Sustainability Talks: Sarah Gordon

Sarah Gordon is the Chief Executive of the Impact Investing Institute. The Institute was launched in 2019 to accelerate the growth and improve the effectiveness of the impact investing market in the UK and internationally. Its work includes a series of research, education and advocacy programmes designed to bring about the market conditions to enable impact investing to flourish. It is part of a global network of National Advisory Boards, which together form the Global Steering Group for Impact Investment. The Institute works with investors from across the spectrum of capital, including pension trustees, asset managers, investment advisors, as well as individual savers.

Sarah oversees the Institute’s strategy and is responsible for its policy and advocacy work around green sovereign bonds, impact reporting and social investment. Previously she was the Business Editor at the Financial Times.

Can you explain how impact investing fits into climate change and the delivery of the UN Sustainable Development Goals (SDGs)?

I think it is useful to start with the definition of impact investments, which are investments made with an explicit intention to generate positive, measurable social and environmental impact alongside a financial return. The word intention is important here as it reflects the mindset required for us to achieve the SDGs and limit global warming.

A massive amount of expenditure is required to reach net zero goals and achieve the SDGs. Just in the UK, billions need to be spent by 2030 to reach national targets and much of that needs to be front-loaded. The level of expenditure means it can’t just be done by public actors. All capital holders need to be directed towards achieving those goals.

We need to be very clear on how to do that. Globally, we need to tap into the big pools of capital, like pension schemes, and impact investments are one route to do that.

What do you think has most contributed to the growing momentum behind impact investing in the past few years?

Momentum is definitely building and that is down to a number of things which I think you can split into push and pull factors.

The push factors are things like the changing attitudes of investors, both institutional and retail. Research has shown that the majority of people want their savings and investments to be doing good. That sentiment is particularly strong amongst high-net-worth individuals and younger people, although as an older person myself I can say my generation does also feel that way! But given today’s awareness of the effects of climate change and social inequality, I think young people feel empowered to demand things from their pension funds or investment managers in a new way.

The other major push factor is the dramatic increase in ESG funds and the capital going in that direction. The pandemic has been part of that too. It has sensitised everyone to the idea that people, societies and economies are vulnerable, and we need to take action to improve resilience.

The pull factors are the growing number of policy interventions in this area. In the EU and UK in particular there has been a lot of policy progress to push money managers to consider ESG factors. For example, the Sustainable Finance Reporting Directive has come into force for Asset Managers in the EU, and the IFRS is consulting on Sustainability Reporting standards. The first means that asset managers have new disclosure obligations on ESG factors, which will reduce “greenwashing” and improve the transparency and credibility of ESG investment products. International sustainability standards could, if properly designed, make it much easier for businesses to disclose their ESG performance, and for investors and individuals to understand and compare that performance. Those are just two examples that may have large effects on market conditions for impact investing and demonstrate just how important it is to have clear standards around impact.

What else needs to happen to help mobilise capital towards impact investing?

Firstly, we definitely need global measurement standards to measure environmental and social impact. The IFRS has made good progress towards harmonising the different standards on a global stage. The FRC in the UK recommended public interest reporting that would require all businesses to report their positive and negative social and environmental impacts. We supported that recommendation, but it wasn’t mandated in the Government’s overhaul of the UK audit regime this week.

Secondly, we need a clarification of fiduciary duty which is fit for the 21st century. A really pervasive myth is that fiduciary duty is incompatible with impact investing. We just don’t think that is the case and have produced a legal paper that explains how fiduciary duty and impact investing are compatible. The paper was written and attested by five leading law firms and reviewed by a number of other lawyers and experts. Redefining fiduciary duty in codes and rules would make a big impact. For pension funds in particular, money managers need to think about creating a world we want to retire into as well as generating good returns. Impact investment can achieve both aims.

There have been good innovations recently in green, social and sustainability linked bonds. What level of impact do you think they can have?

At the moment there are not enough products in the market to satisfy investor appetite. We need more impact investment financial vehicles at scale to unlock big flows of capital and we also need to encourage the development of the support eco-system around those types of financial products.

Last year we worked with the Green Finance Institute and Grantham Institute to publish a proposal for a Green+ Gilt that emphasises the strategic potential for a green sovereign bond to scale up the UK’s drive to a net-zero carbon economy with well-defined social and economic benefits. We tested that idea with the market and there was a clear appetite for a Gilt with social and environmental co-benefits.

I’m pleased to say the Government has announced plans to issue green sovereign bonds and from that we should start to see ripple effects across the market. For example, we may now see more corporates or Local Authorities encouraged to issue green bonds too. This is what has happened in other countries where the government has issued sovereign green bonds.

This used to be a niche world, but that is shifting. Lots of our work this year will be on transition vehicles to encourage innovation around impact investment and unlock capital for the SDGs.