The SEMBA curriculum involves the study of finance through the lens of sustainability, and is supplemented by workshops that include the exploration and discussion of impact investing. This post was written by SEMBA Advisory Board member Rob Morier, Managing Director, Head of North America at Global Evolution.
Institutions and individuals, from the trading desk to the university classroom, are rapidly adopting impact investing. The proliferation of funds and research has been a welcome revolution in the asset management industry. Investors have more options and information available to them than ever before as asset management companies and investors hurry to catch a rising tide of opportunity. As defined by the Global Impact Investing Network (GIIN), impact investments are investments made into companies, organizations, and funds, with the intention to generate social and environmental impact alongside a financial return. While traditional business practices may perpetuate the idea that an organization must choose between doing good and making money, impact investments don’t carry the weight of that trade off, as the intention is to do both.
Although public and private equity markets have been the primary focus for impact investors and asset managers as they set their strategic investment goals pertaining to their mission or value related investments, fixed income has slowly moved from a minor to major player in terms of impact opportunities, despite being a cornerstone of traditional asset allocation models.
Fixed income impact investments have been primarily focused on areas of the market where investors believe they can address specific social and environmental challenges, which ultimately benefit long-term outperformance.
- Local government issued municipal bonds funding projects such as schools, hospitals and public infrastructure have been an area of focus in the impact arena.
- Corporate bonds have carried forward the application of ESG integration commonly used among public equity managers via positive (best-in-class) and negative (exclusionary) screening.
- Green bonds focus exclusively on the environment, and are being issued more frequently for finance projects focused on climate change and other environmental opportunities.
- Private debt has also expanded its impact on private loans, project finance, micro/SME finance funds and other innovative financing structures such as Social Impact Bonds and Development Impact Bonds across geography and industry.
A significant area of the investable market which has received less attention in regard to impact investment opportunities are sovereign bonds issued by governments. Perhaps the size and scale of those countries issuing the debt result in the belief that more immediate impact can made from smaller, more manageable starting points. For larger more developed markets, this may be true in the near-term. However, for those countries starting from lower levels of development such as emerging and frontier markets, the opportunity to affect change and create impact investing opportunities is a key driver in which our firm, Global Evolution, is focusing.
Global Evolution has discovered solid econometric evidence that there is a clear link between improving ESG dynamics and returns in emerging and frontier market sovereign bonds. Global Evolution’s research was initially disseminated and debated in September 2015 at a joint conference with the World Bank and the United Nations, effectively launching a new area of research on investor incentives, financial markets and sustainable developments. Global Evolution has determined that countries investing in ESG improvements will increase investor confidence and attract financing and capital inflows, thus reducing sovereign borrowing costs and debt servicing burdens. Such dynamics effectively increase fiscal space and growth potential, making them likely to outperform.
I first met Global Evolution eight years ago at a CFA conference in Copenhagen. At the time, I was running the European and Middle Eastern business for Artio Global (formerly Julius Baer Investment Management) out of London and was interested in meeting new and interesting asset managers in Europe, particularly when their focus was Emerging and Frontier Markets in regions such as Sub-Saharan Africa and Central America. Global Evolution’s investment philosophy remained with me as I progressed in my career and subsequently drew me back in touch with them after returning to the United States.
In addition to Global Evolution’s singular focus on Emerging and Frontier Market Fixed Income, I was impressed by their commitment to making a positive impact in the markets in which they invest. Even in the mid to late 2000’s, impact investing was relatively nascent in the US market, at least from today’s standpoint. Although an ESG philosophy statement has become an obligatory slide in today’s marketing presentations, sustainable and/or impact investing was not as commonly found as it is today. Nordic asset managers such as Global Evolution and investors such as Norges Bank have pioneered aspects of sustainable research and responsible investments, which are very much woven into the social and cultural fabric of Northern Europe.
Global Evolution maintains a commitment to leaving a legacy of impact investing through their Emerging and Frontier Market portfolios, which they believe assists in lifting developing nations out of poverty. The firm was an early adopter of the United Nations-supported Principles for Responsible Investment (PRI) and remain an important member of the PRI sovereign fixed income-working group. Global Evolution’s pioneering ESG-research has also resulted in its board membership and chairmanship of PRI’s Advisory Committee on Credit Ratings (ACCR).
Global Evolution’s approach to impact investing focuses on the following factors:
Debt investing alleviates poverty: The process of responsibly investing in government debt, especially in early stage emerging and frontier markets, has an extraordinarily positive impact on poverty alleviation.
Raising productivity levels: Increasing human productivity has led to the historic rise in average living standards under industrial capitalism and the subsequent alleviation of absolute poverty in many countries.
Building physical and human infrastructure: Once physical security is established we believe that electricity adds more to an individual’s productivity than any other form of investment. Building other physical infrastructure such as roads, rail, ports, telecoms, water etc., along with health and education delivery, also has a huge impact on productivity.
Government investment is key to early stage industrial take off: At early stages of development much of this investment is government sponsored and financed by their borrowing.
Capital market developments lower investment costs: Developing local capital market and attracting foreign portfolio flows reduces the costs of debt financing.
Getting the macro-policy mix right lowers investment costs: Working with governments on getting the macro-policy mix right also assists in pulling down debt financing costs.
Global Evolution believes that impact in fixed income asset management originates from data and is carried forward by collaborative research. In addition to working with organizations such as the World Bank, International Monetary Fund and the PRI, Global Evolution was recently named to the Advisory Board of the University of Vermont’s Sustainable Entrepreneurship MBA program (SEMBA). SEMBA is an AACSB-accredited MBA program that has been designed from the ground-up for those that understand that these times, and the years to come, demand a new approach to business – focused on more than just the bottom line.
Global Evolution has taken this relationship with SEMBA a step further by hosting a practicum project. Global Evolution will work with SEMBA students for eight months of the year, as they gain a better understanding of the investment management industry and integrated ESG/sustainable development factors in Emerging and Frontier Markets sovereign fixed income from an impact perspective.
The formulation of this research agenda is facilitated out of Global Evolution’s New York offices however the students will be coordinating research and engagement on a collaborative basis with the firm’s portfolio management and research team in Denmark.
The goal of the student practicum project is to ultimately identify a handful of countries to focus supportive research/engagement. This will include travel to New York and Denmark, as well as meetings with our collaborative partners. The students will create a final presentation and report on what they’ve learned through their research and experiences, and will present to their faculty advisor, fellow students, and practicum hosts as a capstone project of the SEMBA degree.
I encourage those interested in careers in impact investing to consider the 1-year, award-winning, Sustainable Entrepreneurship MBA (SEMBA) program at University of Vermont’s Grossman School of Business.
SEMBA is looking for disrupters and innovators – people not content to do things the way they’ve always been done – but those who think differently and know there’s a better way to do business. The unique business education from SEMBA will prepare graduates to live differently, lead differently, and profit differently.
The SEMBA program takes a holistic approach to the admissions process from both a top-down and bottom-up perspective. SEMBA is interested in the total applicant, not just the quantitative test scores or GPAs, but the qualitative factors as well. Most importantly, they are interested in learning about your passion or fit for the SEMBA ethos: capitalism with a conscience.
As the title of this essay infers, impact investing can happen from anywhere. A degree in sustainable business in Burlington, Vermont can take you to an impact analysis on sovereign debt in Botswana and the demonstrable changes individuals can make to improve the quality of life for those in need.
To learn more about SEMBA, connect with Susan Denton, Program Coordinator, at semba@uvm.edu, or click here for additional information.
Please don’t hesitate to contact me if you have any questions regarding Global Evolution.