Do you know the recipe for listed impact investing ?
Now, as more and more locked-down apprentices are turning in their aprons and leaving things to the more seasoned chefs, we’ve decided to share a recipe with you that’s close to our hearts. We’ve been working on it for almost five years. It’s listed impact investing. Many in the asset management industry have dabbled in it without really finding the right formula. We must admit, it took us some time, and a healthy dose of conviction.
Intentionality: Choosing your ingredients
To make a great dish, you have to meet three conditions: the right recipe, the right ingredients, and the right crew in the kitchen. It’s no different for impact investing. The recipe is the manager’s original intent, which must be as clear as possible and add to the investments’ impact. Next, the methodology must be carefully chosen, and all necessary resources deployed to apply this demanding investment approach. Finally, it’s essential that the product have high-quality governance, with both a committed management team and outside experts to provide checks and balances. As a “chef” in the kitchen, we can add an original touch that will make the difference and render the final product unique. For example, a portion of management fees can be redistributed to positive-impact projects.
Additionality: Quality of the preparation
A proven recipe, the right ingredients, and a crew of enthusiasts is good – but it’s not enough. For the magic to happen on the plate, the chef must draw on their patience during the preparation, giving the ingredients time to fully express themselves. Attentive down to the smallest detail, they sometimes also have to be able to break the codes! These principles transpose beautifully to impact investing. In terms of the timeline, we generally find that at least three years is needed for each invested company to implement its strategy and increase its impact tenfold, expressing its full potential. During this period, the manager’s support of these companies is critical as they move towards a growing positive impact. Finally, there may be a review of which companies to support, to choose those that are not necessarily in the spotlight but might be even more deserving than others of such support through their transition. Just as a chef would buy from small farmers who are local or going organic, these different considerations make up what is called additionality: the ‘extra soul’ of any impact approach.
Measurability: Time for the tasting
After the preparation comes the crucial moment of tasting – when the food critics will have their say. Will the combination of the ingredients come through in the flavour? Will the result be worthy of the resources, passion and energy that went in? In impact investing, this is known as impact measurement. There should be enough transparency for clients to be sure that the impact generated by the fund and the portfolio companies lives up to the product’s original promise. Just as a tip rewards a high-quality dish, part of the manager’s variable compensation can be indexed to the achievement of this impact objective.
Like any self-respecting chef, we work to improve our recipe year after year so that our two impact funds can serve an ever-greater environmental and social impact: Echiquier Positive Impact Europe & Echiquier Climate Impact Europe.
If you enjoyed this taste, you’ll want to know more about the impact doctrine of La Financière de l’Echiquier as laid out in the third annual Echiquier Positive Impact Europe impact report.
ESG analysis is not a selectivity requirement. The funds mentioned are primarily exposed to the risk of capital loss, equity risk and discretionary management risk.
By Coline Pavot, Head of Responsible Investment Research, La Financière de l’Echiquier, June 2021
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