Sarah Gordon: “There is still a misconception that delivering positive outcomes means you take concessionary returns.”


13 Dec 2023

The visiting professor in practice at the Grantham Research Institute at the London School of Economics and Political Science (LSE), tells Andrew Holt about making impact investing universal, the need for an oversight unit in government, the benefits of blended finance and leaving your comfort zone.

The visiting professor in practice at the Grantham Research Institute at the London School of Economics and Political Science (LSE), tells Andrew Holt about making impact investing universal, the need for an oversight unit in government, the benefits of blended finance and leaving your comfort zone.

You have experienced the practitioner side of investment at the Impact Investing Institute and now look at ways in which investment can change the dial on ESG. What conclusions have you reached on how investors can create greater sustainability?

It is encouraging that there isn’t an institutional investor who doesn’t think about ESG. They have different ESG approaches and the range is still broad, but 10 years ago there wasn’t much focus on what you could call ESG investment.

However, a lot of ESG is done through what I would call a ‘do no harm’ lens, rather than delivering a positive impact. And importantly, allocations dedicated to impact investing are tiny. We need a regulatory push to encourage institutional investors to dedicate more investment to positive outcomes. But some of that investment is achieving amazing results.

My research highlights that in the UK and emerging markets there are incredible examples of the impact that can be delivered alongside a solid financial return.

There are also some fantastic examples of asset owners and asset managers working with local authorities to deliver positive social and environmental outcomes.

But they are not universal. And they are not at the scale to deliver the impact to really deliver, for example, on the government’s Levelling Up policy demands.

Why are allocations to impact investing so small?

There is still a misconception that delivering positive outcomes means you take concessionary returns. We need to park that perception. There is also an important blocker around fiduciary duty: the duty of investment managers to responsibly look after their clients’ money and that, for many decades, has been interpreted in a narrow way as delivering a maximum financial return.

And that has discouraged investors, like pension trustees, to think more broadly about what outcomes they are seeking to deliver from their investment decisions.

We therefore need new guidance on fiduciary duty. The Impact Investing Institute, where I was CEO, and Share Action have come up with concrete proposals for what new guidance could look like.

How could the government help channel capital from institutional investors into ESG investments?

The work I have been leading at the LSE is advocating to the government: “Look, there is this real opportunity to mobilise private sector capital at scale for economic, environmental and social outcomes.” Different pockets in some government departments are working with private investors.

But there needs to be a commitment across government, and therefore, by central government to be much more ambitious about mobilising private investment for public policy outcomes. You need a manifesto commitment by the leading political parties to do that. We also need an oversight function within government on this issue.

What ideas have you put forward to government on this issue?

One of the proposals in my report is for a growth fund. There is a lot of interest in the leading political parties around mobilising capital, particularly from pension pots. What I have examined in my report is the different approaches and outcomes that public and private investors seek, the process of working, whether the different goals of a private investor and a public investor can be reconciled and trying to give agency to public and private investors, which is important.

What concerns me about some of the proposals out there for a growth fund is that they don’t necessarily respect the approach and the outcomes sought by different investors. I also talk about a UK community growth fund, because we need to channel far more private investment into the social enterprise and charity sectors. They are delivering fantastic positive impact and can deliver much more investment at scale.

So I am proposing a blended finance expertise and oversight unit in central government, working across departments and with private investors, which could oversee both funds.

How are pension funds doing in regard to ESG?

As with the institutional investment industry more broadly, there has been a positive shift in pensions towards being serious about ESG factors and integrating them into their investment principles. But it is more of what you might see as a negative screen, that ‘let’s do no harm’, or ‘let’s have some exclusions,’ rather than delivering positive outcomes.

And a lot of pension funds now have an explicit net-zero commitment, and some funds have been quite taken by surprise as to how much radical change that requires in their approach.

Asset managers often cite their ESG commitments, particularly on climate. Are they substantive in your view?

When we launched the Impact Investing Institute in 2019 the main question asset managers would always ask me was about the lack of standardised ESG and impact metrics. We should be encouraged by the fact that over the four years since, we have made enormous progress in moving towards much greater transparency and accountability across ESG.

We have had global developments like the International Sustainability Standards Board at the International Financial Reporting Standards Foundation – the first report at global sustainability standard setting.

We have also had regulatory developments in a number of countries and regions. In the EU, the Sustainable Finance Disclosure Regulation, along with other regulations, has provided more demanding frameworks.

