"Impact investing is also possible in liquid markets"
Among investors, the term "impact investing" is currently in high demand, as reported by Michael Schmidt, board member of the DVFA (Financial Professionals Association), in an interview with the Börsen-Zeitung. However, market participants have very different interpretations when they use the term "impact". Therefore, the DVFA aims to provide orientation with a guideline released on Tuesday on how investors can generate real impact and transparently report about it.
Gunnar Friede, head of the DVFA's Impact Committee, explains that, from the organization's perspective, three essential conditions must be met. "There are three central criteria that impact investments must fulfill: they must have a positive effect, be demonstrable, and be intended by the investor," emphasizes Friede. According to the DVFA, a criterion that focuses on the additional impact is not practical. Demonstrating such additionality is nearly impossible in practice, both for liquid and illiquid asset classes. “The concept is too abstract”, criticizes Friede.
Also feasible in liquid markets
In the heated discussion about whether impact investing is effective solely in illiquid assets, since disinvestment in liquid holdings merely entails a change of ownership and engagement might only yield results for exceptionally influential investors, the DVFA presents a markedly different viewpoint. "Impact investing is viable even in liquid markets," asserts Schmidt. He underscores that "it is not solely confined to the specialized realm of illiquid investments."
The association's guide for institutional investors extensively delves into the question of impact investing channels. As Schmidt clarifies, there are various channels through which impact can be generated. Capital allocation is obviously a significant lever. "When investors provide liquidity or, conversely, decide to divest, it can have a positive influence on the impact of target companies," argues the DVFA board member.
"Voicing" and "voting"
Research indicates that engagement, such as active dialogue with companies to encourage more sustainable practices, is considered particularly effective. In addition to "voicing," the exercise of voting rights is also a channel to generate impact, emphasizes Schmidt.
Regarding the measurability of impact-oriented investments, Friede states that it's important to differentiate between "company impact" and "investor impact." Company impact describes the effects a company has on the environment and society, such as enabling other businesses or customers to reduce their environmental footprint or contributing to addressing social challenges through its products and services. On the other hand, investor impact expresses the sustainable change in a company and its business model, provided it has been brought about by an investor's activity.
"Company impact" and "investor impact"
Friede asserts that company impact is transferable because the real-world impact of companies continues even when ownership or financiers change. New investors ultimately contribute to sustaining the company's activities that have a positive impact. Thus, company impact cannot be lost due to a change in investors.
In contrast, Friede notes that the investor impact is attributable to a specific investor only and is therefore not transferable or inheritable. "But if the engagement proves successful, and the company undergoes transformation, the investor impact becomes a transferable company impact," explains Friede.