely, I guess yeh – I took a non-traditional route, as we call it. I grew up kind of aware of what was going on in South Sudan, I was very lucky in that I grew up in DC. So my father was quite active with quite a number of the diaspora from Southern Sudan and so when I graduated University, was looking for work, it was very much focused on development, how can I really try and have a personal impact and address some of these social issues around human rights, water security, education, security, how the security inside. So, I did a lot of work with a lobbying organisation trying to get support for the diaspora before the referendum and then also trying to get US commitment to uphold the outcome of the referendum around independence but, independence happened and please don’t judge me on the current political and security climate in South Sudan at the moment, but it was very obvious that it was not the safest place for me to go, and I still had a passion for this type of work, and wanted to continue and impact investing was fairly nascent at that point, certainly not something that you’d associate with equity investing.

But I figured, well, maybe that’s a route I could go down and Aberdeen Standard Investments was willing to take a chance on that and say – okay, how can we extend our ESG franchise and certainly you, Amanda, who had recently joined are incredibly passionate about shifting all assets to being sustainable assets. And I guess that the tag team of us and then adding in Dom, were able to really drive impact as a strategy and hopefully not just in Equities, but across multiple asset classes.

Amanda: Now, the world is obviously facing some real significant challenges, and we’ve only just touched on it a fraction in Sudan, but how far do you feel that investment can go to contributing to solving some of these challenges?

Sarah: I personally don’t think we’ll be able to solve any of these challenges without an investment by-in from the asset management community. If you think about how much it’s going to cost annually to meet the UN’s agenda to meet the Sustainable Development Goals, I mean, that’s several trillion dollars a year. And in emerging markets, there’s a two and a half trillion-dollar funding gap. So, there is phenomenal political will post COVID, and even pre COVID, in achieving some of these social, environmental ambitions and goals. But there’s not enough money, the public finances are already stretched and so it will take buy-in from, from corporates, from public and private institutions and private individuals. And I think that creates the perfect environment for impact investing and in trying to pull capital from all of these sources, and really drive solutions to these challenges.

Amanda: I mean, it sounds a really positive thing. But obviously, all of these things come with challenges. So, what do you think the biggest challenge for impact investing has been and maybe the changes in impact investing have been over the past five years?

Sarah: I think the biggest challenge initially was convincing people that impact can be a source of Alpha. Impact does not mean you have to sacrifice returns, because you are traditionally not investing in certain sectors, you’re probably not investing in fossil fuel companies, extractive companies. So, it was trying to convince or trying to evidence – well not even convince – but evidence how investing in companies that are actually part of a problem and are part of the solution to a problem, are tapping into unmet demand.

And it really is a narrative that unmet need – so issues around not having access to water education, clean energy, that is also an unmet demand. And that then presents quite a sustainable value creation opportunity for businesses, and if we can align our investments with these strategies, that creates quite an attractive return potential and kind of shareholder value creation and I think that was the key hurdle.

And if I look forward to the future, then the next hurdle that we’re kind of grappling with is how we report on impact. There’s no standardised definition of how you report on impact. And every, every impact fund does it slightly differently. And so, the ambition is to be at the forefront of this and constantly evolving, but making sure that we really are at the gold standard of data collection, analysis and reporting for investors.

Amanda: Can we take a slightly different track now and look at how you actually do impact investment, if you like – what are the types of things that you look for in your investments?

Sarah: Well, we work quite closely with our central ESG team when we’re thinking about impact and really trying to understand the nature of the types of issues that we’re looking at. So that’s the very first step, is working with central ESG analysts and trying to understand what are the types of issues, how can we identify solutions to some of these issues? And one piece of work that Beth Meyer just did was around nutrition, how do we define good nutrition and what are the types of problems around the double burden of disease, obesity as well as malnutrition that we’re trying to address and then how can companies provide solutions to that.

And then the next step is the impact analysts going away and looking for companies that fit to the solution and looking for, we call them local solutions to global problems. So, looking for companies that are addressing a specific issue in a country. And then the way we’re trying to assess these companies is focusing on how they’re investing. And that’s really how we’re different is that we don’t use revenue screens, and alignment and materiality are important. But that’s the second stage for us, we’re first looking to see – see, I’m stealing your term – if a company really is a mission led business, do they demonstrate intentional investment to challenge one of these problems, and that makes sure that these companies aren’t going to be able to change strategies or change routes, and that trying to drive an impact is core to their purpose.

Amanda: Now, you’ve already mentioned this, that all companies have impact both positive and negative, it is very clear that the world is also not black or white, there’s a whole variety of shades of grey that investors have to kind of grapple with. This, you know, brings a range of complexities for you as a fund manager, maybe you can bring us to light with an example of a company that you may look to invest in, and how you weigh up the net impacts of your investment if you like.

Sarah: Definitely I mean, that’s a great question. And one we’re constantly grappling with, because as you say, no company is black and white. And I think as a starting point, that’s why it’s so important to have central governance have an impact strategy, we have an impact management group that you Chair, and we also have buy-in from ESG analysts who, don’t necessarily know the financial aspect of the company, but are very much clued up on kind of the impact challenges and the questions and the ESG risks that go hand in hand with running a business. And just because you are a mission lead business doesn’t mean you don’t fall afoul of some of these risks. So, the first step is having good governance. And then when we do get an issue, it’s, it’s our chosen and our view that we should really try and avoid net impact and net impact can come in many different flavours.

