Wellington Management's Campe Goodman discusses how to channel capital towards the most beneficial projects.
The world faces diverse challenges from climate change and rising sea levels to the lack of affordable housing in developed economies. Some challenges threaten the planet, others threaten people - three out of ten people in the world lack safely managed drinking water.1
Impact bond investing is the segment of sustainable investing that channels debt market capital towards solving these challenges. The size of global debt markets means that impact bonds could be a huge lever for change, says Campe Goodman, who manages Wellington's first impact bond fund. But how can funds like Goodman's prioritise and measure the impact of investments?
Planetary priorities
Boston-based Goodman says that impact investing should address three categories of urgent global challenge:
• Life essentials, e.g., access to basic needs such as clean water and housing
• Human empowerment, e.g., education, financial inclusion and bridging the ‘digital divide'
• Protection and improvement of the environment, e.g., through renewables and recycling
Goodman, who has contributed to community services around Boston for more than 20 years, is particularly passionate about human empowerment. But he argues that impact investing also demands rigour.
To be selected for Wellington's new fund, an investment must address one of Goodman's three impact categories and be ‘additional' in that the impact can't be easily achieved in other ways.
Critically, the bond's impact on the world must be measurable through a quantitative key performance indicator (KPI), such as the amount of CO2 or methane emissions avoided, the percentage of charity care provided by hospitals, or the units of additional affordable housing constructed.
Mission to measure
Goodman thinks investors need KPI information to steer capital in the most beneficial direction. "If I were to put $100m in a particular investment, what impact would I get and how would I compare that to other investments?" he asks.
At the moment, issuer reporting varies in form and quality. "Building common standards and ways to report KPIs is Challenge Number 1 and could help the market grow," Goodman says.
KPIs will also reassure investors. "The fear of greenwashing is a bigger challenge to impact investing than the limited scale of the greenwashing itself," he says. Most greenwashing issues can be solved by thoughtful managers who look hard at what they are buying, including using KPIs. "So we will work with issuers to create KPIs," he says, "but if no credible KPIs result, our fund will disinvest."
Source:
1 See UN World Water Development Report 2019, Leaving No One Behind, p.18
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