For ESG investing, the emphasis is mostly on the environment and climate and much less on social impact - issues such as education, poverty reduction and equity. "This means that investors are missing out on return opportunities,” according to Hadewych Kuiper, Managing Director of Triodos Investment Management. “To create real impact you need both social and environmental outcomes.”
Triodos IM invests with a holistic view of sustainability where people and the environment are treated equally. This is why we look as much as possible for companies for our investment portfolios that have a positive impact in both areas. Kuiper: "Consider investing in an organic farm that provides employment for people with psychiatric or psychosocial problems or learning difficulties. A company like this contributes to making our food system more sustainable while at the same time giving people with a distance to the labour market the chance to participate in society and develop personally and professionally."
Kuiper: "However, most of the money in the market flows into green investments: into the environment and, more recently, into climate. These are themes that most sustainable investors understand and are familiar with. Green investments are also often more tangible and easier to link to financial returns; for example, investments in solar and wind energy." In contrast, investments with a social component are often less measurable. The social aspects in the UN Sustainable Development Goals (SDGs) are quite broad, such as ‘no poverty’ and ‘no hunger’.
European legislation now threatens to increase this lacking social component in socially responsible investment (SRI) by focusing transparency requirements mainly on the green content of investments. As a result, the social component can unintentionally get overshadowed, when it deserves more attention. Kuiper warns: "You can't separate the E from the S".
People and the environment are connected
The world faces enormous challenges, from rising inequality to climate change and biodiversity loss. These challenges are often interrelated. The solution usually lies in a combination of environmental and social aspects, argues Nikkie Pelzer, Impact Manager at Triodos IM. “If you focus on the climate by setting up a wind farm but ignore the social aspects, such as the local area, you will be less successful. What you can do is allow the surrounding area to benefit from the wind farm by setting up an energy cooperative for example."
Kuiper also recognises the same connection in developing and emerging countries: "Sustainable energy solutions often go hand in hand with improving the quality of life here. For instance, farmers can use solar panels to generate local energy to irrigate their land. In Nairobi, I spoke to an entrepreneur who uses a biogas plant to generate energy from her cow dung. The impact is less use of fossil fuels and an entrepreneur who is fortunate because she is not affected by increased diesel prices."
Products and services that improve people's lives while addressing environmental issues have a big impact, Pelzer says. “Making your own home more sustainable is financially easy for the elite and the middle classes. However, for a complete and successful transition to a sustainable housing stock and a flexible, clean energy grid then you also need entrepreneurs and housing cooperatives to make things like solar panels and insulation accessible to low-income groups. Companies who do this have a bigger impact and are good to have in your investment portfolio."
European legislation pays little attention to social investment
As of 1 January 2023, sustainable funds must indicate which part of the portfolio is green or complies with the classification of the EU taxonomy. This is a good incentive to direct more capital towards sustainable investments. As yet, however, this incentive is lacking for social aspects.
Pelzer: "European regulations require asset managers to classify every investment: is it green (environmental) or social? Usually a fund will opt for green, even if the investment is partly social. Primarily because social objectives are not in the EU green taxonomy and therefore do not provide a more sustainable rating. In addition, green is easier to define and can be easily linked to a company's revenue stream."
While a social taxonomy is in progress, Kuiper says the question is whether the EU will actually implement this in legislation. Triodos IM strongly supports doing this. "In our view, this would lead to a double assessment of an investment fund: the green content as well as the social content, so that investors can get a better picture," Kuiper said.
Call to the financial sector
The social impact of an investment does not currently lead to a recognised sustainability rating, there are fewer investment opportunities in social than in green investments and social aspects are more difficult to link to financial returns. Kuiper argues that so much more can be achieved with the combination of social and environmental objectives when it comes to impact. “You will achieve real impact with environmental and social investment. Investors and projects that take both into account are the real game-changers."
Kuiper: “Remember that you won't get far with environmental and climate goals if you don't keep an eye on the social aspect too. For the sustainable transition, you need everyone, including the lower-income groups who cannot make their homes sustainable right now because they can't afford it. This division in our society is a serious problem with far-reaching consequences."
The financial sector has a big responsibility, concludes Kuiper. "We need to make sure that capital gets to where it is really needed and where it makes the most impact. This means not just for easy or easily measurable projects. As a sector, let us strike a better balance between environmental and social aspects. After all, there are plenty of opportunities for investments with impact on both fronts that also provide a good financial return."