And I guess the example that I always use is Tesla, which on the surface of it potentially is a brilliant impact case – they are trying to drive an energy revolution and they’re doing this through electric vehicles. But if you look under the hood of the car, there are serious governance questions around an overbearing CEO, some of the market manipulation allegations from Tweets and SEC investigations, there are questions around labour, how employees are treated, and I know that they scored quite negatively recently on one kind of analysis of kind of the Labour Relations and working conditions.

And then a recent move was to stop accepting Bitcoin as payment but previously accepting Bitcoin as payment when there’s a huge environmental cost to that. It does raise questions about what is the net impact, and so for us to be able to invest in a company like Tesla, we would have to see quite strong messages on each of those points and an action plan for change to be able to get comfortable that there isn’t really a netting of impact. And this company really is on a path to positive impact and working on some of these operational issues and working on some of these governance issues. And that’s why having ESG analysis integrated at the very start of your financial analysis is so incredibly important so that we can get a grip on each of these different issues, understand how they’re going to impact the financial return of the business, and also understand how they’re going to impact the overarching strategy

Amanda: So like good foundations to build impact from.

Sarah: Exactly.

Amanda: Now, during my podcast, I have always looked for my guest to provide a bit of inspiration to share something that has inspired them personally on sustainability issues. And now I believe you have a book suggestion for our listeners on the changing landscape of aid, perhaps you can tell us what that is and why this inspired you.

Sarah: I do, this is my all-time favourite book and really one of the reasons that I wanted to pursue a career in development and ultimately how I’ve come to work on impact. It’s called ‘The Man Who Tried To Save The World’ and it’s by Scott Anderson. And Scott Anderson is by trade a wartime journalist, war veteran reporter. And he was friends with a man named Fred Cooney, who revolutionised how we think about aid.

He was an aid worker and crisis response personnel that working in Kurdistan, he’s been to Somalia, he was in Bosnia, but he ultimately disappeared in Chechnya. So what Scott Anderson does is he goes through and kind of tells the story of Fred Cooney’s life, his imperfections, how he came to be an aid worker, the challenges that he faced in really trying to, to kind of up end how we think about aid and make sure that aid is not distributed in a cookie cutter formulaic manner, but we actually think about the types of conflicts that you’re trying to address and making sure that the supplies that you’re taking to Kurdistan aren’t the same supplies as you’re taking to Haiti, because they’re just very simply, they’re completely different topography, completely different climates and then so it’s not going to be appropriate to use the same.

And it tells about his exploits in each of these different countries and some of these crises, and it’s absolutely amazing how he survived, but also how much he accomplished, and then goes into how he disappeared, where he disappeared, why he disappeared – it really did, it convinced me that one person can make a massive difference. And you don’t have to sit there and think – well, I’m not, I’m not gonna be able to change the world. One person – very bluntly – did change the world, did change how we think about aid, and has made a lasting impression.

And I think that’s the key message that we all need to take away is that what you do with your money, how you invest, these are key changes and challenges that will change the world. And so, whether it’s an impact strategy, or sustainable investing strategy, it starts with us. And I think that’s such a powerful message, I would really challenge everybody to go out and read the book. I love it. And it’s really written in a journalistic way, it’s not a thick, heavy textbook job, it just draws you in.

Amanda: Wow, that’s really inspired me. It’s something my son keeps saying to me, how can I, as an individual, change the world – so perhaps it needs to become one for us to read together. I’m really delighted to have that bit of inspiration. Thank you so much. Now, we’re joined to the end of our podcast so I have one final question for you. Impact investing has clearly taken off. It’s amazed me personally, in the last few years, how we’ve gone from something so nascent to something that people are finally just got, if you like. Looking to the future, what do you think, holds for impact investing, perhaps you can touch on how you would like to see it develop?

Sarah: I think we always say, our work isn’t done until every fund is an impact fund in some way. And as cliche as that sounds, I really, truly do believe that’s the direction of travel in the market, in the industry. And impact can come in many different forms. I think every fund has to be impactful, I guess, as we say, at the impactful investor, whether that is focusing on sustainability criteria operationally, or whether it is going the full hog to be an impact investing fund. And I think impact investing is really helping to drive that push and almost pull along the sustainable investing, landscape and ecosystem.

I’m just incredibly excited to see more companies start to change how they invest, and also more investors really start to think about how they’re allocating their own capital. And I hope that creates a perfect environment for us to achieve our ambition and all funds to become impact funds.

Amanda: Oh, Sarah, it’s been an absolute delight to have you today – really inspiring and, you know, oodles of positivity there, which is something I’ve always loved. I’ve also loved hearing about your personal story and how you have come into investments. And we’re very lucky to have somebody with such passion and vision, helping allocate capital in such an inspiring way. So, thank you very much for joining us today.

Sarah: Thank you very much, Amanda. It’s been an absolute pleasure – it always is. Thank you for having me on your podcast.

Amanda: So you’ve been listening to the Aberdeen Standard Investments Responsible Investing podcast aiming to bring you insights into all things responsible investment. Thank you very much for tuning in to our podcast and you can find all of our episodes on our website, SoundCloud, Apple podcast. And until our next podcast, goodbye for now.

 

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