Heather Langsner is the former
director of sustainability research at Riskmetrics, which she joined from
Innovest, the preeminent ESG research house acquired by Riskmetrics in March
2009. Langsner is now a portfolio analyst for a clean tech hedge fund.
She shares here her unique perspective
on the challenges facing the new generation of impact investing
analysts who are undertaking initiatives to measure social and
environmental outcomes and to create rating systems for impact investments.
The first thing that comes to my mind is
that ESG and impact investing are both similar and very different. Like
ESG investors, impact investors seek to identify and evaluate information,
which currently has no standards for measurement or market pricing.
Where ESG analysis differs from impact
analysis is the focus. ESG analysis seeks to reveal hidden risk and opportunity
information about sectors and companies. As a former ESG analyst I was using
conventional equity valuation techniques to try to express the impact of ESG
issues on share price.
A project result is the focus of impact
investors – literally, “is the business idea yielding a specific, measurable
social or environmental benefit?” So, for example, a B-Corporation like
Seventh Generation is now marketing measurable impacts. Seventh Generation is
saying if you use our product you save x amount of trees – and we also provide
returns on equity. [Editor’s note: Seventh Generation is among over 255 companies,
totaling over $1 billion in revenue in 54 industries, that have achieved B-Corporation status under a social and environmental rating system developed
by B-Lab.]
ESG analysts focus typically on large-cap,
publicly traded companies in all the conventional industry sectors evaluated by
Wall Street. They are trying to add something new to conventional equities
valuation while impact investors are trying to establish new kinds of business
models. Impact investors are focused on small-cap, pre-revenue companies
started with a social or environmental concept as the basis for the
business.
So ideally in the future as this concept
is proven, investors who are completely focused on profit and agnostic to
environmental and social issues would be looking for business models like this
where profit and social benefit are one in the same, inextricably linked.
It is imperative that something like IRIS is set up to demonstrate to markets that companies based on social and environmental concepts yield profit and sustained growth opportunity. If they can make it work, who wouldn’t love this! There are a number of companies on the B-Corporation website which seem to demonstrate this already. So this field is very much a “start up.” ESG research is now in its teenage years, and having identity issues. Impact investing analysis is still a toddler and still needs a lot of help. [Editor's note: The Global Impact Investing Network, in partnership with The Rockefeller Foundation, Acumen Fund, and the B Lab, is spearheading the Impact Reporting and Investing Standards (IRIS)]
But fair warning, ESG research is still
having a hard enough time making its market. I would probably just say
that in terms of marketing itself, impact-investing research is where Innovest
was in 1997. Back then, we were just getting our start in trying to sell
this specialized kind of research to the mainstream investment research
community. I would think that IRIS would be targeting the venture capital
community, which is culturally more open to new ideas and in taking hold of an
interesting concept. We sustainability analysts were trying to sell to a
community that was inherently inculcated with the notion that the information
we were offering was counter to their fiduciary responsibilities. Promoters of
impact investing may find it a little easier to get something going with
venture capitalists I would think.