Improve the world, start with your retirement fund!

What exactly does a sustainable investor buy? The previous column on this site by Harald Walkate stimulates thinking about the motivations of a sustainable investor. Ultimately, these can be reduced to (a combination of) these 3 objectives.

Drivers of a sustainable investor

• A good night’s sleep; sustainable investors apply a “moral bottom line. For example, they do not invest in tobacco companies or the fossil fuel industry because of the social harm these companies cause.
• Better returns or lower risks; of course, this objective is not reserved for the sustainable investor; every investor will want to avoid risks and therefore ESG risks as well. And every investor wants to make returns and thus also take advantage of opportunities arising from sustainable trends wherever possible
• A better world; in addition to a financial return, the sustainable investor explicitly pursues a social return to be specified.

On this last point, the sustainable investor will have to think carefully about exactly what social impact it wants to achieve (ecological, social, close to home or far away?). And then how this can be realized.

Most sustainable funds invest in public markets. Investments are then made in publicly traded companies (secondary market). This means that the money from the mutual fund buying shares of sustainable companies does not go to those companies themselves, but to the sellers of the shares.

So in that case, the money does not flow directly to the companies themselves, which would enable those companies to do good things for people and planet. And that is exactly what investors who want to contribute to a better world are looking for. “Additionality” is called this: the investor’s money invested sets in motion activities that would not have happened without that investor’s new provision of capital.

Within the concept of “Additionality,” a distinction is made between “investor contribution” and “investee contribution.

• Investor Contribution is the investor’s contribution. In addition to the investment itself (financial resources), this includes added value such as management support, expertise, a network and strategic advice. The purpose of investor contribution is to strengthen the company and stimulate its growth and impact. Engagement is also included here; the investor can make a difference through dialogue, demanding improvements and possibly even escalation.
• Investee Contribution is the company’s own contribution. The investee company, project or organization realizes concrete results, growth and impact. In addition to financial results, the broader goals of the sustainable investor are crucial here, such as social impact or the success of a specific project. To be clear: impact with a net positive social value.

Public and private markets

The investor contribution differs between public markets and private markets. In public markets, the potential contribution will on average be smaller and the voice and influence on the impact to be realized more indirect. In private markets, the possible contribution is on average larger and the voice and influence on the impact to be realized more direct. For example, financing conditions (covenants) as well as business operations can explicitly focus on achieving impact goals. Significant influence is realized through the size of the investor’s stake in the company (possibly in cooperation with several like-minded investors), which is strongly determined by how essential the financing/investment is to the company. This can be a function of the size of the investment, as well as subordination or maturity, for example. The more important the financing is to a company, the more you have a say. In addition, your influence is also determined by your knowledge and expertise (the more you understand about the company and the industry, the more relevant your advice will be) and your relationship of trust with the company.

Thus, when the investor wants to contribute to a better world with the goal of enabling sustainability solutions that would not otherwise have been possible, on average, a greater investor contribution can be achieved by investing in private markets. In this primary market, the investor’s money goes directly to a project that, for example, builds wind turbines or provides microfinance. Thus, unlike investments in public markets, there is no “a seller of the shares” on the other side of the transaction there.

Access to private markets

Private market investments are not or very difficult to access for the vast majority of private investors. However, private investors can make a major contribution to a better world through their pension fund because;

1. Probably most of the total capital of private investors is in their (personal) pension pots.
2. Their pension fund does have the ability to invest in private markets.

Quantifying the social impact (positive and negative) of an investment is complicated, but this is a field that is developing very rapidly. More and more data on the positive and negative impact of the activities of companies (both public and private) is rapidly becoming available. This provides a wealth of information that should also be used to better assess the extent to which investment funds and pension funds actually contribute to a better world.

Impact of private sustainable investor

Translating those positive and negative impacts into understandable language to the investor is crucial in this regard. This enables that investor to make informed choices about how to make the greatest contribution to a better world. That investor is often also a pension fund participant and thus holds an important key. I am convinced that the investor contribution and impact of this private sustainable investor turns out to be greatest by engaging more actively with his pension fund as a participant!