Interview Duration: 3 Minutes - Anne Gram
In the rapidly evolving world of finance, institutional investors are grappling with the integration of impact investing – an approach that aims to generate positive social and environmental outcomes alongside financial returns. Here, we delve into the common challenges faced by these investors and potential solutions to ensure that impact investing is both credible and effective within institutional portfolios.
## Common Challenges
### Lack of Standardized Metrics and Measurement Tools
One of the primary obstacles is the absence of universally accepted standards for measuring and reporting the social and environmental impact of investments. To address this, investors can adopt standardized frameworks such as the Global Reporting Initiative (GRI) and IRIS+, and collaborate with industry peers, organisations, and regulators to establish clear guidelines and best practices.
### Data Availability and Robustness Issues
Particularly for physical climate-related risks and impact data, there is often a lack of robust, location-specific information, especially in less-developed regions or sectors. Investors should invest in data collection and analytics capabilities, partner with research institutions, and support the development of more sophisticated models to overcome this challenge.
### Misaligned Time Horizons
Social and environmental impacts often take years or decades to materialize, while many investment decisions are made with shorter timeframes in mind. Traditional valuation techniques may undervalue long-term impacts, leading to mispricing and systemic risk. To combat this, investors can lengthen their time horizons for impact investments, particularly in private markets such as infrastructure.
### Integration and Governance Barriers
Shifting from traditional risk management to a focus on real-economy impact requires significant organisational change. Investors can formalise impact governance at the board level, provide sustainability and impact assessment training, and embed impact accountability into decision-making processes to overcome these barriers.
### Policy and Regulatory Uncertainty
Uncertainty around government policies and regulatory frameworks for impact investing can hinder long-term planning and commitment. Active engagement with policymakers on adaptation planning, risk disclosure, and regulation can provide clearer signals and support, helping investors navigate uncertainty and plan for the long term.
## Key Takeaways
Institutional investors can overcome these challenges by adopting standardised impact measurement frameworks, improving data quality, lengthening investment time horizons, embedding impact governance, and actively engaging with policymakers and industry stakeholders. By doing so, they can ensure that impact investing is both credible and effective within their portfolios.
Field building, working together with many different parties, can be impactful in addressing climate and sustainability challenges. Anne Gram, a board and investment committee member at various European pension funds and institutional investors, emphasises the importance of considering the whole investment portfolio when it comes to impact investing, as most growth has a negative impact. She advocates for discussing how the whole portfolio has an impact in the real world and believes that climate risks and biodiversity risks will impact investments and are likely to spread across companies and sectors.
Gram advises the next generation of investment professionals to work hard, follow their heart, and find a coalition of the willing to take action on climate and sustainability challenges. She serves as an investment committee member of two Irish sovereign wealth funds and sits on the supervisory and advisory boards of organisations active in impact, climate, and biodiversity investing. Her focus on sustainable and impact investing was influenced by having children and learning about global warming and the climate.
In conclusion, the universe of companies to invest in comprises those that clearly do the wrong thing, those that make a positive impact, and most that are in the middle. Allocations should hit required risk-return metrics and include positive impact investments, such as dedicating 1% of assets to impact investing. Postponing dealing with these challenges will increase costs, and it is crucial for institutional investors to take action now.
- Institutional investors could overcome a lack of universally accepted standards for measuring social and environmental impact by adopting standardized frameworks such as the Global Reporting Initiative (GRI) and IRIS+, and collaborating with industry peers, organizations, and regulators to establish clear guidelines and best practices.
- To address data availability and robustness issues for physical climate-related risks and impact data, investors can invest in data collection and analytics capabilities, partner with research institutions, and support the development of more sophisticated models.
- As social and environmental impacts often take years or decades to materialize, investors can lengthen their time horizons for impact investments, particularly in private markets such as infrastructure.
- Shifting from traditional risk management to a focus on real-economy impact requires significant organizational change. Investors can formalize impact governance at the board level, provide sustainability and impact assessment training, and embed impact accountability into decision-making processes.
- Uncertainty around government policies and regulatory frameworks for impact investing can hinder long-term planning and commitment. Active engagement with policymakers on adaptation planning, risk disclosure, and regulation can provide clearer signals and support, helping investors navigate uncertainty and plan for the long term. Anne Gram, a board and investment committee member at various European pension funds and institutional investors, encourages the next generation of investment professionals to work hard, follow their heart, and find a coalition of the willing to take action on climate and sustainability challenges by focusing on venture capital, development finance, and science-driven industries. She also advocates for considering the whole investment portfolio when it comes to impact investing, as most growth has a negative impact on biodiversity and climate-change, and believes that energy transition is a critical aspect of sustainability and impact investing.
