Impact versus ESG: Two family offices present their views
Even as sustainable fund flows are sliding, impact investing flows are rising.
And at least some family offices are supportive of that trend.
“Impact investment resonates more closely with my single-family office values versus ESG,” Veronika Linardi, chief executive officer of Singapore-based single family office Togs Capital, told AsianInvestor.
Sustainable funds globally attracted net inflows of just $59 billion in 2023, a significant drop from the inflows of $166 billion the previous year, according to Morningstar’s latest Global Fund Flows.
READ: ESG fund flows slump, Asia bond funds see outflows in 2023
By contrast, the impact investing market has exceeded $1.16 trillion in assets under management (AUM), up from an estimated $715 billion in 2020 and $502 billion in 2019, according to an October 2022 report by the Global Impact Investing Network.
ESG or sustainability approaches primarily assess a company's internal practices that prevent harm, while impact investing is said to prioritise the external impact generated by investments. Target companies often maintain a commitment to responsible operations.
Sustainability and impact preferences remain subjective and need to be considered alongside asset owners’ traditional financial objectives and constraints, Linardi elaborated.
“Many ESG investments adopt a 'No Action, Talk Only' approach, using ESG compliance as a veneer to attract investors, rather than embodying genuine intention,” Linardi said. “Their focus is on regulatory compliance and appealing to a specific investor demographic, rather than effecting meaningful change.”
The lack of standard definitions for terms such as “sustainability” and “impact” adds to the challenge of accurately determining the preferences of investors. Impact investment and ESG investing approaches also overlap significantly in certain sectors.
For another Singapore-based single-family office, Xin Family, investment impact comes with its own set of success metrics.
“In impact investment, the primary focus is on the technological or business model that plays a critical role in generating the intended impact. This impact must be quantifiable and, from our perspective, economically substantial and enduring,” said deputy CEO Ken Chew.
However, not all investors are sold by the approach. The Schroders 2023 institutional investor study showed there was significant interest in impact investing but that it lagged behind other approaches, such as engagement and voting or thematic investing.
CLOSER TO INVESTMENTS
Greenwashing allegations against some companies have led to a more cautious stance towards ESG investment.
Greenwashing behaviours can be split broadly into two categories, according to Claire Herbert, Asia Pacific Sustainable Investment Director at Schroders.
“Firstly, intentionally misrepresenting the sustainability of a product or service; secondly, a difference in views on what is deemed to be sustainable. To me, transparency is important to combat both categories of greenwashing,” Herbert said.
Regulation and investor demand are two reasons disclosure and transparency are on the rise, a trend that is playing out actively across markets globally, she noted.
The seemingly exponential rise in disclosure regulations in recent years – for both underlying companies and investment products – are likely to alleviate concerns around greenwashing, particularly in listed markets, according to Herbert.
In private markets, where impact investing has historically had more of a presence, investors often have a closer relationship to the underlying businesses or projects in which they are investing.
While standardised disclosures may be lacking, investors ultimately can be satisfied about the level of transparency, reducing the risk of greenwashing.
“The susceptibility of impact investing to greenwashing compared to ESG depends on the context, including your relationship with the investments, available disclosures, and whether you have enough information to ensure alignment with your sustainability preferences,” added Herbert.
TECH ADVANCES
As investors move to align with sustainable development goals, technology has been emerging as a potent tool to drive progress, enhance transparency, and enable effective measurement of ESG.
“Conducting due diligence on data reliability and founding teams remains a challenge,” Linardi shared. “We leverage emerging technologies judiciously to enhance efficiency in achieving our overarching goals.”
According to Herbert, automated systems can be used to collect and distribute data, which would improve the overall quality of ESG data.
“We are also seeing more innovative initiatives starting to develop, such as geospatial mapping to help identify biodiversity-related impacts for nature-specific SG goals and impact,” she said.