Greater Access to Private Impact Investments: Historically, it has been challenging for many investors, especially smaller retail investors, to access private impact investments. However, this is changing, and I expect this change to accelerate going forward, such that in a few years, nearly any investor will be able to access private impact investments. This kind of evolution will require innovation in security structure, distribution, and in the regulatory environment. We will likely need new fund structures to invest in these private investments, innovative distribution platforms, and regulations will need to evolve to ensure that investor protections are maintained as the investor base is widened.
Reynders McVeigh: This trend to democratize the resources to be an effective social investor will hopefully accelerate in the coming years. While the focus has largely been on shareholder campaigns and the screening of stock portfolios, we believe the next development will increasingly look at how social investors can shift capital into community-based impact investments that support environmental sustainability, gender diversity, and ownership at a local level.
Silk Invest: Over the next few years the industry should see more focus on the quantification of the results of ESG strategies instead of a focus on investment criteria or filters. This should result in the development of clearer “KPI’s” that quantify ESG objectives, results, and impact outcomes. As an endgame, investor portfolios should track both investment returns and ESG KPIs.
Zeo Capital: What we need is less innovation and more authenticity. Philip Morris International announced in August 2021 that it would be issuing an ESG bond claiming, “business transformation-linked financing” (that’s marketing spin if I’ve ever heard it). I’ll give it to Philip Morris International, it is innovative. But they would not do it if there wasn’t a market for it. And that’s the troubling part. What ESG investor believes Philip Morris belongs in an ESG portfolio?
Here’s another example: Green Bonds. The structure of Green Bonds might be the biggest offender of a supposed “innovation” because the penalty for missing goals is usually a higher coupon. If a portfolio contains bonds most likely to miss their “green” targets, it will generate a higher total return. What investment manager would choose to make less total return and work against their personal incentive structure? Exactly my thoughts…no one. A more aligned ecosystem would be one in which ESG triggers were set up as covenants, accelerating repayment of debt if a company fails to meet them. This would result in ESG factors impacting credit ratings, which would finally force the credit markets to face the reality that ESG factors are credit factors—but unfortunately, we do not foresee that evolution over the next few years.
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