What do you make of the backlash against ESG in some quarters?

What I find particularly unhelpful is the idea that ESG is somehow anti-economic growth. That is the way the debate gets framed in the US and a lot of that is from a Republican pushback.

But it is broader than that. A lot of the pushback against ESG is that it is a liberal agenda that only the rich can afford. I would tie the renewable energy argument to the growth argument. Using more renewable energy will actually contribute to people’s personal wellbeing and prosperity, which is incredibly important.

Does the social side of ESG get neglected?

There are many fantastic social impact investments going on. And in a way, the S pre-dates the E in terms of businesses and investors thinking about ESG.

If you take an organisation like the Co-operative Bank, for example, that was committed to ethical values and delivering positive impact – what we would now call positive social outcomes – a century ago. The S has an amazing history, and for me, it is not E versus the S. The E and the S are incredibly inter-linked and inter-dependent. We need to be driving the E and the S and, of course, the G going forward, but at a much greater scale and with far greater urgency.

The E is easy to define and measure, but that is not the case with the S.

It is a problem to be grappled with, but around the social side a lot of work has been done to help investors think through the standards to look at. But the E isn’t terribly easy either. Net-zero targets, while appearing to be simple, can be quite counter-productive.

If you look at the work of the Transition Plan Taskforce, for example, which is designing templates for transition plans, they have thought through how to think about the S as well as the E and how you integrate them. There is an increasing amount of guidance out there to help investors.

You have been looking at how a potential Labour government could mobilise capital from pensions and other investors for a social benefit. What have you concluded?

Rachel Reeves has come up with some incredibly exciting ideas for what a Labour government would do around mobilising private investment. One of the encouraging things is how the shadow cabinet is demonstrating a real willingness to work with the financial services industry.

That constructive collaboration, which seeks to work with the industry rather than against it, is absolutely critical in delivering flows of private investment towards the challenges that need that capital.

How can blended finance help Britain catch up on its climate challenges?

Blended finance is a broad approach. It means different investors, different types of capital with different types of risk and return expectations working together to deliver positive outcomes – whether that is a financial return, a socio-economic outcome or an environmental outcome.

The focus I take in my report is around the role that public money can play in providing catalytic capital, which then crowds in private investment. The Inflation Reduction Act in the US and the Green Deal and InvestEU in the EU are blended finance programmes using a range of tools, whether that is guarantees, tax credits, first loss capital or creating a market. The UK needs to catch up, as these programmes are putting it at a competitive disadvantage.

Why did you move from impact investing to the academic world?

At the Impact Investing Institute we worked to connect different parts of the investment spectrum to each other. For example, sharing the experience of social investors and the positive impacts they deliver, with mainstream investors. My work is still focused on doing that.

The project I am leading at the LSE is designed to encourage the UK government to be much more ambitious in mobilising private investment into economic, environmental and social policy priorities.

One of the key messages from the research which has just been published is how investors with different risk and return profiles, as public and private investors have, can collaborate closely to design financial solutions to pressing challenges like the climate crisis or social inequality.

So I don’t feel like I have moved from practice to theory, but that I am continuing to encourage collaboration between different types of investors and move investment that delivers positive environmental and social outcomes more into the mainstream.

What is the biggest lesson you have learned in your career?

There are two. Firstly, push yourself out of your comfort zone. I have found this gets more difficult as you get older but have never regretted doing so. I left journalism after a nearly 20-year career at the Financial Times in 2019, to move into the world of impact investing, which required learning a new set of skills, and exercising some different professional muscles.

But I have found it enormously rewarding. In particular, because of the huge amount I have learnt from the great people I have had the opportunity of working with in the last few years.

Secondly, collaboration achieves more than confrontation. And collaboration only works if you engage with other people with kindness and respect. I wish I could say I always practice what I preach, but I do try.

What are your aims for the future on ESG and personally?

I hope that investors in the future will, as standard, take environmental, social and governance factors into consideration when investing in assets. Not just the ‘do no harm’ approach, but that we recognise, and maximise, the positive outcomes of our investment decisions as well as financial returns.

Personally, I hope to get the opportunity to continue sharing the benefits of sustainable finance in addressing the climate and nature crises as well as social injustice and encouraging and energising more policymakers to work closely with private investors to deliver sustainable and inclusive growth.


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