Robert G. Eccles, Visiting Professor of Management Practice, Saïd Business School, Oxford
Please give us a bit of background on yourself, and how your organization plays a leadership role in the impact investing space.
I am an academic at my core, but am interested in research that has direct implications for practice. I backed into the investing world through my decades-long interest in corporate reporting. I wrote the first book on integrated reporting (One Report: Integrated Reporting for a Sustainable Strategy) that was published in 2010 and a second one (The Integrated Reporting Movement: Meaning, Momentum, Motives, and Materiality) published in 2014. My co-author on both books, Mike Krzus, and I are now working on a third. From reporting, I “backward integrated” (no pun intended) into what a company must do to have a sustainable strategy, meaning that is factoring the material environmental, social, and governance (ESG) issues into the core of its corporate strategy. This led me to thinking about what investors need to do to factor ESG issues into their investment process. For the past 10 years the focus of my research has been on how to improve ESG integration by both companies and investors.
How well are companies adapting to the mainstreaming of purpose-driven finance?
This question reflects more optimism than reality, I’m afraid. For a long time the corporate community was more advanced than the investment community when it came to “sustainability.” Admittedly, there was (and is) a lot of variation and much of this was “sustainability programs” not connected to corporate strategy. However, in the past few years, interest in the investment community in “sustainable investing” has grown rapidly. Yet companies would say that they are still feeling more pressure to generate short-term returns than to respond to concerns about how well they are managing material ESG issues. “Purpose-driven” finance, which I interpret to be an investor focused on impact as much as returns, has hardly gone mainstream. Thus, there really isn’t anything for companies to respond to here.
What ways is impact investing making headway, and where is it lagging?
Not to be cute, but it really depends on what you mean by “impact investing.” For example, is this the same thing as “purpose-driven finance?” Like “sustainability” “impact investing” means different things to different people. Traditionally, impact investing was a private market activity of relatively small investments for specific projects which often weren’t expected to earn a market-level of return. It has now become a quite common term among some of the largest asset managers in the world. This would be a clear sign that it is making headway. The flip side of this is a lack of clarity about just what this term means today; this is the lagging side of the coin. At the very least, any investor using the term should be clear about what it means for them. Back on the headway side, I think growing investor interest in the opportunities created by the 17 Sustainable Development Goals will also add to the momentum of impact investing. Another thing which could is if the multilateral development banks, like The World Bank, figure out how to leverage private capital, turning “billions to trillions” in the current phrase. This will require overcoming some big hurdles including the lack of knowledge these MDBs have about the private sector, figuring out the right structures for de-risking these investments, and developing a pipeline of enough viable projects of sufficient scale to match the size of investments the private sector wants to make. One last area of headway is the work being done by the Principles for Responsible Investment in its “Fiduciary Duty in the 21st Century” initiative which shows that fiduciary duty actually requires ESG integration rather than precluding it.
What challenges do you see for the future of purpose-driven finance?
Again, it depends on what you mean by this term. If it’s the same thing as “integrating ESG factors into investment decisions,” the single biggest barrier is the lack of reliable and comparable data on ESG performance. I discuss this in a paper “The Investing Enlightenment: How Principle and Pragmatism Can Create Sustainable Value through ESG” I wrote with Mirtha Kastrapeli of State Street. Organizations like the nonprofit Sustainability Accounting Standards Board (SASB), where I was the Founding Chairman, are addressing this issue. SASB has identified the material ESG issues of interest to investors for is classification system comprised of 10 sectors which subdivide into 79 industries, along with the recommended key performance indicator (KPI) for reporting on them. It will be a long time before a majority of companies are following their guidance and probably even longer before the Securities and Exchange Commission will ever require, or even recommend, that they do so. In the meantime, proxies for corporate reporting are emerging. For example, the big data sustainability company TruValue Labs (for which I’m an advisor) has worked with SASB to apply its technology of taking unstructured data from the Internet to generating metrics through the SASB lens of materiality. Impressive as this work is, it is just a step in the direction of measuring impact, which is the current frontier. Impact is a measure of the positive and negative externalities generated by these outcomes. For example, an outcome is jobs created. The impact would be things like improved living standards in the community or an increase in the number of children graduating from high school. The Investment Leaders Group at the Cambridge Institute of Sustainability Leadership is doing some good work here, like it’s report “In Search of Impact: Measuring the Full Value of Capital.”
What do you think can add to the current momentum for making impact investing even more mainstream?
We’re beginning to see the activist hedge fund community getting serious about ESG and impact investing. The fact that a number of hedge funds have recently started talking about this is telling. I doubt they consulted with each other on this. It’s kind of popped up all of a sudden and the Financial Times even wrote an article about this right after Christmas. It’s easy to be cynical and say that hedge funds are embracing ESG as a form of greenwashing and because they know that their LPs increasingly care about this and so they’re wrapping themselves in ESG for fund raising purposes. But if enough of them are really serious about this, it’s a very big deal. What they call “activism” the impact investment community calls “engagement.” Think of activism as a very proactive and sophisticated form of engagement. Historically, activist hedge funds have seen the “G” in ESG as a way of unlocking value. There’s no reason the same can’t be true of the “E” and the “S.” I can’t think of anything that would make impact investing more mainstream than having the activist hedge fund community embrace it. While it’s still way too early to tell about this for the activist hedge fund community as a whole, I can cite one example where it is definitely for real. This is the engagement campaign JANA Partners and CalSTRS have launched to encourage Apple to offer parents more tools to help avoid the potential unintended negative consequences of personal device usage by children and teenagers. I am pleased to be helping them with this and raising an impact investing fund as a member of the Advisory Board for this fund. Other members are Sister Patricia A. Daly OP, Sting, and Trudie Styler. JANA and CalSTRS delivered a letter to the company’s board of directors on January 6 and in just a few days we’ve already seen some very good progress with two excellent articles The Wall Street Journal written by David Benoit: “iPhones and Children Are a Toxic Pair, Say Two Big Apple Investors” and “Wall Street Fighters, Do-Gooders—And Sting—Converge in New Jana Fund” and a number of other publications. By the time of the conference, I’m sure I’ll want to give the audience an update on where things stand with this campaign.