Primary investors, who have either given a company capital in return for fresh equity or lent it money, can clearly point to how those funds have been used to improve the environment. However, ‘impact’ is a harder concept to define and quantify for a secondary investor who is simply buying shares from another investor.
It is certainly true to say that by driving capital towards those companies helping to solve environmental problems and away from companies that are complicit in them, secondary investors can help to lower the cost of capital for certain companies and increase it for others. It is also true to say that these investors can help to persuade companies to mitigate the problems of climate change and biodiversity loss through regular engagement with management teams and boards.
However, both of these forms of impact are difficult to accurately quantify. They also fall short in two important ways. Firstly, they do not meet asset owner expectations of impact, with end clients wanting to see their investments making profound changes to the world.
Secondly, they are too slow and incremental relative to the speed and scale of the environmental challenges facing our planet. Climate change and biodiversity loss have already promoted unprecedented levels of innovation and cooperation in many aspects of public life.
At the social level, there are movements such as Extinction Rebellion, which has achieved mass engagement and undertakes high levels of political activism. From a governance standpoint, although the COP meetings are by no means perfect, there are few other forums globally where all countries are as engaged, constructive and even willing to make concessions for each other.
A new model is needed for finance, one that can be loosely defined as ‘philanthropic capitalism’. This would have self-interested motivations as much as altruistic ones, recognising that it is in everyone’s interest to sustain life on the planet.
A new paradigm
While many impact investment strategies channel capital towards companies that are enabling the green transition, very few go a step further and share a meaningful proportion of their revenues with charities or agencies that make a direct impact on the environment.
The TT Environmental Solutions Strategy shares one-third of all management fees with carefully selected environmental charities that help to tackle the twin problems of climate change and biodiversity loss. These challenges have triggered a wave of innovation in a range of industries, from how we produce energy, to how we feed and transport ourselves.
One industry that hasn’t evolved sufficiently is finance. We believe our proposal is a step towards addressing this. It is our hope that other investment managers will follow suit, with this ultimately becoming the standard approach for environmental funds and within impact investment more broadly.
Revenue sharing with environmental charities and agencies helps to solve the issue of how to effectively and measurably create impact when investing in secondary markets. It provides a clear and tangible dollar contribution to charities that clients can ultimately report back to their stakeholders.
If this idea was adopted by the wider industry, it would result in tens of millions of dollars flowing to environmental charities to help fund projects that otherwise may simply not have happened. At the very least these projects would be accelerated, which is perhaps equally as important, given that we are racing against the clock with regard to the environment.
Of course, charitable giving itself is difficult to argue against, but why do we believe that this concept is superior to simply lowering fees in the investment management industry in order to allow clients to donate the money saved to charitable causes of their choosing?
A more impactful approach
Firstly, we believe that relationships between investment managers and environmental charities should go beyond simple donations. Holistic and meaningful partnerships with chosen charities should be formed, sharing expertise wherever possible. The concept of philanthropic capitalism allows for the leveraging of knowledge and connections to foster more valuable resources than donations alone.
Moreover, by acting as a focal point for a large and disparate group of clients, investment managers can work with their charities for a far longer period of time than any single client might, providing greater visibility of funding.
We recognise that this new approach would represent a significant commitment for the industry. However, it could be regarded as the ‘fee’ for trading on an impact label, and in our experience is a positive step towards tackling increasingly pervasive environment issues.
