WATCH: Is impact the key to ethical returns?

M&G's co-head of alternative credit, William Nicoll, talks to PDI about the challenges of defining impact investment.

Impact investing takes ethical investment beyond ESG by seeking out positive goods. Private debt has led the way in this strategy, but there are challenges in gaining widespread adoption. PDI talks to M&G’s William Nicoll about how to define impact investing.

See below for full transcript

What is the difference between impact investing and ESG?


The easy way to think about it is ESG is do no harm and impact is, let’s do some positive Good. So ESG is something that is easily applicable to public and private assets because you can look at the environmental, the social the governance standards, and you can follow through where companies are going. The impact is sadly a more difficult thing, because you have to be a measure a positive that comes from something, and without measurement you can’t discuss impact.

How do you define impact investing?


The answer is it took a long time. So we worked with a group called sustainalytics for well over a year to work with them as to what we thought that the main areas for investment would be, and then the criteria for each separate area. So if you’re looking for example at renewable energy, then then you’re looking at each type of renewable energy, and then then which kinds might work best. So for example small hydro electric schemes are quite attractive but a very large hydroelectric scheme may actually do more damage than good when it comes to the flooding that you’ve had in the local area.

Why is M&G getting into impact investing?


We’re not getting into the impact investing space because we’ve been there for a long time already. We have done about £20 billion+ of investments that are actually impact investments. What we haven’t done before is we haven’t codified what we thought an impact investment was and so the real difference that we’ve had over the last few years is to define what impact asset is, and then to start looking for new investments that fit that criteria so that we can then be very clear that the impact is satisfying the criteria that we have. And that it’s measurable.

Has adoption of ESG helped boost interest in impact investing?


I think it’s almost certain the ESG helps to bring the whole idea of sustainability, the whole idea of having correct impact of assets, through to the forefront. And one of the things that we’ve seen clearly over the last few years is that ESG indices have appeared. So you see people like MSCI and Sustainalytics produce things that were indices that were properly in terms of allowing people to invest against them. So that is clearly a positive. There is then the next jump through to proper impact investing so you can measure the good coming through. But all of this is a big continuum and if you think about where we were 10 years ago when we were just talking about ESG and talking about governance really they were they really weren’t talking about the E and the S at all, it was all about governance, and the move that we’ve had from them through to environmental, through so to social ideas, it has been quite dramatic and now we are at the stage of I think almost every pension scheme and certainly any insurance company will be talking about these things. And the next stage will probably feels to me that we’ll start getting allocations into those areas.

Why is private debt a good vehicle for impact investment?


It’s very hard to measure the impact from public debt. And the reason for that is you’ve got big companies borrowing £100-200 million and it’s very hard to track where that money goes. So if you have a large company it’s very unlikely that that company is going to be doing just one thing and therefore it becomes very quickly muddy very difficult to measure and therefore to say hand on heart that you’ve really given the impact is quite difficult. When it comes to the private arena then then you’re normally speaking to the borrower directly and therefore you can have a very rich conversation which includes all the discussion about how you’re going to tell me what you’ve done with the money how am I going to measure it and how can you help me to measure it and what are the right ways to measure it. So I think in that way private debt allows you the measurability that you don’t get elsewhere and also allows you that certainty that your money really is going to impact. I think that’s what’s important.